Australia’s carbon credits scheme

This article was co-authored with Josh Mackenzie.

COP 26 Summit & Net Zero Commitments

The 26th Conference of Parties to the United Nations Framework Convention on Climate Change (COP26) saw 197 countries agree to a new deal, known as the Glasgow Climate Pact (Pact). The Pact’s overarching aim was to reaffirm the Paris Agreement and strongly encourage countries to phase down coal and fossil-fuel subsidies. 

Over 140 countries have now pledged to reach net-zero emissions. Importantly, in the lead up to COP 26 Australia formally committed to net-zero emissions by 2050. 

Global efforts to reduce carbon emissions are codified and coordinated by international agreements such as the Kyoto Protocol and Paris Agreement. The Pact finalised the rulebook of Article 6 of the Paris Agreement regarding carbon trading markets. This was one of the core goals of COP 26, and the Article 6 rules provide clear accounting guidance for emissions trades between nations as well as providing a new crediting mechanism to broaden access to those countries seeking to attract further clean investment through the global carbon market. 

Australian Carbon Credit Units at record prices

In the lead up to COP 26, global carbon trading markets had seen volumes rise exponentially as businesses seek to use carbon credits as part of their strategy to reach net-zero emissions. Indeed, there has been mounting pressure from shareholders, consumers and the public on businesses to better address the negative impacts of emitting excessive carbon dioxide into the atmosphere. This has caused significant demand for Australian Carbon Credit Units (ACCUs) as a means to achieve these targets.

Alongside this demand has been the development of online trading platforms for carbon credits. These online trading platforms present businesses with new opportunities and easier trade, reduce barriers to entry and expand price transparency in the market for ACCUs.

In percentage terms, Australia’s official carbon price has increased by 180 per cent over the past year to a record $51 per tonne in 2021. In the wake of the Pact, it seems likely that carbon offset prices will continue to increase in 2022, particularly given the possibility of new operators entering the market which may facilitate more businesses to trade ACCUs.

AML/CTF Act regulation of Australian Carbon Credit Units

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) seeks to assist Australia’s AML/CTF regulator the Australian Transaction Reports and Analysis Centre (AUSTRAC) and other law enforcement agencies to detect and deter money laundering and terrorism financing in Australia. The AML/CTF Act applies to businesses that provide designated services, which are listed in section 6. These are generally recognised as services at risk of money laundering, terrorism financing and other serious criminal exploitation.

There is a designated service (table 1, item 33) that captures the trading of ACCUs, which specifically applies to businesses that act as agent for a customer in acquiring or disposing of these products. It is important to note that this designated service also includes the trading of securities and derivatives, and would therefore apply to investment managers and other entities involved in the buying and selling of these products on financial markets. As a consequence, a business providing this service will have to, amongst other things:

• enrol with AUSTRAC;
• maintain an AML/CTF Program in order to manage, mitigate and prevent the risk of criminal exploitation of the designated services they provide;
• undertake customer due diligence (CDD) and enhanced CDD where necessary;
• submit Suspicious Matter Reports, Threshold Transaction Reports and International Funds Transfer Instruction Reports to AUSTRAC; and
• keep certain records.

Compliance with the AML/CTF Act obligations can fundamentally impact the design of a business, particularly how that business engages with its customers and what steps need to be taken before a customer can be on-boarded. The obligations also require businesses to enhance their systems and processes to facilitate ongoing transaction monitoring throughout the customer relationship, and ensure reporting to AUSTRAC is made expeditiously and in the appropriate format. These obligations also mean that the business must be cognisant of staff training requirements, and must ensure that the board has visibility of how the business’ financial crime risk is being managed.

Norton Rose Fulbright has a leading risk advisory practice and is well placed to advise businesses on their AML/CTF Act obligations.