The carbon market and Australian carbon credit units
In much the same way as financial markets trade in different currencies, carbon markets trade different types of carbon credits. For example, carbon permits are generally issued by governments as part of an emissions trading scheme and carbon offsets are issued for abatement projects through schemes like the Carbon Farming Initiative. The Carbon Farming Initiative allows farmers and other land managers to earn Australian carbon credit units by storing carbon or reducing greenhouse gas emissions on the land.
Each Australian carbon credit unit (ACCU) represents at least one tonne of carbon dioxide equivalent (CO2-e). Abatement from all types of activities, including those that reduce methane and nitrous oxide emissions, can be measured in tonnes of (CO2-e). This standard allows Australian carbon credit units from different activities to be traded more easily to meet mandatory obligations and voluntary commitments.
ACCUs can be sold to people and businesses wishing to offset their emissions. ACCUs do not have an expiry date, and can be banked or sold for future use.
Kyoto and non-Kyoto Australian carbon credit units
Australia signed up to the Kyoto Protocol and agreed to constrain our overall emissions. The Kyoto Protocol and other international agreements set out the rules for what emissions should be included in our greenhouse accounts, and how we should go about measuring them. The first commitment period of the Kyoto Protocol ended on 31 December 2012.
The Carbon Credits (Carbon Farming Initiative) Act 2011 (the CFI Act) provides for two types of credits: Kyoto Australian Carbon Credit Units (known as Kyoto ACCUs and which satisfy Kyoto Protocol accounting rules) and non-Kyoto ACCUs. Some Carbon Farming Initiative activities are not included in our greenhouse accounts under the Kyoto Protocol and do not count towards our national target. These include soil carbon, feral animal management, improved forest management and non-forest revegetation. Through the Carbon Farming Initiative, these activities can generate non-Kyoto Australian carbon credit units.
Activities that count towards our national target include reforestation, avoided deforestation, and reducing emissions from livestock, manure, fertiliser and waste deposited in landfills. These activities can earn Kyoto Australian carbon credit units. The CFI Act sets a deadline for the creation of Kyoto ACCUs.
The Kyoto abatement deadline for sequestration projects was 31 December 2012 and for emissions avoidance projects was 30 June 2012. All abatement which occurs after these dates must result in the issue of non-Kyoto ACCUs. These non-Kyoto ACCUs will be displayed in the Australian National Registry of Emissions Units (ANREU) in two categories: non-Kyoto (eligible) and non-Kyoto (voluntary) ACCUs.
Non-Kyoto (eligible) ACCUs are displayed in the ANREU where the project would have been a Kyoto project, if the Kyoto abatement deadline had not yet passed. Projects that are credited with non-Kyoto (eligible) ACCUs are described in the Register of Offsets projects as Kyoto Projects. This includes projects for methodologies such as: reforestation, savanna burning, landfill gas capture and reduced emissions from livestock. Non-Kyoto (eligible) ACCUs have these characteristics:
- are created by Kyoto offsets projects after the Kyoto abatement deadline.
- can be surrendered under the carbon pricing mechanism.
- are unable to be converted or exchanged for Kyoto units.
- can be sold on the voluntary market.
Non-Kyoto (voluntary) ACCUs are displayed where the project was always a non-Kyoto project, regardless of the Kyoto abatement deadline. Projects that are credited with non-Kyoto (voluntary) ACCUs are described in the Register of Offsets projects as non-Kyoto Projects. This would include potential methodologies such as: soil carbon, re-vegetation or feral animal management. Non-Kyoto (voluntary) ACCUs have these characteristics:
- are created by non-Kyoto offsets projects.
- are unable be surrendered under the carbon pricing mechanism.
- are unable to be converted or exchanged for Kyoto units.
- can be sold on the voluntary market.
Whether a project generates Kyoto Australian carbon credit units or non-Kyoto Australian carbon credit units is determined by the Clean Energy Regulator, at the time of declaration of an eligible offsets project. This information is published in the Register of Offsets Projects.
More information on Australian carbon credit units is available in the Concise Description of Australian carbon credit units.
The Australian compliance market
Under Australia's carbon pricing mechanism, around 300 companies have a mandatory obligation to reduce, offset or pay for their direct emissions. This is known as the Australian compliance carbon market.
In the Australian compliance market liable entities have a choice of meeting their liability either by taking action to reduce their emissions, acquiring and surrendering carbon units, including Kyoto Australian carbon credit units, or by paying a unit shortfall charge for any amount of a liability that is not met by surrendering units. Liable entities can generate Kyoto Australian carbon credit units themselves or purchase them from the market.
The table below shows the operation of the carbon pricing mechanism legislation, under the Clean Energy Act 2011 (and associated Acts).
|1 July 2012 to 30 June 2013
|1 July 2013 to 30 June 2014
|1 July 2014 to 30 June 2015
|From 1 July 2015
It is important to note that the fixed price is not necessarily the price that will be received for Kyoto and non-Kyoto (eligible) Australian carbon credit units. There is no fixed price for Kyoto and non-Kyoto (eligible) Australian carbon credit units. The price of Kyoto and non-Kyoto (eligible) Australian carbon credit units will be determined by the market, taking into account the transaction costs and whether the project delivers other social and environmental benefits.
From 2015, the linkage between the Australian and European Union emission trading scheme means that it is likely Australian carbon credit units will trade around the price of European Union Allowances.
Kyoto ACCUs and non-Kyoto (eligible) ACCUs are eligible for surrender under the carbon pricing mechanism established by the Clean Energy Act 2011.
During the fixed price period, liable entities may meet up to 5 per cent of their liability in the form of Kyoto or non-Kyoto (eligible) Australian carbon credit units. If over 50 per cent of their liability is from landfill gas emissions they can meet up to 100 per cent of their liability with Kyoto or non-Kyoto (eligible) Australian carbon credit units.
During the flexible price period from 1 July 2015 there are no restrictions on the level of liability that can be met through the use of Kyoto or non-Kyoto (eligible) Australian carbon credit units. Liable entities can negotiate prices with the market for the purchase of Kyoto Australian carbon credit units.
Non-Kyoto (voluntary) ACCUs that are issued in respect of non-Kyoto projects are not eligible for surrender under the carbon pricing mechanism.
The Australian voluntary market
Australian carbon credit units may also be bought by individuals and companies wishing to voluntarily offset their emissions. For example, an individual who books an airline ticket and then chooses to purchase carbon credits to offset the emissions produced by the flight is participating in a voluntary market. Also, when a business voluntarily wants to reduce its greenhouse footprint to meet public commitments or offer carbon neutral goods and services under the National Carbon Offset Standard, it may purchase Australian carbon credit units.
Kyoto and non-Kyoto (eligible) Australian carbon credit units can be exchanged for internationally recognised units which can be sold in some international compliance markets or voluntary markets.
For example Kyoto and non-Kyoto (eligible) Australian carbon credit units from sequestration offsets projects can be exchanged for Removal Units (RMUs). RMUs can be traded to other governments to help meet their Kyoto targets such as the New Zealand Emissions Trading Scheme.
How Australian carbon credit units are generated
Australian carbon credit units are generated through the process shown in the diagram below, starting with the initial step of becoming a recognised offsets entity through to the issuing of Australian carbon credit units into the recognised offsets entity's registry account.
The Register of Offsets Projects on this website lists all eligible offsets projects and displays how many Australian carbon credit units have been issued to each project.
Australian carbon credit units as financial products
Australian carbon credit units are a financial product under the Corporations Act 2001 and participants in the scheme should consider seeking independent legal and/or financial advice with particular reference to their own circumstances and requirements.
The Australian Securities and Investments Commission (ASIC) has published a Regulatory Guide, Do I need a licence to participate in carbon markets? This Regulatory Guide provides an introduction to Australian Securities and Investments Commission's role in relation to regulating carbon markets and emissions units. It may also assist to check whether an entity offering financial advice with respect to Australian carbon credit units or other emissions units should have an Australian financial services licence.
Financial advisers and investment companies must be licensed or registered with ASIC if they:
- Advise on trade in Australian carbon credit units.
- Offer to sell Australian carbon credit units.
- Invite investment in a managed fund that earns any type of Australian carbon credit units.
For more information about the regulation of Australian carbon credit units as financial products visit the ASIC website.
Investing in the Carbon Farming Initiative
Investing in the Carbon Farming Initiative is an important business decision. Before investing, there is research that can be done to inform an assessment of the potential benefits and risks. Potential investors should consider seeking independent legal and/or financial advice with particular reference to their own circumstances and requirements.
Advice about investing in Australian carbon credit units
Australian carbon credit units (ACCUs) issued under the Carbon Farming Initiative are 'financial products'. The Australian Securities and Investments Commission (ASIC) are responsible for regulating registered companies, financial markets and providers of financial services under the Corporations Act 2001. As part of this role, ASIC licenses and supervises financial services businesses that provide 'financial services' about 'financial products'.
An ACCU is transferable within Australia between accounts in the Australian National Registry of Emissions Units.
Tax treatment of ACCUs
You should obtain professional advice about the tax treatment of ACCUs having regard to your own situation. Generally, the following applies to ACCUs:
- the cost of an ACCU will be deductible, with the deduction effectively being deferred through the rolling balance method until the ACCU is sold or surrendered
- the proceeds of selling an ACCU will be assessable income on revenue amount in the income year the ACCU was sold or surrendered
- the A New Tax System (Goods and Services Tax) Act 1999 has been amended to provide that supplies of ACCUs will be GST-free
- sellers of ACCUs will be deemed to have received market value for an ACCU in certain circumstances (for example, transactions between related entities), and
- company tax deductions will be allowed for the cost of acquiring ACCUs but the benefit of any such deductions will be deferred until the year in which the ACCU is surrendered or sold.