Why wouldn’t Australia look to leverage our position as a world-leading democracy and economy to cut emissions through corporate law and technology? We are a top 20 economy as measured by our G20 status with our nation hitting 12th place in the great gross domestic product (GDP) race.
One of the reasons we are an economic powerhouse is due to our status as a stable, liberal democratic nation with the rule of law and strong public institutions. Our corporate law settings are well-established, reliable and predictable. Australia attracts a large stock of foreign investment and has done so for 250 years.
Despite these strengths, our corporate law is too often static and unresponsive to dynamic changes in the economy. This was noted in various Senate Inquiries into FinTech and digital assets in the 46th Parliament. Only in February 2022 was the requirement for so-called ‘wet signatures’ and paper-based execution of documents removed, 20 years after the passing of the Corporations Act.
Australia should be using corporate law to attract new investment and achieve important economic objectives to a much greater degree. There is much to learn from Singapore in this respect. Emissions reduction is one of these important economic objectives.
There are three key areas of corporate law we should deploy to cut emissions and improve our dynamism.
One key area we need to lead on is emissions disclosure. If we move quickly to implement local laws to require emissions to be publicly disclosed, economic risk will be clearer and investment should be easier to attract.
The second is achieving first mover advantage on digital assets laws, by passing a set of laws that protect consumers but also promote investment in Australia.
The third key area is ensuring emissions reduction (carbon credit) units can be easily tokenised and traded.
The emissions disclosure and digital asset laws provide the framework and basis for achieving the reduction of carbon emissions. The latter is facilitated by these two baseline elements.
The Economic Imperative of Net Zero
Our commitment to net zero emissions has been well and truly flagged. As a nation, we can all win from net zero. I am proud that the Liberal Government committed Australia to net zero emissions in 2021.
I have long seen climate risk as an economic risk. I said in 2015:
The concepts underpinning traditional investment methodology apply equally to all matters of environmental, social and governance (ESG) risk factors. An environmental or social externality will generally have an economic cost. Therefore, issues surrounding fossil fuels… should be considered through an economic lens.
Net zero is more than an environmental objective. It is a critical economic imperative for our nation. I have been heavily influenced by the work of Professor Alan Finkel. In his essay, Getting to Net Zero, Finkel says that Australia can significantly cut out total emissions by tripling solar and wind energy production to replace fossil fuels.
There will still be emissions from things like cement production and farming. But the emissions need to be eaten by soil carbon or Direct Air Capture. Australia should have a unique carbon capture advantage given our land mass.
The strength of Finkel’s work is that it breaks down the emissions challenge into bite-size chunks. He shows the path forward and how it can be achieved. We can overcome the emissions challenge through the broader use of existing emerging technologies.
The Liberal Party committed Australia to net zero emissions at the Glasgow Conference of the Parties (COP) in 2021 and established Australia as a leader in low-emissions technologies.
We are proud of this commitment and I believe we can go further by revising our targets in the interceding years to 2050. Based on Finkel’s work, it is clear we can get a deeper cut by 2030 of at least 40% on 2005 levels.
Independent consultancy Climate Analytics estimates the Australian states alone will deliver a 34% cut through their actions, as seen in the state of New South Wales.
There are many opportunities for the Commonwealth in emissions disclosure and corporate law reform that will provide a great economic and environmental benefit to Australia, while also drawing on Australia’s core equities as a sophisticated, high-wage economy.
We have already seen new-generation technologies drive growth in energy and the race to net zero. Solar energy is being exported around the globe by the giant Sun Cable development, to capitalise on Australia’s great natural endowment of resources.
FinTech companies are powering the clean energy transition for consumers. Buy Now Pay Later firm Brighte estimates that in 2021, 15-20% of all solar installations were financed by BNPL. This new technology-enabled consumers to overcome the upfront cost of clean energy.
In October 2022, South Australia became the first major jurisdiction globally to fuel 100% of its total energy demand through solar, from noon to 1:00 pm. Former CEO of the Australian Energy Market Operator, Audrey Zibelman, said: “Never before has a jurisdiction the size of South Australia been completely run by solar power”.
Australia has demonstrated its capacity to be a world leader in this space. One key focus for the government is in identifying and facilitating the capital needed to fund the journey to net zero.
To achieve this objective, the government needs to set out a detailed policy programme to give the markets certainty. The government needs to create a regulatory environment that will appropriately harness new technology and welcome investment.
The key question is: how much will it cost the nation to get to net zero emissions? There is, of course, a cost to replacing existing energy-generating assets. The costs of decarbonisation of energy, transport and industry need to be considered clearly as they are quite separate tasks.
It is possible that Australia has not thought carefully enough about these costs. The Department of Climate Change, Energy, the Environment and Water and the Treasury has not provided a clear answer on the capital cost for Australia’s transition in response to questions when the Senate inquired into 2022 emissions reduction target legislation.
According to the Australian National University’s Professor Frank Jotzo:
To my knowledge, no comprehensive and authoritative estimate for Australia is available. But it must be said that the IEA [International Energy Agency] does not place a particular emphasis on Australia as one country–or, should we say, continent. This actually goes to a broader point of the need to strengthen the capacity and capability in Australia to provide very detailed analysis on the technological and economic aspects of this transition.
We do know that the transition to net zero will be incredibly expensive. It is estimated that annual private investment will need to be 8 times its current level by 2030, to support the clean energy transition.
The Business Council of Australia (BCA) have referred to Finkel’s 2017 estimation that $890 billion will be required to be spent on “power generation, transmission and distribution by 2050 to meet our net zero target.”
The BCA expects that other sectors will require similarly large levels of investment.
The Investor Group on Climate Change (IGCC) wrote in 2020 about the medium-term value of investment needed in each sector:
Investment in renewable and clean electricity production through the period 2020 to 2050 is the sector that will emerge as the largest investment opportunity overall ($385 billion). After 2030, commercial-scale opportunities in green hydrogen production hit scale, leading to substantial investment in the emerging industry. By 2050, green hydrogen is the second-largest investment opportunity at nearly $350 billion. The next largest opportunities to 2050 are transport infrastructure ($104 billion), carbon sequestration ($102 billion), and electricity transmission and distribution ($98 billion).
Much of this capital will need to come from overseas, as Australia has rarely had enough capital to fund our investment needs. I am optimistic about our national net zero economy, but we cannot gloss over the challenges. That is not leadership.
Strong policies should be designed to reduce emissions in energy, transport and industry, for example, while supporting the broader uptake of existing technologies. Other policies could include transmission initiatives and greater emphasis on externality reduction through tax policies.
This is the core framework that is required to drive emissions reduction. The following policy ideas can build on the decarbonisation agenda that Australia needs.
Corporate Law: Leading on Carbon Disclosure
One key policy that Australia should adopt is a carbon reporting mechanism with an aggressive timetable. A mechanism like this would ensure that Australian companies would have a first-mover advantage in disclosing their risk profile.
I believe the Australian Parliament should pass laws that require organisations to disclose their emissions across all three of the ‘emissions scopes’.
Australia should be a leader in carbon disclosure. A firm carbon disclosure regime would not only improve transparency but also attract marginal capital. If you are an international investor, a disclosure regime will allow you to look into an organisation and assess its risk profile according to its scope 1, 2 and 3 emissions.
Scope 1 greenhouse gas emissions as those directly produced from a company’s activities. Scope 2 emissions are generated indirectly through the consumption of an energy commodity, such as electricity, heat or cooling. Scope 3 emissions cover all indirect emissions generated in the economy.
Under the current regime, scope 3 emissions are not reported. This category captures emissions created as a consequence of a company’s activities, but from sources not owned or controlled by that company.
The International Sustainability Standards Board published draft International Financial Reporting Sustainability Disclosure Standards in March 2022.
In the exposure draft, the ISSB wrote:
An entity shall disclose information that enables users of general purpose financial reporting to understand the effects of significant climate-related risks and opportunities on its financial position, financial performance and cash flows for the reporting period, and the anticipated effects over the short, medium and long term — including how climate-related risks and opportunities are included in the entity’s financial planning. An entity shall disclose quantitative information unless it is unable to do so. If an entity is unable to provide quantitative information, it shall provide qualitative information. When providing quantitative information, an entity can disclose single amounts or a range.
Providing investors with this level of transparency and certainty about Australian companies will, I believe, encourage them to place their investments in our businesses, rather than in other jurisdictions with less fulsome disclosure requirements.
We should not simply be encouraging self-regulated carbon disclosure. We should not be asking the Corporate Governance Council to publish a note.
The Investor Group on Climate Change provided testimony to the Senate in 2022 on the need for Australia to put in reporting mechanisms for companies that deal with scope 1, 2 & 3 emissions, in line with the ISSB global standards:
I think we have the advantage that some of the work is actually being done for us internationally through the International Sustainability Standards Board, which is establishing global standards, which is actually really important for investors because the last thing we want is market fragmentation, with different standards in lots of different countries... The whole point is setting the parameters so business can prepare. At the moment, we’re in a situation where there’s uncertainty in the market about when it's going to happen.
The Financial Services Council has also called for a mandatory climate disclosure regime to be developed:
We want a mandatory climate disclosure regime, and we've called for that and think that is a priority. But it should be a principle-based regime; it shouldn't be overly prescriptive.
This year, the Commonwealth Bank of Australia (‘CBA’) became the first Australian bank to disclose its financed scope 3 emissions.
CBA disclosed figures that were much higher than previously expected, stressing the extent of the hidden carbon risks faced by customers and the market. The Financial Review reported that:
CBA’s historic disclosure last month was eye-opening because banks’ scope 3 emissions were previously thought to be around 700 times larger than scope 1. Emmi estimates CBA scope 1 emissions for 2021 were 10,600 tonnes – making scope 3 larger by 2300 times.
At the moment, other Australian organisations have no obligation to follow in CBA’s footsteps. According to the exposure draft of the ISSB global standards published this year, organisations would be required to make disclosures about their sustainability-related risks and opportunities.
These disclosures would include the organisation’s strategy or transition plans for addressing those risks and opportunities, and the organisation’s metrics and targets for monitoring its performance. The disclosures would have scope to capture important information about how climate risks will affect an organisation’s cash flow and long-term business strategy.
New Zealand has already passed laws to require disclosures, their External Reporting Board said:
For financial institutions included in the regime, this will mean measuring the financial emissions of a portfolio. This enables financial institutions to set targets, inform actions and disclose progress. Understanding these emissions is crucial for portfolio alignment and decarbonisation.
The United States has set out expectations in draft Securities Exchange Commission guidance, saying:
A registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.
Given our competitors are already moving, we will need legal requirements to give Australian businesses and investors the necessary level of certainty.
Given the ISSB global standards are virtually finalised, Australia should start the process of implementing them domestically. At the time of writing, the Australian Treasury is consulting on a proposal to introduce carbon disclosure for the financial year 2024-25.
We should be looking to introduce a voluntary approach for companies wanting to move quickly in 2023-24. The faster we move on disclosure, the easier it will be to attract capital and smooth the decarbonisation transition.
The tokenisation of Carbon Credits
The implementation of a carbon disclosure regime could be backed by embracing digital assets innovation and deploying a modern system for carbon credits.
The idea that only the wealthiest fund managers with wholesale access to an obscure system should be able to win exposure to emissions reduction is un-Australian.
The truth is there is no easy way for Australian workers to gain easy exposure to emissions reduction units. It is the preserve of the wealthy.
The Australian system was established in 2009. Law firm Corrs Chambers Westgarth describe the system as:
ACCUs are created and issued under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (‘CFI Act’). Each ACCU represents one tonne of carbon dioxide that is abated through an eligible offsets project (being a project which avoids the emission of greenhouse gases or removes them from the atmosphere).
The Clean Energy Regulator (CER) says:
The Australian National Registry of Emissions Units (ANREU) is administered by the Clean Energy Regulator. ANREU is a system designed to meet one of Australia's commitments under the Kyoto Protocol. The Protocol requires each country with an emission reduction target to establish a national registry to ensure accurate accounting of the issuance, holding, transfer, acquisition, cancellation, retirement and carry-over of Kyoto units.
The only way to trade these units is to have an account with ANREU which can take up to six months to obtain according to industry sources.
An ACCU is a unit issued to an eligible person by the CER under section 147 of the CFI Act. The ACCU is created by making an entry for the unit in an account kept by the person in the electronic ANREU.
From a tax perspective, ACCUs are subject to a unique Australian tax law (division 420). This law effectively forces holders of units to take them to account at the end of the financial year. This means that holders are potentially liable to a tax obligation regardless of whether the units have been sold or traded. It is therefore effectively treated as an income set and not a CGT asset.
BetaCarbon is one market player which has gone to the trouble of obtaining a licence to trade. It has then tokenised its credits to create an alternative secondary market. In doing so it predicts the average trade in Australia will go from $100,000 to $1.
Betacarbon “has minted tokens covering 93,000 tonnes of carbon drawing from 32 emissions reduction projects ranging from landfill gas, native forest regeneration, and indigenous savanna burning.”
One of its backers, former ASIC Deputy Chair Dan Crennan says:
The ACCU system, which is more or less consistent with carbon credit systems, was designed some time ago and designed seemingly for a small group of participants and industries that were obligated to participate in the decarbonisation system; In other words large-scale miners and polluters.
It shouldn’t be this hard. There is no need to use a bespoke unit registry system or to unnecessarily restrict access to trading.
An Independent Review was completed by the Albanese government into Carbon Credit Units, led by Professor Ian Chubb AC.
The purpose of the Review is to ensure that ACCUs and Australia’s carbon crediting framework are strong and credible and will be supported by participants, purchasers and the broader community.
The Review said the scheme is fundamentally sound but it put forward several recommendations.
The Panel makes a number of recommendations. The purpose of each is to improve the scheme: to clarify intention where necessary; to clearly identify (and separate) the key roles of integrity assurance, regulation and administration; to remove unnecessary restrictions on data sharing; to enable free prior and informed consent; and to improve information and incentives, including in relation to non-carbon benefits and attributes.
As part of the response to the review, Australia should look to establish a world-leading carbon credits tokenisation system to broaden the mandate of the scheme. We should also do it to protect the scheme’s integrity.
Blockchain is a natural partner for cutting emissions. The European Union has written:
Blockchain is a powerful tool that can significantly improve the transparency, accountability and traceability of greenhouse gas emissions. It helps companies provide more accurate, reliable, standardised, and readily available data on carbon emissions…
Blockchain can be utilised through smart contracts to better calculate, track and report on the reduction of the carbon footprint across the entire value chain. It can provide instant authentication, verification of real-time data and clear data records.
Within the short lifespan of digital assets, the ACCU regime was established a lifetime ago. The rules are prescriptive, novel and unsuited for broader trading purposes.
If we want to provide democratic access to carbon credit units, a significant body of law reform is needed to mainstream the credit units as interoperable.
Regulate Tokens
Facilitating the tokenisation of carbon credit units is only half the battle. The second half of the battle is ensuring digital assets themselves are regulated properly.
20% of the population has owned some form of crypto. Australia is in a race for consumer protection, capital attraction and innovation. Instead of taking fast action to respond to existing Treasury consultations on crypto markets and custody, the current government has commissioned another review. Our competitors are enhancing their regulatory systems while we establish endless reviews.
The recommendations of the Senate Select Committee on Australia as a Financial and Technology Centre published in October 2021 stacked up internationally. The recommendations were largely similar to the executive order made by United States President Joe Biden in March 2022, after our recommendations were released.
Other jurisdictions are striking ahead. In the United States, Senators Lummis and Gillibrand are working to pass the Responsible Financial Innovation Act. This Act would provide a comprehensive set of regulations for the digital assets market, where the Commodity Futures Trading Commission would regulate digital commodities, stablecoin and other assets.
This is not only a race for capital and investment in this industry but a race for our country’s future and economy.
As a result of the Labor Government’s failure to progress in this agenda, I have taken it upon myself to develop a Private Member’s Bill: the Digital Assets (Market Regulation) Bill 2022 (‘Digital Assets Bill’).
Australians currently face a gaping hole in the regulatory framework. Investment in a financial product is protected, while investment in a crypto product is not.
Further exacerbating this issue is Australia’s licensing framework. Crypto providers hold financial services licenses, not licenses specifically for crypto products. This gives the impression that these providers are offering a regulated product when they are not.
To address this regulatory hole, my Digital Assets Bill includes a licensing regime with the following three licence categories:
This regime has a twofold rationale.
First, by providing a standards-based regime, consumers can have confidence that risk exposure is managed, and on par with other financial services and products.
Second, by providing regulatory certainty, the door to greater investment and growth in Australia’s crypto ecosystem and the virtual economy is opened.
This can be achieved with licensee provisions. I have proposed the following:
To ensure that the parliament leads these reforms and regulators are not running the show, the Minister would have the responsibility for issuing licences. ASIC would have the responsibility of administering and enforcing the regime and will be granted monitoring and investigative authority.
This industry must come out of the shadows and into the light. The Digital Assets Bill provides for a transition period as the industry progresses.
The Bill also sets out a regulatory framework for firms issuing stablecoins.
In the recent collapse of algorithmic stablecoin, Terra, an estimated $60 billion went up in smoke in a ‘digital run’.
Minimum reserve standards must be introduced to ensure that stablecoin issuers provide consumers with a reasonable standard of consumer protection.
In reference to stablecoins, the Governor of the Reserve Bank of Australia, Philip Lowe, said that it is “important that these tokens are backed by high-quality assets and that they meet high standards for safety and security.” Translation: the Australian Parliament should legislate to protect consumers.
In a similar vein, United States Treasury Secretary, Janet Yellen, has urged lawmakers to move on consumer protection in the digital race.
It is with this in mind that the Bill contains provisions requiring licensees to hold in reserve the full amount of the face value of liabilities on the issue in the form of Australian legal tender or foreign equivalent. The stablecoin issuer must hold the capital in an Australian bank to satisfy its licence obligations.
The Lummis-Gillibrand Bill provides a useful precedent, underlining the importance of international collaboration in setting global regulatory standards.
Stablecoins could be a solution to the eye-watering problem faced by 1.7 billion people: de-banking. Unfortunately, there are as many risks as there are opportunities when it comes to stablecoins.
In summary, Australia should build on our net zero commitment by aggressively pursuing three sets of corporate and financial law reform:
These are the decarbonisation issues upon which we Liberals must lead.
Andrew Bragg is a Senator representing New South Wales in the Parliament of Australia. He previously worked in financial services.
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