It becomes evident now which participants of the emissions trading infrastructure are systemically important for carbon markets – and these findings will gain the rank of the regulatory text. This pivotal position of only certain installations will not give them any special privileges – but rather burdensome obligations and strict responsibility.


Currently, MiFID does not apply to the secondary trading of spot emission allowances.

What are the pivotal elements of the Commissions proposal on MiFID II as regards emissions? The issue of reclassification of emission allowances as financial instruments was extensively covered by media but is this really the case that capturing spot emissions trading by financial market legal infrastructure effects in entirely win-win situation for everybody? No, it isn’t and the Commission itself admits so in accompanying documents to the MiFID II/MiFIR proposals.


Final Regulation Order, version of October 2011 on California cap on greenhouse gas emissions and market-based compliance mechanisms has been currently posted on the website of the Californian Air Resources Board, together with accompanying documentation, among others, four Compliance Offsets Protocols.

Considering the potential participation in both GHG compliance programs: the European Union Emissions Trading Scheme and its Californian counterpart, it is noteworthy that the registry rules provided for in the Californian scheme are founded on the fundamentally different principle in the practical and legal functioning as regards the finality of transfers.



Initiating transactions and processes in the Union emissions registry after the new draft regulation enters into force will require careful consideration because the reversal of potential errors, mistakes and irregularities will be, in principle, legally and technically impossible.

Article 36(5) of the Regulation provides literally that during the 24-hour delay ‘an account representative may propose to the national administrator the cancellation of the transfer on the grounds of a suspicion that the transfer was initiated fraudulently’. Such a wording may create some doubts as regards the issue whether an account representative may propose to the national administrator the cancellation of the transfer on the grounds of a erroneously or mistakenly initiated transfer.

As follows from Article 7(4) read in conjunction with Article 7(2) of the EMIR, for the qualification whether an OTC transaction regarding any derivative contract set out in Annex I Section C numbers (4) to (10) of the MiFID (including, consequently, also derivatives for which the underlying asset are emission allowances) entered into by the commodity firm, is subject to the clearing obligation, the decisive significance have two premises:

1) the positive: the breach of the clearing threshold value (to be specified by the European Commission through a delegated act),

2) the negative: the ability of the OTC derivative contracts entered into by a commodity firm to be objectively measured as directly linked to the commercial activity of that counterparty.


One of the most interesting things for investors in the Australian emission trading scheme will surely be the eligibility of international emissions units as compliance instruments under the scheme rules.


In the period from 1 July 2012 to 1 July 2015 the new Australian emission market won’t really be a fully-fledged cap-and-trade.



As was reminded also in the accompanying documents to the MIFiD Directive recent review, the legal classification of emission allowances is not uniform in EU Member States. The said documents observed that some Member States consider emission allowances as property rights, whereas others consider them personal rights.

The nature and characteristics of these allowances (certificate giving the right  to emit 1 metric tonne of CO2) could lend themselves to be classified as an intangible asset or a physical commodity. Emission allowances themselves are not classified as financial instruments under MiFID. On the other hand, derivative contracts on these allowances (and other environmental credits) are financial instruments under MiFID under the same criteria as derivatives on commodities.


This interesting theoretical, but burdened also with multiple practical implications, discussion have moved recently into other continents with the spreading of cap-and-trades.



From the systemic point of view there is no reason, why gas would be treated differently, for the purposes of establishing a coherent regulatory regime for the integrity and transparency of the wholesale energy products, than other fuels for the production of the electricity - like coal, oil and even biomass.



On the surge of recent criticism as regards poor performance of the EU ETS as a means of emission reductions, EPS is minded as a regulatory backstop which will limit the emissions from new fossil-fired power stations. It has to be taken into account in any power generation business projections – in the UK for now.


It is common knowledge that power producers in many countries outside the EU are not facing carbon constraints similar to those present under European Union Emissions Trading Scheme.

As a consequence, there are, however, investors that consider building power facilities outside the EU and importing electricity (provided technical and regulatory requirements allow). It seems that such a situation may be perceived as a regulatory gap that should be eliminated as quick as possible in order to avoid undermining the objectives of the revised EU ETS Directive.



The possibility “for freezing allowances and accounts” is specified in more detail in Articles 70, 71 and 73 of the Commission’s proposal for the Registry Regulation amendment and amounts to three differing legal measures with distinct premises, effects and entities authorised to use them, i.e.:

- suspension of all access by authorised representatives,

- suspension of access to allowances or Kyoto units,

- suspension of processes.



What does it mean CA GHG Allowance? If somebody wish to invest in such an assets for strictly speculative purposes should apply to ARB to become VAE. Beneath an approximation of what could be expected from an investor taking into account purely formal aspects of the potential application. The issue may gain quite practical importance in 2012 already.



The Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories (commonly referred to as the European Market Infrastructure Regulation - EMIR) provides for some new obligations envisioned to be imposed on non-financial counterparties (among others commodity firms) acting also on the emission market. The impacts are far-reaching and may require mayor organisational changes among market participants. There are also ambiguities regarding the practical implementation of the new measure.



Taking into account the division of powers and responsibilities between central and national administrators of the future Union Registry it could rise doubts whom to turn to with matters regarding specific cases within their practical functioning.

It follows from Annex I to the Regulation that the account administrator for operator holding account is a national administrator of the Member State “where installation is located”. For person holding account the account administrator is a national administrator that “has opened an account”. This crucial differentiation creates an area for possible choices as regards jurisdictional matters – mainly for the prospective holders of person holding accounts.



Are such categories of data like operational dispatching decisions and the bidding behaviour of electricity producers at power exchanges, interconnection auctions, reserve markets and over-the-counter-markets, the per-plant and per-hour information on available generation capacity and committed reserves, allocation of those committed reserves on a per-plant level etc. all inside information under REMIT?



Trusted account list, the differentiation between trading and holding accounts, 24-hour delay in effecting transfers, view-only access to the accounts enabling such services as “safe zone” as well as strict rules on finality of transactions entered into the registry are some of the measures that could contribute to the enhancement of the security of the registries and, consequently, of the assets of the account holders. Some of these new instruments are designed as mandatory, but other will require decisions to be made by the emissions market participants depending on the politics and strategies they pursue.


Considering the strict legal consequences following the classification of a certain data as an ‘inside information’ under the REMIT provisions, the question arises which exact categories of information available on the energy market are covered by this definition.



Nowadays we have MiFID Europe-wide passport encompassing trading in financial instruments and – possibly, if CEER proposals materialize – Europe-wide passport for wholesale trading in electricity and gas. What about all cross-border issues relating to the other remaining commodities (in particular other fuels and EUAs) taking part in the production of electricity?