Australian carbon markets – priorities for reform

Australia’s carbon market is evolving, but many in the industry agree it still needs to be more fluid, integrated and transparent, particularly in relation to Australian Carbon Credit Units (ACCUs).

At this year’s Carbon Market Institute’s (CMI) 9th annual Carbon Farming Industry Forum, we heard the sector’s call for a more efficient carbon market. In this article, we reflect on those conversations and set out what we see as the key priorities to build a fluid carbon market that can support Australia’s net-zero transition.

Recent regulatory changes in the Australian carbon market

Australia’s carbon landscape has undergone several important regulatory changes designed to encourage uptake in the holding and trading of emission units. Key changes include:

• the codification of greenhouse gas emissions reduction targets in the Climate Change Act 2022 (Cth)
• the introduction of the Safeguard Mechanism, which requires Australia’s highest greenhouse gas emitters to reduce their emissions in line with the set targets
• an amendment late last year to Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk, to “recognise the recoverable value of carbon credits and allowances” when lenders assess capital sufficiency for the purposes of the Internal Ratings-based Approach, to encourage the use of emissions units as collateral.

Key priorities for reform: Fluidity, integration and transparency

At present, various legal regimes, including the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) and the Personal Property Securities Act 2009 (Cth) (PPS Act), govern interests in and the trade of ACCUs.

For example, under the CFI Act, both the vendor and Clean Energy Regulator (CER) must action the transfer of an ACCU before legal title in the unit passes to a prospective buyer. This reliance on others’ actions creates uncertainty for the purchaser, insofar as their title is contingent on the actions of others, including possibly after they have paid valuable consideration for the units. As a consequence, and t To protect their interests, the purchaser may, for instance, insist that all purchased ACCUs be held on trust for them. As can be seen, this can lead to the creation of ‘hidden’ (or at least unclear and overlapping) interests.

Further, while the legal ownership of ACCUs is determined by consulting the Australian National Registry of Emissions Units (ANREU), the ANREU does not currently record the existence of security interests in emissions units. To access that information, interested parties must perform a separate search  of the Personal Properties Security Register , making transactions multi-faceted, slower and more costly.

Together, these factors create an overlapping system that has the potential to cause delays and generate additional expenses for investors and lenders. As noted by Trovio, co-designers of the new Unit & Certificate Registry, at the Carbon Farming Industry Forum, scaling the carbon credit market will be difficult while the system remains manual.

Could the Australian Carbon Exchange and the Unit & Certificate Register be possible solutions?

It may be that the trading of ACCUs on the Australian Carbon Exchange (ACE) – a centralised market for carbon products, flagged to commence later this year – may alleviate some of the concerns by streamlining ownership transfers, particularly in relation to security interests.

Under the PPS Act, “[a] person who buys an investment instrument”, as which an ACCU is classed, “in the ordinary course of trading on a declared financial market… takes the instrument… free of a security interest in the instrument”. A declared financial market is defined under the Corporations Act 2001 (Cth) to be a financial market specified by the Australian Securities & Investments Commission (ASIC) and approved by the relevant Minister, the most widely known of which is the Australian Securities Exchange (ASX).

As outlined in the explanatory memorandum to the PPS Act, this provision is designed to “protect the integrity of transactions in prescribed markets”, ensuring smooth and streamlined ownership transfers in a centralised market where liquidity is essential to operation.

At the same time, ACCUs will transition from the ANREU to the new blockchain-enabled Unit & Certificate Registry. Carbon units listed in the Registry will, as foreshadowed at the Carbon Farming Industry Forum, be able to display ‘attributes’ attached to particular units, offering the transparency essential to a truly fluid financial product.

Takeaways on reform

The designation of the ACE as a ‘declared financial market’ – and the consequent application of the PPS Act’s rules regarding the taking-free of investment instruments traded on it – may help ease some of the pressures caused by current market rigidity and reduce the capital cost of entering Australia’s carbon markets.

Similarly, the ability of ACCUs to show attached attributes in the new Unit & Certificate Registry may provide the sought after transparency needed for investors lenders and purchasers to make informed investment decisions and drive liquidity.

It is clear that further reform is necessary to drive the push for investors to see carbon credits as a genuinely marketable and tradable product, and to couple carbon reduction and its environmental benefits with legitimate capital opportunities.

If you have any questions about the trading of carbon credit units in Australian markets or need assistance in protecting your interests in a transaction, please get in touch with a member of our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Geoff Farnsworth

Jonathon Parkin

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