12 Apr 2012

ASIC releases new guidance and policy proposals for carbon financial products

by Matthew Daley, Graeme Dennis

More guidance has been released on how Australian carbon credit units and eligible international emissions units will be regulated as financial products.

In light of the introduction from 1 July 2012 of Australia's carbon pricing mechanism (made law by the Clean Energy Act 2011 and related legislation), the Australian Securities and Investments Commission (which will be responsible for regulating entities and individuals that provide financial services in relation to certain carbon credits and emissions units) has released Regulatory Guide 236: "Do I need an AFS license to participate in carbon markets?" (RG 236).

RG 236 has been designed to assist entities in determining whether they require an Australian financial services licence (AFSL) (or are required to vary an existing AFSL) in order to provide financial services in relation to carbon markets and emissions units. Additionally, the Government released an exposure draft Corporations Amendment Regulation 2012 on 17 February 2012, in relation to regulating emission units as financial products as from 1 July 2012.

Carbon markets in Australia

While a variety of types of emissions units are currently traded in carbon markets in Australia and overseas, only certain emission units will be recognised as financial products in Australia (Regulated Emission Units). These are:

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

Note that 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 recognised under the Clean Energy Legislative Package as EIEUs, and therefore are not financial products. These include: (a) some Kyoto Protocol emissions units (such as assigned amount units), temporary CERs or long-term CERs; and (b) emissions units traded within other emissions trading schemes, such as European Union allowances and New Zealand units.

Note also that Regulated Emission Units may be associated with another recognised financial product, for example, a derivative. Where that is the case the other financial product will be regulated rather than the Regulated Emission Units.

When are you providing a financial service for Regulated Emissions Units?

If a person carries on a business of:

  • providing advice;
  • "dealing";
  • "making a market";
  • operating a registered scheme; or
  • providing a custodial or depository service

in relation to Regulated Emission Units, they will need to be covered by an AFSL issued by ASIC unless they are able to rely upon an available exemption.

This means that a service provider will need to not only carefully consider whether its activities fall within the above financial services but also whether they will amount to "carrying on a business". This test is informed by both the Corporations Act and the general law. Generally, you will be deemed to carry on a business in Australia if, among other factors, you have a place of business in Australia.

A service provider can either seek to obtain its own AFSL or otherwise seek to become the representative of the holder of an appropriate AFSL. As might be expected, the obligations of an AFSL holder are significantly more onerous than those imposed on a representative.

Once the Regulations amending the Corporations Act are finalised (which is likely to be May 2012), ASIC will accept applications for new AFSLs (or variations to existing AFSLs).

Providing advice

Advising includes providing an opinion or recommendation about Regulated Emissions Units that is made with the intention of influencing a person's decision in relation to the Regulated Emissions Units, or could reasonably be regarded as having that intention. Purely factual information will not be financial product advice, but it is important to consider the overall impression created by the provider of the information in light of the above definition.

Those entities which provide financial product advice in respect of Regulated Emissions Units will need to carefully consider whether there are any available exemptions.

"Making a market" triggers the obligation to be covered by an AFSL

Broadly speaking, a person will be considered to be "making a market" in relation to the Regulated Emissions Units:

  • where the person regularly states the prices at which it proposes to acquire or dispose of the credits on their own behalf;
  • in circumstances where other persons have a reasonable expectation that they will be able to regularly effect transactions at the stated prices.

This will be a question of fact which will need to be carefully considered by the liable entity. Regular trading or offering to trade, even through an exchange or licensed broker, can amount to "market-making".


Dealing includes applying for or acquiring, varying or disposing of Regulated Emissions Units.

There are a number of licensing exemptions which may be applicable to dealing in Regulated Emissions Units, including: 

  • persons dealing in Regulated Emissions Units on their own behalf; and
  • 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.

Additionally, 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
  • dealing on own behalf in regulated emissions units and derivatives over regulated emission units 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.

Other "financial services"

A person may also be operating a managed investment scheme with respect to Regulated Emission Units (for example, where the Regulated Emission Units are part of scheme property) or otherwise providing a "custodial or depository service" by holding the Regulated Emission Units on trust for another person.

What are the obligations of an AFSL holder?

The key obligations imposed on AFSL holders are, amongst others, to ensure that: 

  • the financial services covered by the AFSL are provided efficiently, honestly and fairly; 
  • they comply with all conditions imposed by ASIC on their AFSL, financial services laws and certain base level financial requirements; 
  • they have adequate resources available and arrangements in place in order to carry out the financial services; and 
  • all representatives are adequately trained and competent to provide those financial services.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.