Australia: Environmental Futures Launch on the ASX

By: Matthew Watts, Lisa Lautier, and Dhivya Kalyanakumar

Environmental Futures

In a push to support investors through the energy transition, the Australian Securities Exchange (ASX) has listed a suite of environmental futures contracts on ASX 24 covering:

• Australian Carbon Credit Units (ACCUs);
• Large Generation Certificates (LGCs); and
• New Zealand Units (NZUs).

Available to wholesale clients only, each environmental futures contract is standardised, with one contract being equal to 1,000 underlying units for ACCUs, 1,000 underlying units for NZUs and 1,000 underlying certificates for LGCs. The environmental futures are listed on an annual basis out to 5 years, creating a liquid forward curve intended to improve price and data transparency in the market.

Those holding positions at expiry will be required to either deliver or take delivery of underlying certificates or units. The delivery process is facilitated by ASX Clear (Futures) and takes place in the relevant registry for ACCUs (Australian National Registry of Emissions Units), LGCs (Renewable Energy Certificates registry) and NZUs (New Zealand Emissions Trading Register).

We are seeing a steady rise in the number of clients looking to utilise emissions and environmental units (including ACCUs) to offset their own emissions and we welcome this new market that will provide an opportunity for participants to price and hedge emissions reduction risk.

Australian Carbon Exchange

We understand that the ASX continues to separately work with the Clean Energy Regulator on an exchange that will facilitate the trading of ACCUs. Direct trading in ACCUs is currently only available through private contracts between parties which offers limited price transparency. We are eagerly awaiting the implementation of this initiative which, once established, will create a centralised, standardised, regulated marketplace for buying and selling ACCUs and provide greater price transparency for participants.

AFSL Requirements

Importantly, environmental futures are regulated as derivatives and are therefore financial products under the Corporations Act 2001 (Cth) (Corporations Act). Accordingly, those intending to trade environmental futures must first consider whether they need to be authorised under an Australian financial services licence (AFSL) to undertake those activities. In particular, those trading environmental futures may be required to hold an AFSL authorisation permitting them to trade in derivatives.

Further, ACCUs are considered financial products under the Corporations Act. Those required to deliver, or take delivery of ACCUs, on expiry of an environmental futures contract will also need to consider whether they may be required to hold an AFSL authorisation permitting them to deal in ACCUs. Certain exemptions from these requirements may also apply.

Our detailed explanation of the Australian carbon offset regulatory framework can be found here.