The legal nature of emission allowances issued and traded under the rules of the European Union Emission Trading Scheme (EU ETS) is not defined nor harmonised at the EU level. The definition of allowances is stipulated in Article 3(a) of the ETS Directive where it represents the right to emit one tonne of carbon dioxide (CO2) equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of the ETS Directive and shall be transferable in accordance with the provisions of the ETS Directive.

The EU Member States notifications referred to in the Europen Commission Report of 18 November 2015 on the functioning of the European carbon market (COM(2015) 576 final), p. 25), describe emission allowances variably as: 

The study of the Financial Markets Law Committee (Issue 116 – Emission Allowances: Creating legal Certainty, October 2009, p. 5) observes "emission allowances have aspects of both administrative grants or licences and of private property". The said study is further concerned over the far-reaching potential ramifications of the above alternate legal classifications. 

Most significantly, the legal nature of an emission allowance will be relevant for the following legal issues:

  • the determination of the law, which governs the creation, transfer and cancellation of emission allowances,
  • whether (and how) security rights can be created over emission allowances,
  • how emission allowances should be treated for tax and accounting purposes,
  • how emission allowances should be dealt with in the insolvency of a registered holder, 
  • whether and to what extent emission allowances, or derivative interests in emission allowances, should be treated as subject to regulation as an investment, and
  • whether emission allowances are capable of being stolen, or otherwise being the subject of property-based criminal activity.

The aforementioned study of the Financial Markets Law Committee of October 2009 observes that English, Dutch and German lawyers are tending to recognise emission allowances as proprietary rights (p. 13). However, given the said non-harmonisation, pursuant to the aforementioned Report of November 2015, the European Commission plans to analyse the benefits of clarifying legal status of the emission allowances in the EU ETS following the recommendation of the European Court of Auditors.

The European Court of Auditors in the Special Report No 6 "The integrity and implementation of the EU ETS" (Publications Office of the European Union, 2015) in July 2015 recommended the European Commission to analyse the benefits of treating allowances as property rights across the EU (para 92 of the Report). Although the allowances have certain typical characteristics of property rights, they are not explicitly categorised by the EU laws as such, since in accordance with Article 345 of the Treaty on the Functioning of the European Union, the Treaties in no way prejudice the rules in the EU Member States governing the system of property ownership.

Report of 23 November 2017 from the Commission to the European Parliament and to the Council, Report on the functioning of the European carbon market (COM(2017) 693 final (p. 30)) refers, moreover, to the preliminary ruling the Court of Justice of 8 March 2017 where the Court refrained from defining the nature of allowances (Judgment of the Court of Justice of 8 March 2017 in Case C-321/15 ArcelorMittal Rodange et Schifflange SA v État du Grand-duché de Luxembourg, EU:C:2017:179).

Certain characteristics of the nature of allowances are, however, defined in Article 40 of the EU ETS Registry Regulation states that an allowance shall be a fungible, dematerialised instrument that is tradable on the market. In the Registry Regulation some elements of the finality of transactions were also stipulated, in particular the rule that: 

clip2   Links


MAD/MAR application to the carbon market

  • the record of the Union Registry constitutes prima facie and sufficient evidence of title over an allowance,
  • purchaser and holder of allowance acting in good faith acquires title to an allowance free of any defects in the title of the transferor,
  • accounts in the Union Registry are governed by the laws and fall under the jurisdiction of the EU Member State of their administrator and the units held in them are considered to be situated in that Member State's territory (Article 11(5) of the Registry Regulation).

As from 3 January 2018 emission allowances themselves are defined as financial instruments to be covered by the MiFID II/MiFIR legal framework, and the Market Abuse Regulation (MAR). As a result of that, spot transactions in allowances will be fully subject to financial market rules. The Paris-based EU financial market watchdog (ESMA) concluded anyway, emission allowances and derivatives of emission allowances are not commodity derivatives under the MiFID II/MiFIR legal framework. This is due to the fact emission allowances and derivatives of emission allowances are included in points 4 and 11 in Section C of the Annex I to MiFID II Directive, while the respective points for commodity derivatives are (5), (6), (7) and (10). 

"The definition of commodity derivatives does not include derivatives of emission allowances, as point (4) of Section C of Annex I of MiFID II is not cross-referred to in the definition of commodity derivatives" (Consultation Paper ESMA's guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under MAR, 30 March 2016, ESMA/2016/444, p. 13).

As regards relation to securities financing transactions (SFTs) and SFTR ESMA report of 6 January 2020 (Guidelines on reporting under Articles 4 and 12 SFTR, ESMA70-151-270, p. 12,17, 18) observes:

“It is worth mentioning that emission allowances are not considered a commodity, but a financial instrument under MIFID II. Moreover, none of the SFTs definitions refers to emission allowances. Therefore, ESMA is of the view that transactions involving the use of emission allowances should not fall under the definition of SFT and therefore should not be reported under SFTR”. 



Commission Delegated Regulation (EU) 2019/1122 of 12 March 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council as regards the functioning of the Union Registry


Article 36
Nature of allowances and finality of transactions
1.   An allowance shall be a fungible, dematerialised instrument that is tradable on the market.
2.   The dematerialized nature of allowances shall imply that the record of the Union Registry shall constitute prima facie and sufficient evidence of title over an allowance, and of any other matter which is by this Regulation directed or authorised to be recorded in the Union Registry.
3.   The fungibility of allowances shall imply that any recovery or restitution obligations that may arise under national law in respect of an allowance shall only apply to the allowance in kind.
Subject to Article 58 and the reconciliation process provided for in Article 73, a transaction shall become final and irrevocable upon its finalisation pursuant to Article 74. Without prejudice to any provision of or remedy under national law that may result in a requirement or order to execute a new transaction in the Union Registry, no law, regulation, rule or practice on the setting aside of contracts or transactions shall lead to the unwinding in the registry of a transaction that has become final and irrevocable under this Regulation.
An account holder or a third party shall not be prevented from exercising any right or claim resulting from the underlying transaction that they may have in law, including to recovery, restitution or damages, in respect of a transaction that has become final in the Union Registry, for instance in case of fraud or technical error, as long as this does not lead to the reversal, revocation or unwinding of the transaction in the Union Registry.
4.   A purchaser and holder of an allowance acting in good faith shall acquire title to an allowance free of any defects in the title of the transferor.


Subscribe to read more …


We use cookies on our website to support technical features that enhance your user experience and help us improve our website. By continuing to use this website you accept our Privacy Policy.