Unless you are engaged in the carbon markets, you may not be aware of how the Australian Financial Services Licence (AFSL) regime applies to activities in advising on, buying and selling carbon instruments and carbon contracts.

And you may be wondering how and why is this applicable to me?

With Australia joining 140+ other countries in setting net zero targets and implementing, along with 20+ other countries, mandatory TCFD aligned climate-related reporting obligations commencing from the end of FY26, we envisage that the engagement by Australian corporates in carbon offsetting arrangements (where offsets provide for offsetting of net emissions), carbon abatement activities and other emissions reduction arrangements will become more mainstream in the next few years.

ASIC has made it clear in its latest consultation (Consultation Paper CP 378 Safeguard mechanism reforms: Updates to RG 236 (asic.gov.au)) on Regulatory Guide RG 236 Do I need an AFS licence to participate in carbon markets? (asic.gov.au) that corporates dealing on their own behalf to buy carbon offsets which are financial products do not require an AFSL (RG 236.47). Further, ASIC confirms that a corporate offering to enter into a carbon abatement contract does not constitute a financial service (RG 236.52). 

These statements are important guidance from ASIC under the proposed draft ASIC RG 236 (at RG 236.47 and RG 236.52 respectively) to clarify these regulatory positions at an increasingly complex time in the climate regulatory landscape.

Background

ASIC regulates emissions units that are financial products and ASIC published ASIC RG 236 'Do I need an AFS licence to participate in carbon markets?' initially in March 2012 (which was updated in 2015). 

In Australia currently, ACCUs and EIEUs (including SMCs) are financial products.  

What is an ACCU?

An ACCU is an Australian carbon credit unit issued by the Clean Energy Regulator to a project proponent for undertaking activities that result in carbon abatement in an eligible offset project under the ACCU Scheme. The ACCU Scheme, established under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act), proposes to encourage landholders, communities and businesses to undertake activities that either avoid or reduce the release of greenhouse gas emissions, remove carbon dioxide from the atmosphere or sequester carbon. For each tonne of carbon dioxide equivalent emissions stored or avoided by an ACCU Scheme project, the Clean Energy Regulator issues and ACCU to the project proponent.  Project proponents may, among other things, sell ACCUs to the Government through a carbon abatement contract or surrender ACCUs to the Clean Energy Regulator to offset their own greenhouse gas emissions or trade ACCUs on the carbon market. Other participants in the carbon market for ACCUs are safeguard facilities that acquire ACCUs to meet their baseline emissions number under the NGER Act, other businesses and individuals that voluntarily acquire ACCUs to offset greenhouse gas emissions of their business activities and financial institutions and other liquidity providers who trade ACCUs as part of their financial services business.

What is an EIEU?

An EIEU is an eligible international emissions unit as defined by the Australia National Registry of Emissions Units Act 2011 (Cth) (ANREU Act) as:

• certified emission reductions (other than a temporary certified emission reduction or a long-term certified emission reduction);
• emission reduction units;
• removal units;
• prescribed units issued in accordance with the Kyoto rules; and
• SMCs (if the legislative rules specify that type of unit).

While EIEUs may be traded in the Australian carbon market, there is currently no incentive under an Australian legislative framework to trade in EIEUs for the purpose of meeting Australian legislative requirements involving emissions reduction, other than SMCs. Further information about SMCs is provided below.

Other types of financial products related to emissions units

In addition, there are other types of financial products related to emission units which are regulated under our AFSL regime, for example:

• derivatives over emissions units (where the emissions unit may be an ACCU, EIEU or other type of emissions unit);
• interests in a managed investment scheme, which may include aggregated arrangements for ACCU Scheme projects; and
• a contract in relation to carbon abatement (that generates regulated emissions units) which constitutes a facility to make a financial investment.

This area of law is complex and requires careful analysis of the relevant product and activities being undertaken as to whether the activity requires an AFSL.

Safeguard mechanism reforms

In July 2023, the Australian Government implemented the safeguard mechanism reforms (commencing on 1 July 2023) and ASIC is now consulting on updating RG 236 having regard to these reforms.

In summary, under the safeguard mechanism reforms, the Australian Clean Energy Regulatory has been given powers and authority to issue a new type of carbon instrument – safeguard mechanism credit units (SMCs) from January 2025.

The safeguard mechanism reforms set out legislated targets, known as baselines, for the net greenhouse gas emissions of certain large industrial facilities, known as safeguard facilities. These reforms are implemented under the Safeguard Mechanism (Crediting) Amendment Act 2023 by amending the National Greenhouse and Energy Reporting Act 2007 (NGER Act). 

Under these legislative changes implemented in 2023 (under the proposed changes to the NGER Act) if a safeguard facility’s net emissions exceed its baseline for a monitoring period, it may be liable for a civil penalty. A safeguard facility is a facility emitting more than 100,000 tonnes of CO2-e per annum. In January 2023, this included 215 facilities in Australia totalling 136 million tonnes per annum of CO2-e, being at that time 28% of Australia’s total emissions of 487 million CO2-e.¹

Under the safeguard mechanism reforms, the Clean Energy Regulator is empowered to issue SMCs from January 2025 to safeguard facilities whose net emissions are below their baselines. As noted above, safeguard facilities may also acquire ACCUs to offset their emissions to reach their baseline emissions targets.

However, the safeguard mechanism legislation operates so that a safeguard facility may participate in the ACCU Scheme but its abatement activities in relation to covered emissions are only counted once for the purposes of calculating its net emissions. Project proponents cannot register new eligible offset projects after May 2023 that solely abate covered emissions from the operation of safeguard facilities. This is because such abatement could be used to reduce a facility’s net emissions number as well as to generate ACCUs, thereby counting the same emissions reduction twice.

ASIC consultation on RG 236

ASIC is currently seeking feedback on its proposed draft RG 236 where it confirms that ACCUs and EIEUs (including SMCs) are financial products and provides an explanatory narrative and examples where other financial products associated with such carbon instruments and other carbon instruments may or may not be financial products. 

In its explanatory guidance (in RG 236.74 to 236.122), ASIC gives examples of derivatives which are financial products and different examples of ACCU Scheme aggregation arrangements which may or may not be a managed investment scheme. If an ACCU Scheme aggregated project is a managed investment scheme and the persons involved are retail clients, the scheme may need to be registered with ASIC as a registered scheme under Chapter 5C of the Corporations Act. If an ACCU Scheme aggregated project is not a managed investment scheme, then the arrangement between a participant and the project proponent may still be a financial product as a derivative or a facility for making a financial investment.  In each case, careful analysis is required to determine whether all of the elements of a managed investment scheme apply (as defined in section 9 of the Corporations Act) or whether the relevant arrangement is a facility for making a financial investment or managing a financial risk.

ASIC also confirms its view (at RG 236.119) that, at this stage, it considers that other emissions and environmental units that can be traded in Australia and overseas² are not financial products. ASIC explains it holds this view because it does not consider these other types of emissions are acquired to manage financial consequences, manage financial risk or make a financial investment. This is an interesting view considering the significant changes occurring globally with the implementation of climate-related financial reporting (based on the TCFD) and nature-related financial reporting (under the TNCD) and considerable focus (and consensus) on the financial impacts and consequences of climate-related risks and nature-related risks (including an organisation’s scope 3 emissions) and the impetus for organisations to have a net zero transition plan for reducing their net emissions (see our recent article on Australia’s new proposed mandatory climate-related financial reporting regime). We expect this view and approach to other emissions units, biodiversity credits and carbon credits may change over time, particularly, as Australia’s proposed climate-related financial reporting regime will require reporting entities to report on their offset strategy to reduce net emissions and we will likely also see a legislated nature-related financial reporting regime (based on the TNFD) being implemented in the near future as well.

If you are involved in advising on or dealing in carbon emissions units, other carbon instruments, carbon abatement contracts, ACCC Scheme aggregation projects or other aggregation arrangements, it is important to understand the implications of ASIC’s guidance in RG 236 for your activities. As well as to ascertain whether you may be involved in giving advice or dealing (on behalf of others) in a regulated carbon emission unit, a derivative, an interest in a managed investment scheme or a miscellaneous financial facility requiring you to be licensed with applicable AFSL authorisations under the Corporations Act. 

At Dentons, we are happy to assist with any questions you may have with respect to the regulatory framework for carbon instruments in Australia and the relevant licensing requirements for activities engaged in with respect to such carbon instruments.

If you would like to make submissions on this recent consultation process, which closes on 3 June 2024, we would be happy to work with you.

1. Safeguard Mechanism Reforms - Position Paper January 2023 - DCCEEW.gov.au
2. For example, Biodiversity Certificates issued under the Nature Repair Act 2023, Large Scale Generation Certificates and Small Scale Technology Certificates issued under the Renewable Energy (Electricity) Act 2000, Energy Savings Certificates issued under the NSW Electricity Supply Act 1995, Victorian Energy Efficiency Certificates issued under the Victorian Energy Efficiency Target Act 2007, European Union Allowances issued by a member state of the European Union, or by other jurisdictions participating in the European Union Emissions Trading System, New Zealand Emissions Units issued by the New Zealand Government under the New Zealand Emissions Trading Scheme and Verified Carbon Units issued according to the international Verified Carbon Standard.