3 January, 2012
Legal News & Analysis – Australia – Energy & Project Finance – Environment
Now it is law, what legal issues are left?
An emissions trading scheme is now part of the laws of Australia. This heralds the birth of the Australian carbon market, and the incorporation of this new market into our financial services framework. From a financial markets law perspective, what else could there be to do?
Plenty, actually.
Not that there are any critical issues with the markets law foundations of the scheme. Important elements have been included in the Australian scheme from which it can be seen that our government has learned from the overseas schemes already in existence. For example, under the Australian scheme it is clear that the carbon units (which do not yet appear to have a “catchy” official or semi-official name):
- are personal property
- can be the subject of security arrangements and other interests
- can benefit from legal protection to ownership even if found to be previously stolen, provided the owner purchased them unaware of the theft.
Each of these is important to the confidence needed for a functioning market and their presence should facilitate the growth of that market. Of course, there are still some further tasks which do need to be completed around scheme design before the market can develop, such as the precise manner of application of the floor price to international units. However, it is hoped (and anticipated) that these remaining few matters can be settled before the first auction of units of a vintage during the flexible price period.
So what is left to consider from a financial markets law perspective? Well, there are a couple of matters that deserve some attention.
One of these is the regulation of carbon units under the financial services regulation provisions of the Corporations Act. Whilst it is clear that carbon units will be a financial product, the extent to which the full regulatory regime applies to them is a matter which is still to be decided. For example whether licensing exemptions will be available similar to those which exist for overseas derivatives market participants needs to be settled, as well as the application of any short selling restrictions and any transitional period. Following resolution of these (which is already quite progressed), practical matters such as obtaining licences or variations to them will need to be addressed. It is also interesting to note that financial services regulation of European carbon units is now being considered by the European Union.
Also, standard documentation for trading carbon units need to be completed. This is currently being worked on in the Australian market. Some of the critical elements which such documents need to possess include:
- compatibility with documents used in other carbon markets for foreign and international units which can be surrendered under the Australian scheme (such as units from overseas schemes)
- compatibility with Australia’s netting laws, which now has added importance with the impending commencement of Australia’s personal property securities reforms
- acceptance by a range of market participants on both the “buy” side and the “sell” side (particularly those who may be more familiar with simpler emissions reductions purchase agreements)
- provisions which address the events which happen, and can happen, under the scheme, including if it is abandoned.
Not surprisingly, the last of these has received a lot of attention. And it should, because drafting around this matter can be easier said than done. After all, what should “abandoned” mean? However, consideration of this issue has also raised what might be thought of as one of the legal “myths” which surround our new scheme. A myth which does not appear to be believed by many lawyers who actually practice in this field. It is that somehow the Clean Energy Act is imune from amendment or repeal. The Clean Energy Act does not benefit from any special protection, it is a piece of legislation like any other. In any case, it is not clear that this should be considered a legal issue of concern any more than it is with anything else which is created by law and then traded. Perhaps instead of asking whether repeal is legally possible, it is better to ask will it be repealed. This question involves considerations of the workings of our parliamentary system and the reality of the political process. Far be it from a lawyer’s place to offer an opinion on such matters, but it would seem a terrific oversimplification to assume that because repeal is legally possible that it is necessarily a material risk (indeed, taking such an extreme approach to the government bond market, which also trades uncertificated property created under law, is likely to be regarded as most unusual).
So, will financial market participants have anything to consider in 2012 in relation to the law of Australian carbon trading? Yes. Perhaps not esoteric matters of constitutional law but the more prosaic matters of regulation and documentation. Although these may not seem exciting (except to lawyers, of course) they will be critical to the reality of our newest financial market.
For further information, please contact:
Scott Farrell, Partner & Practice Team Leader (B&F) – Mallesons Stephen Jaques