A new world order for Carbon Trading in the EU Emissions Trading Scheme (the “EU ETS”) was ushered in on 20 June 2012 by the migration of the carbon trading account and registry system from separate Member State registries to a single Union Registry. These changes are borne out from a number of regulatory developments and market issues, such as the VAT fraud and the theft of carbon credits through cyber-phishing or hacking. The migration comes at the end of process whereby access to accounts were suspended on 3 June 2012 and reopened on 20 June 2012.
A number of issues have already arisen with respect to the new registry infrastructure that were not anticipated. For instance, we now know that a significant number of account users across all Member State registries have failed to nominate an Additional Authorised Representative ("AAR") ahead of the suspension. This means that under the new regulations1, without such AARs being in place, it is not possible to now make a transfer from an account in the Union Registry. This has the potential to impact delivery obligations that are due in the immediacy of the lifting of the suspensions.
Similarly, there have been other 'unknowns' prior to the migration of which we now know more. Although some 'unknowns' remain, the purpose of this alert is to highlight what we now know.
Q.1 Is the migration to the Union Registry now fully completed?
Ans: Yes, in the sense that accounts are all now accessible (subject to fulfilling the account holder's requirements of a valid European Commission Authentication Service registration) and the suspension has been lifted. However, the migration involved three main steps: (1) the detagging of Phase 2 EU allowances (“EUAs”) from Assigned Amount Units2 (“AAUs”) and converting them to non-Kyoto EUAs, (2) the migration of all national registry account data into the Union Registry, and (3) the consolidation of the individual Member State Kyoto required registry structure into a consolidated platform within the Union Registry allowing Member States to nonetheless retain their individual registry identity for Kyoto purposes.
All of the above items have been completed subject to some functional limitations to the account arrangements – for example, the ability to create ‘Trading Accounts’3 and the ability to nominate counterparty accounts to the ‘Trusted Account List’4 in the Union Registry. A registry software update will be necessary to enable this to happen. The Commission has promised an update on the timing of this update around 15 July 2012, but the software change is not expected to happen until sometime in September 2012.
Q.2 Does everyone who formerly had a national registry account now have a new account in the Union Registry?
Ans: Yes. Anyone who had an account in a national registry involved in the EU ETS (the "Old National Account") will have a new account in the Union Registry. The new Union Registry accounts will begin with an “EU” designator (the "New EU Account"). So whether or not the Old National Account was in the UK registry or the French registry, all New EU Accounts will begin with an “EU” designator. In other words, it will not be known who the National Administrator of a counterparty's new EU account is simply from the information of the account number provided.
However, the Old National Account still exists, albeit with a new, additional two-digit numerator at the end of the previous account number. This means all existing account information held by counter parties about that Old National Account will be incomplete unless notification of the updated account number has been provided by an account holder. Therefore, each prior account holder shall, in fact, have two accounts now: one with a national designator (e.g. "GB" if the old one was in the UK) and another with an "EU" designator. Please note that it is possible that different National Administrators may have taken different approaches on this issue. We are basing our comment above on the actions taken by the UK National Administrator.
Q.3 Why are there now two accounts instead of just one?
Ans: The creation of two accounts in place of one is driven by the difference between Kyoto and EU carbon units. Only Certified Emission Reductions (“CERs”) and Emission Reduction Units (“ERUs”) can be used as compliance Kyoto credits within the EU ETS, whilst other Kyoto credits (e.g. AAUs) cannot be. The idea of having the Old National Account and the New EU Account is in recognition that some Kyoto credits will not be used for compliance, but may nonetheless be traded by an account holder, such as AAUs or tCERs5. If a person was to do so, it would be necessary for them to have an account in the UK Kyoto registry (albeit now consolidated within the Union Registry platform), as the New EU Account is not going to hold Kyoto credits that are not EU ETS compliance credits.
At the time of the migration, CERs and ERUs that were held in Old National Accounts were not transferred to the New EU Accounts in the Union Registry. That is not to say such CERs and ERUs cannot be held in the New EU Account, but the account holder will have a choice as to whether it trades EU ETS compliance credits (EUAs, AEUAs6 and compliance CERs, ERUs) from a single account, or keeps the Kyoto units trading separate from the EU allowance trading.
What is currently unknown, is whether the Old National Account will have to be maintained in order to receive CERs from the CDM Registry for those account holders who are currently participants in CDM projects. The UK National Administrator has assumed that the maintenance of such accounts would be necessary from a CDM perspective; but it is our understanding that sources at the CDM registry suggest that no formal agreement between the UNFCCC and the EU Commission has been reached on this issue.
Q.4 How does this impact any obligations I have under my trading documentation with counter parties?
Ans: Under the industry standard trading documentation, parties are obliged to notify each other of their account details in time for deliveries of carbon credits to occur. In some cases, there is an obligation to provide such notification of account details 30 calendar days in advance of any delivery date. Parties are also able to nominate, where they have more than one account, which account in order of priority, they wish to use for receipt of such deliveries.
With the change of the Old National Account details as well as the creation of New EU Accounts, parties clearly have an obligation to notify their counter parties of the new account information. With a minimum of two accounts now existing for each existing account holder7, it will be necessary for parties to re-nominate their preferred waterfall of accounts for the purpose of receiving carbon credit deliveries. To the extent that a party is unable to make a delivery because it has failed to nominate an AAR in time, please contact us for further advice on this issue.
Q.5 Are the Union Registry changes limited to the EU-27 only?
Ans: No, they also apply to Norway, Iceland and Lichtenstein as EEA countries that have, through the Decision of the EEA Joint Committee, adopted the EU ETS into their laws. In other words, the changes apply to the EU-30. They do not apply to Switzerland.
No doubt the new world order for carbon trading in the EU ETS will take some getting used to. This transition has been a long time in the making but the significance of its impact has often been under-recognised. In particular, the need to re-paper existing trades and sign up to new documentation in anticipation of the next EU ETS trading phase has not been affected yet, mostly due to the delays in the publication of industry common trading documentation. This documentation is now in place but the task of renegotiations with counter parties is, in many cases, yet to begin.
1 Commission Regulation (EU) 920/2010 as amended by Commission Regulation (EU) 1193/2011 (the “Registries Regulation”).
2 AAUs are carbon credits issued under the Kyoto Protocol.
3 Trading Accounts are a new type of account created under the Registries Regulation that enable holders to have faster settlement functionality in the EU ETS as compared with holders of other account types.
4 Pursuant to the Registries Regulation, nomination of counter parties to ‘Trusted Account Lists’ will be required in order to make deliveries of carbon credits to such counter parties.
5 Temporary CERs or tCERs are another type of carbon credit issued under the Kyoto Protocol for Land Use Land Change and Forestry activities.
6 Aviation EU allowances.
7 We assume new account applications will be given an EU account only and not be offered a national account unless they specifically applied for it.
Client Alert 2012-145