ASIC updates its guidance on regulated emissions units (RG 236)
In the Corporations Act 2001 (cth) (Corporations Act),Australian Carbon Credit Units (ACCUs) and eligible international emissions units (EIEUs) are specifically defined as financial products. This is in addition to other financial products such as derivatives or interests in managed investment schemes. Anyone dealing in or advising on ACCUs, EIEUs, related derivatives or interests in managed investment schemes must consider if they are providing financial services requiring an Australian financial services licence (AFSL), or if they can rely on any exemption.
Regulatory Guide 236 Do I need an AFS licence to participate in carbon market (RG 236) is a guide issued by the Australian Securities and Investment Commission (ASIC) for those involved in carbon markets.
Under the last reform of the Safeguard Mechanism which commenced on 1 July 2023 (Safeguard Mechanism Reforms), a new type of EIEU, Safeguard Mechanism Credits (SMCs), was introduced (refer to our discussion on the reforms here).
Following the Safeguard Mechanism Reforms, ASIC proposed to amend the RG 236 and sought feedback from stakeholders in May of this year.
On 30 September 2024, ASIC released the updated RG 236, incorporating relevant feedback received from stakeholders. Additionally, ASIC has also released feedback received on CP 378 on its website.
In this article, we explain financial services regulatory implications on regulated emissions units, and highlight some of the key changes in the RG 236.
Key changes to the RG 236
The updated RG 236 aims to reflect the changes resulting from the Safeguard Mechanism Reform, which does not substantially alter the treatment of ACCUs and EIEUs (together, Regulated Emissions Units) from a financial services perspective, and as such, the changes made to the RG 236 refine and clarify existing guidelines rather than substantially altering the regulatory treatment of Regulated Emission Units from a financial services perspective. Additionally, the updates in the RG 236 aim to address changes the carbon market industry has seen since the first RG 236 was issued in 2015, ensuring RG 236 remain current and relevant to the market participants.
The key changes to the RG 236, include:
- specific inclusion of SMCs as a type of financial products;
- updated examples of other types of financial products; and
- additional guidance on financial services regulatory implications on certain commonly engaged activities in a carbon market.
Overview of emissions units from a financial services regulatory perspective
Players in carbon markets must consider if any activities they are undertaking in carbon markets are financial services requiring an AFSL.
Two key concepts to determine whether a person requires an AFSL or not are: 1) ‘financial products’, and 2) ‘financial services’.
What is a ‘financial product’?
There is a list of financial products in section 764A of the Corporations Act, and the list specifies that the following, amongst other things, are financial products:
- ACCUs and EIEUs (including SMCs) (together, Regulated Emissions Units)
- shares;
- interests in a managed investment scheme;
- derivatives; and
- foreign exchange contracts that are not derivatives.
Also, there is a general definition of a financial product in the Corporations Act that a financial product is a facility through which a person:
- makes a financial investment;
- manages financial risks; or
- makes non-cash payments.
In a carbon market context, the key financial products are:
- Regulated Emissions Units;
- derivatives in relation to emissions units; and
- interests in a managed investment scheme.
A derivative is defined in the Corporations Act as an arrangement where the amount of the consideration is ultimately determined, derived from or varies by reference to the value or amount of something else. In a carbon market, arrangements such as an option to acquire emissions units at a fixed price on a future date would constitute a derivative.
The Australian Carbon Credit Unit Scheme (ACCU Scheme) allows people to participate in projects and activities to reduce greenhouse gas emissions or store carbon to earn ACCUs. Those projects and activities may satisfy the requirements of a managed investment schemes, for example:
- people contribute money or money’s worth as consideration to acquire rights;
- for the purpose of financial benefits; and
- the members do not have day to day control over the scheme.
Interests generated from a project or activity, if it constitutes a managed investment scheme, are financial products. Conversely, an arrangement where people generate carbon abatement without the right to receive financial benefits or interest in property will not be considered as a managed investment scheme.
It requires careful consideration of each arrangement to determine whether it is a derivative or a managed investment scheme.
A carbon abatement contract is specified as a non-financial product in the Corporations Act.
What is a ‘financial service’?
Financial services are services provided to clients that relate to financial products.
For example, a person provides financial services if the person:
- provides financial product advice;
- deals in a financial product;
- makes a market for a financial product;
- operates a managed investment scheme; or
- provides a custodial or depository services.
In a carbon market context, some common types of financial services in relation to Regulated Emissions Units are as set out in the table:
Type of financial services | Examples of activities in carbon markets |
Providing financial product advice | Providing information on Regulated Emissions Units if the information is provided with the intention of influencing the person’s decision on Regulated Emissions Units to: people seeking to enter into an ACCU Scheme projectsafeguard facilities to make a decision about acquiring or disposing ACCUs or SMCs |
Dealing in a financial product | Applying for, acquiring, varying or disposing a financial product; or arranging for another to apply for, acquire, vary or dispose a financial product constitute ‘dealing’, such as: brokering a transaction relating to Regulated Emissions Units.acquiring, surrendering or retiring Regulated Emissions Units on behalf of another |
Making a market for a financial product | Regularly quoting prices at which they are prepared to buy or sell Regulated Emissions Units on their behalf will be making a market. In a carbon market context, a project proponent regularly quoting prices at which it would buy ACCUs and the others would reasonably expect that they can enter into a transaction at the stated price, the project proponent will be taken as market making. |
operating a registered managed investment scheme | If an ACCU Scheme project is a managed investment scheme that requires registration, the operator is required to be a responsible entity. |
providing a custodial or depository services | A person holding Regulated Emissions Units on behalf of another may be taken to provide a custodial or depository services unless the number of clients does not exceed 20 in aggregate. |
Ascertaining whether you are providing financial services can often be unclear. You must review relevant sections in the Corporations Act and corresponding ASIC regulatory guides to understand what each type of financial services involves.
In the updated RG 236, ASIC has inserted a new paragraph 236.38 to provide additional guidance when a person would not be providing a financial service as follows:
- when providing mapping and spatial analysis to inform the design of an ACCU Scheme project;
- when providing greenhouse gas measurement or nature capital accounting services, including in relation to ACCU Scheme projects;
- when performing greenhouse gas and energy audits for safeguard facilities or ACCU Scheme projects; or
- when monitoring the co-benefits of an ACCU Scheme project, such as monitoring the positive impact of the project on biodiversity.
Do you need an AFSL?
The fact that products or services you may be engaged in in carbon markets fall under the definition of a ‘financial product’ or a ‘financial service’ does not necessarily mean you must hold an AFSL.
You require an AFSL if you are ‘carrying on a financial services business’ in Australia, and whether you are ‘carrying on a financial services businesses’ depends on the factual circumstances.
In general, if financial services you provide are more than minor and are systematic, repetitious and have continuity, it is most likely that you will be carrying on a financial services business in Australia. However, there are a number of other factors that need to be considered as well such as the nature of business, if an agent is engaged, and so forth.
AFS licensing exemptions
If you consider that you are carrying on a financial services business in Australia, you must hold an AFSL, unless you can rely on exemptions covering all financial services you may be providing.
There are a number of exemptions in the Corporations Act for each type of financial services, and we outline a few below that we consider relevant in a carbon market context:
- ‘Self-dealing’ exemption (section 766C(3)):
If you are dealing in a financial product on your own behalf (whether directly or through an agent or other representative), you will not be taken to ‘deal’ in the financial product. For example, if you are acquiring ACCUs for your own use, you will not be taken to be dealing in ACCUs. Whereas, if you are acquiring ACCUs for another entity, you will be dealing in ACCUs on behalf of another and you will require an AFS Licence.
- ‘Related body corporate’ exemption (section 911A(2)(i)):
If you are providing financial services only to a related body corporate, you are not taken to provide financial services requiring an AFSL. For example, if you are acquiring ACCUs on behalf of a related body corporate or provide financial product advice on Regulated Emission Units, you are not required to hold an AFSL.
- ‘Managing financial risk’ exemption (regulation 7.6.01(1)(ma))
if you are dealing in Regulated Emission Units, or derivatives for Regulated Emission Units for the purpose of managing financial risk for yourself, a related body corporate or an associated entity, your conduct will not be taken to ‘deal’ in Regulated Emission Units.
We regularly advise clients in relation to these types of products alongside our project approvals team who operate heavily in the carbon credit and biodiversity space. If you would like to know more about our work in this space please contact Natalie Kurdian or Celine Seo.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.