COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Towards an enhanced market oversight framework for the EU Emissions Trading Scheme
Date: 2010-12-21
Institutions: European Commission
Subjects: EU environmental policy, air quality, pollution control measures, reduction of gas emissions, tradeable emission permit

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EUROPEAN COMMISSION 

Brussels, 21.12.2010 
COM(2010) 796 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Towards an enhanced market oversight framework for 
the EU Emissions Trading Scheme

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Towards an enhanced market oversight framework for 
the EU Emissions Trading Scheme 

1. 

INTRODUCTION 

The EU Emissions Trading Scheme (EU ETS)1 was introduced on 1 January 2005. 
The scheme ensures that emission reductions are made at least cost to society, and it 
is  therefore  one  of  the  EU's  most  important  tools  for  reducing  greenhouse  gas 
emissions.  The  scheme  covers  energy-intensive  industrial  sectors,  the  power  sector 
and as from 2012 also the aviation sector. As part of the Climate and Energy Package 
adopted in April 2009, the EU ETS was strengthened and improved to give a longer-
term stability of the regulatory framework2. In fact, a declining cap on the number of 
emission  allowances  has  been  set  until  2020  and  beyond.  While  this  cap  might  be 
revised downwards in the context of future policy developments, market participants 
already now can integrate the currently known minimum decline in their investment 
decisions.  

Although  the  European  carbon  market3  has  grown  significantly  both  in  size  and 
sophistication  during  its  first  six  years  of  operation,  it  remains  a  relatively  young 
market. It is therefore important to ensure that the market can continue to expand and 
safely  be  relied  upon  to  give  an  undistorted  carbon  price  signal.  It  follows  that  the 
market needs to have an appropriate market oversight framework. Such a framework 
needs  to  secure  fair  and  efficient  trading  conditions  for  all  market  participants 
through transparency requirements as well as by preventing and sanctioning market 
misconduct, in particular insider dealing and market manipulation. Such a framework 
should also provide safeguards to minimise the risk that the carbon market is used as 
a vehicle for other illegal activities, such as money laundering or VAT fraud. 

2. 

OBJECTIVE OF THIS COMMUNICATION 

Article  12(1a)  of  Directive  2003/87/EC  (the  EU  ETS  Directive)  provides  that  the 
Commission  shall  examine  whether  the  market  for  emission  allowances  is 
sufficiently  protected  from  insider  dealing  and  market  manipulation  and,  if 
appropriate, shall bring forward proposals to ensure such protection. 

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Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the 
Community and amending Council Directive 96/61/EC, OJ L 275, 25.10.2003. 
Directive 2009/29/EC amending Directive 2003/87/EC so as to improve and extend the greenhouse gas 
emission allowance trading scheme of the Community, OJ L 140, p. 63. 
For  the  purpose  of  this  Communication,  "European  carbon  market"  covers  the  trading  in  the  30 
countries that currently participate in the EU ETS (the EU-27, Iceland, Liechtenstein and Norway) in 
EU allowances and other units that may be used for compliance under the EU ETS. 

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This Communication provides a first assessment of the current levels of protection of 
the carbon market from such market misconduct or similar problems. On the basis of 
this  stock-taking,  the  Commission  will  launch  a  broad  stakeholder  consultation  on 
the  best  way  forward  during  the  first  half  of  2011  with  a  view  to  presenting,  if 
necessary, any legislative proposal by the end of 2011. 

3. 

THE EUROPEAN CARBON MARKET TODAY 

3.1. 

Structure of the market – who can trade, what can be traded and where? 

At present any person is able to access the carbon market either directly or indirectly 
via a financial intermediary. There are two main types of participants in the market 
for  emission  allowances:  compliance  buyers,  who  have  a  regulatory  obligation  to 
surrender allowances within prescribed deadlines, and financial intermediaries, who 
have no compliance obligations themselves4. Among the compliance buyers one can 
distinguish  between  power  companies  and  industrial  companies.  The  two  largest 
groups of market participants are the power companies, who are the biggest emitters 
of greenhouse gases among the participating sectors, and the financial intermediaries. 

A  salient  feature  of  the  EU  ETS  is  the  active  participation  by  financial 
intermediaries  that  have  facilitated  trading  among  installations  and  developed 
derivative  products,  such  as  futures,  options  and  swaps,  to  help  participating  firms 
manage  risk.  The  resulting  broader  participation  in  the  carbon  market  increases  its 
liquidity  and  contributes  to  the  emergence  of  a  reliable  price  signal.  The 
intermediation  provided  by  financial  firms  is  particularly  important  for  small  and 
medium-sized  companies  and  for  operators of  individual  installations  who  may  not 
have adequate resources or expertise themselves, or whose compliance needs are too 
small to justify continuous direct presence on the carbon market. 

The products that are currently traded in the carbon market and that can be used for 
compliance  in  the  EU  ETS  are  allowances  as  defined  in  Directive  2003/87/EC 
establishing  the  EU  ETS1  (the  EU  ETS  Directive),  and  credits  under  the  Kyoto 
Protocol's  offsetting  mechanisms,  namely  Certified  Emission  Reductions  (CERs) 
stemming from the Clean Development Mechanism (CDM) and Emission Reduction 
Units (ERUs) from Joint Implementation (JI) projects5. All these units can be traded 
for immediate delivery, so-called spot  trade, but the major part of the transactions 
relate  to  derivatives  based  on  allowances  and  CERs,  such  as  forwards,  futures, 
options  and  swaps.  Preliminary  information  available  to  the  Commission  indicates 
that in 2009, 75-80% of the total volume was traded as derivatives contracts. 

Table  1  in  the  Annex  illustrates  the  diversification  of  the  European  carbon  market 
with an overview of the products offered by a number of climate exchanges. 

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A.D. Ellerman, F.J. Convery and Ch. de Perthuis. 2010. Pricing Carbon. Cambridge University Press, 
New York. See pages 127-139 for an overview of the market development. 
See Directive 2004/101/EC amending Directive 2003/87/EC establishing a scheme for greenhouse gas 
emission  allowance  trading  within  the  Community,  in  respect  of  the  Kyoto  Protocol's  project 
mechanisms (the so-called "Linking Directive"), OJ L 338, 13.11.2004, p. 18. 

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Over-the-counter (OTC)6 spot and  forward transactions,  which used to prevail  on 
the  carbon  market,  receded  with  the  development  of  standardised  exchange-based 
spot and future trades, as illustrated in Figure 1. 

Figure 1 – Transactions on exchanges versus OTC since 20057 

In  addition  to  trading  at  an  exchange  or  OTC  via  a  broker,  bilateral  trades  directly 
between  two  parties  who  are  known  to  each  other  are  also  possible.  Bilateral 
transactions tend to be large in size, and their prices are not disclosed. An increasing 
number of bilateral trades are now cleared through a central counterparty8.  

Finally,  it  is  also  possible  to  buy  allowances  at  auctions  held  by  a  number  of 
Member  States,  although  this  possibility  has  so  far  been  used  only  to  a  limited 
extent9. As from 2013, however, auctioning will be the main allocation method in the 
EU ETS. It will be phased in over time with a view to full auctioning as from 2027. 
Under the new Auctioning Regulation (cf. section 5.2) access to this primary market 
will  initially  be  restricted  to  certain  categories  of  participants.  However,  it  is  not 
excluded that the list of persons eligible to apply for participation in the auctions may 
be  extended  to  include  further  categories  of  participants  as  more  evidence  will  be 
gathered with the auctions in the third trading period. 

3.2. 

Data availability and market transparency 

Market transparency increases the ability of participants in a specific market to make 
informed  trading  decisions.  It  also  reinforces  their  confidence  in  that  market's 
integrity  and  efficiency.  At  the  same  time,  transparency  is  one  of  the  basic  tools 

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and 

State 

trends 

OTC transactions are privately negotiated between two counterparts rather than via a market exchange. 
Source: 
9. 
http://siteresources.worldbank.org/INTCARBONFINANCE/Resources/State_and_Trends_of_the_Carb
on_Market_2010_low_res.pdf  
A.D. Ellerman, F.J. Convery and Ch. de Perthuis. 2010. 
In phase 2 of the EU ETS (2008-2012) around 4% of allowances are issued via auctions organised by 
Austria, Germany, Hungary, Ireland, the Netherlands and the United Kingdom. 

market 

carbon 

2010, 

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of 

p. 

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available to counter various forms of market misconduct. It is therefore important to 
look  at  the  current  data  availability  in  the  European  carbon  market.  Usually,  a 
distinction is made between transaction data and fundamental data, and between data 
available to the public and data which is only available to regulatory authorities. 

The  exchanges  and  other  organised  trading  venues  display  anonymised 
information about bids, offers, trades and closing prices in real time for market 
participants.  Such  information  is  also  available  for  the  general  public  with  some 
minutes delay. The details of OTC transactions are in principle not available to 
other  market  participants.  However,  a  number  of  market  analysts  and  financial 
news agencies publish and sell trading data to the public, including daily information 
on  the  volume  of  OTC  transactions  that  have  been  cleared  at  exchanges  (both  spot 
and forward transactions). 

The  most  relevant  fundamental  data  pertain  to  the  verified  emissions  of  the  around 
11,000 installations that are subject to the obligation under the EU ETS to surrender 
allowances to cover their greenhouse gas emissions. The Community Independent 
Transaction  Log  (CITL)10  provides  annual  data  on  the  independently  verified 
emissions of all installations covered by the EU ETS. The level of emissions of the 
installations determines the demand in the market and the information is thus highly 
price sensitive. According to the revised Registries Regulation, the Commission will 
make  the  verified  emissions  data  per  installation  relating  to  the  previous  calendar 
year  available  to  the  public  on  1  April,  or,  if  1  April  falls  on  a  weekend  or  on  a 
holiday,  the  verified  emissions  figures  will  be  displayed  on  the  first  working  day 
following  1  April11.  Information  on  the  number  of  free  allowances  that  Member 
States  have  allocated  to  installations  is  also  public12.  The  importance  of  this 
information  on  free  allocation  will  decrease  gradually  over  time  as  auctioning  is 
phased  in  as  the  principal  allocation  method  in  the  EU  ETS.  Other  relevant 
disclosures (e.g. regarding the measures taken to implement the EU ETS Directive) 
are also made in a general and non-discriminatory manner by the Commission. 

Furthermore,  several  transparency  measures  are  envisaged  under  the  Auctioning 
Regulation  (cf.  section  6.2)  ,  which  inter  alia  relate  to  the  auction  calendar,  the 
announcement of results and monthly and annual reporting on the auctions.  

4. 

TYPES OF MARKET ABUSE AND OTHER ISSUES TO BE ADDRESSED 

The term "market abuse" in the strict sense of the Market Abuse Directive13 (MAD) 
covers only insider dealing and market manipulation as defined in that Directive. 

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The CITL is the electronic system that records the issue, transfer and cancellation of allowances, and 
conducts an automated check on each transaction to ensure that there are no irregularities. 
Annex  XVI  point  4(a)  of  Commission  Regulation  (EC)  No  2216/2004  of  21  December  2004  for  a 
standardised  and  secured  system  of  registries  pursuant  to  Directive  2003/87/EC  of  the  European 
Parliament  and  of  the  Council  and  Decision  No  280/2004/EC  of  the  European  Parliament  and  of  the 
Council, OJ L 386, 29.12.2004, p. 1 as last amended by Commission Regulation (EU) No 920/2010 of 7 
October 2010 for a standardised and secured system of registries pursuant to Directive 2003/87/EC, OJ 
L 270, 14.10.2010, p. 1. 
http://ec.europa.eu/environment/climat/emission/2nd_phase_ep.htm 
Directive 2003/6/EC on insider dealing and market manipulation (market abuse), OJ L 96, 12.4.2003, p. 
16. 

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This is also what the EU ETS Directive refers to in its Article 12(1a) and what will 
be  the  focus  for  the  remainder  of  this  Communication.  However,  the  Commission 
considers  it  important  to  look  more  broadly  at  the  problems  of  market  misconduct 
and  abuse  in  order  to  ensure  that  the  integrity  of  the  carbon  market  is  sufficiently 
protected. As the market matures, it will be necessary to ensure that safeguards are in 
place which protect the European carbon market in its entirety and which enable the 
prevention,  detection  and  sanctioning  not  only  of  insider  dealing  and  market 
manipulation,  but  also  of  other  forms  of  misconduct,  such  as  money  laundering, 
terrorist financing and other criminal activities. 

During  2009  and  2010,  three  incidents  occurred  in  the  European  carbon  market 
which illustrates the wider range of risks that need to be dealt with. Although these 
incidents do not constitute market abuse in the sense of the Market Abuse Directive, 
they did give rise to calls for stricter regulation of the European carbon market: 

•  Cases of Value Added Tax (VAT) fraud were detected in the carbon market in 
2009-2010. While presenting a serious problem, this type of fraud is not specific 
to the carbon market and has in the past occurred on other markets as well. The 
Commission  worked  closely  with  Member  States  to  combat  this  problem,  and  a 
new  Directive  on  the  application  of  the  VAT  reverse  charge  mechanism  for 
emissions trading14 was adopted on 16 March 2010 and came into force in April 
2010 helping to close off opportunities for fraud. 

•  So-called "phishing attacks" from fraudsters trying to get unauthorised access to 
accounts  of  market  participants  are  also  not  specific  to  the  carbon  market,  but 
nevertheless  prompted  the  Commission  to  take  rapid  action  in  cooperation  with 
Member States15.  

•  The resale in the European carbon market by  a Member  State of CERs that  had 
already been used for EU ETS compliance, however, was an incident specific to 
the  carbon  market.  The  EU  reacted  quickly  to  prevent  such  CER  recycling  by 
way of amendments to the Registries Regulation16, and the Commission will not 
hesitate to act swiftly again if new risks should emerge. 

There are also a number of other issues that are not related to market abuse or fraud, 
but  which,  if  and  when  clarified,  would  increase  the  transparency  and  overall 
efficiency  of  the  EU  ETS.  Harmonised  accounting  standards  for  emission 
allowances are one such issue17. After a failed attempt to establish accounting rules 
in  2004  (IFRIC  3  which  was  withdrawn),  the  International  Accounting  Standards 
Board (IASB) in 2008 started a joint project with the Financial Accounting Standards 
Board  (FASB)  in  the  United  States  to  develop  comprehensive  guidance  on  the 
accounting for emission allowances18. The Commission encourages the IASB and the 

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http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1376 
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/125 
Article 53 of Commission Regulation (EC) No 2216/2004 as last amended by Commission Regulation 
(EU) No 920/2010.  
Another related issue is the national accounting of allowances and credits. 

Http://www.ifrs.org/Current+Projects/IASB+Projects/Emission+Trading+Schemes/Emissions+

Trading+Schemes.htm 

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FASB to complete their work as soon as possible, so that the resulting standards can 
be considered for endorsement at EU level. 

5. 

EXISTING  FRAMEWORK  UNDER  THE  ETS  DIRECTIVE  AND  OTHER  RELEVANT 
LEGISLATION 

The EU ETS Directive gives the Commission a specific monitoring role over the 
ETS that is linked to, but not limited to, the introduction of auctioning as the main 
allocation method.  

The  Directive  provides  that  the  Commission  shall  monitor  the  functioning  of  the 
carbon  market  submit  an  annual  report  to  the  European  Parliament  and  to  the 
Council.  The  report  shall  include  the  implementation  of  the  auctions  and  the 
liquidity and volumes traded in the market. If the Commission has evidence that the 
carbon  market  is  not  functioning  properly,  it  shall  submit  a  report  to  the  European 
Parliament and to the Council, accompanied by any appropriate legislative proposal 
aiming  at  increasing  the  transparency  of  the  carbon  market  and  improving  its 
functioning.  

As  financial  intermediaries  and  power  companies  are  the  major  actors  in  the 
European carbon market, an examination of the level of market oversight has to take 
account  of  both  financial  and  energy  markets  legislation.  Furthermore,  the 
Auctioning  Regulation  sets  out  a  framework  that  aims  to  ensure  the  integrity  and 
transparency of the auctions in emissions allowances. 

5.1. 

Financial markets legislation 

Financial  markets  legislation  is  relevant  for  the  carbon  market  to  the  extent  that 
trading  in  that  market  involves  use  of  financial  instruments,  is  carried  out  by 
authorised  financial  intermediaries  or  is  channelled  through  marketplaces  and/or 
infrastructures  organised  and  supervised  in  accordance  with  financial  market 
regulation.  The  diverse  mix  of  products,  trading  venues  and  participants  in  the 
carbon  market  means  that  financial  markets  rules  apply  differently  to  the  different 
market segments. However, a number of general observations can be made on how 
the  financial  markets  legislation  currently  regulates  the  operation  of  the  carbon 
markets.  

Firstly, the Market Abuse Directive applies to emission allowance derivatives that 
conform  to  a  definition  of  a  financial  instrument provided in  the Directive. For the 
MAD to apply, the financial instrument must be admitted to trading on a "regulated 
market" or a request for its admission to trading on such a market must have been 
made.  Emission  allowance  derivatives  traded  on  regulated  markets  are  therefore 
already subject to the prohibitions of insider dealing and market manipulation set out 
in the MAD. Financial regulators in the Member States have the duty to maintain on-
going  surveillance  of  those  markets  and  are  able  to  take  enforcement  measures 
against market abuse, whenever necessary. 

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Secondly,  the  Markets  in  Financial  Instruments  Directive19  (MiFID)  applies  to 
emission allowance derivatives provided that they meet certain criteria, for example 
they  are  traded  on  a  regulated  market  or  a  "multilateral  trading  facility"  (MTF). 
As  a  result,  financial  intermediaries  providing  investment  services  concerning  such 
emission allowance derivatives have to obtain an authorisation under the MiFID and 
are subject to on-going supervision by financial regulators. This also means that their 
activity  has  to  conform  to  a  series  of  operational  and  reporting  requirements  (e.g. 
conduct of business rules, transaction reporting for intermediaries, ensuring sufficient 
availability  of  information  on  instruments  admitted  to  trading  on  regulated  markets 
and  MTFs)  that  all  aim  to  secure  sufficient  investor  protection  and  market 
transparency.  

Some of the exchanges where emission allowances, CERs and ERUs are traded are 
regulated  markets  and  some  are  multilateral trading  facilities.  Other  trading  venues 
for spot products are either regulated at national level or self-regulated. 

Both  the  MAD  and  the  MiFID  are  currently  subject  to  comprehensive  reviews  and 
Commission proposals are expected in 2011. While the outcome of those reviews is 
yet to be determined, one of the general objectives of the MAD review is to extend 
the scope of application of that directive to take account of technical and regulatory 
developments  in  the  financial  markets,  with  the  rules  on  market  abuse  becoming 
applicable  to  those  new  types  of  trading  venues  and  financial  instruments  that  are 
currently beyond its scope. The MAD review will also consider ways to reinforce the 
effectiveness of enforcement and supervisory co-ordination with a prominent role of 
the  European  Securities  Markets  Authority  (ESMA).  The  review  will  also  seek 
improvements  to  transparency,  supervisory  oversight  and  integrity  in  derivative 
markets,  including  commodity  derivatives  and  related  spot  markets.  As  for  the 
MiFID  review,  the  Commission  aims  inter  alia  to  look  at  improving  oversight  and 
transparency  measures  to  ensure  commodity  derivative  markets  function  efficiently 
for  hedging  and  price  discovery  purposes.  Targeted  improvements  may  also  be 
considered  with  regard  to  information  and  protection  needs  of  investors  as  catered 
for  by  financial  intermediaries.  Any  legislative  measures  that  may  eventually  be 
proposed by the Commission in those areas will have clear bearing on the regulatory 
treatment of the carbon market and the protection of investors in that market.  

Thirdly,  a  number  of  new  financial  markets  measures  may  become  applicable  in 
other  specific  segments  of  the  carbon  market.  Notably,  on  15  September  2010,  the 
Commission  adopted  a  proposal  for  a  Regulation  on  OTC  derivatives,  central 
counterparties  and  trade  repositories20.  The  Regulation  is  in  particular  expected  to 
introduce  a  reporting  obligation  for  OTC  derivatives,  a  clearing  obligation  for 
qualifying  classes  OTC  derivatives  (decided  by  ESMA),  and  measures  to  reduce 
counterparty credit risk and operational risk for bilaterally cleared OTC derivatives. 
Those  specific  duties  would  apply  to  carbon  market  participants  involved  in  OTC 
derivatives  trade  in  emission  allowances,  unless  they  are  covered  by  one  of  the 
limited exemptions foreseen for non-financial firms under the draft Regulation. 

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Directive  2004/39/EC  on  markets  in  financial  instruments  amending  Council  Directives  85/611/EEC 
and 93/6EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing 
Council Directive 93/22/EEC, OJ L 145, 30.4.2004, p. 1. 
COM(2010) 484 final. 

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5.2. 

Auctioning Regulation 

The Auctioning Regulation21 establishes a regulatory framework for the auctions of 
emission  allowances  for  the  third  trading  period.  The  Regulation  has  effectively 
broadened the scope of application of the MAD and the MiFID rules in the carbon 
market, as it requires auction platforms and financial intermediaries to follow largely 
the same requirements even if their activity is pursued outside the typical secondary 
market setting and may involve emission allowances that do not qualify as financial 
instruments (one of the products that may be auctioned is a two-day spot contract). 
Under  the  Auctioning  Regulation,  the  application  of  several  measures  stemming 
from the Anti-Money Laundering Directive will also be extended to the participants 
in  the  auctioning  process.  Specifically,  the  Regulation  inter  alia  imposes on  the 
auction platforms obligations to notify the supervisory authorities where incidents of 
market  abuse,  money  laundering, terrorist  financing  or  other  criminal  activity have 
been detected or suspected. 

The  various  elements  of  this  framework  will  be  re-assessed  in  the  Commission’s 
further work on carbon market oversight. 

5.3. 

Energy markets legislation 

In December 2010, the Commission adopted a legislative proposal which follows up 
on  the  Third  Energy  Market  Liberalisation  Package  and  addresses  the  transparency 
and integrity of European wholesale energy markets. The draft Regulation on Energy 
Market  Integrity  and  Transparency  (REMIT22)  prohibits  market  abuse  (insider 
dealing  and  market  manipulation)  on  wholesale  markets  in  electricity  and  related 
products and on wholesale markets in natural gas and related products. The measures 
under  REMIT  are  consistent  with  the  Market  Abuse  Directive  and  do  not  apply  to 
financial  instruments  which  are  already  covered  by  that  Directive.  While  the 
framework does not apply directly to any part of carbon market, it is relevant in the 
sense  that  it  concerns  a  market  with  significant  linkages  to  carbon  trading  and  its 
introduction may have a disciplining effect on the overall market conduct of certain 
players with presence in both the energy and carbon markets. 

6. 

CONCLUSION AND NEXT STEPS 

Conclusions: 

(1) 

The  carbon  market  has  developed  well  in  terms  of  liquidity,  EU-wide 
participation  of  intermediaries  and  transparency,  which,  other  things 
equal, reduces the risks of market abuse compared for example to some 
commodities  markets.  The  emergence  of  climate  exchanges  alongside  the 
over-the-counter  market  and 
financial 
intermediaries  alongside  compliance  buyers  are  signs  that  the  European 
carbon market has matured significantly.  

strong  participation  of 

the 

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Commission Regulation (EU) No 1031/2010 of 12 November 2010. on the timing, administration and 
other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of 
the European Parliament and the Council establishing a scheme for greenhouse gas emission allowances 
trading within the Community, OJ L 302, 18.11.2010, p. 1. 
COM (2010) xxx 

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(2) 

(3) 

(4) 

A  major  part  of  the  carbon  market  is  subject  to  market  regulation 
already.  To  the  extent  that  the  allowance  derivatives  market  is  within  the 
scope of financial markets legislation, it benefits from the regular safeguards 
and supervisory arrangements that apply to any other market for commodity 
derivatives. 

Spot  trading  in  emission  allowances  is  currently  not  regulated  at  the 
European  level.  A  handful  of  Member  States  have  individually  decided  to 
extend rules applicable to trading in financial instruments to such allowances 
when traded on spot markets established within their jurisdiction23. 

A key future segment in the primary market, auctions, will come in full 
under the market oversight regime set out by the Auctioning Regulation, 
irrespective  of  whether  the  auctioned  product  qualifies  as  a  financial 
instrument  or  not.  This  will  further  diminish  vulnerability  of  the  carbon 
market to misconduct.  

Next steps: 

(1) 

(2) 

The  carbon  market's  continued  growth  and  its  ability  to  provide  an 
undistorted carbon price signal are in part conditioned by that market's ability 
to  deal  effectively  with  the  risks  of  market  abuse  and  other  forms  of 
misconduct. The Commission will launch an in depth study and initiate a 
stakeholder  consultation,  examining  in  greater  detail  the  structure  of  the 
carbon market and the current level of market oversight. The study will cover 
not only market abuse in the strict sense, but also the overall integrity of the 
auctions  and  the  trading  in  the  European  carbon  market,  including 
supervisory aspects.  

The Commission will consider implications for the carbon market of the 
revision  of  financial  legislation  and  the  establishment  of  energy  market 
legislation. The two frameworks are envisaged to address deficiencies on the 
flanks  of  the  European  carbon  market  and  it  is  necessary  to  ensure  utmost 
consistency  between  those  regimes  and  any  appropriate  measures  that  may 
still need to be taken for the carbon market. In this context, the Commission 
will  consider  the  inclusion  of  the  European  carbon  market  under  financial 
markets legislation, e.g. by replacing the currently existing spot trade by trade 
in  "spot  futures"24  admitted  to  trading  in  regulated  markets.  The  option  to 
define  EU  ETS  compliance  units  as  financial  instruments  will  also  be 
explored, with particular focus on the suitability and proportionality of such 
an  approach.  Bringing  spot  transactions  in  EU  ETS  compliance  units  -  as 
instruments in their own right - under the ambit of rules set out in the Market 
Abuse  Directive  and/or  the  Markets  in  Financial  Instruments  Directive  as 
well  as  any  other  financial  markets  legislation  necessary  for  the  efficiency 

23 

24 

For example, Germany already applies rules on regulated markets to trades in commodities and rights 
taking place on an exchange. In France, legislation was passed in autumn 2010 envisaging coverage of 
spot carbon market by rules currently applied to regulated markets. The changes in French legislation 
build  on  a  comprehensive  assignment  report  of  Mr  Michel  Prada,  The  Regulation  of  CO2  Markets, 
available at: http://www.economie.gouv.fr/services/rap10/100419rap-prada.pdf  
Here understood as a financial instrument with a relatively short time for delivery.  

EN 

10 

   EN 

                                                 
and  integrity  of  the  carbon  market,  such  as  the  Anti  Money  Laundering 
Directive25,  the  Settlements  Finality  Directive26  or  the  Financial  Collateral 
Directive27 is an alternative that will also be studied. 

(3) 

The  Commission  will  continue  to  act  swiftly  if  any  new  risks  should 
appear, while assessing further the need to present a legislative proposal 
by  end  of  2011.  Any  legislative  proposal  to  introduce  a  specific  oversight 
framework  for  the  carbon  market  would  be  preceded  by  an  impact 
assessment. The benefit of any safeguards ensuring market integrity would be 
weighed against any negative impacts on liquidity and on access to the carbon 
market for different classes of participants (notably small emitters, SMEs).  

25 

26 

27 

EN 

Directive  2005/60/EC  on  the  prevention  of  the  use  of  the  financial  system  for  the  purpose  of  money 
laundering and terrorist financing, OJ L 309, 25.11.2005, p. 15. 
Directive  98/26/EC  on  settlement  finality  in  payment  and  securities  settlement  systems,  OJ  L  166, 
11.6.98, p. 45. 
Directive 2002/47/EC on financial collateral arrangements, OJ L 168, 27.6.2002, p. 43. 

11 

   EN 

                                                 
Table 1 – Products offered by various climate exchanges28 

Continuous Exchange Trading 

ANNEX  

Exchange 

Country  of 
operation 

Spot 

Futures 

Forwards 

Options 

Swaps 

Auctions 

OTC 
Clearing 

EUAs  CERs  ERUs  EUAs  CERs  ERUs  EUAs  CERs  EUAs  CERs  ERUs 

ECX/ICE 

UK 

Bluenext 

France 

EEX 

Germany 

NASDAQ 
OMX 

Norway 

Green 
Exchange 

USA 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

Climex 

The 
Netherlands 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

CER / 
EUA 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

√ 

28 

EN 

Based on table in The Post-Trade Infrastructure for Carbon Emissions Trading. Report prepared for the City of London Corporation by Bourse Consult. Published July 
2010. http://217.154.230.218/NR/rdonlyres/EA473E51-37BD-49CA-8729-3CD87BF4A2A0/0/BC_RS_CarbonEmissionsTrading.pdf  

12 

EN