ASIC issues updated regulatory guide on carbon markets

Following a consultation earlier this year,¹ last month the Australian Securities and Investments Commission (ASIC) updated regulatory guide "RG 236 Do I need an AFS licence to participate in carbon markets?" (RG 236)² to address the safeguard mechanism reforms and provide further guidance on when participants in Australian carbon markets are likely to need an Australian financial services licence (AFSL).

This is the first revision of RG 236 since publication in 2015. It is a welcome update given the developments in the carbon markets since then, and the greater number of participants in the development, management and funding of carbon projects. Notably, the Australian market has seen a significant increase in the number of people seeking to trade carbon credits and invest in carbon projects.

Importantly, RG 236 provides helpful examples and other insights on ASIC's views regarding whether certain activities will require an AFSL and how existing licensing exemptions apply to activities in the carbon markets. Participants in the carbon markets would be well advised to review RG236 before entering into transactions that involve carbon projects or trading carbon credits in Australia and to seek expert legal advice.

This update discusses some of the key takeaways from revised RG 236.

• Safeguard mechanism credits (SMCs)
• Updated guidance on when an AFS licence may be required
• Updated guidance on exemptions

Safeguard mechanism credits (SMCs)

New RG 236 provides substantial commentary on the safeguard mechanism legislative reforms that commenced on 1 July 2023. RG 236 now:

• Outlines the process of how the Clean Energy Regulator issues SMCs to responsible emitters (which can occur from January 2025).
• Illustrates the responsible emitters which are eligible for SMCs and the options for a responsible emitter to surrender units to the government if required.

Notably, SMCs are a type of eligible international emissions unit (EIEU), which are a financial product under the Corporations Act 2001 (Cth). RG 236 addresses the AFS licensing implications in relation to SMCs, which also apply to other financial products and types of emissions units, such as Australian carbon credit units (ACCUs).

Updated guidance on when an AFS licence may be required

Participants in the carbon markets should be aware that their activities may be regulated under the AFSL regime in the following key ways:

• By providing financial product advice
• By dealing in a financial product
• Making a market in a financial product
• Operating a managed investment scheme
• Providing a custodial service

Whether any of the above regulated activities are triggered will depend on the structure of a specific transaction or dealing relating to carbon credits. As may be expected, the law in this area is quite complex and technical, and there are often a number of exemptions that may apply to avoid the need to obtain an AFSL.

For example, an issue that often arises in transactions involving carbon projects or carbon credits is whether an arrangement is a derivative, which itself is a particular type of regulated financial product under the Corporations Act 2001(Cth). RG 236 now provides more up-to-date examples which will help participants determine if certain forms of arrangements in carbon markets are likely to be derivatives, particularly with regards to options and forward contracts over carbon credits entered into by secondary traders in the market.³ However, making this determination will remain complex in many circumstances, including:

• Payments made to service providers under a carbon service agreement that are based on the future price of ACCUs or if the payment for service is made by way of an actual transfer of ACCUs.
• Carbon credit offtake arrangements entered into with a project proponent.

Updated guidance on exemptions

Parties to the above transactions, including overseas participants dealing with Australian parties, are often not fully aware of the application of the AFSL regime and the availability of exemptions in these circumstances. New RG236 helps to address this by providing guidance on a number of matters, including the following:

• Whether other types of emissions units (other than ACCUs, SMCs and other EIEUs), such as biodiversity certificates or renewable energy certificates, are financial products on the basis that they meet the general definition of a financial product under the Corporations Act 2001(Cth). Thankfully, the answer is that ASIC does not consider these other types of emissions units to be financial products.⁴
• When information and activities provided in relation to carbon credits (including in relation to safeguard facilities and SMCs) would be considered to be purely factual information and not, therefore, financial product advice.⁵
• How the exclusion from the definition of a derivative for the "future provision of services" applies in the context of carbon markets.⁶
• When parties to a derivative transaction may be able to rely on the licensing exemption that applies if the derivative transaction is for the purpose of surrendering or cancelling carbon credits to meet offset obligations or to manage financial risk.⁷
• When a party that retires carbon credits on behalf of another person would be considered to be dealing in a financial product.⁸

For further assistance in relation to the above and navigating the Australian carbon markets landscape, please reach out to the Norton Rose Fulbright carbon market team. Our team is comprised of lawyers across multiple disciplines such as corporate, environmental, banking and financial services, and we have worked closely with a variety of participants in the carbon markets, including purchasers, sellers, project developers, financiers, aggregators, landholders and carbon service providers since the inception of the Australian carbon market in 2011.

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