Emission trading schemes evidently evolve in the direction of attributing the decisive character of the entry in the registry as regards the proof of ownership over emission allowances while retaining the institution of ‘good faith’ as a some sort of ‘safety valve’ for the gross breaches of business honesty.
The Australian program represents the most recent manifestation in that regard.
Under the European Emission Trading Scheme the above principles have been incorporated into the European legal order as the intended remedy for the occurrence of mass frauds connected with phishing of emission permits from registries. As an effect the Registry Regulation governing the circulation of carbon permits has been significantly modified (for legal complications that followed the affair and their implications for the functioning of the carbon market the see the articles referred to here).
The role of good faith the in business activity in the carbon market has been clearly underlined by the recent judgment of the England and Wales High Court Case No: HC10C00532 between Armstrong DLW GMBH and Winnington Networks Ltd of 11 January 2012 where the trader assessed in the judicial proceedings not sufficiently prudent in conducting the transaction when it comes to due diligence process of the trade counterparty (even though the type of transaction involved was spot trade not financial instruments) was ordered to compensate for the loses incurred by the third person (from which the allowances had been earlier stolen).
The emerging Australian carbon price scheme integrates from the outset some safeguards for protecting the certainty of the circulation of the carbon permits.
Pursuant to the Australian regulations If there is an entry for a carbon unit in a person’s registry account, then that person is acknowledged as the legal owner of the unit (subject to the requirements of the procedures of the allowances tracking system).
Furthermore, a transfer of a carbon unit is of no force until it is registered in the Registry.
The Australian Clean Energy Act 2011 uses in that regard the regulatory language stipulating that the registered holder of a carbon unit:
(a) is the legal owner of the unit; and
(b) may, subject to the said Act and the provisions on the tracking scheme, deal with the unit
as its legal owner and give good discharges for any consideration for any such dealing.
The above provision, however, only protects a person ‘who deals with the registered holder of the unit as a purchaser:
(a) in good faith for value; and
(b) without notice of any defect in the title of the registered holder.’
Such rules incorporated into the Australian emissions trading scheme seem to represent a some sort of equivalent to Article 37(2) and (4) of the Registry Regulation applying in the European carbon market according to which:
- the record of the Union Registry constitutes prima facie and sufficient evidence of title over an allowance or Kyoto unit, and of any other matter which is directed or authorised to be recorded in the registry.
- a purchaser and holder of an allowance or Kyoto unit acting in good faith acquires title to an allowance or Kyoto unit free of any defects in the title of the transferor.
The legislative reasons for introducing the above legal framework for the Australian carbon market explain that the above-mentioned defects in title might arise, for example:
- if a carbon unit was transferred by the registered holder in error and sold on by an unintended recipient before the error is detected;
- if a carbon unit was transferred fraudulently, such as if evidence of a transmission by operation of law was false; or
- there is unauthorised access to a registry account (the event that occurred in practice in the European emission registries).
Transparent and secure property rights over and legal interests in carbon units will promote confidence in the integrity of the units and reduce uncertainty for their holders, and further promote confidence in the development of the market for carbon units.
It is noteworthy that both of the above legal frameworks, the European and the Australian one apply in that regard uniform rules that do not differentiate between distinct types of units, like EUAs and Kyoto units in the European carbon market, and carbon units, ACCUs, and prescribed international units in the Australian program.