Proposed reforms to Australian carbon market - Discussion Paper released for public comment

On 11 October, the Clean Energy Regulator (CER) released the Discussion Paper on 'Enabling deep, liquid, transparent and accessible carbon markets in Australia' (Discussion Paper) for public consultation. The Discussion Paper proposes reform to increase the sophistication and liquidity of Australian carbon markets (including Australian Carbon Credit Units (ACCUs), Safeguard Mechanism Credits (SMCs), Renewable Electricity Guarantee of Origin certificates (REGOs) and future Nature Repair Market certificates).

The Discussion Paper is designed to support consultation around two key topics:

1. First, the Unit and Certificate Registry, which is expected to imminently replace the Australian National Registry of Emissions Units (ANREU) as the infrastructure where carbon certificates are stored and transferred.
2. Second, broad and high-level structural changes to the trading model of Australian carbon markets to facilitate wider investment.

The potential changes associated with these topics sit within the broader context of increased global competition to secure capital investment in clean energy and decarbonisation. Additionally, there is growing demand within Australian carbon markets from participants seeking carbon credits for voluntary and non-Safeguard compliance purposes.

Unit and Certificate Registry

The Discussion Paper provides insight into the intended operation of the new Unit and Certificate Registry. It is expected to replace ANREU in phases beginning with the transition of SMCs in late 2024, followed by REGOs, Nature Repair Market certificates and ACCUs during 2025. Large-scale generation certificates (LGCs) and small-scale technology certificates (STCs) are expected to remain separately housed through the Renewable Energy Certificate Registry (REC Registry).

At a high level, the Unit and Certificate Registry will have the potential to provide market participants with:

• greater ease of use to facilitate trading (such as automation, integration with back-office systems, and application programming interface (API) access to account holders and over the counter (OTC) platforms); and
• increased visibility of data to inform investment decisions (including attributes such as specific project methodologies, co-benefits to First Nations peoples, or the location of the project generating the ACCUs).

The CER has confirmed that the migration to the Unit and Certificate Registry is intended to practically support carbon market participants with modernised infrastructure, decreased transaction costs, and increased functionality. It is not designed to replace the OTC trading platforms currently provided by third parties.  

The CER is seeking feedback on the priority features and functions that should be implemented in the Unit Certificate Registry.

Proposed exchange trading model

The Discussion Paper also flags potential significant future changes to the structure of Australian carbon markets. A proposal has been developed by the CER, with assistance from the Australian Securities Exchange (ASX), designed to facilitate much wider participation and 'ASX-style' exchange trading of carbon certificates. As the Discussion Paper proposes these changes for the first time and is intended to take a pulse on market receptiveness, we would not expect the CER to implement these changes in the near future. However, we note that the proposed changes do not require legislative amendments to implement.

At a high level, the proposal moves from 'over the counter' (OTC) trading to a centralised exchange trading model, which would reduce counterparty risk in clearing and settlement arrangements and facilitate investment. The Discussion Paper acknowledges that this model should be supported by a more liquid and sophisticated market, which is currently impeded by the barriers of time, cost, and the legislated 'fit and proper person' clearance associated with holding an ANREU account.  

Consequentially, the CER proposes a process of 'transmutation’. Carbon certificates would remain stored on the central registry, but be tradable on the exchange through ‘proxy’ certificates carrying equitable interest in the ACCUs (known as CHESS Depositary Interests (CDIs), which are already well utilised on the ASX). ACCUs could remain in CDI form for as long as the holder wishes to continue trading the interest, however must be 'transmuted' back into an ACCU by an ANREU account holder for the purposes of relinquishment and surrender (such as to ensure compliance with Safeguard Mechanism obligations).

The CER also seeks feedback on whether ACCUs should be traded as a generic class, or two classes for the purposes of trading. Those classes being 'carbon sequestration' and 'emissions avoidance', based on the method of the ACCU project which generated the ACCU. The aim here is to strike an appropriate balance between allowing the market to trade on more specific attribute information, while maintaining the liquidity and stability of the ACCU market as various methodologies are developed and discontinued.

Public consultation

The Discussion Paper and associated materials can be found here.

Public consultation is open from 11 October 2024, and written submissions close 22 November 2024. The consultation is open to:

• participants in CER schemes, including entities creating, holding and trading carbon units and certificates;
• safeguard facilities;
• carbon market participants;
• consultants; and
• brokers and intermediaries.

If you have any queries about the Discussion Paper or if you would like assistance making a written submission, please contact a member of our team.

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Written by Melanie Debenham (Partner), Kathryn Pacey (Partner), Heidi Asten (Partner), Peter Briggs (Partner), Naomi Hutchings (Executive Counsel), and Gillian Mahony (Solicitor)