Legal nature of emission allowances
European Union Carbon Market Glossary

 


 

 

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 Report on the functioning of the European carbon market, accompanying the document Report from the Commission to the European Parliament and to the Council, Climate action progress report, including the report on the functioning of the European carbon market and the report on the review of Directive 2009/31/EC on the geological storage of carbon dioxide of 18 November 2015 (COM(2015) 576 final), p. 25, describe emission allowances variably as:

 

financial instruments,

 

- intangible assets,

 

- property rights,

 

- state property, and

 

commodities.

 

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.

 

Certain characteristics of the nature of allowances are, moreover, defined in Article 40 of the 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:

 

- 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).

 

 

 

 

IMG 0744

    Documentation    

 

 

 

Report on the functioning of the European carbon market, accompanying the document Report from the Commission to the European Parliament and to the Council, Climate action progress report, including the report on the functioning of the European carbon market and the report on the review of Directive 2009/31/EC on the geological storage of carbon dioxide of 18 November 2015 (COM(2015) 576 final), p. 25

 

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

 

European Court of Auditors, Special Report No 6 "The integrity and implementation of the EU ETS", Publications Office of the European Union, 2015

 

Sabina Manea, 'Instrumentalising Property, An Analysis of Rights in the EU Emissions Trading System', The London School of Economics and Political Science (2013)

 

Financial Markets Law Committee, Issue 116 – Emission Allowances: Creating legal Certainty, October 2009

 

Interplay between EU ETS Registry and Post Trade Infrastructure, Publications Office of the European Union, 2015

 

K. Anttonen, M. Mehling and K Upston-Hooper (2007), 'Breathing Life into the Carbon Market: Legal Framework of Emission Trading in Europe'

 

 

 

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    Links    

 

 

 

Security interests over emission allowances

 

Legal nature of emission allowances as a property rights

 

MAD/MAR application to the carbon market

 

 

 

 

 

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Last Updated on Friday, 16 June 2017 12:14
 

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