European Union Allowance (EUA) means the tradable unit under the European Union Emissions Trading Scheme (EU ETS), giving the holder the right to emit one tonne of carbon dioxide (CO2), or the equivalent amount of two more powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs). Article 3(a) of the EU ETS Directive defines the emission allowance as being “an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable in accordance with the provisions of this Directive”.

With MiFID II, emission allowances have become financial instruments under Annex I, Section C (11).

In contrast to energy markets, spot markets of emission allowances do not fall under the realm of REMIT.

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Legal nature of emission allowances

Furthermore, despite being subject to weekly and daily position reporting, derivatives on emission allowances do not fall under the definition of commodity derivatives under MiFID II and are therefore not subject to position limits and position management controls (ESMA Preliminary report of 15 November 2021, Emission Allowances and derivatives thereof, ESMA70-445-7).

The EUAs are recorded within the Union Registry, strictly within the EU Transaction Log. It covers the following transaction types:

  • creation – the European Commission issues all EUAs by creating them on the EU Total Quantity Account, then transfers them for auctioning to the EU Auction Account and for free allocation to the EU Allocation Account;
  • free allocations – EUAs are transferred from the EU Allocation Account to the respective Operator Holding Account of firms entitled to receive free EUAs;
  • auctioning – EUAs are (i) transferred from the EU Auction Account to the Auction Delivery Account of the auction platform, and (ii) after being bought by market participants at an auction, they are transferred from the Auction Delivery Account to the successful bidder’s Trading Account or Operator Holding Account;
  • transfers – account holders can transfer EUAs between their own accounts, or to other accounts to settle trades made outside of the Union Registry;
  • surrender or deletion – account holders transfer EUAs from their Operator Holding Accounts to the EU Deletion Account either as part of their annual compliance obligation, or to be cancelled without it being recorded as surrendering.

Inflows of new physical EUAs in the market occur in two ways. First, through the EU Allocation Account, which receives once a year allowances from the EU Total Quantity Account and subsequently releases those for free to Operator Holding Accounts (compliance accounts). Second, through the EU Auction Account which continuously receives allowances from the EU Total Quantity Account and evenly distributes those through the established auctioning platform to successful bidders.

Both sources of inflows are visible through (i) the abrupt surge of compliance accounts from free allocations (as the EU Allocation Account balances decrease) and (ii) the continuous increase of both compliance and non-compliance accounts over the calendar year from auctions (ESMA Final Report of 28 March 2022, Emission allowances and associated derivatives, ESMA70-445-38).


New type of emission allowances created for ETS system for buildings, transport and additional sectors 


Directive (EU) 2023/959 of the European Parliament and of the Council has introduced new sectors (maritime transport) in the EU ETS as of 2024, but, what’s more important, has created an adjacent ETS (so-called ETS 2) system for buildings, transport and additional sectors as of 2027. The rules for the latter are laid down in the Chapter IVa of the EU ETS Directive.

Considering that allowances covered by the said Chapter IVa of Directive 2003/87/EC are not fungible with the rest of the EU emission allowances, the respective differentiations have been introduced in the EU ETS Registry Regulation. 

Commission Delegated Regulation of 25.10.2023 amending Delegated Regulation (EU) 2019/1122 supplementing Directive 2003/87/EC of the European Parliament and of the Council as regards the functioning of the Union Registry (C(2023) 7112 final) amended the EU ETS Registry Regulation and set up the following definitions:

  • ‘general allowances’ mean allowances created pursuant to Chapter III of Directive 2003/87/EC, including allowances stemming from emission trading systems that are linked with the EU ETS pursuant to Article 25 of that Directive, allowances created pursuant to Article 3g of that Directive and allowances created pursuant to Articles 3c and 3d of that Directive that were issued after 1 January 2025 (Article 3(8) of Delegated Regulation (EU) 2019/1122,
  • ‘regulated entity allowances’ mean allowances created pursuant to Chapter IVa of Directive 2003/87/EC’ (Article 3(8a) of Delegated Regulation (EU) 2019/1122).

Non-fungible character of general allowances and regulated entity allowances has been expressed in Article 36(5) of the EU ETS Registry Regulation, which reads:  “Allowances covered by Chapter IVa of Directive 2003/87/EC shall not be fungible with allowances covered by Chapters II and III of that Directive. Allowances covered by Chapter IVa of Directive 2003/87/EC shall not be held on operator holding accounts, aircraft operator holding accounts, maritime operator holding accounts or third country government accounts”.

This will have to be reflected in trading documentation, since it is necessary to hedge proper type of emission allowances for compliance (surrendering).

As of 1 January 2025, general allowances are to be issued also for the aviation sector, by means of free allocation and auctioning, thus covering emissions from the stationary, maritime and aviation sectors.

However, in order to ensure a smooth transition and legal certainty for the users, aviation allowances issued before the end of 2024 will remain in the accounts and in circulation. 



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