EU ETS Registry Regulation - more than just technicalities
- Category: EU ETS
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).
Since 2012 all EU ETS operations have been centralised in the Union Registry, which is a database operated by the European Commission that holds accounts for all entities participating in the ETS markets (operators with compliance obligations as well as other entities trading EUAs without compliance obligations) where EUAs are registered.
The book entry in an entity’s account in the Union Registry is prima facie proof of ownership of an EUA.
Other than records which are required for operators to comply with ETS requirements (such as the recording of verified CO2 emissions and their reconciliation with allowances), all transactions between accounts in the Registry are also registered.
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, initially, two 'opt-out' auction platforms (British and German).
The rules on the function of the Union Registry were established in Commission Regulation (EU) No 1193/2011 and by Commission Regulation (EU) No 389/2013 for the third trading period of the EU Emissions Trading System (EU ETS) (2013-2020).
The Union Registry rules were adapted to the new legal context set for the fourth trading period of the EU ETS (2021-2030) by the Commission Regulation (EU) 2019/11224 that is applicable as of 1 January 2021. The latter has repealed the former in most parts. However, the fulfilment of requirements of the second period of the Kyoto Protocol is still governed by Regulation (EU) No 389/2013.
Legal rules governing the functioning of the Union Registry were initially 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 applied to allowances created for the EU ETS third trading period commenced on 1 January 2013 and was repealed with effect from 1 January 2021. However, it shall continue to apply until 1 January 2026 to all operations required in relation to the trading period between 2013 and 2020, to the second commitment period of the Kyoto Protocol and to the compliance period as defined in Article 3(30) of that Regulation.
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 (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.’.
Amendments in the fourth trading period
Some important modifications are envisioned as from 1 January 2021 with respect to the EU ETS Registry:
- existing person holding accounts will be transformed into trading accounts (with the exception of person holding accounts in the Kyoto registries, which will not be transformed);
- it will not be possible to open new person holding accounts;
- operator holding accounts may hold aviation allowances (this does not depend on the issuance year of the allowances); in accordance with the revised ETS Directive, stationary installations may use aviation allowances for emission in the fourth trading period, i.e. for emissions in 2021 and later, this means that it is not possible to use (surrender) them for emissions in 2020, during the compliance period that ends on 30 April 2021;
- the Union Registry will clearly display whether a particular allowance was issued for the third or the fourth trading period of the EU ETS - accordingly, it will be possible to choose which allowance is to be transferred/surrendered/deleted;
- as the allowances issued in the Swiss Emissions Trading System are equivalent to EU emission allowances, the Swiss allowances will also have indication of the period of issuance and the same restrictions will apply to them as to EU allowances.
Further potential amendments are considered by the ESMA Final Report of 28 March 2022 (Emission allowances and associated derivatives, ESMA70-445-38).
Given that the Union Registry Regulation currently allows for omnibus accounts (where the account holder holds EUAs on behalf of third parties), which do not permit the identification of individual holders, ESMA in the said Report recommends that the Union Registry Regulation should be amended in a way that allows for the identification of ultimate beneficial owners of emission allowances so that the Union Registry data can valuably be used by National Competent Authorities for the exercise of their market monitoring responsibilities.
The Registry Regulation introduced only as of 1 January 2021 the obligation for accounts in the Registry to be identified with an LEI (where assigned). The said ESMA Report observes that, as a consequence, the number of accounts that could be identified with an LEI, as of 2022, was very low. Furthermore, the requirement to flag pure OTC transactions in the settlement data recorded in the EU registry (EU transaction log) was not accompanied by any validation rule to ensure that the data inputted in the register actually contained such flag. As a result, this information was not provided for nearly 46% of all transactions in 2021 included in the registry. Hence, the ESMA’s recommendation is to segregate in the Registry the EUAs held for its own account from those held on behalf of others. ESMA argues that assets protection requirements are particularly relevant for fungible assets, such as EUAs, which might be kept in one account on behalf of several final assets holders.
When the account in the registry is that of a CCP, requirements applicable to the CCP ensure that it maintains separate accounts allowing it to identify who is the owner of the assets. However, if any account in the Union Registry can be used as an “omnibus account”, having further safeguards for the protection of the assets by ensuring that records and accounts are kept that enable to segregate the EUAs held for its own account from those held on behalf of others would be appropriate to strengthen the protection of final EUAs holders.
The Union Registry, the EUTL, and the public website of the EUTL seem rather stable and “were fully operational for 365 days around the clock throughout 2019, with only minor interruptions adding up to a total of approximately 7 hours due to technical upgrades” (European Commission’s Report of 18 November 2020 on the functioning of the European carbon market, COM(2020) 740 final, p. 8).
Modernisation of the EU ETS Registry - January 2023
In January 2023 European Commission opened the public feedback period on Commission Delegated Regulation (EU) amending Delegated Regulation (EU) 2019/1122 as regards the modernisation of the functioning of the Union Registry. The respective legislative propositions are as follows.
Mandatory use of trusted account lists for transactions above a particular threshold
Currently, users of the Union Registry can initiate transfers without any limitations depending on the thresholds (value) of the transfer. To improve the security of high value transactions the draft amendment proposes that the use of trusted account lists for transactions above a particular threshold should be mandatory.
For this purpose Article 23 would be amended as follows:
(a) paragraph 1 is replaced by the following:
‘1. Accounts in the Union Registry shall have a trusted account list.ʼ;
(b) the following paragraphs 3a and 3b are inserted:
ʻ3a. The central administrator may set a threshold above which transactions can only be performed to accounts that appear in the trusted account list.
‘3b. Account representatives may set thresholds for transactions for their own accounts. Such limits have to be approved by a second account representative or a national administrator.’
Requirement to identify transactions of emission allowances between account holders that are part of the same group.
At this moment, information on the group structure is required only for operator holding accounts. The draft amendment proposes to introduce the requirement to provide this information for trading accounts as well.
For this purpose, in Article 55, the following paragraph 5 would be added:
‘5. Upon initiation of a transfer, the authorised representative shall indicate whether the transfer has been executed between account holders that belong to the same group.’
The amendment replaces throughout the Regulation the acronym ‘EUTL’ by ‘Union Registry’.
Articles concerning issues involving EU ETS emission allowances registry:
Push-Push-Pull – new proposition to improve the registries safety
Legal complications with cross-border collateral EUAs arrangements after recent Registry Regulation amendment
The legal nature of emission allowances as a property rights
Transfer of EUAs as a proof of ownership
The protection of the good faith acquirer of emission allowances and finality of transactions in the new Registry Regulation – do they cause traders feel more comfortable?
Discrepancies in views on the finality of transfers in emission trading among EU ETS and California cap-and-trade regulators
The surrender of allowances initiated in error - the only reversible transaction pursuant to the draft of the Commission Regulation establishing a Union Registry of emission allowances
Emissions allowances – are they property rights? Australia and California regulators’ views
The possibility for freezing allowances and accounts – important change to the registry system
The draft of the Commission Regulation establishing a Union Registry of emission allowances - practical consequences for jurisdictional decisions as regards an account’s location
The draft of the Commission Regulation establishing a Union Registry – the finality of transfers rules and other details for the new security measures revealed
Delivery delay mechanism in EU ETS registries – something like the RGGI design?
The publicness of the data held in the CO2 allowances registries – pivotal principles decided by the recent judgment
Legal complications with the recovery of the stolen allowances