Documents considered by the Committee on 26 January 2011 - European Scrutiny Committee Contents

8   Oversight of the EU Emissions Trading Scheme



COM(10) 796

Commission Communication: Towards an enhanced market oversight framework for the EU Emissions Trading Scheme

Legal base
Document originated21 December 2010
Deposited in Parliament5 January 2011
DepartmentEnergy & Climate Change
Basis of considerationEM of 17 January 2011
Previous Committee ReportNone, but see footnotes
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared


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


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.


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.


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.


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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