Financial Services Licensing Returns to the Carboniferous

ASIC has updated its guidance on RG 236 to help firms decide whether they need an Australian Financial Services (AFS) licence to engage in carbon market activities. With a significant increase in participants seeking to trade carbon credits and invest in carbon offsets, this is a welcome development as it provides further clarity for participants. In particular, it provides insights into how ASIC views certain activities and whether those activities require an AFSL, how existing licensing exemptions may apply as well as helpful examples.

The new RG 236 addresses the Safeguard Mechanism reforms that commenced on 1 July 2023.

The Safeguard Mechanism is the government’s policy for reducing emissions at Australia’s largest industrial facilities. It sets legislated ‘baselines’ on the greenhouse gas emissions of these facilities. As disclosed by the Department of Climate Change, Energy, the Environment and Water, these ‘baselines’ are anticipated to help achieve the government’s emission reduction targets of 43% below 2005 levels by 2030 and net zero by 2050. The most recent reforms to the Safeguard Mechanisms apply a decline rate to facilities’ baselines so that they are reduced predictably and gradually over time on a trajectory consistent with the government’s emission targets.

These reforms are addressed in the new RG 236 by:

1. including Safeguard Mechanism Credits (SMCs) as a type of eligible international emissions unit (EIEU), which are regulated as a financial product under the Corporations Act 2001 (Cth);
2. providing guidance on whether other types of emissions units (other than ACCUs, SMCs and other EIEUs), such as biodiversity certificates or renewable energy certificates, are financial products; and
3. commenting on financial services regulatory implications on certain commonly engaged activities in a carbon market (please see below table for examples of commonly undertaken activities relating to regulated emissions units that are likely to amount to one or more of these types of financial services).

For the avoidance of doubt, ASIC has included the following examples of specific activities that are not providing a financial service:

• providing mapping and spatial analysis to inform the design of an ACCU Scheme project;
• providing greenhouse gas measurement or nature capital accounting services, including in relation to ACCU Scheme projects;
• performing greenhouse gas and energy audits for safeguard facilities or ACCU Scheme projects; or
• monitoring the co-benefits of an ACCU Scheme project, such as monitoring the positive impacts of the project on biodiversity.

Participants in the carbon markets should be aware of the following activities that are licensable (with more detail in respect of what constitutes these activities set out in the table below):

• providing financial product advice;
• dealing in a financial product;
• making a market in a financial product;
• operating a managed investment scheme; or
• providing a custodial or depository service.

If you would like to know about how this regulatory update may affect your activities, please reach out to our expert licensing specialists Hugh Griffin and Lucy Adamson.

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