Australian Carbon Credit Units (ACCUs) and certain other emissions units are considered ‘financial products’ in Australia. However, they are not reportable under the ASIC Derivative Transaction Rules (Reporting) 2024 (ASIC Rules) since in their direct form, they are not an ‘over-the-counter (OTC) derivative’. Where an ACCU is the underlier of an OTC derivative however, i.e. there is a derivative over an ACCU, then it may be reportable under the ASIC Rules.
Summary
There are regulated emissions units which can be traded in Australia – some (but not all) of which may be ‘financial products’ under the Corporations Act 2001 (Cth). Australian carbon credit units (ACCUs) and safeguard mechanism credit units (SMCs) (a type of eligible international emissions unit) are the main regulated emissions units which are traded and are ‘financial products’. This has been the case since 2012 for Kyoto ACCUs and non-Kyoto ACCUs.
In ASIC RG 36, a ‘regulated emission unit’ is defined as:
‘A carbon unit, an Australian carbon credit unit or an eligible international emissions unit, which are:
– emissions units recognised under the Clean Energy Legislative Package; and
– financial products under the Corporations Act’.
ACCUs are not exchange-traded or OTC derivatives. ACCUs are directly traded in their own carbon markets and do not meet the definition of derivative.
The Clean Energy Regulator has stated that derivatives may be related to or associated with an ACCU, which also confirms our understanding that an ACCU in itself is not a derivative:
‘Please note that any financial product which is related to or associated with an ACCU, such as a derivative or a managed investment scheme, may require a Product Disclosure Statement to be provided by the person offering or recommending that financial product.’
What is an ACCU?
An ACCU represents carbon dioxide emissions equivalent to one tonne (tCO2-e) which is:
- avoided or mitigated i.e. one tonne’s worth of carbon dioxide emissions has not been emitted; or
- offset under sequestration projects – these projects are called ‘eligible offsets project’ and is carried out under the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). The sequestration projects range from reforestation to energy efficiency.
Legally speaking, an ACCU is personal property as its registered holder (i.e. the person that has an entry alongside its name on the electronic Australian National Registry of Emissions Units) is the legal owner and may pass title of the ACCU to another.
The Clean Energy Regulator is responsible for the administration of the ‘ACCU Scheme’ – this is where the registration of the eligible offset projects occurs and the ACCUs are issued once carbon abatement is achieved through such projects. ACCUs issued are either Kyoto or non-Kyoto ACCUs and before an ACCU is issued to you, you must have a certificate of entitlement.
Are derivatives on ACCUs reportable under the ASIC Rules?
ACCUs in themselves are not reportable given they fall out of the derivative definition. They are akin to other exclusions from ‘OTC derivatives’ such as tradeable water rights and securities or bonds.
If there is an OTC derivative with an ACCU, carbon unit, eligible international emissions unit etc. as an underlier, such a transaction may be reportable under the ASIC Rules. For example, a forward sale of an ACCU for future settlement and an option to buy an ACCU are derivatives.
However, ASIC Rule 1.2.4 (7) excludes from its scope and from the definition of an OTC Derivative transactions in other products that are intangible property where market practice is to settle on a spot basis (e.g. T+2 or T+3). Specifically, ACCUs and other environmental units have been listed as an exclusion and this view is consistent with the jurisdictional approaches of MAS, HKMA, ESMA and the US Regulators.
Hence, only OTC derivatives where the underlier is a longer-dated emissions product will be reportable.
Some agreements relating to carbon markets may be considered a derivative over emissions units – this would be where the agreement’s value changes by reference to the quantity, price, volume or emissions unit’s value such as an option contract to buy emissions units at a fixed price at a future date. A derivative over an emissions unit is a ‘financial product’ regardless of whether the underlier is a financial product. Forward Contracts for ACCUs, VCUs or VEECs are derivatives, even though only ACCUs are a financial product i.e. all forward contracts where these are the underliers are a ‘derivative over an emissions unit’.
ASIC Technical Guidance (paragraph 323) for the ASIC Rules, shows a list of commodity underlier codes that are to be used in trade reporting in instances where the transaction to be reported is a ‘derivative over an emissions unit’ and the unit is one of the below environmental commodity units:
- Renewable energy certificates/units
- Energy efficiency certificates/units
- Carbon credits—specified and unspecified unit types
- Emission allowances—unspecified unit types
How can TRAction assist?
If you require assistance with the identification and reporting of your OTC derivative contracts with ACCUs and other emissions units as the underlying instrument, please get in touch with us.
