The Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting on carbon market oversight organised by the Commission services Brussels, 4th May 2011 considers the implications of classifying emission allowances and other EU ETS compliance units as financial instruments under MiFID. It seems, however, not probable taking into account arguments of many participants of various market sectors and branches in their responses to the MiFID review consultation.




Spot trading in emission allowances (“EUA”) is currently not regulated at the European level. The general approach consists in excluding emission allowances as financial instruments under Markets in Financial Instruments Directive (MiFID), but capturing derivative contracts based on such allowances (with the exception of Romania, where EUA’s were classified as financial instruments).


Pivotal elements of the European Commission proposal on MiFID II/MiFIR released on 20 October 2011 as regards emissions market are analysed in brief in “MIFID II and emissions – consequences under preliminary investigation”.


See also: MiFID II exemption for EUAs compliance buyers – EP report of 5 October 2012


On 21 December 2010 the European Commission published a communication on carbon market oversight Towards an enhanced market oversight framework for the EU Emissions Trading Scheme, in which the discussion was launched on whether emission allowances should be considered as financial instruments for the purpose of MiFID. This thread is followed in the Discussion paper in view of a European Climate Change Programme (ECCP) stakeholder meeting on carbon market oversight organised by the Commission services Brussels, 4th May 2011 (in the rest of this article referred to as “Discussion paper”).

Concurrently, the Commission obtained stakeholders feedback on the question: “What is your opinion on whether to classify emission allowances as financial instruments?” in the Public Consultation: Review of the Markets in Financial Instruments Directive (MiFID) recently concluded ( and a legislative proposal to amend MiFID is expected to be adopted by the Commission in the coming months.


Under the considered approach, according to the Discussion paper, the scope of the EU financial markets legislation would be extended to apply to the spot segment of the carbon market. This would be achieved by classifying emission allowances (and other ETS compliance units) as financial instruments under MiFID (i.e. by listing them as a new class of financial instruments in Annex I Section C of that Directive).


It seems that such a legislative concept met with a cold reception in responses to the MiFID review consultation from market participants.

The Union of the Electricity Industry–EURELECTRIC, in its response, raises, for instance, that the classification of emission allowances in the context of secondary spot trading as financial instruments is not appropriate for a number of reasons:

1) From a technical point of view, spot emission allowances:

- do not confer financial claims against the public issuer of such allowances;

- do neither represent titles to capital (with voting rights) or title to debentures;

- nor constitute forward contracts;

2) From a personal application scope, spot emission allowances are meant to serve climate change objectives and are therefore designed to apply to industrial operators. Their primary purpose is not to serve as an investment product proposed and managed by;

3) The classification of spot emission allowances as financial instruments would imply:

- legal obligations under MAD and MIFID that would not prove always relevant (e.g. prospectus in case of take-over bid) and would require the creation of an exception sub-regime;

- some legal obligations would be too burdensome to comply with especially for industrial SMEs as well some small power utilities;

4) Classifying emission allowances as financial instruments could cause a requalification under IFRS 9, triggering the application of fair value accounting.

EURELECTRIC concluded that the European Commission should design an appropriate regime for emission allowances and such a regime should adapt a selection of the most relevant provisions from the financial regulation to the characteristics of industrial market participants, and should classify emission allowances in a new sui generis category.


Also International Swaps and Derivatives Association, Inc. (ISDA) contend that:

a) EUAs are not in themselves financial instruments;

b) the role and purposes of the “physical” EUA markets are different from those of financial markets;

c) the financial capture of a large number of non-financial companies would be inappropriate, bearing in mind that they do not carry on “investment business” and, in the context of EUAs, do not have retail customers;

d) the quantum of systemic risk is extremely low.


ISDA made an observation (I consider crucial from the systemic point of view) that extending the scope of financial regulation to include non-financial underlying products/instruments could create a precedent in relation to other non-financial assets.


As a result, ISDA view on the issue, expressed in MiFID review consultation, is similar to that of EURELECTRIC. ISDA does not believe it is appropriate for dealings in emission allowances to be subject to financial regulation, but by the physical regulatory authorities.


European Federation of Energy Traders (EFET) generally shared the views of the above mentioned organisations and added that the primary reason for emission allowances was to provide the means to industrial operators to meet obligations under an emissions trading scheme – their primary purpose was not to serve as an investment product.


In that sense also French financial regulator raised the circumstance of absence of an issuer in the usual meaning of the word in relation to the EUA’s.



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