The Californian Final Regulation Order belongs to legal measures regulating cap-and-trade schemes that apply the concept of strict ex ante holding limits as regards the volumes of allowances, the entity is eligible to possess.

Section 95920 of the Final Regulation Order defines the holding limit as the maximum number of California GHG allowances that may be held by an entity or jointly held by a group of entities with a direct or indirect corporate association at any point in time.


The said approach is quite unique taking into account the mechanisms of the European Union Emissions Trading Scheme. The review of the oversight measures of the EU ETS is  underway effecting these days in adopting by the European Commission the view that emission allowances should be considered financial instrument and all infrastructure of the financial market should generally apply thereto (with some exceptions – see: “MIFID II and emissions – consequences under preliminary investigation”).


Taking into account in this context the newly announced MiFID II and MiFIR Proposals it is apparent that the different regulatory measure has been considered appropriate in that regard i.e. position limits taken, however, on an individual basis and applied ex post.


The issue is quite fundamental when it comes to commercial strategies on the carbon market. It seems that emissions market participants have legitimate interests to be able to be confident in the rules that could have an impact on the possibility to execute previously agreed transactions, and not to be surprised by the sudden regulatory measures introducing, hypothetically, a ban on certain types of transactions or on certain counterparties.



Bearing in mind these arguments and legal certainty considerations, the approach taken by the Californian Regulator (Air Resources Board – ARB) has the advantage over MiFID II and MiFIR Proposals.

Legal measures considered in this article:


1. Final Regulation Order, version of October 2011, of the Subchapter 10 Climate Change, Article 5, Sections 95800 to 96023, Title 17, California Code of Regulations, Article 5: California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms

available at

(“Final Regulation Order”);


2. Proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European

Parliament and of the Council of 20 October 2011, COM(2011) 656 final,

available at

(“MiFID II Proposal”);


3. Proposal for a Regulation of the European Parliament and of the Council on markets in financial instruments and amending Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories of 20 October 2011, COM(2011) 652 final,

available at

(MiFIR Proposal)



It is true that MiFID II and MiFIR regulate not only emission allowances but all financial instruments while Californian Final Regulation Order restricts itself only to carbon credits. Consequently, MiFID II and MiFIR Proposals, being the broader in scope, need to apply more flexible regulatory language and approach. The effect is, however, the participants in emission market in California will enjoy greater legal certainty as regards potential possibilities for regulatory interventions in emission trading than European counterparties.


Some details for the Californian regime for holding limit in emission allowances


The concept for the holding limit under the Californian cap-and-trade consist practically in principle that the total number of allowances held by a group of entities with a direct or indirect corporate association in their holding accounts must sum to less than certain amount.


An interesting feature of the design is the possibility for entities that are part of a corporate association to allocate shares of the holding limit among themselves. This holding limit allocation results in each entity having a specified percentage share of the group’s holding limit. The sum of the shares allocated among the entities must sum to one.

The group of associated entities must inform the accounts administrator of the allocation of the holding limit when registering. The holding limit allocation will remain in effect until the group of associated entities informs the accounts administrator of subsequent changes to the allocation of the holding limit.

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.


The application of the holding limit will treat beneficial holding by an agent as part of the holding of the principal.



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