|Further developments as regards carbon markets position limits|
|Tuesday, 29 May 2012 18:34|
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The position limits will be counted in California for each future vintage separately – according to the draft law. Also under the Australian framework the controlling corporation of a group must notify the Clean Energy Regulator if the group has a significant holding of carbon units.
The first cap-and-trade scheme implementing position (holding) limits in the carbon market has been the California design. EU ETS approach to position limits, even after MiFID II reform, is entirely different (see: Emission allowances position limits – transatlantic approach common in principle but methods of realisation different).
The recent developments in that regard cover significant amendments of the framework as proposed by the Discussion Draft of March 30, 2012 ‘Amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms to Allow for the Use of Compliance Instruments Issued by Linked Jurisdictions’ (further referred to as ‘Draft Amendments’).
The Australian framework for addressing position limits regulated by Part 12 of the Australia Clean Energy Act 2011 shouldn’t also be omitted.
I. Proposed changes in the California rules for carbon position limits
Considering the improvements introduced by the Draft Amendment it should be noted that first, it was added that the holding limit relates not only to the maximum number of California GHG allowances but also allowances from external GHG ETS programs to which California has linked (the reason for this change flowing from the undergoing linking with Quebec cap-and-trade).
Second, indirect corporate association is no longer relevant for calculating position limits (for definitions of direct and indirect corporate associations see section 95833 of the Draft Amendments).
The interesting thing is that the California legislators decided to switch sanctions applicable in case of position limits violations. The existing rule in that regard is that if the violation is not discovered until after the transfer request is recorded, then the transfer request may be reversed (besides penalties imposed).
The new proposed provision envisions that if the Executive Officer of the ARB determines that a reported transfer request not yet recorded into the tracking system would result in an entity’s holdings exceeding the applicable holding limit, then the Executive Officer should not approve the transfer request.
If, however, the violation is not discovered until after a transfer request is recorded, or the holding limit is exceeded at the beginning of a compliance year when allowances purchased at advance auction now fall under the current vintage holding limit, then the accounts administrator will inform the violator which will have five business days to bring its account balances within the holding limit. After that the ARB may transfer allowances in excess of the holding limit to the auction holding account for consignment to auction. The propositions also envision penalties, which may be applied whenever the holding limit is exceeded or transfer requests are filed with the accounts administrator that would violate the holding limit.
The said proposals should generally be assessed in the affirmative. Transfer reversals always cause legal uncertainty. As carbon trading is characterised with great speed, the allowances being the subject of reversal may, in the meantime, repeatedly change hands. This inevitably would entail more legal complications than the new framework consisting in allowing to remedy the violation within five days and, after the said time-limit, the sale of the allowances in excess of the holding limit in an auction.