As a first step, one must distinguish between physically settled spot/forward and derivativesmarkets. Derivatives of carbon allowances traded on exchanges and OTC
are largelyregulated.IETA supports the introduction of targeted regulatory measures for trading of physicalspot/forward carbon emission allowances
that complement the efficient operation of deep,liquid and competitive markets. A consistent and proportionate regulatory framework will attractparticipation, reward innovation, and enhance environmental efficiency.IETA also emphasizes the need for EU regulators to co-ordinate with each other, to establishharmonized transparency standards, definitions and reporting for the pan-European carbonmarket and for cross-border cooperation in detecting fraudulent activity.In this context, IETA welcomes the adoption of amendments to the registry regulation in theclimate change committee of February 2010. The fast-track implementation of security featuresand the introduction of a single EU registry for phase III will make it far more difficult to fraud thesystem and abuses will be more easily detected and can be faster dismantled.
What are carbon emission allowances?
A carbon emission allowance is a unit which grants the holder the right to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of the EU Emissions Trading Directive. Carbon emission allowancesare traded pre-dominantly for compliance usage.IETA notes that there are substantial interdependencies between European emissionallowances markets and some other energy markets (mainly electricity and gas) since there arelinkages in the price formation processes of these markets.(1) Spot dealsEmission allowances
can be sold in spot markets where delivery is scheduled to be madewithin two trading days or another generally accepted standard delivery period. Spot trading of emission allowances is currently not subject to any specific EU legislation
. Spot contracts areexplicitly excluded from the scope of MiFID.
OTC options, futures, swaps and other derivative contracts relating to emissions allowances are regulated under MiFID if they can be settled in cash.
Here we only address the trading of spot allowances in the ‘secondary market’ but the forthcoming regulation onauctioning of EU allowances for phase III should address the risk of market manipulation in the ‘primary market’.
For the avoidance of doubt, the reference to allowances is a reference to EU Allowances (EUAs), Certified EmissionReductions (CERs), Emission Reduction Units (ERUs) and any other compliance unit.
Romania has recently reclassified spot EUAs as financial instruments (23/02/2010). IETA does not believe that ablunt unilateral reclassification is the right way to regulate the carbon market. IETA supports the call by the Frenchgovernment’s Prada report for a harmonization of the legal status of emission allowances and uniform application of tax/accounting rules across the EU.
Art 38 of MiFID Implementing Regulation. Moreover, MiFID earmarks energy as a "commodity" while carbon creditsare not mentioned. It is, however, not very plausible that carbon credits would fall within the definition of "commodity"as this excludes intangible rights and goods, while explicitly including energy.