|EU ETS Registry Regulation - more than just technicalities|
Article 19(1) of Directive 2003/87/EC requires that all emission allowances issued from 1 January 2012 onwards must be held in a Union Registry on accounts managed by the European Union Member States.
The EU system of emission allowances registries has been operational since January 2005 and provides a standardised and secure system of electronic registries which tracks the issuance, holding, transfer and cancellation of all allowances issued under the European Union Emissions Trading Scheme (EU ETS).
Initially each EU Member State had a its own emissions alllowances registry. In 2012, these registries were replaced by the single Union Registry, which provides a harmonized basis to transfer allowances across the EU.
This single registry is operated and maintained by the European Commission, whereas national registry administrators in all 31 countries participating in the EU ETS remain the point of contact for the representatives of - as (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) indicates - more than 20 000 accounts (companies or physical persons).
Also the allocation processes in phase 3 of the EU ETS are performed centrally in the Union Registry, both for the allocation of allowances to stationary and aircraft operators for free and for the auctioning of allowances through the common and two 'opt-out' auction platforms.
The legal instrument providing specific rules on the Union Registry is the Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 1193/2011.
The said Regulation applies to allowances created for the EU ETS third trading period commencing on 1 January 2013 as well as for subsequent periods, annual emission allocation units and Kyoto units.
It also applies to aviation allowances to be auctioned that were created for the trading period from 1 January 2012 to 31 December 2012.
In 2013 the Registry Regulation has been once more revised to finalise the functionalities needed for phase 3 of the EU ETS and to incorporate the accounting of transactions under the Effort Sharing Decision.
In relation to the EU ETS, the revised Registry Regulation also provides for the mechanism to implement the provisions of Article 11a of the EU ETS Directive (whereby operators can exchange international credits for allowances).
This was due to the need to determine, in the course of the finalisation of preparations of EU ETS Phase 3, the details for the exchange process of JI and CDM credits held by companies with compliance obligations under the EU ETS into Phase 3 allowances.
For details that this legislative measure brings as regards CER and ERU regulatory EU ETS environment in the third trading period see CERs and ERUs market as from 2013.
Further potential improvements to the EU ETS registry infrastructure can be inferred from recital 27 of the Registry Regulation, which indicates:
"Since it may be desirable to provide for additional account types or other means that would facilitate the holding of allowances or Kyoto units on behalf of third parties, or the taking of a security interest in them, these issues should be examined in the context of a future review of this Regulation."
Particularly facilitating the taking security interest in emission allowances would be noteworthy for carbon market participants.
Also other interesting designs, like for instance consolidated account present under the California cap-and-trade rules, would be worth considering.
EU ETS Registry Regulation role is far more significant than merely providing for technical measures for securing the transactions in emission allowances are recorded on the relevant accounts.
Of equal or even more importance are provisions that harmonise certain aspects of Member States civil law to ensure that the free circulation of carbon credits after they are registered in accounts in the Union Registry can be challenged only in limited circumstances.
The reasons for this are explained in the recitals to the said Regulation, which elaborate as follows:
"As allowances and Kyoto units exist only in dematerialised form and are fungible, the title to an allowance or Kyoto unit should be established by their existence in the account of the Union Registry in which they are held. Moreover, to reduce the risks associated with the reversal of transactions entered in a registry, and the consequent disruption to the system and to the market that such reversal may cause, it is necessary to ensure that allowances and Kyoto units are fully fungible. In particular, transactions cannot be reversed, revoked or unwound, other than as defined by the rules of the registry, after a moment set out by those rules. Nothing in this Regulation should prevent an account holder or a third party from exercising any right or claim resulting from the underlying transaction that they may have in law to recovery or restitution in respect of a transaction that has entered a system, such as in case of fraud or technical error, as long as this does not lead to the reversal, revocation or unwinding of the transaction. Furthermore, the acquisition of an allowance or Kyoto unit in good faith should be protected."
The Registry Regulation provides a number of provisions which provide clarity as to the when the physical transfer of an allowance to an account is considered irrevocable, in particular:
- Article 104 provides that all transactions and other processes communicated to the EUTL in accordance with Article 6(3) (i.e. all EUA transactions) shall be final when the EUTL notifies the Union Registry that it has completed the processes, and
- Article 40 provides that, subject to Article 70 (errors - see below) and the reconciliation process foreseen in Article 103, a transaction shall become final and irrevocable upon its finalisation pursuant to Article 104,
Regarding the reference to Article 70, although there is a mechanism to provide for the correction of errors, this only operates in relation to an account holder unintentionally or erroneously initiating the surrender or deletion of allowances.
It would not allow a reversal of a finalised transfer to another account holder.
Nevertheless, there are multiple interdependencies between the rule of the EU ETS Registry Regulation and the Settlement Finality Directive still to resolve (for details see Interplay between EU ETS Registry and Post Trade Infrastructure, Publications Office of the European Union, 2015, p. 38 - 44).
Another key provision in the EU ETS Registry Regulation relates to cross-border issues and stipulates that accounts in the Union Registry are governed by the laws and fall under the jurisdiction of the Member State of their administrator and the units held in them are considered to be situated in that Member State’s territory.
For further details and practical conseqences of the above precedent rules see some of articles in the box.
Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 1193/2011
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)
|Last Updated on Sunday, 29 October 2017 21:34|