Article 19(1) of the EU ETS Directive 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).
Evolution of the EU ETS system of allowances registries
In the early phases of the EU ETS each EU Member State had its own emissions alllowances registry.
However, 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 countries participating in the EU ETS remain the point of contact for the representatives of more than 20 000 accounts of companies and physical persons (data indicated in the European Commission Report of 18 November 2015 on the functioning of the European carbon market (COM(2015) 576 final).
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.
Legal rules governing the functioning of the Union Registry are stipulated in 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 commenced on 1 January 2013 as well as for subsequent periods, annual emission allocation units, Kyoto units as well as aviation allowances.
In 2013 the Registry Regulation has been 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 security interest in emission allowances could be noteworthy for carbon market participants.
Also other interesting designs, like for example consolidated account, as used under the California cap-and-trade rules, would be worth considering.
Finality of transfers in the EU ETS Single Registry
The EU ETS Registry Regulation‘s 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 Registry Regulation, 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 contains 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 EU ETS Registry Regulation and the Settlement Finality Directive still to resolve (for details see for example “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.
Another Registry Regulation’s modification of a vital practical importance is meant to provide for the rule that aviation operators and other operators would not be able to use EU ETS allowances issued by a Member State with the EU ETS “obligations lapsing” (see Commission proposes safeguard measures for EU Emissions Trading System, Frequently Asked Questions).
The objective of this amendment is to protect the environmental integrity of the EU ETS in the event of a UK departure from the EU ETS in March 2019.
The underlying threat is if the UK leaves the EU ETS in March 2019 , there would be no requirement in the EU law for the UK stationary operators and aviation operators to comply with their EU ETS obligations for the 2018 calendar year, as the deadlines to submit a verified emissions report and surrender allowances will be after the UK exit from the EU.
Allowances for verified emissions in the year 2018 must be surrendered by 30 April 2019, whereas the UK's EU membership will cease on 29 March 2019 (save for the unanimous agreement providing for the contrary), meaning that UK operators would not have to surrender allowances for their 2018 emissions.
To avert the above consequences the the wording proposed by the European Commission, envisioned, in particular, the following amendments to the Registry Regulation:
- the replacement in Article 41 of the paragraph 3 by the following paragraph:
'3. The central administrator shall ensure that the Union Registry assigns each allowance a unique unit identification code upon its creation. Allowances which are created as from 1st January 2018 pursuant to the National Allocation Table or the international credit entitlement table of a Member State in respect of which there are obligations lapsing for aviation operators and other operators, or to be auctioned by an Auction Platform appointed by such a Member State, shall be identified by a country code as from 1st January 2018.';
- the insertion in Article 67 of the following paragraph 4:
'4. Allowances which have a country code pursuant to Article 41(3) may not be surrendered.'
Due to the EU-wide nature of the EU ETS, the origin of emission allowances was so far, as a general rule, not discernible for carbon market participants.
The above amendment entailed the following important changes to the EU ETS practical functionalities:
1. as from 1 January 2018, any ETS allowances issued (auctioned or allocated for free) by the United Kingdom (including allowances issued in exchange for international credits) would be marked, i.e. made distinguishable for market participants from allowances issued by other EU Member States,
2. as long it cannot be guaranteed that the United Kingdom will enforce compliance obligations arising under the EU ETS for the years 2018 and 2019, these marked allowances will not be accepted as of 1 January 2018 for compliance purposes, including for surrender for 2017 emissions.
The above measures were said to be without prejudice to any future agreement with the United Kingdom that may provide for specific arrangements after the date of withdrawal on 29 March 2019 to enable United Kingdom entities to effectively enforce compliance obligations arising under the EU ETS for the years 2018 and 2019.
Among adverse effects of the proposed solution appeared:
- fragmented market for EU allowances (UK allowances would likely be traded at a discount to allowances issued by other Member State),
- more complex forward emissions contracts,
- more complex contractual definitions for trading venues and OTC market in emission allowances.
In reaction to the above initiative, to protect the integrity of the EU ETS and to provide the necessary certainty to the market that UK 2018 compliance obligations would be fulfilled, the UK Government proposed to amend the UK law (2012 Regulations) to bring forward the deadlines for the 2018 compliance year to before the date of withdrawal from the EU, i.e. before 29 March 2019 (Consultation on bringing forward EU emissions trading system 2018 compliance deadlines in the UK, November 2017).
Accordingly, the deadlines for the UK aviation and stationary operators to submit a verified emissions report and surrender allowances would be brought forward before the date of EU Exit, respectively to 28 February 2019 and 22 March 2019.
Finally, the Commission Regulation (EU) 2018/208 of 12 February 2018 amending Regulation (EU) No 389/2013 establishing a Union Registry modified the Article 41 of the Registry Regulation by inserting the paragraph 4 as follows:
‘4. Allowances which are created as from 1 January 2018 pursuant to the National Allocation Table or the international credit entitlement table of a Member State which has notified the European Council of its intention to withdraw from the Union pursuant to Article 50 of the Treaty on European Union, or to be auctioned by an Auction Platform appointed by such a Member State, shall be identified by a country code and shall be made distinguishable according to the year of creation. Allowances created for 2018 shall not be identified with a country code where Union law does not yet cease to apply in that Member State by 30 April 2019 or where it is sufficiently ensured that the surrender of allowances must take place by no later than 15 March 2019 in a legally enforceable manner before the Treaties cease to apply in that Member State. The Member State concerned shall immediately after 15 March 2019 report on compliance to the Member States and the Commission.’.
12 March 2019
12 February 2018
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)
Articles concerning issues involving EU ETS emission allowances registry: