Alert – Carbon trading: licensing requirements

16 March 2012

Australia's carbon pricing mechanism which was introduced by the Clean Energy Legislative Package will commence on 1 July 2012. Emissions units recognised under the Clean Energy Legislative Package will be considered as financial products under the Corporations Act from that date.

Australian businesses which engage in activities relating to regulated emissions units will therefore be required to hold an Australian Financial Services Licence (AFSL) unless an exemption applies.

Current licensees will also need to vary their licence if they wish to invest, deal in, or advise on regulated emissions units. Existing authorisations are not sufficient.

ASIC has indicated that it will accept applications for new licensees and variations for regulated emissions units once the draft regulations are finalised. This is likely to occur by May 2012.

New requirements

On 17 February 2012, Treasury released draft regulations relating to regulated emissions units as financial products from 1 July 2012. The regulations also propose retail disclosure obligations relating to regulated emissions units.

ASIC has now released a regulatory guide (RG236) designed to assist entities determine whether they require an AFSL. ASIC has also released a consultation paper (CP175) on proposals for applying existing ASIC policies to regulated emissions units.

Which emissions units will be regulated?

All emissions units recognised under the Clean Energy Legislative Package will be considered financial products. These include:

  • carbon units (issued by the Clean Energy Regulator);
  • Australian carbon credit units (issued by the Cleaner Energy Regulator under the Carbon Farming Initiative); and
  • eligible international emissions units (EIEUs).

These are 'regulated emissions units'.

While each type of EIEU is considered a financial product regardless of whether it is issued, acquired, held, or disposed of outside Australia, some internationally traded emissions units are not considered financial products. These include:

  • some Kyoto Protocol emissions units, such as assigned units, temporary certified emissions reductions (CERs) or long-term CERs; and
  • emissions units traded within other emissions trading schemes, such as the European Union allowance and New Zealand units

There are other emissions and environmental units traded in domestic carbon markets in Australia and overseas that will not be considered financial products (e.g. units issued according to the international Verified Carbon Standard).

When are you providing a financial service for regulated emissions units?

Regulated emissions units will be dealt with under the licensing regime like any other financial product. That is, entities that wish to:

  • provide financial product advice;
  • deal in a financial product;
  • make a market for a financial product; or
  • operate a registered managed investment scheme,

in relation to a regulated emissions unit will be required to obtain an AFSL.

What licensing exemptions apply?

Current AFS licensing exemptions applicable to carbon markets include:

  • persons dealing in regulated emissions units on their own behalf or on behalf of a related body corporate;
  • dealing in derivatives over regulated emissions units or foreign exchange contracts on their own behalf if dealing is done for the purposes of managing a financial risk and dealing in derivatives or foreign exchange contracts is not a significant part of the entity's business; and
  • foreign financial services providers.

The draft regulations propose additional exemptions for:

  • dealing in carbon units on behalf of a related or associated entity that is a liable entity, regardless of the purpose of the dealing; and
  • self dealing in regulated emissions units and related derivatives or foreign exchange contracts or dealing on behalf of a related or associated entity, if done for the purpose of managing financial risk in relation to the surrender, cancellation or relinquishment of regulated emissions units, where it is not the principal purpose of the entity's business.

Foreign financial services providers

ASIC has not indicated that existing class order relief for foreign entities regulated in the UK, US, Hong Kong, Singapore or Germany will be extended to cover regulated emissions units. Therefore, entities relying on these exemptions will not be able to provide financial services in relation to regulated emissions units under the class orders. Specific relief will need to be obtained if a licence would otherwise be required.

Consultation paper

ASIC has also released a consultation paper discussing the training and financial requirements of licensees who deal with regulated emissions units. The paper proposes that:

  • regulated emissions units be classed as Tier 1 products for the purposes of training requirements; and
  • AFS licensees who deal with regulated emissions units meet the standard financial requirements required by AFS licensees.

If the training requirement proposal is accepted, advisers who provide financial product advice on regulated emissions units will be required to meet training requirements at a Tier 1 level. This involves:

  • general knowledge training about the economic environment;
  • specialist knowledge training on the actual features of regulated emissions units; and
  • if the adviser provides personal financial product advise, further skills training.

How we can help?

Contact us if you need advice on these requirements or any assistance to apply for an AFSL or for a licence variation.


Author(s) Richard Batten, Duncan McGregor