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IETA Position on Transparency and Oversight in the EU’s Carbon Market

IETA Position on Transparency and Oversight in the EU’s Carbon Market

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This paper outlines the International Emissions Trading Association (IETA)’s view on various initiatives concerning regulation and oversight of the EU’s carbon emissions market (EU ETS) .

IETA is the leading voice of the international business community on the subject of emissions trading. IETA supports efforts to address the pressing environmental challenge of climate change, and is dedicated to the establishment of environmentally effective market-based emissions trading systems that generate reductions at least cost to the community.
This paper outlines the International Emissions Trading Association (IETA)’s view on various initiatives concerning regulation and oversight of the EU’s carbon emissions market (EU ETS) .

IETA is the leading voice of the international business community on the subject of emissions trading. IETA supports efforts to address the pressing environmental challenge of climate change, and is dedicated to the establishment of environmentally effective market-based emissions trading systems that generate reductions at least cost to the community.

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Published by: ieta2 on Jan 19, 2011
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05/12/2014

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IETA–MAKINGMARKETSWORKFORTHEENVIRONMENT
RuedelaLoi235,Boite271040Brussels,Belgium+32(0)22301160;
brussels@ieta.org
Market integrity and transparency regime for the EU’s carbon marketIETA Position Paper 
June 2010Key messages
IETA strongly condemns any forms of market abuse;
IETA supports appropriate measures for enhancing oversight, transparency and integrity of the carbon market based on an impact assessment with a thorough cost-benefit analysis;
Carbon derivatives are mainly traded on central platforms which provide a high level of transparency and are subject to high levels of financial regulation;
The Commission’s proposals for regulation of OTC derivatives must not drive out liquidity inthis young and growing market, and must allow for efficient price formation to achieve CO
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 emission reductions at the lowest cost;
IETA supports well-defined, targeted transparency measures for highly bespoke physicalcontracts that are traded bilaterally or over-the-counter to support efficient price discoveryand market integrity;
Transparency rules for the physical carbon market could be embedded into the work onmarket integrity and transparency of physical power and gas markets;
IETA looks forward to discussing with the Commission the appropriate scope of the MiFIDreview which should ensure that the same market participants benefit from an appropriatelevel of regulatory protection in order to safeguard their interests and the integrity of themarket in general;
An EU-wide carbon market monitoring function should be introduced within existing EUregulatory structures to allow data exchange and coordination among national regulatorswhile the power of investigation would remain at national level;
It should be clarified that all oversight rules applying to EUA should apply also to secondarymarket transactions on CER/ERU or other instruments that would become tradable in theEU ETS under future arrangements.
 
IETApositionontransparencyandoversightintheEU’scarbonmarket 
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IETA–MAKINGMARKETSWORKFORTHEENVIRONMENT
January19,2011Geneva–Washington–Brussels–Torontowww.ieta.org
Introduction
This paper outlines the International Emissions Trading Association (IETA)’s view on variousinitiatives concerning regulation and oversight of the EU’s carbon emissions market (EU ETS)
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.IETA is the leading voice of the international business community on the subject of emissions trading. IETA supports efforts to address the pressing environmentalchallenge of climate change, and is dedicated to the establishment of environmentallyeffective market-based emissions trading systems that generate reductions at least costto the community.There is only one regulatory initiative
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which will directly address carbon market oversight in theEU, but regulatory developments in financial and commodity derivatives markets will also haveimplications for carbon market participants.IETA welcomes the initiation on 17 December 2009 of a series of stakeholder consultations bythe Commission on commodity derivatives and asks for further clarity concerning how carbonproducts will be included in the following regulatory initiatives:
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Review of the Market Abuse Directive (MAD);
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Enhancement of regulatory framework for over-the-counter (OTC) derivatives;
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Enhancement of trade and price transparency in the Market in Financial InstrumentsDirective (MiFID);
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Review of exemptions from MiFID for commodity firms;
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Possibility to empower regulators to set position limits;
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Proposal for EU level oversight of electricity and gas forward physical and spot markets,which might include carbon emissions, with regard to market integrity and transparency.
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 IETA urges the Commission to ensure that the carbon market and its products are not subject tounnecessary regulatory overlaps. Stakeholder consultation by all Directorate Generals isessential to ensure coherence and reduce costly and confusing duplication. The design andimplementation of any regulatory framework must follow the “better-regulation principle” andmust be founded on sound market failure and cost benefit analysis to ensure thecompetitiveness of EU industry.IETA welcome the Commission’s recognition in its 2009 Communication on derivatives
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thatdifferent solutions might be needed for different asset classes. It is critical that the Commissiontakes account of the diverse range of assets and participants (compliers, traders, investors) itintends to cover. To prevent unintended consequences, regulatory solutions must not beapplied uniformly to all asset classes without prior analysis of the market characteristics of eachasset.
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A glossary is annexed to the paper, for clarification of different concepts used.
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According to article 12(1a) of Directive 2003/87/EC, the European Commission is to examine by end-2010 whether the EU’s emission trading scheme is sufficiently protected from insider dealing and market manipulation and bringforward regulation to ensure it.
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IETA will submit a separate reply to the consultation published by DG Energy on 31 May on ‘Initiative for theintegrity of traded energy markets’.
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COM(2009) 563/4 ‘Ensuring efficient, safe and sound derivatives markets: Future policy actions’
 
IETApositionontransparencyandoversightintheEU’scarbonmarket 
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IETA–MAKINGMARKETSWORKFORTHEENVIRONMENT
January19,2011Geneva–Washington–Brussels–Torontowww.ieta.org
As a first step, one must distinguish between physically settled spot/forward and derivativesmarkets. Derivatives of carbon allowances traded on exchanges and OTC
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are largelyregulated.IETA supports the introduction of targeted regulatory measures for trading of physicalspot/forward carbon emission allowances
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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
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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
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. Spot contracts areexplicitly excluded from the scope of MiFID.
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OTC options, futures, swaps and other derivative contracts relating to emissions allowances are regulated under MiFID if they can be settled in cash.
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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’.
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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.
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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.
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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.

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