I would imagine a good "consequences" system to work luch like morrowind or Oblivion. Commit a "Crime" and you have a bounty on your head. You will be left alone for a while, but if the bounty gets too big, it becomes arrest on site. If you manage to avoid that and keep comitting crimes/killing lowbies, it become kill on site and maybe some type of penalty such as loss of money, but nothing like down leveling or day long debuffs. Maybe if you get so bad, towns may send search parties out for you. Players could take on your bounties as well a la EVE.

The whole goal is to make these "consequences" just as fun to live with as being a law abiding citizen. I love running from the law in Oblivion, maybe even killing a guard here and there. Eventually I always get caught and usually killed or I pay off the guards. But then I no longer have a bounty and its back to square 1.

Bottom line: MAKE IT FUN!