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.
Another important change that is proposed by the Draft Amendments is the differentiation in computation of position limits. “Annual Allowance Budget” (being the number of allowances issued for the current budget year) according to the proposal will be calculated as the sum of not only the compliance budgets of California but also all external GHG ETS to which California has linked. This change appears rather straight consequence of the general decision for the linkage admissibility.
For future vintages position limits will be calculated separately from the current one, and - if the proposed amendments enter into force - separately for each future vintage. In my opinion, if the position limits should be applied at all, they really ought to be counted for each vintage separately. This seems to be more clear and transparent formula than other.
As regards the allocation of shares of the holding limit among entities that are part of a direct corporate association the rule is sustained that the accounts administrator must be informed of the way for the allocation when the entity is registering.
The legislators decided, however, to delete the provision:
‘If entities with a direct or indirect corporate association do not allocate shares of the holding limit among themselves, the accounts administrator will not record any transfer request which would result in the entities with a direct or indirect corporate association exceeding the holding limit.’
It seems that it was considered that the basic rule requiring the indication of the allocation of the position limit while registering is sufficient (the failure to do comply with this requirement should effect in incomplete registration process and per se the lack of the eligibility to trade in California emission allowances). If the above reasoning is true, the rule that is proposed to be deleted really is superfluous.
The provision stating that the application of the holding limit will treat beneficial holding by an agent as part of the holding of the principal was also deleted (the consequence of the general abandonment of the concept for beneficial holdings – see: Beneficial holdings disclosure requirements for emissions agents under the California cap-and-trade and Major overhaul of the California cap-and-trade - linkage with the Quebec scheme and the KYC-checks substitution for the beneficial holding disclosure provisions).
II. The Australian legal framework for carbon allowances position limits
When it comes to reviewing position limits regulations in the carbon market the important piece of legislation is also Australia’s Clean Energy Act 2011 (and specifically Part 12 titled ‘Notification of significant holding of carbon units’).
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 (I omit in this place the rule for non-group entities which a similar).
The said rule applies to a controlling corporation if the controlling corporation’s group begins to have a significant holding of carbon units with a particular vintage year; ceases to have such a significant holding or there is a change in the significant holding percentage.
The controlling corporation must, within 5 business days after becoming aware of the event, give the Clean Energy Regulator a written notice informing the Regulator of the event; and setting out the additional information as follows:
(a) the name and address of the controlling corporation;
(b) for each member of the controlling corporation’s group that, immediately after the event, holds one or more carbon units with the vintage year:
(i) the name and address of the member; and
(ii) details of the member’s holding of those carbon units;
(c) such other information (if any) as is specified in the regulations.
Part 17 Australia’s Clean Energy Act 2011 provides for pecuniary penalties for breaches of civil penalty provisions.
If the Clean Energy Regulator receives the above-mentioned notice it must publish on its website the name and address of the controlling corporation and:
(a) if the controlling corporation’s group has a significant holding percentage in relation to those units—the significant holding percentage; and
(b) if the controlling corporation’s group does not have a significant holding of those units—a statement to that effect.
The controlling corporation’s group has a significant holding of carbon units with a particular vintage year if the percentage worked out using the following formula is 10% or more:
Total number of carbon units with the vintage year held by the members of the controlling corporation’s group/Carbon pollution cap number for the vintage year x 100.
The said rules do not apply to a carbon unit with a vintage year that is a fixed charge year (the financial years beginning on 1 July 2012, 1 July 2013 and 1 July 2014).
It is striking that the basic requirement applying to significant holdings of emission allowances under the Australia’s Clean Energy Act 2011 is the obligation to notify the Regulator, which subsequently makes the appropriate publication on its website. It appears that the company achieving the level of significant holdings isn’t restricted from further increasing its position and isn’t forced by law to sell the excess. It seems therefore that the fundamental function of this piece of legislation in to safeguard the transparency of the carbon market and not to restrict companies from acquiring large volumes of carbon permits. Such a solution is in a glaring opposition to California approach in that regard.