oversightEmissions trading: Questions and Answers on enhance

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Emissions trading: Questions and Answers on enhanced market over
2010-12-21 11:10:29.180 GMT


Brussels, 21 December 2010

Emissions trading: Questions and Answers on enhanced market oversight for the
European carbon market

What is market oversight and why is it important?

The European carbon market has grown significantly both in size and
sophistication during its first six years of operation, but it remains a
relatively young market. The purpose of the EU Emissions Trading Scheme (EU
ETS) is to ensure that the greenhouse gas emission reductions that are
necessary in the participating sectors are made at least cost. It is therefore
important to ensure that the market can continue to expand and be relied upon
to give an undistorted carbon price signal. It follows that there needs to be
an appropriate market oversight framework, the main purpose of which is to
secure fair and efficient trading conditions for all market participants. This
is achieved by way of transparency requirements as well as by preventing and
sanctioning market misconduct, in particular insider dealing and market
manipulation. However, the framework should be broader than that and also
provide safeguards to minimise the risk that the carbon market is used as a
vehicle for other illegal activities, such as VAT fraud (see also the reply to
the last two questions).

Why has the Commission issued a Communication on carbon market oversight?

Article 12(1a) of Directive 2003/87/EC 1 provides that the Commission, by 31
December 2010, shall examine whether the market for emission allowances is
sufficiently protected from insider dealing and market manipulation.

In this Communication the Commission gives a first assessment of the situation.

What is the Commission's conclusion at this stage?

The carbon market in Europe has developed well since the launch of the EU
Emissions Trading Scheme in January 2005. From a market oversight perspective,
it can be concluded that a major part of the carbon market is subject to
appropriate market regulation already, namely the trading in derivatives of
allowances and other units that can be used for compliance in the EU ETS
(currently CERs and ERUs), which largely falls under financial markets
regulation. However, the spot trading in emission allowances is currently not
regulated at EU level, while a handful of Member States have decided
individually to extend rules applicable to trading in financial instruments to
such allowances when traded on spot markets established within their
jurisdictions. The spot market is relatively limited and represented no more
than 20-25% of the total trading volume in the European carbon market in 2009.
More details on the structure of the carbon market are given in the
Communication itself.

What are the next steps?

During 2011, the Commission will examine in greater detail the current level of
market oversight and in particular the options available to enhance it (incl.
the classification of allowances as a financial instrument).

How will stakeholders be involved?

An internet-based stakeholder consultation will be conducted in the first half
of 2011. Stakeholders who are familiar with the carbon market and its
interactions with energy and financial markets are encouraged to respond to the
stakeholder consultation and advise the Commission on the best way to protect
this market from any form of market misconduct.

In addition, an ongoing public stakeholder consultation 2 relating to the
review of the Market in Financial Instruments Directive 3 (MiFID) also
addresses the carbon market, notably the option to classify emission allowances
as a financial instrument. The consultation is open until 2 February 2011.

Will the Commission issue a legislative proposal and if so, when can it be

If the results of further work and consultations indicate that the level of
market oversight should be enhanced, the Commission would present such a
proposal in 2011.

Any legislative proposal to introduce an enhanced oversight framework for the
carbon market must be based on careful analysis and impact assessment. The
benefit of any safeguards ensuring market integrity will be weighed carefully
against any negative impacts on liquidity and on access to the carbon market
for different participants (notably small emitters, SMEs). The Commission will
strive to ensure maximum consistency between financial markets legislation,
energy markets legislation and any rules to be developed for the carbon market.

How does the work done on carbon market oversight relate to the work on energy
market oversight and financial market oversight?

In view of the structure of the carbon market as regards products traded
(derivatives), trading venues (often multilateral trading facilities or
regulated markets under financial markets regulation) and participants (large
share of financial intermediaries), the ongoing work on enhancing the oversight
of financial markets will directly enhance the level of oversight in the carbon
market as well. While the Commission's proposal for an integrity and
transparency framework for the energy markets does not apply directly to any
part of the carbon market, it is relevant in the sense that it concerns a
market with significant linkages to carbon trading. Its introduction may have a
disciplining effect on the overall market conduct of certain actors with
presence in both the energy and carbon markets.

What are the options for enhancing the carbon market oversight framework at
this stage?

A priori , the Commission has identified a number of options, the costs and
benefits of which will be assessed in a study. One option is the inclusion of
the European carbon market under financial markets legislation, e.g. by
replacing the currently existing spot trade by trade in "spot futures" 4
admitted to trading in regulated markets. The option to define EU ETS
compliance units as financial instruments will also be explored, with
particular focus on the suitability and proportionality of such an approach.
Bringing spot transactions in EU ETS compliance units - as instruments in their
own right - under the ambit of rules set out in the Market Abuse Directive
and/or the Markets in Financial Instruments Directive as well as any other
financial markets legislation necessary for the efficiency and integrity of the
carbon market is an alternative that will also be studied.

Would any market oversight rules adopted for the EU ETS apply only to emission
allowances or also to CERs and ERUs that can also be used for compliance in the

This question will be studied in more detail in 2011, but it is likely that any
new market oversight provisions would apply to all units that can be used for
compliance in the EU ETS.

Will the introduction of large-scale auctions of allowances in phase 3 not
create new risks for the integrity of the market?

No, despite the fact that auctions of phase 3 allowances will be spot, the
Auctioning Regulation contains specific provisions that apply to auctions which
protect the integrity of the market. In addition only "regulated markets" are
allowed to function as an auction platform. A "regulated market" is the type of
multilateral trading platform which is subject to the most comprehensive
regulation under financial markets legislation.

What fraudulent behaviour has occurred in the carbon market and what did the
Commission do to address it?

During 2009 and 2010, three types of incidents occurred in the carbon market,
which illustrates the wider range of risks that need to be dealt with: (i)
Value Added Tax (VAT) fraud, (ii) so-called "phishing attacks" on holders of
accounts in the electronic registry, and (iii) resale by a Member State of
Certified Emission Reductions (CERs) that operators had already used for
compliance under the EU ETS. If used credits re-enter the European carbon
market, market actors do not know whether any one credit can still be used for
compliance, or whether it has already been used once. Such uncertainty must be

The Commission reacted swiftly to all of these incidents, and will not hesitate
to do so again, should new risks emerge in the market.

Firstly, a Directive enabling Member States to apply reverse charging of VAT to
allowances and other units that can be used for compliance under the EU
Emissions Trading Scheme was adopted in March 2010 and entered into force in
April 2010.

Secondly, a number of amendments have been made to the Registries Regulation 5
. These measures formally entered into force in October 2010 although some
could be applied earlier. The measures include reinforcing the requirements for
opening an account in the electronic registry and giving National
Administrators the power to refuse to open a new account in the registry.
National Administrators are also able to suspend or close accounts, subject to
an appeals procedure. Finally, the Regulation now clearly states that CERs or
ERUs that have been surrendered for compliance can only be transferred into a
retirement account and may not be surrendered again nor transferred to an
operator account or personal holding account in the EU ETS.

Does the Commission support the work of law enforcement authorities?

In line with the rules in the Registries Regulation the Commission is fully
cooperating with law enforcement and tax authorities.

1 :

See Directive 2003/87/EC as amended by Directive 2009/29/EC, OJ L 140,
5.6.2009, p. 63.

2 :


3 :


4 :

Here understood as a financial instrument with a relatively short time for

5 :

Commission Regulation (EU) No 920/2010 of 7 October 2010 for a standardised and
secured system of registries 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, OJ L 270, 14.10.2010, p. 1.
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