Easier to lose than land (Source: Salisbury Area Plaques)

In anticipation of the centralised European registry for the EU ETS the Commission has turned its attention to the legal issues surrounding the traceability of stolen emissions allowances. The approach taken is deferential to the national laws of individual Member States rather than providing a harmonised EU-wide rule. However, the Commission’s proposals have done little to address the risks faced by market participants if found to be unwittingly holding stolen allowances. This is not particularly helpful for the overall health of the emissions market.

Identification and recording of emissions allowances

Much like a land registration system, each emissions allowance within the EU ETS is currently identified by a unique serial number (called a unique unit identification code in the EU ETS registry regulation) and is recorded in one of the national Member State registers, depending on which Member State it has been allocated to. The Community Independent Transaction Log (CITL) supervises and verifies all transfers of allowances between national registries to ensure that they comply with the EU ETS rules.

Phase III of the EU ETS (commencing in 2013) will see a centralisation of the registry system, with all emissions transactions being carried out through a single EU registry, the European Union Transaction Log (EUTL). The central registry will be operated by the European Commission and will replace the individual Member State registries.

Theft of emissions allowances

Since the start of 2011 the emissions market has witnessed several incidents of allowances being stolen from national registries. Eastern European Member States in particular were affected, with millions of euros’ worth of allowances being lost when fraudsters broke into the electronic registry systems. This brought the emissions spot market to a halt in January 2011.

A substantial number of these allowances have not been recovered to this day. This is in spite of each allowance having a serial number, which in theory at least should make its movement through the accounts in the registries easily traceable. However, the approach of the Commission has been to leave the recovery of stolen allowances to the legal systems of individual Member States, without attempting to draft any generally applicable rules in this respect.

Where have all the serial numbers gone?

That derogating to individual Member States represents official policy in this area has been confirmed recently by the Commission’s intention to amend the EU ETS registry regulation to make serial numbers confidential. This means that any stolen allowances will no longer be capable of identification; the responsibility for holding them rests with their owner at any particular time.

The Commission’s proposal is that unknowing purchasers of stolen allowances should be allowed to keep them, while the interpretation of “purchaser in good faith” should be left to the national laws of each Member State. However, Member States have different rules regarding the tracing of stolen property. Emissions market participants would be left uncertain as to what they are holding in their registry accounts. They would no longer be able to identify which allowances are stolen, and would also be potentially liable to losing them if the law of a particular Member State stipulated that the allowances should be returned to their original owner.

Effects on the market

This level of uncertainty does not bode well for the emissions market and could seriously undermine the viability of the EU ETS. There have already been objections to the Commission’s proposal not to publish serial numbers. Coupled with this are the recent closures by some financial institutions of their emissions trading desks, amid fears that the market is too unstable to merit involvement. While the Commission’s attempts to address the security issues in the EU ETS are in themselves commendable, the approach has not so far elicited the desired response from the market.

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