Several recent media articles have reported that local councils could be barred from purchasing carbon credits under the Federal Government’s Carbon Pricing Mechanism because of a restriction on local councils’ power to invest money. The restriction was imposed in 2010 following the global financial crisis to prevent councils losing money through risky financial products called derivatives. The media articles indicated that the Division of Local Government has judged carbon credit units to be the same class as those financial products.
A local council’s power to invest money is governed by the Local Government Act 1993, in particular section 625 which provides that a council may invest money that is not, for the time being, required for any other purpose and that it may only be invested in a form that is notified by order of the Minister.
The current Ministerial Investment Order was gazetted on 11 February 2011 and relevantly provides as follows:
“… a council or county council may only invest money (on the basis that all investments must be denominated in Australian Dollars) in the following forms of investment:
- any public funds or securities issued by or guaranteed by the Commonwealth, any State of the Commonwealth or a Territory;
- any debentures or securities issued by a council (within the meaning of the Local Government Act 1993);
- interest bearing deposits with, or any debentures or bonds issued by, an authorised deposit-taking institution (as defined in the Banking Act 1959 (Cth)), but excluding subordinated debt obligations;
- any bill of exchange which has a maturity date of not more than 200 days; and if purchased for value confers on the holder in due course a right of recourse against a bank which has been designated as an authorised deposit-taking institution by the Australian Prudential Regulation Authority;
- a deposit with the New South Wales Treasury Corporation or investments in an Hour-Glass investment facility of the New South Wales Treasury Corporation.”
We have been advised by the Division of Local Government that it will be issuing advice to local councils later in the year after seeking input from the Accounting Standards Board. We understand that one of the issues being considered by the DLG in relation to the application of the Ministerial Order on Investments is whether there is a distinction between:
- a council purchasing carbon credits to cover its liability under the carbon pricing mechanism;
- a council trading in options to hedge against the future carbon price; and
- a council selling credits generated as a result of participation in the Carbon Farming Initiative (“CFI”).
The CFI, established by the Carbon Credits (Carbon Farming Initiative) Act 2011, is a voluntary mechanism which allows farmers and land managers to earn carbon credits by storing carbon or reducing greenhouse gas emissions on land. These credits (called Australian Carbon Credit Units) can then be sold to people and businesses wishing to offset their emissions.
The CFI provides opportunities for local councils who manage land to earn carbon credits through sequestration offset projects that remove carbon dioxide from the atmosphere by sequestering the carbon in living biomass.
The NSW Government’s position on this issue has significant implications for local councils’ participation in the Carbon Pricing Mechanism. If a Council cannot purchase carbon credits to cover its liability, it faces substantial penalties under the Commonwealth legislation. If a council is permitted to purchase credits to account for its liability but barred from trading in options, this could limit a council who is liable under the scheme from minimising its costs of compliance. The NSW Government’s decision could also potentially preclude local councils from participating in the scheme by conducting land management activities which satisfy the requirements of the CFI.
Note: This information is not to be relied upon as legal advice.