Basic rules on the commercial circulation of Australian carbon credit units
Saturday, 27 October 2012 12:50

 

Under the Australian climate legislation ACCUs are personal property and, subject to the relevant provisions, transmissible by assignment, by will and by operation of law.

 

 

ACCUs are carbon units issued under the Australian Carbon Credits (Carbon Farming Initiative) Act 2011 (Bill). They may be either a Kyoto Australian carbon credit unit or a non-Kyoto Australian carbon credit unit, depending whether the sequestration or emissions avoidance meets Australia’s commitments under the Kyoto Rules.

 

Explanatory Memorandum to the Bill (Explanatory Memorandum) clarifies the fundamental rules on the commercial circulation of ACCUs.

 

General rules

 

Australian carbon credit units are issued by the Australian Carbon Credits Administrator (the said role is performed from 2 April 2012 the Australian Clean Energy Regulator) on behalf of the Commonwealth, through making an entry in the relevant person’s registry account. The unit is thus represented by an electronic entry in the Registry, rather than by a paper certificate. The Administrator will only be able to issue ACCUs in accordance with the certificate of entitlement.

 

It is recognised that while an ACCU will always be equivalent to one tonne of carbon dioxide either avoided or sequestered, the value of that unit is determined by the demand for that unit in the market.

 

Under the Australian rules, ACCU which has been issued by the Administrator is personal property and, subject to the relevant provisions in the Bill, transmissible by assignment (that is, as a result of some form of agreement to transfer the units to another person), by will (that is, as part of a deceased person’s estate) and by operation of law.

 

The Bill states that the registered holder of an ACCU:

(a) is the legal owner of the unit; and

(b) may, subject to the Bill and the Australian National Registry of Emissions Units Act 2011, deal with the unit as its legal owner and “give good discharges for any consideration for any such dealing” (Part 11, Division 3, clause 150A of the Bill).

This provision, however, only protects a person who deals with the registered holder of the unit as a purchaser:

(a) in good faith for value; and

(b) without notice of any defect in the title of the registered holder.

 

If there is an entry for a carbon unit in a person’s Registry account, then that person is the legal owner of the unit, subject to the requirements of provisions governing the registry of emission units.

 

A transfer of a carbon unit is of no force until it is registered in the Registry. This provision protects a bona fide purchaser of carbon units, if they purchased the units for value and without knowledge of any defects in the registered holder’s title to the affected carbon units. It would, for example, permit the person to sell the units or use them as security.

Defects in title might arise, for example:

• if a carbon unit was transferred by the registered holder in error and sold on by an unintended recipient before the error is detected;

• if a carbon unit was transferred fraudulently, such as if evidence of a transmission by operation of law was false; or

• there is unauthorised access to a Registry account.

 

Pursuant to the Explanatory Memorandum the Australian Government’s policy intention in adopting this approach in the Bill is to reduce uncertainty for holders of ACCUs, and promote market confidence in and development of the carbon market. The infamous experiences suffered by the EU ETS registry holders are clearly visible in the background of this approach.

 

In the Australian scheme the concept of transfer of an ACCU consists of the removal of an entry for the unit from the first account and making an entry for the unit in the second account.

 

Under the Australian rules transfer is initiated by an electronic instruction from the transferor transmitted to the Administrator, which then removes the entry for the unit from one account and makes an entry for that unit in another account. This mechanism is rather obvious for EU ETS participants, and, in fact, it is hard to imagine any emissions trading system practically working in other way than electronic means.

 

Transmissions by operation of law

 

Transmissions by operation of law bring additional issues. Under the EU ETS rules, considering the matter enters the scope of national legal orders of the EU Member States, the uniform rules in that regard probably for long yet will not be possible.

 

The Explanatory Memorandum under the Australian program gives in that regard an example of a transmission of a unit to a person as the trustee of a deceased person’s estate. In this situation, it is the transferee who needs to establish evidence of transmission and, if necessary, open a Registry account. The timeframe for a person to provide the Administrator with evidence of the transmission of ACCUs in these circumstances is 90 days. This is to ensure that the new owner of the ACCUs has sufficient time to provide proof of ownership. The Administrator can also extend that period.

 

The Bill is not, however, a self-reliant legal instrument in that regard since the rules on such  evidences of transmission required to prove the transfer of ACCUs as a personal property are specified in other Australian regulations (depending, it can be presumed, on the type of the juridical event).

 

Transmissions by assignment

 

Part 11, Division 3, clause 152 of the Bill states that a transmission by assignment of an Australian carbon credit unit for which there is an entry in a Registry account is of no force until:

(a) the transferor, by electronic notice transmitted to the Administrator, instructs the Administrator to transfer the unit from the relevant Registry account kept by the transferor to a Registry account kept by the transferee;

and

(b) the Administrator complies with that instruction.

 

The words that need to be underlined in this passage are “of no force”. Note – not “invalid” or “ineffective”. It may be debatable what the date of such an assignment is: the date of the juridical act of assignment or the date of entry with the Registry or any other potential date. I suppose the provisions of the Australian substantial law decide on this issue (the provision that the transmission is “of no force” until the Administrator transfers the ACCUs also applies to the transmission of Australian carbon credit units by operation of law, not only by assignment).

 

Other issues

 

Explanatory Memorandum also mentions that the Bill does not affect the creation or enforcement of, or any dealings with (including transfers of), equitable interests in ACCUs. The specific provision in that regard has been included for the avoidance of doubt. In addition, the Bill is not intended to prevent the taking of security over ACCUs (see Part 11, Division 3, clause 157A of the Bill).

 

 

 

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