In the lead up to today’s compliance deadline (of prior to 1 April 2025), we have seen a great deal of activity from mining and oil and gas companies when it comes to procurement of Australian carbon credit units (ACCUs) for the purposes of the Safeguard Mechanism. This article sets out some of our observations on ACCUs procurement and associated matters.
Overview of Safeguard Mechanism
Before jumping into our observations, a high-level reminder of the operation of the Safeguard Mechanism and the importance of 1 April of each year is in order.
The Safeguard Mechanism is a legislative regime that applies to facilities that emit more than 100,000 tonnes of carbon dioxide equivalent covered emissions a year (these facilities are known as designated large facilities).[1] Covered emissions are in effect scope 1 emissions of one or more greenhouse gases (excluding certain emissions).
Each designated large facility has a baseline emissions number (i.e. a baseline) that applies for each financial year ending 30 June. Reforms made to the Safeguard Mechanism in 2023 have the effect that a designated large facility’s baseline emissions number will generally reduce by 4.9 per cent each financial year until 2030.
The responsible emitter for a designated large facility has a duty under the Safeguard Mechanism to ensure that an excess emissions situation does not occur for its facility. A penalty is payable by the responsible emitter under the Safeguard Mechanism if an excess emissions situation occurs for its facility.
An excess emissions situation will occur for a designated large facility if the facility’s net emissions number for a financial year exceeds the facility’s baseline emissions number for that financial year.[2]
A designated large facility’s net emissions number for a financial year is in effect the number of tonnes of carbon dioxide equivalence of the total amount of covered emissions from the operation of the facility during that financial year, as reduced by the number of ACCUs and safeguard mechanism credit units (SMCUs) surrendered for that facility and financial year.[3] The deadline for the surrender of ACCUs and SMCUs so as to reduce a designated large facility’s net emissions number for a financial year is prior to 1 April following the end of that financial year.
Accordingly, a responsible emitter for a designated large facility can, where the covered emissions from its facility in a financial year are in excess of its facility’s baseline, avoid an excess emissions situation occurring by ensuring ACCUs and/or SMCUs are surrendered for its facility (and the applicable financial year) prior to 1 April following the end of that financial year.
Observations
ACCUs procurement
We have seen increasing activity of mining and oil and gas companies seeking to procure ACCUs. This increasing activity correlates with the reduction in the baselines for designated large facilities as mentioned above and the increase in the ACCUs market price seen towards the end of 2024 (although the market price has now dropped from its high at the end of 2024). We note that, in mid-2024, ASX launched market-traded ACCUs futures contracts, with those contracts now providing transparent forward price curves for ACCUs.
We have primarily been seeing mining and oil and gas companies seek to procure ACCUs from the market on a spot basis for the purposes of surrendering those ACCUs to reduce their net emissions numbers. However, we have also seen companies enter into (or seek to enter into) long-term forward contracts for the procurement of ACCUs from registered projects.[4] Where companies have looked to procure ACCUs under forward contracts, we have seen companies offer prepayments to project proponents for future deliveries of ACCUs. These prepayments have sometimes been lump sum amounts that have secured the purchaser a price per ACCU that is at a significant discount to the prevailing ACCUs market price.
AFSL issues
We have had a number of mining and oil and gas clients seek advice on Australian Financial Services Licence (AFSL) requirements related to their procurement and surrender of ACCUs. ACCUs and SMCUs are financial products for the purposes of Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act), which chapter establishes the AFSL regime. Contracts for the sale and purchase of ACCUs or SMCUs may also be derivatives for the purposes of Chapter 7 of the Corporations Act and therefore financial products.
As ACCUs and SMCUs are, and contracts for the sale and purchase of ACCUs and SMCUs may be, financial products for the purposes of Chapter 7 of the Corporations Act, responsible emitters and their related bodies corporates will need to carefully consider whether an AFSL may be required in relation to their procurement (and potentially surrender) of ACCUs or SMCUs.
There are a range of exemptions from the AFSL requirements that responsible emitters and their related bodies corporate may be able to be rely upon in relation to the procurement and surrender of ACCUs and SMCUs. These exemptions include the self-dealing exemption and, in the case of derivatives for ACCUs, the exemption in respect of managing financial risk in relation to ACCUs. However, the availability of exemptions needs to be carefully considered on a case-by-case basis because their availability often depends on a range of factors specific to the relevant situation (including any relevant joint venture arrangements where the responsible emitter is the operator or manager of a joint venture).
Controlling corporation and responsible emitter
Operators of designated large facilities should be aware that the concepts of a ‘controlling corporation’ and a ‘responsible emitter’ under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) are separate and have different functions.
A ‘controlling corporation’ is in effect a corporation that does not have a holding company incorporated in Australia. A controlling corporation must apply to be registered under the NGER Act if its group meets one of the applicable thresholds under the NGER Act for a financial year. Those thresholds are set out in section 13 of the NGER Act and relate to aggregate greenhouse gas emissions, energy production or energy consumption of the facilities under the operational control of the controlling corporation’s group members.
A controlling corporation that is required to be registered under the NGER Act has annual reporting obligations under the NGER Act relating to the greenhouse gas emissions, energy production and energy consumption of the facilities under the operational control of the controlling corporation’s group members.
A ‘responsible emitter’ is a concept for the purposes of the Safeguard Mechanism only and is the person who has operational control of a designated large facility. While the ‘responsible emitter’ and ‘controlling corporation’ concepts are separate, a corporation may (but will not always) be both a ‘controlling corporation’ and a ‘responsible emitter’ under the NGER Act. As mentioned above, the responsible emitter for a designated large facility has a duty under the Safeguard Mechanism to ensure that an excess emissions situation does not occur in respect of its facility.
Given the similarity between the concepts of a controlling corporation and a responsible emitter under the NGER Act, a group may wish to confirm that the correct entities have been registered as the responsible emitters for the group’s designated large facilities and that the group’s controlling corporation has not inadvertently been registered as the responsible emitter.
Assisting clients with ACCUs procurement
Due to the increasing need for mining and oil and gas companies to procure ACCUs and SMCUs to satisfy their Safeguard Mechanism obligations, we are offering clients a master agreement that is specifically designed for the procurement of ACCUs and SMCUs for that purpose. This agreement allows a company to enter into spot, forward or option transactions in respect of ACCUs or SMCUs and to be a buyer or seller under those transactions. We are more than happy to discuss this agreement with you.
[1] The operation of the Safeguard Mechanism is primarily established under the National Greenhouse and Energy Reporting Act 2007 (Cth) and the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth).
[2] For the sake of simplicity, we do not comment in this article on how a declared multi-year period for a designated large facility affects the duty of the responsible emitter for that facility to ensure that an excess emissions situation does not occur in respect of that facility for a financial year.
[3] The reduction applying as a result of the surrender of ACCUs and/or SMCUs is determined in accordance with the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth).
[4] Being ‘eligible offsets projects’ under the Carbon Credit (Carbon Farming Initiative) Act 2011 (Cth).