Questions & Answers On EU Emissions Trading: New Registry Rules

1. What is the role of registries in Emissions Trading?

The registries for the EU Emission Trading System (EU ETS) record the holding of emission allowances and the transactions concerning those allowances, like the banking system does for money. The main types of transactions are: creation of allowances, free allocation, auctioning, trading, surrendering of allowances for compliance and their deletion. The registries also record installations and aircraft operators surrendering sufficient allowances to cover their verified emissions.

2. Why needs the Registries Regulation to be amended?

The Registries Regulation1 was last modified in 2010, to prepare for the inclusion of aviation in the EU ETS and the switch from national registries to the single Union Registry in 2012.

New provisions for the EU ETS registries are needed in order to set up the infrastructure for the third trading period of the EU ETS (2013-2020), in particular with regard to auctioning and free allocation of allowances, following the adoption of the respective implementing acts.

At the same time this amendment offers the opportunity to introduce enhanced registry security measures in the wake of the cyber-attacks witnessed earlier in 2011.

3. When will the draft Regulation be adopted and become applicable?

On 17 June 2011, the EU Climate Change Committee, in which all Member States are represented, approved the draft new registry Regulation proposed by the European Commission. The draft regulation will soon be transmitted to the European Parliament and the Council, which will have three months to scrutinise the draft. If they do not raise objections, the Commission will adopt the regulation, which will enter into force upon its publication in the Official Journal.

The draft Regulation contains some provisions that will already apply in 2011 and 2012, notably those related to security, early auctions and the NER300 funding programme (see question 8). The other new rules will apply from 2013, the start of the third trading period.

4. What are the proposed new security measures and when will they apply?

The security of the registries has become a priority as a result of the fraud with emission allowances in 2010 and 2011. In early 2011 the Commission took immediate action by temporarily suspending all national registries until they fulfilled minimum security requirements. The Commission’s new proposals will bring the security of the future Union Registry into line with state-of-the-art security measures used in the financial sector.

The main security measures and their applicability are summarised in the table below. Most provisions will apply from early 2012, when the single Union Registry will become operational. A few measures will be effective immediately upon entry into force of the draft Regulation and some can be implemented only by mid-2012.

Main new security measures in the draft Regulation	Applicability
Preventive measures to avoid fraud include:
two-factor authentication (similar to the use of a token in online banking);	From early 2012
out-of-band confirmation of transactions;	From early 2012
introduction of a trusted account list;	From mid-2012
obligatory 4-eyes principle;	From early 2012
strengthened know-your-customer checks for account holders and their representatives;	Immediately upon entry into force of the draft Regulation
new account categories, including holding accounts and trading accounts. Trading accounts will offer more flexibility to transfer allowances than holding accounts.	From mid-2012
Measures to respond quickly and effectively in case of fraud include:
completion of transfers of allowances between registry accounts will in general be delayed by 26 hours: the seller will be able to cancel a fraudulent transaction within the first 24 hours (in addition to which the registry administrator will have two hours to execute the cancellation);	From early 2012
national administrators may freeze allowances and accounts in case of suspicion of fraud;	Immediately upon entry into force of the draft Regulation
wider access to confidential information held in the Union Registry will be given to competent national authorities: Europol will get a permanent ready-only access to the database;	Immediately upon entry into force of the draft Regulation
anti-money laundering provisions are further strengthened.	From early 2012
Measures to avoid disruption to the market, if fraud were to occur, include:
allowances will be fully fungible, which means that an allowance can be substituted by any other allowance, if there were a legal claim;	From early 2012
buyers in good faith will acquire full entitlement to purchased allowances;	From early 2012
non-disclosure of the serial number of allowances;	Immediately upon entry into force of the draft Regulation

non-display of the serial number of allowances: they will be visible only to registry administrators, which may provide them on request to the competent national authorities.

From early 2012

 

5. What does the fungibility of allowances mean? What happens in case of theft, breach of contract or insolvency?

A good or a commodity is “fungible” when individual units can be substituted by any other unit of the same good or commodity, like a kilogram of sugar. The fungibility of allowances foreseen by the draft Regulation implies that the claim – for instance in case of theft, breach of contract or insolvency of the account holder – cannot be directed at a specific allowance. This rule does not exclude claiming back the same amount of allowances or credits of the same kind or claiming damages, for example. Transactions in the Union Registry that became final are thus irrevocable and cannot be unwound.

6. Does the draft Regulation harmonise the ownership of allowances?

No, the draft Regulation does not harmonise the ownership of allowances. However, apart from laying down that the allowances are fungible, it protects holders or buyers of allowances that are in good faith. Indeed, these persons will acquire full entitlement to the allowance. The interpretation of the term “good faith” is left to national law.

7. What happens with the serial number of allowances?

In early 2011, lists of serial numbers of allegedly stolen allowances were disclosed. That caused confusion in the carbon market, as in some jurisdictions stolen allowances identifiable through their serial numbers may have to be returned, which rendered trading more risky. To avoid such confusion in the future, the draft Regulation expressly prohibits the disclosure of the serial numbers of stolen allowances. Moreover, in the single Union Registry serial numbers of allowances would not be visible to users, only to registry administrators, which may provide them on request to the competent national authorities. These measures are complemented by the fungibility of allowances and the protection of the buyer in good faith. Together this ensures that stolen allowances and the fraudsters involved can ultimately be tracked down for the purposes of a criminal or civil law procedure, but at the level of users trading is not disrupted.

In case of Kyoto units (e.g. Clean Development Mechanism credits), only the unique part of the unit identifier will not be displayed: information on the unit type, the project number, etc. will remain visible.

8. What are the new provisions concerning the NER300?

NER300 is an EU funding programme for the demonstration of innovative renewable energy technologies and carbon capture and storage (CCS) technologies.2 It is so named because the funding will come from the sale of 300 million allowances held in the new entrants’ reserve of the third trading period. To enable the European Investment Bank to start monetising these allowances before the single Union Registry becomes fully operational, the draft Regulation enables the Commission to open the appropriate account(s) and create the allowances thereon immediately following the entry into force of the draft Regulation.

9. What happens with Kyoto units, accounts and processes?

The draft Regulation ensures that the EU ETS registry can function seamlessly and independently of decisions taken on the Kyoto Protocol. It will remain possible to hold Kyoto units on accounts in the Union Registry. The draft Regulation does not include provisions to implement the rules in the revised ETS Directive on the use of Kyoto units for compliance in the third trading period and the use of the registries for the purposes of the Effort Sharing Decision.3 These issues will be the subject of a later amendment.

10. Will the draft Regulation be reviewed? What is the relation to the work on market oversight?

Apart from the future amendments mentioned in the previous question, the draft Regulation may have to be reviewed to reflect the outcome of the work on market oversight4 and in the light of the experience gained with the security measures.