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.
The earlier post titled: “The draft of the Commission Regulation establishing a Union Registry – the finality of transfers rules and other details for the new security measures revealed” referred to the pivotal issue of finality of transfers under the draft new emissions registry regulation (see: box). The said post concluded that the implementation of such a rule to the Union legal order would be a crucial change, and will have an effect on many consequent legal issues.
The legal measure commented upon in this post:
The draft of the Commission Regulation establishing a Union Registry for the trading period commencing on 1 January 2013, and subsequent trading periods, of the Union emissions trading scheme pursuant to Directive 2003/87/EC of the European Parliament and of the Council and Decision 280/2004/EC of the European Parliament and of the Council and amending Regulations (EC) No 2216/2004 and (EU) No 920/2010 (‘Regulation’).
The technical consequence of the said question is that also the reversal of finalised processes initiated by the account holders in error will be significantly more difficult (and say it clear – impossible). It expressly follows from Article 64 of the Regulation that, taking into account the types of processes initiated by the common account holders, the possibility for such a reversal, in practice, is restricted to erroneously surrendered allowances. No other transactions will have the ability to be reversed.
Theoretically, the Regulation provides for four categories of such reversible processes, which are the following:
(a) allocation of general allowances;
(b) allocation of aviation allowances;
(c) surrender of allowances;
(d) deletion of allowances.
but the allocation of allowances is the competence of Member States and the Commission and not of the ordinary account holders (operators and traders), and, in turn, the deletion of allowances (meaning ‘the definitive disposal of an allowance by its holder without accounting it against verified emissions’) would be, in principle, rather exceptional and rare process.
Subject to very limited exceptions under the Regulation transfers of allowances and Kyoto units in the Registry are final and irrevocable upon finalisation of the transaction. Pursuant to the Article 37(2) ‘no law, regulation, rule or practice on the setting aside of contracts and transactions shall lead to the unwinding of a transaction that has become final and irrevocable under this Regulation’. Article (37(1) stresses that ‘holding an allowance or Kyoto unit in the Union Registry shall constitute conclusive evidence of the account holder's ownership of the allowance or Kyoto unit. Transfer of an allowance or Kyoto unit in the Union Registry shall constitute conclusive evidence of the change of ownership of the allowance or Kyoto unit’.
The one of the sparse exceptions relates to a transaction completed after a relevant judicial or administrative authority has handed down a decision opening insolvency proceedings in respect of the account holder initiating the transaction.
Recital (12) in the preamble to the Regulation underlines that allowances and Kyoto units exist only in dematerialised form and are fungible, so their ownership 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 undoing of transactions entered in a registry, and the consequent disruption to the system and to the market that such undoing may cause, it is necessary to ensure that transactions cannot be reversed, revoked or unwound, other than as defined, after a moment set out by the rules of the registry. Regulation makes the reservation that it shouldn’t 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, e.g. in case of fraud or technical error, as long as this does not lead to the reversal, revocation or unwinding of the transaction.
Specific conditions for reversal
Even as regards such a narrowly delineated scope for legally allowed reversal the Regulation lays down further multiple requirements.
The Union Registry accepts the proposal for reversal, blocks the units that are to be transferred by the reversal and forwards the proposal to the Central Administrator provided that all of the following conditions are met:
(a) the transaction to be reversed was not completed more than 30 working days prior to the account administrator's proposal for reversal;
(b) no operator would become non-compliant for a previous year as a result of the reversal;
(c) the destination account of the transaction to be reversed still holds the amount of units of the type that were involved in the transaction to be reversed;
(d) the transaction to be reversed was not yet followed up by a deduction in accordance with Article 52 of the Regulation from the minimum deposited quantity after an accounting transfer made on the basis of the transaction to be reversed;
(e) the allocation of general allowances to be reversed was carried out after the expiry date of the installation's permit.
Reversal procedure
The Commission should approve the proposal within 10 working days. The Central Administrator is obliged to ensure that the Union Registry completes the reversal with different units of the same unit type on the destination account of the transaction that is being reversed.
If an account holder or a national administrator acting on behalf of the account holder unintentionally or erroneously initiated one of the above-mentioned four types of transactions, it may propose to the administrator of its account to carry out a reversal of the completed transaction in a written request. The request should be duly signed by the authorised representative or representatives of the account holder that are authorised to initiate the type of transaction to be reversed and should be posted within five working days of the finalisation of the process. The request should contain a statement indicating that the transaction was initiated erroneously or unintentionally.
If the administrator of the account establishes that the request fulfils the above-mentioned conditions and the administrator agrees with the request, it may propose the reversal of the transaction in the Union Registry.