Tender: Legal Nature of EU Emissions Trading System
Belgium, 08 April 2016
The EU emissions trading system (EU ETS) is a cornerstone of the European Union's policy to combat climate change and is its key tool for reducing industrial greenhouse gas emissions costeffectively. The EU ETS was established 10 years ago as 'cap and trade' system. Now it covers more than 11 000 power stations and industrial plants in 31 countries4 and since 2012 its scope was expanded to airlines. Around 2 000 intermediaries, traders, organisations and individuals voluntarily participate in the EU ETS - the first - and still by far the biggest - international system for trading greenhouse gas emission credits. As a market-based mechanism, it is reducing emissions in line with the cap in the most cost effective way, and also provides a price signal for the industry and power sectors to promote investment in clean, low-carbon technologies.
The general objective of this study is to provide further clarity on the legal nature of allowances, not covering the carbon units (e.g. AAUs, CERs, ERUs) issued as per the Kyoto protocol to the UNFCCC25.
The specific objectives of the study are:
to outline the characteristics of allowances which are typical of private property rights, of administrative rights or of sui generis rights, based on the current EU legislation, the national Member Sates regime, and case law;
To provide a detailed comparative legal analysis of the treatment of allowances in five Member States: Belgium, Germany, France, Poland and the UK;
based on consultations with relevant stakeholders to identify the main issues related to the legal nature of allowances which might have practical implications on the legal certainty, investment confidence and liquidity of the carbon market. In particular the following aspects related to the legal nature of allowances should be considered: property right, establishing security interest, insolvency, taxation, accounting, and criminal justice.
to identify any consequences of the allowances being recognised as financial instruments udder MiFID II with relation to the general legal nature of allowances and in particular on the issues identified under (iii).
The analysis should take into account the general EU law and the national provisions of Belgium, Germany, France, Poland and the UK; (v) to present possible options for providing further clarity on the legal nature of allowances in view of the issues spelled out under (iv) with clear identification of the proposed remedy instruments (changes to the relevant legal framework or soft law measures). The options and respective remedy tools should be analysed against their feasibility, practical nature, benefits and required effort.
Legislative analysis of the legal nature of allowances
The contractor must provide an analytical overview of the characteristics of allowances which are typical of private property rights (in rem, in personae), of administrative rights and of sui generis regulatory rights, based on the current EU legislation, case law and the Member States regimes. Detailed analysis of EU law must be presented including the legal provisions linked directly or indirectly to the legal nature of allowances, in particular those of the Treaty on the Functioning of the EU, the ETS Directive, the Registry Regulation, the Auctioning Regulation and other related EU law. The contractor must provide a detailed overview and analysis of the case law of the European Court of Justice (ECJ) related to the legal nature of allowances, including those concerning free allocation of allowances, allowances being object of criminal activity, and any other related cases. This part of the analysis should include only general available information regarding the national regime of all Member States.
Comparative legal analysis of the treatment of allowances in Belgium, Germany, France, Poland and the UK:
The contractor must provide a detailed legal analysis of the provisions related to the legal nature of allowances as set by national legislation or case law of Belgium, Germany, France, Poland and the UK. These MSs have been chosen because they cover the largest volume of trade in allowances and they are relevant for the current set up of the EU ETS and in particular the primary market (auctioning) of allowances. The overview and analysis must cover at least the classification of allowances as property rights (in rem, in personae), administrative rights or sui generis rights; how does the transfer of title over allowances take place, the extent to which the establishment of security interests is possible under each jurisdiction, the treatment of allowance from the point of view of taxation and accounting and in case of insolvency, theft, fraud or other serious crime.
Identification of issues related to the legal nature of allowances
The contractor must carry out a consultation with relevant stakeholders (7-10 representatives, form the industry, financial intermediates, NGOs) identified together with the Commission on the possible legal issues stemming from the current legal framework applicable to allowances. Taking into account the opinions of these representatives and the analysis made under the previous tasks, the contractor must identify the main issues related to the legal nature of allowances which might have practical implications on the legal certainty, investment confidence and liquidity of the carbon market. The scope of this analysis must cover at least the following areas:
Liquidity of the market in allowances, including cross-border trade;
Legal certainty: possible administrative discretion to cancel allowances, to claim allowances back in case of free allocation or to withdraw them from the market;
Establishing and enforcing security interests over allowances and their treatment in case of insolvency, fraud or similar event resulting in loss of allowances;
Treating allowances for taxation and accounting purposes;
Allowances as subject of criminal activity: VAT fraud, theft, money laundering, market abuse.
Consequences of allowances becoming financial instruments
The contractor must analyse the consequences on the legal nature of allowances arising from the fact that they will be recognised as financial instruments in the EU in accordance with MiFID II. The analysis must take into account the EU law and the national regime of financial instruments in Belgium, Germany, France, Poland and the UK which should be applicable to the allowances once they are recognised as financial instruments as per MiFID II and MAR. The analysis based on the general EU law provisions and on the national law provisions of the indicated MSs must clarify the implications of the new regime on the issues outlined under section 3.3.3 of these tender specifications.
Taking into account the analysis and overview under the sections 1-4 of these tender specifications, the contractor must present practical and possible options for providing further clarity on the legal nature of allowances with comprehensive identification of the proposed remedy instruments (changes to the relevant legal framework or soft law measures). The options and respective remedy tools should be analysed against their feasibility, practical nature, benefits and required effort for the Commission, Member States including national competent authorities and national registry administrators, and for the market participants. The proposed options should be analysed and presented in a clear format where the pros and cons are identified and the comparison should be comprehensive, exhaustive and should be supported with examples.
The contractor must present a concise summary of the issues identified in the final report, including the current legal characteristics of allowances, identified possible legal issues, consequences of allowances being recognised as financial instruments, options and possible remedy tools.
Submission Deadline: 18 April 2016
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