Regulating Bidding for Emissions Allowances under Phase Three of the EU Emissions Trading Scheme (ETS)

The Financial Services Authority (FSA's) Consultation Paper CP12/6 is entitled 'Regulating bidding for Emissions Allowances under Phase Three of the EU Emissions Trading Scheme (ETS)' issued in line of of implementation of reduction of carbon emission process initiated by European Union.

The European Union (EU) is committed to a 20% reduction in carbon emissions from 1990 levels by 2020. One of the European Commission’s key policies for achieving this is a market-based requirement for the industry to account for their emissions by surrendering a matching number of allowances throughout each trading period. These allowances are issued under a ‘cap and trade’ system, whereby the available number will diminish over time. This system is known as the EU Emissions Trading Scheme (ETS).

A right to emit one tonne of carbon (or the equivalent in another greenhouse gas) is known as an EU Allowance (EUA). Member States can currently auction up to 10% of allowances, with the balance being issued at no cost but from 2013 this proportion will greatly increase.

To accommodate this auctioning, there will be a common European auction platform through which allowances are auctioned, but the UK has exercised a right to host a national platform instead. To achieve this, the Treasury’s Recognised Auction Platforms Regulations 2011 created a new type of body which the FSA may recognise and supervise – a Recognised Auction Platform (RAP) – applying a regime similar to that applicable to Recognised Investment Exchanges. 

FSA consulted on approach to recognising RAPs last summer (CP11/14). The Treasury is now consulting on amendments to legislation that would make bidding on such auction platforms a regulated activity, in certain circumstances. This means that FSA will be required to specifically authorise certain firms intending to bid; namely investment firms, credit institutions and a category of firms that are exempt from the Markets in Financial Instruments Directive (MiFID).

Present Consultation Paper was published in March 2012. Comments should reach FSA by 19 April 2012.