CONFLICT OF LAWS IN EMISSIONS TRADING
Koji TAKAHASHI*

I.
II.
III.

IV.
V.

Background and Purpose of this Article
Proprietary Issues Which May Give Rise to Conflict-of-Laws Problems
Approaches for Determining the Law Applicable to the Proprietary Issues
A.
Application of the Overriding Mandatory Rules of the Law of the Forum(lex fori)
B.
Application of the Law of the Issuing StateC.
Application of the Law of the Place of Registration
Clarification and Unification of Substantive-Law Rules on the Proprietary Issues
Other Conflict-of-Laws Problems

I.

Background and Purpose of this Article

Emissions trading has been the subject of many debates since the Kyoto Protocol
to the United Nations Framework Convention on Climate Change allowed
industrialised nations to use it as a supplementary measure to achieve their target to
reduce greenhouse gas emissions. Much has been written about its political andeconomic implications. Yet, its legal aspects have been largely unexplored. There
has been surprisingly little analysis on the private international law aspects of it.
This lack of analysis does not mean that there are no significant conflict-of-laws
problems that arise.
The Kyoto Protocol’s first commitment period will expire at the end of
2012. During the second commitment period, starting in 2013,1 emissions trading
will continue in various forms. The EU Emissions Trading Scheme,2 for example,*

Professor, Doshisha University Law School (Kyoto, Japan). The author wishes toexpress gratitude to the Swiss Institute of Comparative Law and the Inamori Foundation for
their research grants. This article is a summary version of the author’s earlier work inJapanese serialized in NBL vol. 961 (2011.9.15) p. 10-18, vol. 962 (2011.10.1) p. 72-78,
vol. 963 (2011.10.15) p. 84-90, vol. 964 (2011.11.1) p. 91-97, and vol. 965 (2011.11.15)
p. 94-105.
1
The Parties to the United Nations Framework Convention on Climate Change(UNFCCC) decided in the COP (Conference of the Parties) 17 to launch a second
commitment period of the Kyoto Protocol starting in 2013 for an unspecified duration.
2
Established by the Directive 2003/87 of the European Parliament and of theCouncil of 13 October 2003 establishing a scheme for greenhouse gas emission allowance
trading within the Community (OJ L 275, 25/10/2003, p. 32). This Directive has
subsequently been amended by the Directive (2004/101), Directive (2008/101), Regulation(219/2009), and Directive (2009/29).
Yearbook of Private International Law, Volume 13 (2011), pp. 145-163© sellier. european law publishers & Swiss Institute of Comparative Law

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Koji Takahashi
sets specific reduction targets for 2013 onwards.3 In due course, the Kyoto Protocol
will be replaced by a new legal regime.4 It is expected that emissions trading will
also be given an important role in that new regime. Moreover, emissions trading
can be used to curb emissions of substances other than greenhouse gasses. In fact,
the world’s first emissions trading scheme was created to reduce the emission ofsubstance harmful for the health. 5 Because emissions allowances are legal constructs, there can be as many emissions trading schemes as the legal regimes,
which create them.6
The present analysis is not predicated on the particularities of any specificemissions trading scheme existing today. Its scope is broader, covering any emissions trading schemes of the past, present, and future with the following
characteristics:7– The States participating in the scheme (hereafter “constituent States”)
make commitments to limit emissions of certain substance in their territories during a specified period of time.
– To honour their commitments, the constituent States impose obligations
on the entities active within their territories to limit emissions arising from theiractivities.
– At the start of the commitment period, emissions allowances are allocatedto the constituent States in quantities corresponding to their respective
commitments.
– In the course of the commitment period, emissions allowances may also
be generated from emissions abatement projects.
– The emissions allowances are capable of being owned by the States andnon-State entities, which have, accounts in the registries maintained by theconstituent States, with such ownership being transferable both domestically andinternationally.
– The issuance, holding, transfer and other dispositions of emissions allowances are registered in the registries8 maintained by the constituent States.9
3
Article 9 of the Directive 2003/87 (note 2), as amended by, inter alia, the Directive
2009/29. The amendment by the Directive 2009/29 applies to the trading period
commencing in 2013.
4
The Parties to the UNFCCC decided in the COP 17 to launch a process to develop
by 2015 a new regime which is to take effect in 2020.
5
Under Title IV added by the 1990 Amendments to the United States Clean Air Act,the aim of which is to reduce sulphur dioxide (SO²) emissions.
6
Besides the Kyoto Protocol scheme and the EU scheme, other examples ofcurrently existing emissions trading schemes include the Regional Greenhouse Gas Initiativeof the north-eastern States of the United States and the national emissions trading schemesof Norway, Switzerland and New Zealand.
7
In fact, the analysis of this article could be also applicable to the trading of quotas
other than emissions allowances, such as fishing quotas, if it is equipped with all the listed
characteristics.
8
Instead of registries, certificates may be created to record emissions allowances(e.g. s. 18(1A) of the Personal Property Securities Act 1999 of New Zealand contemplates

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Conflict of Laws in Emissions Trading– The constituent States and their entities are authorised to use emissions
allowances to help meet their commitments and obligations.
The aim of this article is to suggest solutions to the conflict-of-laws problems
which may arise in an emissions trading scheme meeting the above criteria.
Reference will be made to the rules of currently existing emissions trading schemes
for the sake of illustration. The analysis will focus primarily on proprietary issues
such as the transfer of ownership of emissions allowances and the creation andeffect of security interests in allowances. Those issues will be outlined in thefollowing chapter.

II. Proprietary Issues Which May Give Rise toConflict-of-Laws Problems
The laws of constituent States of the same trading scheme may differ regarding therequirements for the transfer of ownership of allowances; the additional steps, ifany, needed to make the transfer effective against third parties; the method for
determining priority when multiple transfers are involved; the impact, if any, of therescission or termination of an underlying contract on the validity of a transfer; andthe possibility of and conditions for a good faith acquisition.
The possibility of a good faith acquisition is of particular importance for atransferee of an emissions allowance since ordinarily, a transferee cannot be surewhether the transferor’s title to the allowance is free from any defects. In an

the possibility of such certificates – “emissions unit certificates” – being issued). The
present article will not extend its analysis to allowances embodied in certificates because theconflict-of-laws problems arising from such allowances could be dealt with in the same way
as securities (shares and bonds) and because the trend of dematerialisation is expected tocontinue.
9
In the EU Emissions Trading System, an EU-wide centralised registry (“Union
Registry”) became operational at the beginning of 2012 (See Article 19(1) of the Directive
2003/87 (note 2) as amended by the Directive 2009/29/EC). But an entity’s account in theUnion Registry is administered on behalf of the Member State where the entity is located(See Table I-I of Annex I of the Commission Regulation No. 920/2010 of 7 October 2010
establishing a Union Registry for the periods ending 31 December 2012 of the Union
emissions trading scheme (OJ L 270, 14.10.2010, p. 1) (For the trading period commencing
in 2013, the position is the same under Table I-I of Annex I of the Commission Regulation
No. 1193/2011 of 18 November 2011 establishing a Union Registry for the trading period
commencing on 1 January 2013, and subsequent trading periods, of the Union emissions
trading scheme (OJ L 315, 29.11.2011, p. 1)). For the purpose of the present article, “anaccount on the registry of State A” should be understood in the EU context to mean “anaccount administered on behalf of State A in the Union Registry.”

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international context, the question of good faith acquisition may arise in situations
like the following hypothetical:10
Case 1: An emissions allowance held in X’s account in the registry of State A isstolen by Y through a phishing attack. After registration has been transferred to Y’s
account in the registry of State B, Y concludes a sale contract with Z, who is acting
in good faith. Registration is then transferred from Y’s account in the registry ofState B to Z’s account in the registry of State C. The laws of States A and B allow
good faith acquisition of an emissions allowance upon the transfer of registration.
Under the law of State C, however, a good faith acquisition is not allowed. What
law is applicable to determine whether and under what conditions Z acquires good
title to the allowance?11
The significance of this question is amply demonstrated by a spate of thefts ofallowances, which actually occurred in recent years within the EU Emissions
Trading Scheme.12 Trading was brought to a halt as Europe’s registries were closed
to improve security measures.13Even after the registries reopened, the liquidity ofthe market suffered from lingering uncertainty over the title of stolen allowances.
Transfer of ownership is not the only form of trading of emissions allowances. Allowances may also be used as collateral to secure indebtedness or otherobligations.14 Demands for such use will grow with improvement in the liquidity

10

The resolution of this hypothetical case will be discussed in section C. of Chapter
III below.
11
If Z fails to acquire good title, it does not necessarily follow that the allowance
which Y has stolen will be returned from Z to X. If the trading scheme treats allowances asfungible property and enshrines the finality of registered transactions, Z may have to executea new transaction to return allowances in the quantity equal to the amount it failed toacquire. This seems to be the case under Article 32b(3) and (4) of the Commission
Regulation No. 920/2010 (note 9), which is applicable for the trading period ending 31
December 2012 (For the trading period commencing in 2013, the position is the same under
Article 37(3) and (4) of the Commission Regulation No. 1193/2011 (note 9)).
12
In January 2010, 250,000 units of allowances were stolen from various accounts in
the German registry in a phishing attack; in November 2010, 1.6 million units were stolen
from an account in the Romanian registry as a result of infiltration by a trojan virus; inJanuary 2011, 7.5 million units were stolen from an account in the Austrian registry througha hacking attack; and in the same month, 7 million units were stolen from an account in the
Czech registry.
13
The national registries of Germany, the Netherlands and Belgium were closed in
November 2010. In January 2011, the national registries of all constituent States of the EU
trading scheme were closed. It took about three months before all registries could resume
operation.
14
Emissions allowances have been used as collateral within clearing and settlement
systems. For example, ICE Clear Europe has been accepting such security since September
2009 (BOURSE CONSULT LLP, The Post-Trade Infrastructure for Carbon Emissions Trading(2010) para. 3.3.1.3).

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and integrity of the market. 15 Yet, the law of the constituent States may differ
regarding the types of security interests, if any, which may be created in emissions
allowances, the effect of such security interests, and their survival upon transfer of
the allowance. The uncertainty over the law applicable to those issues will have anegative impact on borrowing costs.

III. Approaches for Determining the Law Applicableto the Proprietary Issues
To promote legal certainty, it is necessary to clarify the law applicable to the
proprietary issues outlined in the preceding chapter. However, it is not sufficientfor each constituent State to clarify individually the way in which it determines theapplicable law, because if different constituent States of the same trading scheme
determine the applicable law in different ways, the same allowance may be considered to be owned by different entities under the different laws which are applicablein different constituent States. To ensure the cohesive operation of a trading
scheme, it is important to go one step further by unifying the determination of theapplicable law among constituent States. The following analysis will evaluate
several approaches with the aim of coming up with the appropriate uniform methodof determining the applicable law.
The normal method for determining the applicable law is to apply choiceof-law rules. The normal way to determine the applicable choice-of-law rules is tocharacterise the issue. Since emissions allowances are a novel type of asset, various
characterizations have been suggested, such as an administrative license, acommodity, a negotiable instrument, and a financial instrument.16 Even in the samelegal system, the characterization of an emissions allowance may differ dependingon the field of law 17 since different questions need to be asked to determine
characterization for different fields.18 Therefore, the characterization of emissions
15
D. THRING, Carbon credits as collateral, in LANG MICHENER LLP ENVIRONMENT,
Energy and Emissions Trading Brief Summer 2010 and In Brief Fall 2010 (20 September2010).
16
J.-J. BARBÉRIS/ A. TIGNOL, La régulation des marchés du CO² Rapport de lamission confiée à Michel Prada, Inspecteur général des Finances honoraire (2010), Annexe
VII lists the legal characterisations of emissions allowances in more than 30 countries
around the world. In a majority of the countries, no clear legal characterisation exists.
17
In New Zealand law, emissions allowances are an “investment security” for the
purpose of the Personal Property Securities Act 1999, a “commodity” for the purpose of the
Securities Markets Act 1988, and “chattel” for the purpose of the Securities Act 1978.
18
Such questions include whether the government should be able to revoke the initial
allocation of allowances with or without compensation, whether the use and trade ofallowances should attract value added tax (VAT), whether emissions trading should be
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allowances for the purpose of conflict of laws is not necessarily affected bycharacterization in other fields of law. Generally, the conflict-of-laws characterization is determined by choosing the most suitable connecting factor for the issue inquestion. The following analysis will, before considering the appropriate connecting factor, first evaluate an approach that sidesteps the normal choice-of-law
process.

A.

Application of the Overriding Mandatory Rules of the Law of theForum (lex fori)

It is imaginable that States could enact rules for the proprietary issues of emissions
trading as overriding mandatory rules to ensure their applicability in all cases
within their scope, without the need to follow the normal choice-of-law process.
For example, Japan’s Act to Promote Measures to Counter Global Warming provides that the ownership of a Kyoto Protocol allowance is transferred upon its
registration in the transferee’s account (Article 35(1)). This means that, unlike thetransfer of ownership of tangible movables for which it is sufficient that there be avalid contract to transfer (Article 176 of the Japanese Civil Code), it is necessary toeffect registration to transfer the ownership of allowances. The Act also provides
that in the case of transfer of registration to the registry of another Contracting
State, registration in the transferee’s account shall be deemed to be effected at thetime notification from that other Contracting State that the registration has been
completed is received by the administrator of the Japanese registry (Article 35(2)).
Although those rules are not expressly characterised as overriding mandatory rules,
some Japanese commentators interpret them as such to ensure legal certainty.
If there is no real prospect for unifying the determination of the applicablelaw among constituent States within the same trading scheme, there is something
to be said for this approach, as at least it would clarify the legal position from theperspective of the enacting State. But this solution seems undesirable if there is areal possibility of unifying the determination of the applicable law. In such circumstances, if one of the constituent States enacts substantive-law rules as overriding
mandatory rules, it risks disturbing the uniform application of law among theconstituent States since even the States willing to secure the application of theirown overriding mandatory rules19 may not be open to the mandatory application ofallowances should be subject to the same rules (e.g. rules on good faith acquisition) as thesale of tangible movables, whether the security interests available for tangible movables
should be capable of being created in allowances, and what should be the proper treatmentof allowances in the cases of insolvency and bankruptcy.
19
See e.g. Article 9(2) of the Regulation No 593/2008 on the Law Applicable toContractual Obligations (Rome I) (OJ L 177, 4/7/2008 p. 6); Article 16 of the Regulation
No 864/2007 on the Law Applicable to Non-contractual Obligations (Rome II) (OJ L 199,
31/7/2007 p. 40). In Japan, the application of the forum’s overriding mandatory rules has no
statutory basis but scholarly support for it is unanimous and there are a few court decisions
endorsing it (the decision of Tokyo District Court on 28 August 2007 (1991 Hanrei Jihô 89)
on Article 24 of the Anti-Monopoly Act concerning the remedy of injunctions, the judgment

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rules belonging to third States (i.e. States which are neither the forum State nor theState whose law is applicable under the normal choice-of-law process). 20 Thus,
suppose that another Contracting State to the Kyoto Protocol has a rule identical to
Article 35(1) of the Japanese Act. Where registration of an allowance is transferredfrom the registry of Japan to the registry of that Contracting State, the latter would
consider ownership to be transferred upon registration in the transferee’s account,whereas Japan would consider, in accordance with Article 35(2), ownership to betransferred upon receipt of notification from that Contracting State. This time gap,
which could be substantial if a system error or human error is involved,21 can become significant if the transferor or the transferee becomes insolvent in theintervening period.22

B.

Application of the Law of the Issuing State

It is imaginable that some might argue that the law of the issuing State, as the lex
creationis, should be the law applicable to the proprietary issues outlined in
Chapter II.
Obviously, this approach is workable only if each allowance is assigned an
identifier showing the place of issuance and that information is disclosed to traders.
In this regard, each Kyoto Protocol allowance is accompanied by a unique serial
number indicating, inter alia, the national registry at which it was issued. However,the national identifiers of EU allowances are not disclosed to traders.23
Even with respect to the allowances which display unique identifiers, itwould be inappropriate to apply the law of the issuing State for two reasons.
of the Tokyo District Court on 24 February 2004 (1853 Hanrei Jihô 38) on Article 35 of the
Patent Act concerning in-house inventor’s rights).
20
See e.g. Article 9(3) of the Rome I Regulation, which provides for the applicationof overriding mandatory rules of a limited category of third States in limited circumstances.
The Rome II Regulation contains no provision sanctioning the application of overriding
mandatory rules of third States. In Japan, there is no judicial or scholarly support for theapplication of such rules.
21
Emissions trading schemes are certainly not immune from system errors. For
example, on 28 and 29 June 2010, the International Transaction Log of the Kyoto Protocol
closed down for a system failure. BOURSE CONSULT LLP (note 14), at paras 2.5.3, 3.3.2 also
alerts to such risks.
22
BOURSE CONSULT LLP (note 14) notes that a dispute as to the exact timing of thetaking effect of a transfer may be triggered by the transferor’s insolvency (para. 3.3.1.1),
recalling that when administrators were appointed to Lehman Brothers, Lehman’scounterparties experienced considerable uncertainty as to which transactions had passed thepoint of irrevocability (para. 3.3.1.4).
23
See Article 75(1) of the Commission Regulation No. 920/2010 (note 9), which isapplicable for the trading period ending 31 December 2012 (For the trading period
commencing in 2013, the position is the same under Article 83 of the Commission
Regulation No. 1193/2011 (note 9)).

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Firstly, emissions allowances are usually traded as fungible commodities without
specifying the issuing State because they are homogenous assets when the timecomes for them to be surrendered to help meet the targets of emissions reduction.
Secondly, it would be difficult, costly and time-consuming to apply the law of theissuing State in the cases of the transfer of ownership of, or granting of security
interest in, a pool of emissions allowances. A bulk assignment is widely practiced
with securities (shares and bonds)24 and it is conceivable that the same practice willdevelop with emissions allowances.25 Imagine the hypothetical case below.
Case 2: X purports to create a security interest in favour of Y in emissions allowances originally issued respectively in the States A, B and C, all of which are currently held in X’s account in the registry of State A. No security interest may becreated in allowances under the law of State B. The type of security interest, which
may be created in allowances under the law of State A, is not available under thelaw of State C. What law is applicable to determine what security interest, if any, X
may create in those allowances and under what conditions?
The application of the law of the issuing State would compel X to satisfy, for eachof the allowances, the requirements of the law of States A, B, and C respectively. It
would be burdensome to ascertain and comply with each law.26 It would even be
impossible to create a security interest in a pool of allowances, which changes
composition over time.

C.

Application of the Law of the Place of Registration

Transfer of ownership of, or granting of security interest in, a diversified or mutable portfolio of emissions allowances would be facilitated if the law of the place ofregistration is applicable because it would be sufficient to ascertain and comply
with a single law only. If this approach is applied to Case 2, the law of State A
would be applicable to determine what security interests X may create in the allowances issued in States A, B, and C and under what conditions they may be created.
24
R. GOODE/ H. KANDA/ K. KREUZER/ C. BERNASCONI, Explanatory Report on theHague Convention on the Law Applicable to Certain Rights in Respect of Securities Heldwith an Intermediary (Permanent Bureau of the Hague Conference on Private InternationalLaw, 2005), para. Int-38.
25
As noted earlier, the writings which allude to conflict-of-laws problems ofemissions trading are rare. The few which exist particularly mention the issues which could
arise from the creation of security interests in a pool of emissions allowances: e.g.
FINANCIAL MARKETS LAW COMMITTEE, Issue 116 – Emission Allowances: Creating Legal
Certainty: Legal assessment of lacunae in the legal framework of the European Emissions
Trading Scheme and the case for legislative reform (2009), paras 3.1-3.8; BOURSE CONSULTLLP (note 14), at para. 3.3.1.3.
26
To the same effect, see P. THIEFFRY, La titrisation des quotas d’émission de gaz àeffet de serre, Bulletin du Droit de l’Environnement Industriel (Suppl. to No 10, 2007);FINANCIAL MARKETS LAW COMMITTEE (note 25), at para. 3.8.

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The application of the law of the place of registration will also enhance legal certainty because the place of registration is easily ascertainable by all parties
concerned. This advantage is palpable where the registration necessary to carry out
a transaction is completed within the same national registry, as the law of the Stateof that registration would become applicable regardless of whatever foreign elements involved in the transaction. Another element that will promote legal certainty is the fact that the types of security interests available under the law of theplace of registration will be able to be registered in the registry in which the allowance is held, whereas other kinds of security interests, available under other legal
systems, will not be able to be registered.
The application of a single law to the creation of security interests in adiversified portfolio could be ensured also by applying the law of the place inwhich the security grantor is located.27 An advantage of this approach is that in theevent of a grantor’s insolvency, insolvency proceedings are likely to be administered in that State.28 But determining the grantor’s location may not be straightforward because the concept of location has various meanings, such as the place ofcentral administration, the principal place of business, the place of business engaged in the particular transaction, habitual residence, domicile, and the like. Even
if the concept of location was clearly defined,29 it would be harder to identify thanthe place of registration. The law of the place of registration seems preferable also
because the kinds of security interests available under the law of the grantor’slocation may not be able to be registered in the registry where the allowance is held
except where the grantor’s location coincides with the place of registration.
It is therefore submitted that the proprietary issues outlined in Chapter IIshould be governed by the law of the place of registration of the allowance. In thecontext of the EU trading scheme, where there is an EU-wide centralised registry,30
the “place of registration” should be understood to refer to the law of the State on
whose behalf the account in question is administered.31 In the relevant Regulation,
it is provided that an account shall be governed by the law of the Member State of27
This approach is recommended by the UNCITRAL Legislative Guide on Secured
Transactions (2010) with respect to the creation, third-party effectiveness and priority of
security rights in intangible assets (Recommendation 208).
28
UNCITRAL Legislative Guide on Secured Transactions (2010), paras 41, 42 at
p. 393.
29
Recommendation 219 of the UNCITRAL Legislative Guide on Secured
Transactions (2010) defines the grantor’s location as its place of business. If the grantor has
a place of business in more than one State, it is defined as the place of business where
central administration is exercised. If the grantor has no place of business, it is defined ashabitual residence.
30
See (note 9) above.
31
If it were envisaged to create an emissions trading scheme with only one common
registry which, unlike the EU scheme, is not operated on behalf of a particular constituent
State for a particular transaction, it would be unwise to leave disharmonised the diverse
substantive-law rules of the constituent States, unless they could agree to apply the law of aparticular State to all proprietary issues.

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its administrator and the units held in the account shall be considered to be situatedin that Member State's territory.32 Although it is not totally clear whether this provision is intended to specify the governing law for proprietary issues, it seems consistent with the above submission.
The view that the applicable law should be the law of the place of registration is espoused also by a report of the Financial Markets Law Committee.33 That
report reaches that conclusion by drawing an analogy between emissions allowances and registered intellectual property (such as patents and trademarks). It may
be thought that the analogy is workable because it is generally undisputed that theissues regarding whether and under what conditions registered intellectual property
may be transferred or furnished as collateral are determined by the law of the placeof registration.34 However, the analogy cannot be sustained where the registrationof emissions allowances is transferred across borders. Consider the following
scenario.
Case 3: X holds an emissions allowance in its account in the registry of State A. It
concludes a contract with Y to sell the allowance to Y. The registration of theallowance is accordingly transferred into Y’s account in the registry of State B.
Under the law of both States A and B, the ownership of an allowance is transferred
upon registration in the transferee’s account in accordance with a valid sale contract. What law is applicable to determine whether and when the ownership of theallowance is transferred to Y?
As in this scenario, the registration of an emissions allowance may be transferred
across borders. This gives rise to the question of which place of registration (State
A or State B in Case 3) serves as the connecting factor. For intellectual property
rights, no cross-border transfer of registration takes place: the registration of apatent issued by State A cannot be transferred to the registry of State B because
only patents issued by State B can be registered in the registry of State B. The
analogy with intellectual property cannot, therefore, provide an answer to the question presented by a cross-border transfer of the registration of an allowance.
In his article,35 Professor Louis D’AVOUT also comes to the conclusion thatthe law of the place of registration should be the applicable law but on a different
reasoning. He sees the transfer of an emissions allowance as the transfer of personal right, based on the observation that what is transferred is the right to demand
32

Article 10(4) of the Commission Regulation No. 920/2010 (note 9), which isapplicable for the trading period ending 31 December 2012 (For the trading period
commencing in 2013, the position is the same under Article 10(5) of the Commission
Regulation No. 1193/2011 (note 9)).
33
FINANCIAL MARKETS LAW COMMITTEE (note 25), at para. 3.6. The Committee is anindependent committee of legal experts established by the Bank of England.
34
See UNCITRAL Legislative Guide on Secured Transactions, Supplement on
Security Rights in Intellectual Property (2011), paras 297-299.
35
L. D’AVOUT, Les quotas face au conflit international des lois, 56 Revue Lamy
Droit des Affaires 93 (2011).

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the registry administrator to modify the registration. He draws inspiration from thechoice-of-law rule for the assignment of receivables consisting of two prongs: atransfer is governed by the law of the transferred right and the third-party effectiveness of the transfer is governed by the law of the debtor’s domicile. He concludes
that both prongs of the rule, in the context of the transfer of emissions allowances,would point to the law of the place where the administrator of the national registry
is established. However, it would seem that the right to demand the registryadministrator to modify a registration is a relatively insignificant aspect of the rightemanating from emissions allowances.36 Furthermore, the analogy with the transfer
of a personal right is unable to provide an answer to the question presented by across-border transfer of the registration of an emissions allowance. Professor
D’AVOUT suggests that in such cases, the law of the initiating registry should
primarily be the applicable law, on the condition that registration in the receiving
registry is effected. Whether this is tantamount to a cumulative application of thelaw of the initiating registry and the law of the receiving registry is unclear.
Whatever is meant, that suggestion is not a conclusion flowing directly from theanalogy with the transfer of a personal right.
It seems that a better analogy can be drawn with tangible movables. It is
well established that proprietary issues of tangible movables are governed by thelaw of the place of their location (lex loci rei sitae).37 Since emissions allowances
are intangible, they have no physical situs (location). But fictional situs could be
attributed to allowances by treating their places of registration as their situs. It
would then be possible to draw a parallel with tangible movables and apply the
choice-of-law rules for the latter by analogy to emissions allowances. Because thelocation of movables can be changed, the choice-of-law rules for tangible movables of all countries should have a built-in mechanism for dealing with a change oflocation across borders (conflit mobile). It should therefore be possible, by applying choice-of-law rules for tangible movables by analogy, to deal with a crossborder transfer of registration in emissions trading. In what will follow, this approach will be illustrated by using the Japanese choice-of-law rules for tangible
movables as a model. The rules of many other countries are by and large thesame. 38 To the extent there are differences, such other rules might serve as anequally good model.
Let us first consider a simple case of transfer by reference to Case 3. Under
the Japanese choice-of-law rule for tangible movables, the acquisition and/or lossof proprietary rights are determined by the law of the place where the movable issituated at the time the causal facts are completed.39 A mechanism for dealing with
36

J.-J. BARBÉRIS/ A. TIGNOL (note 16), at para. 3.1.4, is also against thecharacterization of emissions allowances as personal right.
37
G.C. VENTURINI, Property, in K. LIPSTEIN (et al, eds) International Encyclopediaof Comparative Law: Private International Law, 1976, p. 7.
38
See notes 39, 41, 43, 44 below. For a broader comparative survey, see G.C.
VENTURINI (note 37), at 13-14.
39
Article 13(2) of Hô no Tekiyô ni Kansuru Tsûsoku Hô (literally “Act to Provide
for the General Rules on the Application of Laws”). It seems that the rules are the same

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conflit mobile is built in. Thus, suppose that X, the owner of chattel, concludes
with Y a contract to sell the chattel to the latter when the chattel is situated in State
A and then transfers its possession to Y in State B. Whether and when ownership istransferred from X to Y is determined by following the timeline. First is the moment when the sale contract is concluded. At that moment, the chattel is situated inState A and, accordingly, the law of State A governs the requirements for the transfer of ownership. If under that law, the taking of possession by the transferee isneeded in addition to a valid contract, ownership is not transferred to Y at thatmoment. Second is the moment when Y takes possession of the chattel. At thatmoment, the chattel is situated in State B and, accordingly, the law of State B isapplicable. If the requirements for the transfer under the law of State B are met,
ownership is transferred to Y. This is how the change of location of chattel is handled. This built-in mechanism for conflit mobile comes into operation if the choiceof-law rules for tangible movables are applied by analogy to Case 3. Then, the lawof State A and the law of State B would successively govern the requirements forthe transfer of ownership, with the result that the ownership of the allowance istransferred to Y upon the registration in Y’s account in accordance with the law ofState B.
The same approach may be applied to deal with the question of good faithacquisition arising in the context of a cross-border transfer. The relevant choice-oflaw rules for tangible movables and the built-in mechanism for dealing with conflit
mobile are the same as outlined above. Thus, suppose that Y steals chattel from X
in State A and removes it to State B. While the chattel is in State B, Y concludes asale contract with Z, acting in good faith. Z then takes possession of the chattel inState C. Whether and when Z acquires good title is determined by following thetimeline. First is the moment when the sale contract is concluded. At that moment,
the chattel is situated in State B and, accordingly, the law of State B governs therequirements for good faith acquisition. If the law of State B requires the transferee
to take possession of the chattel, good faith acquisition does not occur at that moment. Second is the moment when Z takes possession of the chattel. At that moment, the chattel is situated in State C and, accordingly, the law of State C isapplicable. If the requirements for good faith acquisition under that law are met, Z
acquires good title. This built-in mechanism for conflit mobile comes into operation if the choice-of-law rules for tangible movables are applied by analogy to Case
1. Then, the law of State B and the law of State C would successively govern therequirements for good faith acquisition. Since the requirements are not met undereither law in Case 1, Z would not acquire good title.
Another illustration may be drawn from a case involving security interests.
Imagine the following scenario:

under Dutch law (J. RUTGERS, International Reservation of Title Clauses, 1999, para.
2.3.3.3). It is broadly the same under English law under Winkworth v. Christie, Manson andWoods Ltd [1980] Ch. 496. See also L. COLLINS (et al. eds), Dicey, Morris & Collins on the
Conflict of Laws (14th ed.), 2006, Rule 125.

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Case 4: X concludes a contract with Y to create a security interest in favour of Y
in the allowance which it holds in its account in the registry of State A. X records
Y’s interest in the allowance in its (X’s) account. X then transfers the registrationof the allowance to its own account in the registry of State B. Under the law ofState A, a security interest may be created in emissions allowances by a valid contract with the security taker and by recording that interest in the security grantor’s
account.40 Under the law of State B, a similar security interest may be created inemissions allowances but that interest cannot be exercised unless it is recorded in
the account of the security taker. What law is applicable to determine what security
interest, if any, is created and under what conditions? What law is applicable todetermine what effects, if any, the security interest created has when the registration is transferred to the registry of State B?
The Japanese choice-of-law rules for tangible movables make a distinction between, on the one hand, the acquisition and/or loss of proprietary rights and, on theother, the effects of the rights created or acquired.41 Again, a mechanism for dealing with conflit mobile is built in. Thus, whereas the acquisition and/or loss ofproprietary rights are governed by the law of the place where the movable is situated at the time the causal facts are completed, the exercise and effects of the acquired proprietary rights are governed by the law of the place where the movable issituated presently, i.e. as and when questions arise.42 It follows that if a security
interest is created in chattel pursuant to the law of State A while the chattel is situated in State A and subsequently the chattel is removed to State B, that security
interest will survive as the comparable security interest available under the law ofState B,43 provided that the requirements for its exercise are satisfied under thatlaw. If no comparable security interest exists under the law of State B, the effect of
the security interest created under the law of State A is suspended while the chattel
remains situated in State B. 44 This built-in mechanism for dealing with conflit
40

Various systems of recording a security interest in an emissions allowance areconceivable. Broadly, there will be two types. One is the system requiring the allowance tobe left in the security grantor’s account. The other is the system requiring the allowance tobe transferred to the security taker’s account. Each of these systems is sub-divided into two
categories. The first is the system requiring no recording of security interests in the account.
The second is the system requiring security interests to be recorded in the account. Whichsystem is adopted will depend on the law of each constituent State as well as the overalldesign of the trading scheme.
41
The same distinction is stipulated in Swiss law (Article 100 of the Federal Act on
Private International Law (Loi fédérale sur le droit international privé)). It is also
observable in French law (See e.g. S. CLAVEL, Droit international privé (2nd ed.), 2010,
paras 881-896; P. MAYER/ V. HEUZÉ, Droit international privé (10e éd.), 2010, para. 656).
42
Article 13(1) of Hô no Tekiyô ni Kansuru Tsûsoku Hô (note 39).
43
It seems that the position is the same under Dutch law (J. RUTGERS (note 39), atpara. 2.3.3.5).
44
English law seems to come to a similar result albeit by a different route: theexclusion of the law of the former situs as being contrary to the ordre public of the present
situs (L. COLLINS et al. (note 39), at para. 24-037).

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mobile comes into operation if the choice-of-law rules for tangible movables areapplied by analogy to Case 4. The result is that the security interest available under
the law of State A is created when it is recorded in X’s account in the registry ofState A. When the registration of the allowance is transferred to the registry ofState B, it would have effect as the comparable security interest under the law ofState B if it were recorded in Y’s account. Yet, because it is not so recorded, thesecurity interest cannot be exercised while the allowance remains registered in theregistry of State B.
From the foregoing analysis, it could be concluded that the law of the placeof registration should be the law applicable to the proprietary issues outlined in
Chapter II. It could also be concluded that the choice-of-law rules for tangible
movables, along with their built-in mechanism for dealing with conflit mobile,should be applied by analogy to deal with the transfer of registration acrossborders. This approach should be adopted as a uniform solution by the constituent
States of the same trading scheme to ensure the scheme’s cohesive operation.

IV. Clarification and Unification of Substantive-Law
Rules on the Proprietary Issues
Even if the constituent States of the same trading scheme adopt a uniform approachfor determining the law applicable to proprietary issues, it is not enough to ensure
legal certainty unless each constituent State clarifies its substantive-law rules.
Since emissions allowances are a novel type of asset, substantive-law rules relating
to allowances will be unclear unless either the pre-existing rules for other assets areextended to cover allowances or rules specific to allowances are created.
For instance, the possibility of good faith acquisition and its requirementswith regard to emissions allowances may be unclear. To take Japanese law as an
example, the Act to Promote Measures to Counter Global Warming provides thatan entity holding a Kyoto Protocol allowance in its account is presumed to havegood title (Article 38). On that basis, the Act further provides that a transferee ofan allowance acquires good title by having the registration transferred to its
account from the transferor’s account, unless it knows, or fails to discover due toits gross negligence, that the transferor has no good title (Article 39). To thisextent, the position is clear. But Article 39 excludes from its scope of application
cases in which registration is transferred to the Japanese registry from the registryof another Contracting State. In such cases, it is not clear whether the provisions ofgood faith acquisition for tangible movables (Article 192 et seq. of the Civil Code)are to be applied by analogy.
The position may be unclear also regarding what, if any, security rights may
be created in emissions allowances. Some States have express legislative provisions on this issue. Japan’s Act to Promote Measures to Counter Global Warming
provides that no possessory pledge (shichiken) may be created in Kyoto Protocol
allowances (Article 36). The Dutch law likewise expressly prohibits the pledging
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Conflict of Laws in Emissions Tradingof emissions allowances.45 On the other hand, New Zealand law makes it clear that
security interests may be created in allowances.46 However, a majority of States
have no specific provisions detailing what, if any, security rights may be created inallowances.47 Even under the legal systems, which have specific provisions, there
may be points left open for interpretation. Thus, it has been suggested underJapanese law that nothing prevents a chattel mortgage (jôtotanpoken), a kind of
security interest different from a possessory pledge (shichiken), from being createdin allowances.
If, in tandem with unifying the determination of the applicable law among
constituent States of the same trading scheme, each such State individually clarifies
its substantive-law rules, a degree of legal certainty will be achieved. However, if ahigher level of certainty is desired, constituent States would have to go one stepfurther by unifying their substantive-law rules.48
To illustrate the merit of unifying substantive-law rules, it is convenient tore-visit Case 4. Under the analysis presented above, the security interest createdunder the law of State A will survive as the comparable security interest available
under the law of State B provided that the requirements for the exercise of suchsecurity interest under that law are satisfied. However, due to the doctrine ofnumerus clausus (a limited number of proprietary rights), there is a diversity
among legal systems as to the kinds of security interests available. Thus, it may
happen that no similar security interest exists under the law of State B. Even where
similar security interests exist, it may not be easy to determine which security
interest is comparable. Even if a comparable security interest is identifiable, therequisites for its exercise under the law of State B may not be satisfied. All theseconflict-of-laws barriers may inhibit the use of emissions allowances as collateralfor borrowings. Those hurdles could be avoided if security interests capable ofbeing created in emissions allowances were harmonised among the constituent
45
There is a specific prohibition under Article 16.42(3) of the Environmental
Management Act which provides that as an exception to Article 228 of book 3 of the Dutch
Civil Code, no right of pledge can be created in emissions allowances (P. ZAMAN,
Developing Carbon Structured Products, Butterworths Journal of International Banking and
Financial Law (16 January 2008), p. 16 (fn. 11); B. AKKERMANS, The European Union
Development of European Property Law (October 19, 2010), Conference Proceedings,
Oldenburg, May 27-28, 2010 (<http://ssrn.com/abstract=1694404>), p. 8).
46
See Climate Change (Unit Register) Regulations 2008 (SR 2008/357),
Regulation 18.
47
It has been suggested that under French law, allowances may be subject to apledge (nantissement) as intangible property (J.-J. BARBÉRIS/ A. TIGNOL (note 16), at para.
3.1.4.3) and that under Finish law, allowances may be subject to mortgage under section 3of the Business Mortgage Act (yrityskiinnityslaki 634/1984) as intangible property similar
to patents (K. ANTTONEN/ K. UPSTON-HOOPER/ M. MEHLING, Breathing Life into the Carbon
Market: Legal Frameworks of Emissions Trading in Europe, 16 European Environmental
Law Review 96, 99 (2007)).
48
To the same effect, see FINANCIAL MARKETS LAW COMMITTEE (note 25), atpara. 6.3.

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States of the same trading scheme.49 One possible approach is to create new kindsof security interests uniquely tailored for emissions allowances and recognised by
all constituent States of the same trading scheme. A useful model can be found in
the 2001 Cape Town Convention on International Interests in Mobile Equipment.50
It has created international security interests for mobile assets which can be registered in an international register to disclose their existence and to clarify priorities
among competing interests. This Convention has demonstrated that by limiting theobjects of security interests, it becomes easier to achieve harmonisation and caterfor the particular needs of the objects. If international security interests were created for emissions allowances, the registries for recording the holdings and transfers of allowances could be conveniently used to disclose the existence of suchsecurity interests and clarify priorities among competing interests.
It would be beneficial if rules on other proprietary issues could also be
harmonised. Thus, a uniform rule might provide that the ownership of an allowance is transferred only upon registration in the transferee’s account pursuant to avalid agreement of transfer. Such a rule seems preferable to the rule providing thatownership is transferred by a valid agreement alone, since the latter might give rise
to a priority question in the case of multiple transfers of the same allowance. The
preferable rule has been actually implemented by at least two States. 51 The
European Commission Regulation No. 1193/2011, too, seems to endorse that position by stating in Recital that title to an allowance should be established by its
existence in the account in which it is held.52
With respect to the impact, if any, of rescission or termination of theunderlying contract on the validity of the transfer, the Commission Regulations
provide that the dissolution of the underlying contract shall not lead to the unwinding of the transaction in the registry, though they leave open the possibility that theexecution of a new transaction may be ordered under national law.53 This position
has the merit of safeguarding legal certainty.54
49

The Commission Regulation No 1193/2011 (note 9), notes in Recital (13) thatmeans to facilitate the taking of a security interest in allowances should be examined in thecontext of a future review of the Regulation.
50
In force since March 2006 with 51 Contracting States as of January 2012.
51
E.g. s. 22(1) of Climate Change Response Act 2002 New Zealand and Article L.
229-15-I, al. 2 of the French Code de l’Environnement.
52
Recital (12) of the Commission Regulation No. 1193/2011 (note 9).
53
Article 32b(3)(a) of the Commission Regulation No. 920/2010 (note 9), as
amended by the Commission Regulation No. 1193/2011 (note 9), applicable for the trading
period ending 31 December 2012. For the trading period commencing in 2013, the positionis the same under Article 37(3)(a) of the Regulation No. 1193/2011.
54
According to B. AKKERMANS (note 45) at 8, in the Netherlands, Article 16.42(1)of the Environmental Management Act provides that rescission or avoidance of anagreement of transfer has no consequence on the validity of the transfer. That provision wasmade in derogation from the general rule (causal transfer system) requiring the underlying
agreement to remain valid, since the Dutch government had pointed out in its Memorandum
accompanying the bill that an unwinding of a transaction between a Dutch buyer and an

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Conflict of Laws in Emissions Trading
With respect to good faith acquisition, it would be more difficult to come up
with a uniform rule acceptable to all parties concerned because good faith acquisition is a zero-sum game, protecting the transferee at the sacrifice of the rightful
owner. Opinions will be divided as to whether good faith acquisition should bepermitted at all, whether the acquisition should be for value, whether an exception
should be made if the allowance in question has been stolen, and such otherpoints. 55 The European Commission, apparently taking lessons from previous
thefts, has inserted a uniform rule in its Regulation No. 920/2010. It provides thatthe purchaser of an allowance acting in good faith shall acquire title free from any
defects in the transferor’s title.56 It sets no requirement beyond the good faith of thetransferee and, accordingly, is strongly favourable to the transferee.
Unlike the European Union, which has permanent legislative bodies, it may
be unrealistic to expect individual States involved in negotiations for setting up anemissions trading scheme to also engage in discussions for prescribing detailed
private-law issues. Yet, all efforts should be made to promote legal certainty bytrying to clarify and unify not only the way in which the applicable law is determined, but also the contents of substantive-law rules.

V.

Other Conflict-of-Laws Problems

The present article has examined the trading of allowances registered in national
registries, 57 a basic form of emissions trading engaged in by States and entities
bound by emissions reduction targets. Another type of trading may develop withrespect to emissions units held in the books of intermediaries which are derived
from emissions allowances registered in national registries. Such trading may beengaged in by, inter alia, those who wish to offset carbon footprints but are notqualified to open an account in the national registries. 58 Transactions would beEnglish seller would make it necessary to alter not only the Dutch registry but also theEnglish registry and the log of the European Commission.
55
E.g. Article 193 of the Japanese Civil Code, applicable only to tangible movables,
allows the rightful owner to recover stolen movables for a period after theft.
56
Article 32b(4) of the Commission Regulation No. 920/2010 (note 9), as amended
by the Commission Regulation No. 1193/2011 (note 9). This Regulation is applicable for the
trading period ending 31 December 2012. For the trading period commencing in 2013, theposition is the same under Article 37(4) of the Regulation No. 1193/2011.
57
Spot and forward contracts fall within this category. But transactions of financial
derivatives associated with emissions allowances are outside the scope of the present
analysis. The issues arising from such transactions are not specific to emissions trading but
instead are suited to be regulated by securities law.
58
Who is qualified to open an account on national registries will depend on the
stipulation of the international agreement establishing the trading scheme or the law of eachconstituent State. Japan’s Act to Promote Measures to Counter Global Warming, forYearbook of Private International Law, Volume 13 (2011)161

Koji Takahashi
settled by entries in the books of intermediaries. Layers of intermediaries may be
developed below the level of the national registries, creating a pyramid shaped
structure of holding. Each intermediary would keep an omnibus account with its
upper-tier intermediary in which it would hold its clients’ positions. The uppermost intermediary would keep an omnibus account in the national registry.59 Someintermediaries may offer the facility of delivery versus payment (DVP) settlement
which enables cash to be transferred simultaneously with units, by holding bothaccounts for units and accounts for cash and linking them with each other.60 Sincean emissions unit is fungible, it would not be traceable to a particular emissions
allowance. Consequently, it would be impossible to determine the law applicableto the transaction of indirectly-held units by reference to the national registries, if
pyramid shaped structures of holding were formed across borders. To deal withessentially the same problem presented by securities held with intermediaries, theHague Conference on Private International Law has created a convention61 setting
forth elaborate rules for determining the applicable law. But different choice-oflaw rules have been implemented in the EU directives.62 The EU Commission iscurrently re-visiting the problem as part of its deliberation on the draft Securities
Law Directive. The thoughts and debates accumulated during those processes will
provide useful guidance when it comes to considering the law applicable to the
trading of indirectly-held emissions units.
The present article has focused on the proprietary aspects of emissions trading. Conflict-of-laws problems also arise in contractual matters, such as the formation and validity of a contract for the sale of allowances. Since party autonomy
is universally respected in contractual matters,63 parties can secure a high level ofexample, allows only Japanese corporations to open an account on the national registry(Article 32(2)), excluding individuals and foreign corporations.
59
Such a structure is already emerging in the EU with the advent of settlement
services offered by Clearstream, Euroclear and CDC (BOURSE CONSULT LLP (note 14), atpara. 5.3). Clearstream, for example, offers a settlement service called GEMA (Global
Emissions Market Access) which is linked to several national registries (“GEMA: Access to
the Carbon Emissions Market via Clearstream” Clearstream Announcement A10170 (18October 2010)).
60
In the securities market, the DVP settlement is commonly offered by CSDs
(central securities depositories) such as Euroclear and Clearstream. Clearstream has
extended the DVP settlement to emissions allowances (Clearstream Announcement A10170(note 59)).
61
2006 Hague Convention on the Law Applicable to Certain Rights in Respect ofSecurities held with an Intermediary (not yet in force as of January 2012).
62
Article 9(2) of the European Parliament and Council Directive 98/26/EC on
settlement finality in payment and securities settlement systems; Article 9(1) of theEuropean Parliament and Council Directive 2002/47/EC on financial collateralarrangements; Article 24 of the European Parliament and Council Directive 2001/24/EC on
the reorganisation and winding-up of credit institutions.
63
E.g. Article 3 of the Rome I Regulation; Article 7 of Hô no Tekiyô ni KansuruTsûsoku Hô (Japan) (note 39).

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legal certainty by expressly choosing the governing law for their contract.
Although there are few issues peculiar to emissions trading, the questions which
may be worth asking include whether the United Nations Convention on
International Sale of Goods (CISG) has any chance of being applied to the sale ofemissions allowances, how to determine the law applicable to a sale contract concluded between sovereign States, and what would be the legal relationships if theprinciples of public international law are chosen to govern a sale contract.
In the field of dispute resolution, the question may be raised as to whether adispute concerning the ownership or registration of emissions allowances isarbitrable. Closely related to this question is the question of whether such disputes
are subject to the exclusive jurisdiction of the courts for the State of registration. In
the case of a cross-border transfer, an additional question may arise as to whether itis the courts for the State of the initiating registry or those for the State of thereceiving registry, which have jurisdiction. Where a State is party to a dispute, theissue of sovereign immunity, including the width of the exception based oncommercial transactions, may arise.
In the preceding chapters, this article has examined the problems which
merit more attention than have hitherto attracted if a stable and cohesive operationof emissions trading schemes is to be ensured. Some other conflict-of-laws problems which may arise from emissions trading have been sketched out in the present
chapter. A thorough analysis of those other problems is left for the future.

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