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Regulations on Emissions Auctions in Phase Three to Come into Force

by Simone Goligorsky

On October 23, 2012, the Community Emissions Trading Scheme (Allocation of Allowances for Payment) Regulations 2012 (SI 2012/2661) (ETS Regulations) were made.  The ETS Regulations deal with the administration of auctions under Phase Three of the EU Emissions Trading Scheme (EU ETS) and will come into force in the UK on November 14, 2012.

Operation of the EU ETS will change significantly in Phase Three. The most significant changes include:

  • A reduction in free European Union Allowances (EUAs);
  • A move of the decision making process on allocations of EUAs from Member States to the European Commission (EC);
  • The appointment of ICE Futures Europe (ICE) as the preferred platform to conduct the auctions scheme; and
  • The imposing of the requirement for certain firms to apply to the Financial Services Authority (FSA) for a variation of an existing authorisation, or requirement to seek authorisation to perform an activity regulated by the Markets in Financial Instruments Directive (MiFID).

During Phase Three, fewer free EUAs will be allocated.  Any additional EUAs that are required by market participants will have to be purchased through auctions.  Over the course of Phase Three, an estimated 50% of EUAs and 15% of European Union Aviation Allowances (EUAAs) will be auctioned, compared to 10% of EUAs in Phase Two

The auction process was previously operated by the UK Debt Management Office (DMO). In late 2011, the UK commenced an EU-wide open procurement process.  In April 2012, ICE was selected as the preferred platform to conduct auctions on behalf of the Department of Energy and Climate Change (DECC) during Phase Three. The last auction of Phase Two conducted by the DMO took place on October 25, 2012. 

Certain market participants will now have to apply to the FSA for a variation of permission to participate in the auction process, as ‘bidding in emissions auctions’ is now a regulated activity pursuant to MiFID.  Undertaking a regulated activity requires FSA authorisation. Market participants who will not seek authorisation from the FSA, or a variation of an existing permission, will have to use an authorised broker or an ICE member if they wish to participate in the auctions.

On July 19, 2012, the FSA published a policy statement covering the bidding process for EUAs under Phase Three. The policy statement sets out the Emissions Allowance Auction Bidders Instrument, that implements the measures regulating to participation in the auction process, which came into force on July 27, 2012. On the same day, the FSA started accepting applications for variations of existing authorisations.

Phase Three auctions are scheduled to begin in November 2012, subject to completion of the EC’s approval process of the ICE auction platform, which is expected to happen in early November 2012.

The following are the provisional forthcoming auction dates: November 21, 2012 and  December 5, 2012 for EUAs and November 26, 2012 and December 10, 2012 for EUAAs.

Those wishing to participate in the auction process in the UK must, inter alia, be members [...]

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EU Emissions Trading System Single Registry: Timetable Announced

by Prajakt Samant and Simone Goligorsky

On April 27, 2012, the European Commission (EC) announced the full activation of the EU Emissions Trading System (EU ETS) single registry.  The full activation process will include the migration of over 30,000 EU ETS accounts from national registries.

On May 3, 2012, the EC provided the following transition table in relation to the full activation:

  • Starting on May 14, account holders (including aircraft operators) will not be able to open or close accounts or to modify accounts and account representative details, neither in national registries nor in the single registry.
  • From June 3, the operation of national registries and the single registry will be suspended simultaneously and account holders will not be able to access registry accounts, including allowances held in these accounts.  Data held by the national registers will start to be migrated to the EU registry.
  • On June 20, the single registry will be fully activated.  Users of existing national registries will be able to use the single registry as soon as they receive their new authentication credentials from their national administrator.

This will impact account holders in two ways.  First, account holders will have to comply with increased documentation requirements and security features to access the transferred accounts in the single registry.  Second, account holders will not be able to transfer any allowances until all necessary documentation requirements are satisfied.

In addition, the EC announced that in the event that account holders have any questions or difficulties during the transition, national helpdesks will continue to provide support.  The Environment Agency will continue to be the national administrator for the UK. 

The EC has further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS.  A subsequent update will enable phase III auctions, new account categories and a trusted account list.  The EC has stated that software development in relation to these updates has been commenced and a timetable will be communicated on July 15, 2012.

Separately, on May 8, 2012, the UK Department of Energy and Climate Change launched a public consultation on the implementation of phase III EU ETS in the UK.  The consultation seeks the views of market participants on how the proposed legislative framework should be successfully implemented in the UK.  By simplifying the existing legislative framework, market participants will be subject to less of a regulatory burden than has been imposed by the current regime.  Market participants wishing to respond have until July 31, 2012 to do so.




Regulated Bidding for Emissions Allowances Under Phase Three of the EU Emissions Trading Scheme

by Prajakt Samant and Simone Goligorsky

The UK’s Financial Services Authority (FSA) published a Consultation Paper (Consultation) on March 15, 2012 detailing its proposals for authorization and supervision of firms intending to bid for emission allowances under Phase Three of the European Union Emissions Trading Scheme (EU ETS).  Phase Three covers the period of 2013-2020 and marks the final phase of the EU’s strategic commitment to a 20 percent reduction in carbon emissions from the levels in the 1990s.

The purpose of the Consultation is to set out the circumstances in which bidding for emissions allowances becomes subject to FSA regulation following amendments to current regulations.  It offers a preliminary guide for firms looking to bid for emissions allowances with a view to allowing as much time as possible for applications for permission to be processed.  The first auctions are not expected until autumn 2012, however the European Commission (EC) may choose to commence auctions on its central platform as early as June 2012.

The UK (alongside Germany and Poland) has opted to host a national platform for EU ETS auctions.  This right is enabled under the Regulated Auction Platform Regulations 2011, which creates in the national platform a Regulated Auction Platform and in turn, a new body subject to FSA supervision.  Bidders will have the choice of two types of emission product available for auction: a two-day spot and a five-day future.  The choice of emission product will play a role in determining whether or not a firm will be subject to FSA regulation.  Amongst others, investment firms and credit institutions are most likely to require FSA authorization to undertake auctioning activities.

Changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 will establish bidding as a new regulated activity, therefore, firms will still be required to make a further application to the FSA even if they currently have permission to carry out existing FSA regulated activities.  It is not, however, anticipated that any variation of a firm’s existing permissions would be unduly complex.  This would be the case unless the FSA considers that the proposed bidding activities will pose any material risk to the firm’s business, since the FSA is of the view that the newly created bidding activity is similar to certain existing regulated activities.

The FSA invites comments by April 19, 2012 with the intention to finalize the proposals set out in the Consultation through rules which are due to be published in late May 2012.  A policy statement and feedback on any responses will be published shortly thereafter.




Non-EU Countries Oppose Inclusion of Emissions from Airlines in EU ETS

by Prajakt Samant and Simone Goligorsky

Following the preliminary court ruling that all aviation emissions are to be regulated under the European Union (EU) Emissions Trading Scheme (ETS), several non-EU countries have convened to oppose the inclusion of their airlines in the EU ETS. In a meeting held in Moscow at the end of February, a reported 26 countries, all members of the United Nation’s International Civil Aviation Organization (ICAO), met to discuss possible countermeasures to the EU ETS.

The countries, which include the U.S., China, India and Russia, stated that if non-EU based operators are forced to participate in the EU ETS, then they may consider adopting one or more of the following measures:

  • Prohibiting national airlines from participating in the EU ETS;
  • Lodging an official complaint with the ICAO;
  • Requiring EU airlines to submit data, including flight details, thereby adversely affecting entities operating in Europe;
  • Suspending current and future talks with EU airlines regarding possible new routes; and
  • Recovering the cost of the EU ETS by imposing levies and charges on EU airlines.

The countries also requested a review of the Bilateral Air Services Agreements, including the Open Skies agreement. Following the meeting in February, delegates of the opposing nations issued a declaration stating that the “inclusion of international civil aviation in the EU ETS leads to serious market distortions and unfair competition.”

Separately, Russia has stated that it would consider imposing fees on European carriers undertaking flight routes over Siberia, or capping the number of flights over Siberia. This measure would come despite Russia having previously agreed to ease the restrictions, as part of its World Trade Organization accession.  

A spokesman for the U.S. State Department stated that he hopes that the European law will be revised before coming into force, thereby exempting non-EU airlines. Instead, he is of the view that it would be prudent to adopt a scheme that would be more globally suitable. Policy makers in the EU have stated that they would be amenable to such this approach, as long as the global program adopted ensured that all airlines using EU airports paid for carbon credits.

Further meetings of the non-EU countries opposed to the inclusion are scheduled for the months.




Consultation Describes State Aid for Third EU Carbon Emissions Trading Period

by Prajakt Samant

The European Commission (EC) published in December 2011 a Consultation on the draft guidelines for targeting State Aid (Guidelines) in furtherance of the European Union (EU) Emission Trading Scheme (ETS) when the Third Trading Period begins in January 2013.  Interested parties have until January 31, 2012, to submit comments on the draft Guidelines before they are finalized.

Launched in 2005 to combat human-caused climate change by ratcheting down emissions of carbon dioxide, the ETS, as revised in 2008, allocates EU-wide emissions allowances for auction that can be used, banked or traded.  According to the Consultation, State Aid (as defined in the Treaty on the Functioning of the EU), can be directed to the following emission reduction activities:

  • Minimize Carbon Leakage — Carbon leakage occurs when emissions from a source within an EU Member State are reduced by migrating to a source outside of the EU where emission controls are less strict or non-existent.  State Aid can be directed to minimize the risk of leakage.
  • Efficient Power — State Aid can be used to make investments in highly efficient power plants, including facilities capable of capturing and sequestering greenhouse gas (GHG) emissions from power plants Efficiency is to be measured against a standard articulated in the Guidelines.
  • Allowance Grants in lieu of Auction — Member States will have the option to grant free (non-auctioned) allowances to electricity generators where the savings are invested in modernizing their operations through investments in clean technologies and in diversifying their energy mix and sources of supply.
  • Exempting Certain Emission Sources — According to the Consultation, State Aid can be used to exempt certain small emission sources, including hospitals, from the EU ETS, but not from other obligations to reduce GHG emissions.

The amount of State Aid awarded to each of these applications will be based either on a formula in the Guidelines or according to the application’s environmental contribution.  Awards are to be guided by the precept of European law that a sledgehammer should not be used to crack a nut, also known as the principle of proportionality.




EU ETS to Cap Aviation Greenhouse Gas Emissions

by Prajakt Samant

The Court of Justice of the European Union (CJEU) ruled preliminarily that international aviation emissions can be regulated under the European Union (EU) Emissions Trading Scheme (ETS), which became effective on January 1, 2012.  The December 21, 2011, ruling in Case C-366/10 dates back to December 2009, when several U.S. airlines brought judicial review proceedings to enjoin the UK’s Department of Energy and Climate Change (DECC) from implementing its decision to extend the EU ETS to greenhouse gas (GHG) emissions from airplanes.

In May 2010, the High Court of England and Wales referred the issue to the CJEU, which was asked to rule on the lawfulness of the decision.  Agreeing with the opinion of the Advocate General of the CJEU, given in October 2011, the CJEU confirmed that the Aviation Emissions Directive did not infringe:

  • Customary international law, as EU regulators are entitled to permit air travel on the condition that operators comply with EU standards;
  • The Chicago Convention on International Civil Aviation, as the EU is not a party to it;
  • The Kyoto Protocol, as the EU is not required to pursue the limitation or reduction of GHG emissions from aviation fuels, but rather, could seek to meet GHG emissions targets as it wished; and
  • The Open Skies Air Transport Agreement that the EU and U.S. signed in 2007, as the uniform application of the EU ETS to all flights departing from EU airports is consistent with the agreement, which prohibits discriminatory treatment between U.S. and EU operators.

Airline carriers with flights passing through EU airports will therefore be required to buy emissions allowances, if they have not been doing so already.  Initially, airlines will only be required to pay for 15 percent of their emissions, with 85 percent covered by free allowance, but airlines will be fined if they exceed their allocated quota of allowances.  

The case will now return to the High Court for the completion of the judicial review.  The U.S., China and India have indicated that they may mount a challenge against the CJEU’s ruling.  In addition, certain airlines have already threatened to boycott the requirement, while others have suggested that they will pass on the costs to their passengers.  The increase in costs for airlines could lead to a competitive disadvantage for European airlines.




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