8 Oversight of the EU Emissions Trading
Scheme
| (32395)
18249/10
COM(10) 796
| Commission Communication: Towards an enhanced market oversight framework for the EU Emissions Trading Scheme
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| Legal base | —
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| Document originated | 21 December 2010
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| Deposited in Parliament | 5 January 2011
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| Department | Energy & Climate Change
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| Basis of consideration | EM of 17 January 2011
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| Previous Committee Report | None, but see footnotes
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| To be discussed in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
8.1 Following the adoption of Directive 2003/87/EC,[39]
the Community's Emissions Trading Scheme (ETS) came into operation
on 1 January 2005. This requires Member States to grant free of
charge to undertakings in certain areas — notably energy,
metal production and minerals — a permit covering emissions
of carbon dioxide,[40]
and to establish for each of two trading periods (2005-07 and
2008-12) a national plan dealing with the total quantity of allowances[41]
and their allocation. Those undertakings with a permit are then
able to emit quantities of carbon dioxide up to the permitted
limits, and would have to surrender an allowance equal to their
actual emissions; an undertaking failing to surrender sufficient
allowances is subject to a financial penalty (though any unused
balance may be sold to another undertaking). A further Directive
(2009/29/EC)[42] establishes
the arrangements applicable from 2013-2020, and in the process
both extends the scope of the Scheme, and amends it by (among
other things) setting a central cap on EU emissions (which will
decrease annually by 1.74%) and establishing auctioning as the
preferred method for allocating allowances.
8.2 According to the Commission, the European
carbon market — despite having grown significantly in both
size and sophistication during the first six years of its operation
— remains relatively young, and it therefore remains important
to ensure that it can continue to expand and be safely relied
upon to give an undistorted carbon price signal. The Commission
says that it follows from this that an appropriate market oversight
framework is necessary in order to secure fair and efficient trading
conditions for all participants through transparency requirements
and the prevention of market abuse. It has therefore sought in
this Communication to provide a first assessment of the current
levels of protection, thereby fulfilling a requirement placed
upon it by Directive 2003/87/EC: and it says that this will form
the basis of a broad consultation exercise in the first half of
2011, with any necessary legislative proposals being made by the
end of the year.
The current document
THE EUROPEAN CARBON MARKET TODAY
8.3 The Commission notes that access to the carbon
market can be obtained either directly by those who have to trade
in order to meet their obligations under the ETS or indirectly
via a financial intermediary, with active participation by the
latter having facilitated trading among installations and developed
derivative products in order to help participating firms manage
risk. As a result, it says that the carbon market has shown increased
liquidity and the emergence of a reliable price signal, this being
especially important for small and medium-sized enterprises and
the operators of individual installations who may not have the
necessary resources or expertise. It observes that the products
currently traded on this market are the ETS allowances and credits
under the Kyoto Protocol's offsetting mechanisms,[43]
and that, although all of these can be traded for immediate (spot)
delivery, the major part of the transactions (about 75-80% in
2009) relates to derivatives. In addition, the Commission notes
that over-the-counter (OTC) transactions have increasingly been
replaced by the development of standardised exchange-based trades;
that bilateral trades — which tend to be large in size,
but whose prices are not disclosed — take place directly
between two parties; and that it is also possible to buy allowances
at auctions held by a number of Member States, with auctioning
due to become the main allocation method under the ETS as from
2013.
8.4 The Commission also looks at data availability
and transparency, noting that the latter increases the ability
of participants to make informed trading decisions, and reinforces
confidence in market integrity and efficiency, whilst being one
of the main ways to counter misconduct. It points out that exchanges
and other organised trading venues display anonymised information
about bids, offers, trades and closing prices for market participants,
that this information is also available to the general public
after a small delay, but that details of OTC transactions are
in principle unavailable to other market participants. However,
it adds that a number of market analysts and financial news agencies
publish and sell trading data to the public, including the daily
volume of transactions which have been cleared at exchanges. The
Commission suggests that the most relevant data relate to the
verified emissions of around 11,000 installations which are obliged
under the ETS to surrender allowances to cover their greenhouse
gas emissions, and it notes that the Community Independent Transaction
Log provides annual data on the independently verified emissions
of all installations covered by the ETS, adding that, since this
determines the demand in the market, it is highly price sensitive.
Finally, the Commission observes that information is also made
public on the number of free allowances allocated by Member States
to installations, but that the importance of this will decrease
as auctioning is phased in.
TYPES OF MARKET ABUSE
8.5 The Commission points out that the term "market
abuse" as defined in the Market Abuse Directive (2003/6/EC)
covers only insider dealing and market manipulation, but that
it is important to look more broadly at the problems of market
misconduct and abuse: also, as the market matures, measures will
be necessary to protect the European carbon market in its entirety,
covering such areas as money laundering, terrorist financing and
other criminal activities. It goes on to highlight three other
risk areas which need to be addressed, namely Value Added Tax
fraud, "phishing" attacks, and the recycling of allowances
which have already been used in order to comply with the ETS:
and it says that there are other issues — such as harmonised
accounting standards — which, though not related to market
abuse or fraud, would increase the transparency and overall efficiency
of the ETS.
EXISTING LEGAL FRAMEWORK
8.6 The Commission says that the ETS Directive
gives it a specific monitoring role which is linked to, but not
limited to, the introduction of auctioning as the main allocation
method, but it adds that, as financial intermediaries and power
companies are the main participants on the European carbon market,
any examination of the level of market oversight has to take account
of more general legislation relating to both financial and energy
markets. The former includes the Market Abuse Directive (which
applies to those emission allowance derivatives which are regarded
as financial instruments and traded on regulated markets) and
the Markets in Financial Instruments Directive (2004/39/EC), both
of which are currently subject to comprehensive reviews, with
Commission proposals expected in 2011. The Commission adds that
a number of new financial markets measures may become applicable
in other specific segments of the carbon market, and that it proposed[44]
in September 2010 a Regulation on OTC derivatives, central counterparties
and trade repositories, which is expected to introduce a range
of obligations applicable to carbon market participants involved
in relevant activities.
8.7 The Commission also refers to the Auctioning
Regulation (1031/2010/EC) it adopted in November 2010, which establishes
a regulatory framework for the auctioning of emission allowances
in the 2013-2020 trading period, and which it says has both effectively
broadened the scope of the Market Abuse and Markets in Financial
Instruments Directives in the carbon market and extended to auctioning
participants a number of measures stemming from the Anti-Money
Laundering Directive. Finally, it draws attention to the legislative
proposal[45] it put forward
recently, which aims to address the transparency and integrity
of European wholesale energy markets.
8.8 The Commission concludes that the carbon
market has developed well in terms of liquidity, EU-wide participation
of intermediaries, and transparency, thus reducing the risk of
market abuse compared with some commodities markets; that the
major part of the carbon market is already subject to market regulation;
and that auctions (which it describes as a key future segment
of the primary market) will come in full under the market oversight
regime set out by the Auctioning Regulation. As regards the next
steps, it says that it will launch an in depth study and initiate
a stakeholder consultation covering not only market abuse but
also the overall integrity of the market; consider the implications
for the carbon market of the revision of financial legislation
and the establishment of energy market legislation; and continue
to act swiftly if any new risks should appear, whilst assessing
further the need to present a legislative proposal by the end
of 2011.
The Government's view
8.9 In his Explanatory Memorandum of 17 January
2011, the Minister of State at the Department of Energy &
Climate Change (Mr Charles Hendry) says that, as this is not a
legislative proposal, there are no immediate policy implications
at this stage, and that the Communication also limits the scope
of policy action to oversight related to market abuse, noting
also that there is already a well developed regulatory landscape
for much of carbon market activity.
8.10 He adds that the Government's starting position
for any legislative proposal will be that provisions for increased
market oversight should be proportionate to the risks which the
carbon market is facing; that oversight should provide the right
level of investment certainty, without reducing the effectiveness
of the market, decreasing liquidity or increasing overall costs
of compliance; and that the framework should cover the entire
range of transactions and all carbon compliance units. He says
that the Communication highlights possible gaps in the regime
applying to trading for immediate delivery (spot trading) and
notes that the Commission will be assessing possible ways of addressing
this, the implications of which the Government will be studying
further ahead of any consultation. He also comments that the Communication
makes clear that there are a number of pieces of existing or proposed
legislation which may impact on the issues under consideration,
and that it will be important to ensure a joined-up approach to
policy development in all these areas.
Conclusion
8.11 As we have noted in earlier Reports,
the Commission is currently engaged in an attempt to address the
problem of market abuse in a number of areas, and the issues dealt
with in this document are therefore similar to those contained
in the recent draft Regulation on integrity and transparency in
the wholesale energy market. In the latter case, we have decided
to hold the document under scrutiny pending receipt of an Impact
Assessment from the Government, but, as this Communication on
the Emissions Trading Scheme is essentially intended to launch
a consultation exercise with a view to the Commission putting
forward a legislative proposal later in the year, we are content
to clear it on the basis of this Report to the House.
39 OJ No. L 275, 25.10.03, p.32. Back
40
Although the activities currently listed are in practice limited
to those emitting carbon dioxide, the Scheme also covers other
greenhouse gases (methane, nitrous oxide, hydrofluorocarbons,
perfluorocarbons and sulphur hexafluoride). Back
41
The ability to emit one tonne of carbon dioxide equivalent during
a specified period. Back
42
OJ No. L 140, 5.6.09, p.63. Back
43
Certified Emission Reductions stemming from the Clean Development
Mechanism, and Emission Reduction Units from Joint Implementation
projects. Back
44
(31958) 13917/10: see HC 428-iv (2010-11), chapter 4 (20 October
2010). Back
45
(32345) 17825/10: see HC 428-xiii (2010-11). Chapter 3 (19 January
2011). Back
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