Special Report No 6 // 2015#The integrity and implementation of the EU ETS #(pursuant to Article 287(4), second subparagraph, TFEU)
Date: 2015-04-15
Institutions: European Court of Auditors
Subjects: EU Emissions Trading Scheme, EU control, EU emission allowance, Kyoto Protocol, disclosure of information, greenhouse gas, reduction of gas emissions, sanction (EU), spot market, tradeable emission permit

EN 

2015 

NO 06

Special Report  The integrity and 
implementation  
of the EU ETS

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OF AUDITORS

 
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EN 

2015 

NO 06

Special Report

The integrity and 
implementation  
of the EU ETS

(pursuant to Article 287(4), second subparagraph, TFEU)

Audit team

02

The ECA’s special reports set out the results of its performance and compliance audits of specific budgetary areas or 
management topics. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks 
to performance or compliance, the level of income or spending involved, forthcoming developments and political and 
public interest.

This performance audit was produced by Audit Chamber I — headed by ECA Member Augustyn Kubik — which specialis-
es in preservation and management of natural resources spending areas. The audit was led by ECA Member Kevin Cardiff, 
supported by Mary Kerrigan, head of private office; Gediminas Macys, attaché of private office; Colm Friel, head of unit; 
Emese Fésűs, team leader; Stefan den Engelsen, deputy team leader; Marco Dentamaro, auditor; Andreas Dürrwanger, 
auditor; María Luisa Gómez-Valcárcel, auditor; Laura Gores, auditor; Joanna Kokot, auditor; Loulla Puisais-Jauvin, auditor; 
Frédéric Soblet, auditor and Anna Zalega, auditor.

From left to right: S. den Engelsen, E. Fésűs, K. Cardiff, C. Friel.

Contents

03

Paragraphs

Abbreviations

Glossary

I–VII 

Executive summary

1–8 

1–8 

4–6 

7–8 

Introduction

European Union Emissions Trading System (EU ETS)

EU ETS in practice from 2005 to 2012 (Phases I and II)

EU ETS from 2013 (Phase III)

9–11 

Audit scope and approach

12–86  Observations

12–41 

The framework for protecting the integrity of the EU ETS

14–24 

Regulation and oversight of the emissions market were continuously improved by the Commission, but 
further progress is needed

25–28 

Concerns related to the definition of allowances

29–41 

The systems related to the EU Registry for processing fundamental EU ETS information showed certain 
shortcomings

42–86 

The implementation of the EU ETS

46–63  Member States’ systems for the recording and reporting of emissions during phase II of the EU ETS were not 

sufficiently developed

64–79 

There were gaps in the Commission’s guidance and monitoring of Member States’ implementation during 
phase II of the EU ETS

80–86 

Certain weaknesses were found in the national implementation of the EU ETS sanctioning regime and 
practices for surrendering international project credits

 
 
Contents

04

87–97  Conclusions and recommendations

Annex  —  Background Information

Reply of the Commission

 
 
Abbreviations

05

AAR: Annual Activity Report

CDM: Clean development mechanism

CER: Certified emission reduction

CF: Compliance Forum

CO2: Carbon dioxide

CO2e: Carbon dioxide equivalent

DG: Directorate-general

EA: European Cooperation for Accreditation

EEA–EFTA: European Economic Area–European Free Trade Association

ERU: Emission reduction unit

ETS: Emissions Trading System

EU ETS: European Union Emissions Trading System

EUA: European Union allowance

EUTL: European Union Transaction Log

GHG: Greenhouse gas

IPCC: Intergovernmental Panel on Climate Change

IPPC: Integrated Pollution Prevention and Control

JI: Joint implementation

KYC: Know your customer

MAD: Market abuse directive

MAR: Market abuse regulation

MIFiD: Markets in financial instruments directive

MRG: Monitoring and reporting guidelines

Abbreviations

06

NAP: National Allocation Plan

OTC: Over-the-counter

UNFCCC: United Nations Framework Convention on Climate Change

VAT: Value added tax

Glossary

07

Account holder: Account holder1 is a natural or legal person that holds an account in the Union Registry.

Allowance: Under the European Union Emissions Trading System (EU ETS), one European Union Allowance (EUA) 
corresponds to the right to emit 1 tonne of carbon dioxide equivalent during a specific period (CO2e)2. European 
Union Allowances can be used by operators within the EU ETS to cover their verified emissions or can be traded 
with other operators in need of EUAs.

Back-loading: As a short-term measure, the Commission postponed the auctioning of 900 million allowances 
until 2019–20 to allow demand to pick up3. The overall volume of allowances to be auctioned in phase III does not 
change because of this back-loading; only the distribution of auctioned allowances over the 2013–20 period (the 
‘auction time profile’) changes. The back-loading of auctions is implemented through an amendment to the EU 
ETS Auctioning Regulation4 adopted by the Commission in 2014, following approval by the EU Climate Change 
Committee and scrutiny by the European Parliament and Council. An amendment was also made to the EU ETS 
directive in 2013 to clear the way for this amendment5.

Cap-and-trade: The EU ETS is considered to be a ‘cap-and-trade’ system. This means that there is a ‘cap’, or limit, 
on the total amount of allowed emissions by the installations covered in the system. In phases I and II of EU ETS, the 
caps were set at national level, with approval from the Commission. For phase III, the cap is set at EU level. Within 
the cap, industry companies and aircraft operators receive emission allowances which they can sell to or buy from 
one another as needed. Voluntary traders can also enter the market to buy and sell allowances. The limit on the 
total number of available allowances ensures that they have a value.

1  Article 3 of Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European 

Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission 
Regulations (EU) No 920/2010 and No 1193/2011 (OJ L 122, 3.5.2013, p. 1).

2  Article 3 of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 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, p. 32).

3 

European Commission, DG Climate Action: http://ec.europa.eu/clima/policies/ets/reform/index_en.htm

4  Commission Regulation (EU) No 176/2014 of 25 February 2014 amending Regulation (EU) No 1031/2010 in particular to determine the volumes of 

greenhouse gas emission allowances to be auctioned in 2013–20 (OJ L 56, 26.2.2014, p. 11).

5  Decision No 1359/2013/EU of the European Parliament and of the Council of 17 December 2013 amending Directive 2003/87/EC clarifying provisions on 

the timing of auctions of greenhouse gas allowances (OJ L 343, 19.12.2013, p. 1).

Glossary

08

Central administrator: According to the ETS directive6, the central administrator is designated by the Commission 
to maintain an independent transaction log recording the issue, transfer and cancellation of allowances, also 
conducting an automated check on each transaction to ensure there are no irregularities in the issue, transfer and 
cancellation of allowances. The registry regulation specifies that the central administrator operates and maintains 
the Union Registry7.

Clean Development Mechanism (CDM): CDM projects under the Kyoto Protocol involve investments in sustainable 
development projects in developing countries to reduce emissions. These generate tradable certified emission 
reductions (CERs). These so-called credits are allowed, under certain conditions, for use under the EU ETS.

Competent Authority: Member States appoint a Competent Authority or authorities for the implementation of the 
rules of the EU ETS directive.

Greenhouse gas (GHG) emissions: The atmospheric gases held responsible for causing global warming and 
climate change. The major GHGs are carbon dioxide (CO2), methane (CH4) and nitrous oxide (N20). Less prevalent 
— but very powerful — greenhouse gases are hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur 
hexafluoride (SF6)8.

Harmonised allocation rules: In phase III of the EU ETS, the Commission developed harmonised allocation 
rules9, with benchmarks per product based on the average greenhouse gas emission performance of the top 10 % 
performing installations in the EU. The benchmarks are calculated independently of the applicable technology, fuel, 
size of the installation or its geographical location.

Installation: An installation is a stationary technical unit10 where one or more activities emitting GHG gases are 
carried out and any other directly associated activities which have a technical connection with the activities carried 
out on that site and which could have an effect on emissions and pollution.

Joint implementation (JI): Together with CDMs, this is one of the two project-based mechanisms introduced under 
the Kyoto Protocol. Industrialised countries carry out joint implementation projects for emission reductions with 
other developed countries to generate tradable emissions reduction units (ERUs) which can be used, under certain 
conditions, within the EU ETS.

Kyoto Protocol mechanisms: The Kyoto Protocol (see Box of the Annex for more details) introduced three 
mechanisms that can be used to achieve the emission reduction targets: emissions trading, clean development 
mechanisms (CDM) and joint implementation (JI). Emissions trading allows countries that have unused emission 
units to sell these to countries exceeding their caps. JI and CDM are project-based mechanisms that generate credits 
which can be traded to offset emissions.

6  Article 20 of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 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, p. 32).

7  Article 4 of Commission Regulation (EU) No 389/2013.

8  Glossary of climate change acronyms, United Nations Framework Convention on Climate Change (UNFCCC).

9  Commission Decision No 2011/278/EU of 27 April 2011 determining transitional Union-wide rules for the harmonised free allocation of emission 

allowances pursuant to Article 10a of Directive 2003/87/EC of the European Parliament and of the Council (OJ L 130, 17.5.2011, p. 1).

10  Article 3 of Directive 2003/87/EC.

Glossary

09

Market abuse directive and regulation (MAD/MAR): The initial market abuse directive of the European Parliament 
and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) (Directive 2003/6/
EC) was repealed and replaced by new rules adopted in 2014. These are Regulation (EU) No 596/2014 on market 
abuse (MAR)11 and Directive 2014/57/EU on criminal sanctions for market abuse (MAD)12. The market abuse 
regulation enters into application in July 2016 and Member States have 2 years to transpose the new directive13 into 
national law.

Markets in financial instruments directive (MiFID): The initial markets in financial instruments directive of the 
European Parliament and of the Council of 21 April 2004 on markets in financial instruments (Directive 2004/39/
EC) was repealed and replaced by new rules adopted in 2014. These are the new Directive 2014/65/EU on markets 
in financial instruments and Regulation (EU) No 600/2014 on markets in financial instruments. The new rules will be 
applicable from January 201714.

National Administrator: The National Administrator is the entity responsible for managing on behalf of a Member 
State a set of user accounts under the jurisdiction of a Member State in the Union Registry.

Operator: Any person15 who operates or controls an installation or, where provided for in national legislation, to 
whom decisive economic power over the technical functioning of the installation has been delegated.

OTC: The term over-the-counter (OTC) describes all financial market transactions that are not traded on an 
exchange, nor executed on a regulated market, but instead privately negotiated between two counterparts.

Secondary market: A market where investors buy securities or assets from other investors and not from the issuer.

Spot market: A market where securities or commodities are traded for immediate delivery, as opposed to a futures 
market.

Surrendering of allowances: By 30 April each year, the operator of each installation is required to surrender 
a number of allowances equal to the total of verified emissions from that installation during the preceding calendar 
year16. Under the EU ETS in phase II, operators may also, subject to certain limitations, surrender international 
credits (CERs and ERUs) generated by Kyoto Protocol mechanisms (CDM and JI). In total, the operator must surrender 
sufficient EUAs, CERs and ERUs to cover its verified emissions.

11  Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing 

Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (OJ L 173, 
12.6.2014, p. 1).

12  Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) 

(OJ L 173, 12.6.2014, p. 179).

13  http://ec.europa.eu/finance/securities/index_en.htm

14 

Ibid.

15  Article 3 of Directive 2003/87/EC.

16  Article 12(3) of Directive 2003/87/EC.

Glossary

10

Tonne of CO2 equivalent (CO2e): Means one metric tonne of carbon dioxide or an amount of any other greenhouse 
gas with an equivalent global-warming potential17.

Transaction: A transaction is a process18 in the Union Registry that includes the transfer of an allowance or Kyoto 
unit from one account to another account.

Union Registry: The registry is an electronic system which keeps track of the ownership of allowances. The central 
administrator19 operates and maintains the Union Registry. The registry20 is accessible to the public and contains 
separate accounts to record allowances held by each person to whom and from whom allowances are issued or 
transferred. In the Union registry any person may hold allowances.

Value added tax (VAT) reverse charge mechanism: This mechanism involves shifting the tax liability from the 
supplier to the recipient, meaning that the customer, when he is identified as a taxable person, would be liable to 
pay the VAT instead of the supplier. It is likely that a reverse charge system would eliminate VAT carousel fraud.

17  Annex II of Directive 2003/87/EC.

18  Article 3 of Commission Regulation (EU) No 389/2013.

19  Article 4 of Commission Regulation (EU) No 389/2013.

20  Article 19 of Directive 2003/87/EC.

Executive  
summary

11

I
The European Union’s Emissions Trading Scheme 
(EU ETS) is the EU’s flagship policy to combat climate 
change. It is the world’s largest cap-and-trade system 
for greenhouse gas (GHG) emissions. A limit, or cap, 
was placed on overall emissions from high-emitting 
industry sectors, which is reduced over time. The cap 
restricts emissions of more than 11 000 energy-inten-
sive installations across the EU, covering around half 
of GHG emissions. These installations receive emission 
allowances or buy them at auctions, and can also trade 
allowances as needed. Each allowance represents the 
right to emit 1 tonne of carbon dioxide (CO2) equiva-
lent. Each year, installations must surrender allow-
ances equivalent to the amount of carbon dioxide 
equivalent (CO2e) emitted.

II
The EU ETS is often quoted as the reference model 
for emerging climate change policy and emissions 
trading schemes elsewhere in the world. This innova-
tive scheme introduced in 2005 and progressively 
improved is now in its third phase of implementation. 
At European level, the environmental goal of the EU 
ETS is not just reducing emissions in line with the cap, 
but also putting a price on carbon and giving a finan-
cial value to each tonne of CO2e saved. The price is 
determined by the market in allowances. This encour-
ages installations to apply the most cost effective 
emission reduction measures, and promotes invest-
ment in low-carbon technologies, particularly if prices 
of allowances are high.

III
For the EU ETS to work as intended, it is necessary 
that the integrity of the system is ensured, and that 
the scheme is correctly implemented. The Court 
assessed whether the European Union Emissions Trad-
ing Scheme was managed adequately, by examining 
whether an appropriate framework was established 
for protecting its integrity as a market-based mecha-
nism, as well as examining its actual implementation. 
As regards the implementation, the Court focused on 
phase II of the EU ETS (2008–12) so that lessons can be 
learned for the future developments of this policy.

Executive summary 

12

IV
Overall the Court concluded that the management of 
the EU ETS by the Commission and Member States was 
not adequate in all respects. It was hindered by certain 
issues related to the robustness of the framework for 
protecting its integrity, and by significant weaknesses 
in the implementation of phase II of the EU ETS.

V
There have been significant improvements to the 
framework for protecting the integrity of the system, 
notably through the inclusion of most of the spot 
market for allowances under the markets in financial 
instruments directive (MiFID) and market abuse (MAD 
(market abuse directive)/MAR (market abuse regula-
tion)) regimes by the qualification of emission allow-
ances as financial instruments. However a number 
of issues should still be addressed in order to make 
the framework sufficiently robust, to provide better 
regulation and supervision, and to encourage investor 
confidence, in order to leverage the EU ETS as a tool of 
environmental policy.

(a)  There are remaining issues regarding the regula-

tion and oversight of the emission market related 
to compliance traders, bilateral over-the-coun-
ter (OTC) spot trading and smaller market 
participants.

(b)  There is no EU level oversight of the emissions 
market, and there is insufficient regulatory 
cooperation.

(c)  The legal definition of emission allowances is not 
sufficiently clear and there is also a lack of clarity 
regarding the creation and protection of security 
interests in allowances.

(d)  The Union Registry processes fundamental EU ETS 
data and has a high risk profile due to the financial 
stakes and wide range of account holders. While 
the security of the registry has been significantly 
improved during phase II of the EU ETS, there is 
still need for further progress. Member State pro-
cedures to control the opening of EU ETS accounts, 
monitor transactions, and cooperate with regula-
tory authorities had significant shortcomings and 
the Commission cannot adequately monitor trans-
actions due to data protection considerations. 
Furthermore the development and operation of 
the Registry at the Commission was hindered by 
internal coordination issues and resource con-
straints, as described in paragraphs 39 to 41.

VI
There were significant weaknesses in Member States’ 
and the Commission’s implementation of the EU 
ETS control framework in phase II. These need to be 
addressed during phase III so that there is sufficient 
assurance that the system is operating as intended.

(a)  Systems for monitoring, reporting and verification 
of emissions were not sufficiently well implement-
ed or harmonised. Competent Authorities did not 
adequately check the work performed by verifi-
ers, and performed limited on-the-spot checks at 
installation level.

(b)  There were gaps in the Commission’s guidance 
and monitoring of Member States’ implementa-
tion during phase II of the EU ETS, and the assess-
ment of Member States’ phase II National Allo-
cation Plans (NAPs) by the Commission was not 
sufficiently transparent.

(c)  Some Member States did not provide all the 

required reports on the operation of the EU ETS, 
and the Commission did not publish the annual 
implementation report required under the EU ETS 
directive.

Executive summary 

13

4.  The control framework at the level of the Member 
States should be better applied to ensure that the 
weaknesses identified are taken into account for 
the implementation of phase III (see detailed Rec-
ommendations 4(a) to (f) to the Commission and 
the Member States following paragraph 94).

5.  During phase III, the level of guidance and infor-
mation about the implementation of the EU ETS 
should be improved (see detailed Recommenda-
tions 5(a) to (c) to the Commission and the Mem-
ber States following paragraph 96).

6.  The implementation of sanctions in relation to 
the EU ETS should be made more transparent. 
Up-to-date and accurate information should be 
available at Member State and EU level on the 
implementation and results of penalty proce-
dures, and the Commission should better monitor 
enforcement practices across the EU as well as 
the consistent application of national penalties 
(see detailed Recommendations 6(a) to (c) to the 
Commission and the Member States following 
paragraph 97).

(d)  The impact of valuable consultation and coordina-
tion fora between the Commission and Member 
States was limited due to the low level of partici-
pation by Member States.

(e)  The Commission has had a limited role in ensuring 
the harmonisation of key controls in the imple-
mentation of the EU ETS by Member States.

(f)  The Court could not assess the effectiveness of 

the Member States’ diverse sanction systems due 
to a lack of consolidated information at Member 
State and European level. There were divergent 
practices concerning specific rules for the surren-
dering of international project credits between 
the Member States. These issues potentially affect 
the level playing field for operators.

VII
In order to address the observations described above, 
concerning the framework for protecting the integrity 
of the system and its implementation, the Court makes 
the following recommendations.

1.  Remaining issues in emission market regulation 
and oversight should be addressed by the Com-
mission in order to further improve market integ-
rity (see detailed Recommendations 1(a) to (c) to 
the Commission, following paragraph 91).

2.  The legal status of allowances should be further 
clarified in order to contribute to stability and 
confidence (see Recommendation 2 following 
paragraph 92).

3.  Certain aspects of the systems for processing 

fundamental EU ETS information (the EU Union 
Registry and related procedures) should be further 
improved. In particular the Commission should 
consider how effective monitoring of cross-border 
transactions can be developed and coordinated at 
EU level to mitigate risks of abuse and fraudulent 
activities, and identify appropriate measures to 
enhance the control framework and promote best 
practices by Member States on account opening 
across the EU. The Member States should ensure 
that these controls are implemented (see detailed 
Recommendations 3(a) to (e) to the Commission 
and the Member States, following paragraph 93).

Introduction

14

02 
The EU ETS is the world’s largest 
cap-and-trade (see Box 1) system for 
GHG emissions and is often quoted 
as the reference model for emerging 
climate change policy and emissions 
trading schemes elsewhere in the 
world. The cap restricts emissions of 
more than 11 000 energy-intensive in-
stallations across the EU22. From 2013, 
the EU ETS covers around 50 % of the 
greenhouse gas (GHG) emissions in the 
EU23. As well as limiting total emissions 
with a sufficiently high carbon price, 
the EU ETS should encourage installa-
tions to apply the most cost effective 
emission reduction measures, and 
promote investment in low-carbon 
technologies24.

21  COM(2008) 30 final of 

23.1.2008, ‘20 20 by 2020 
Europe’s climate change 
opportunity’.

22  Covering the following main 

sectors: combustion 
installations, cement, clinker, 
lime, mineral oil refineries, pig 
iron, and steel. Sectors which 
are not included include 
terrestrial transport, 
agriculture and the service 
sector.

23  COM(2012) 652 final of 

14.11.2012, ‘The state of the 
European carbon market in 
2012’.

24  European Commission Climate 
Action, ‘The EU Emissions 
Trading System (EU ETS)’ 
factsheet, available at http://
ec.europa.eu/clima/
publications/docs/
factsheet_ets_en.pdf

European Union 
Emissions Trading System 
(EU ETS)

01 
The EU ETS is an essential pillar of the 
European Union’s policy to combat cli-
mate change (for further background 
information on the international 
framework for emissions trading see 
Part I of the Annex). Its objective is to 
promote reductions of greenhouse gas 
emissions in a cost-effective and eco-
nomically efficient manner. It is one 
of the main components of the EU’s 
climate and energy package21, which 
has three objectives for 2020 (known 
as the ‘20-20-20’ targets):

 — 20 % reduction in EU greenhouse 
gas emissions from 1990 levels;

 — raising the share of EU energy con-
sumption produced from renew-
able resources to 20 %;

 — 20 % improvement in the EU’s 

energy efficiency.

1
x
o
B

The EU ETS cap and trade system

The cap-and-trade system works by putting a limit on overall emissions from high-emitting industry sec-
tors. This limit is reduced over time. Within this limit, companies can buy and sell emission allowances as 
needed. Each allowance represents the right to emit 1 tonne of CO2e. The amount of allowances determines 
the amount of emissions permitted, i.e. emissions are ‘capped’. The allowances are distributed to installations, 
and can be freely traded on the market25. Each year, installations must surrender allowances equivalent to the 
amount of CO2e emitted. The price is determined by the market.

25  COM(2010) 796 final of 21.12.2010, ‘Towards an enhanced market oversight framework for the EU Emissions Trading Scheme’.

 
Introduction

03 
The EU ETS was established by Direc-
tive 2003/87/EC26. Under this directive, 
the Member States are required to 
develop and put in place the necessary 
systems and administrative arrange-
ments to implement the EU ETS at 
national level. The directive also gives 
a range of specific responsibilities to 
the Commission, many of which are 
aimed at ensuring a consistent and 
coordinated implementation of the 
EU ETS. Since the EU ETS also created 
a market for the trading of emis-
sion allowances, the Member States 
and Commission need to ensure the 
integrity and stability of the EU ETS so 
that it can effectively contribute to its 
environmental objectives.

05 
The first phase (2005–07) of the EU ETS 
was a 3-year pilot period to prepare for 
the second phase (2008–12). Allow-
ances were distributed free of charge. 
As most of the Member States did not 
yet have historical data on installation 
emissions included in the EU ETS, the 
phase I caps were based on studies 
and forecasts. The objective of the first 
phase was to establish a functioning 
market, to set a price for carbon and to 
build the necessary infrastructure for 
monitoring, reporting and verifying 
actual emissions. The data generated 
from the first phase then filled the in-
formation gap and helped set national 
caps for the second phase.

EU ETS in practice from 
2005 to 2012 (Phases I and II)

04 
The operation of the EU ETS is organ-
ised in trading periods or phases: for 
the first two phases (2005–12), the 
cap on allowances was set at na-
tional level through National Alloca-
tion Plans (NAPs) established by the 
Member States and assessed by the 
Commission.

06 
The second phase (2008–12)27 coin-
cided with the first commitment phase 
of the Kyoto Protocol — the 5-year 
period during which EU Member States 
should reduce their emissions accord-
ing to the targets set under the Kyoto 
Protocol28. On the basis of the verified 
emissions reported from phase I, the 
volume of emission allowances permit-
ted in phase II was cut to 6,5 % below 
the 2005 (i.e. first EU ETS compliance 
year) level, thus ensuring that real 
emission reductions would take place 
(see Part II of the Annex for more 
information on supply and demand 
developments during phase II of the 
EU ETS).

15

26  Directive 2003/87/EC of the 
European Parliament and of 
the Council of 13 October 2003 
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, p. 32).

27 

In phase II, EEA–EFTA 
(European Economic 
Area — European Free Trade 
Association) members Iceland, 
Liechtenstein and Norway 
joined the EU ETS.

28  The European Union 

committed itself to achieving 
an overall reduction of 8 % of 
GHG emissions in the 2008–12 
period as compared with 1990 
levels (which is higher than the 
target referred to for overall 
industrialised countries in the 
Box of the Annex). This target 
is shared among the 
15 Member States under 
a legally binding agreement, 
the Council Decision 
2002/358/EC of 25 April 2002 
concerning the approval, on 
behalf of the European 
Community, of the Kyoto 
Protocol to the United Nations 
Framework Convention on 
Climate Change and the joint 
fulfilment of commitments 
thereunder (OJ L 130, 
15.5.2002, p. 1).

Introduction

16

EU ETS from 2013 (Phase III)

07 
For phase III (2013–20), the system of 
NAPs was replaced. The cap for emis-
sions from installations covered under 
the EU ETS is now set at EU level. For 
those allowances still given for free, 
harmonised allocation rules apply 
which are based on ambitious EU-wide 
benchmarks of emissions perfor-
mance. As in previous phases, installa-
tions which are not allocated any or an 
insufficient number of free allowances 
to cover their emissions need to buy 
additional allowances on the market, 
or reduce their emissions.

08 
At the beginning of phase III, over 
40 % of all allowances are auctioned. 
Auctioning is considered by the Com-
mission and economic theory as the 
most transparent allocation method 
and puts into practice the principle 
that the polluter pays (Part III of the 
Annex provides more background 
information on reform and future per-
spectives of the EU ETS).

Audit scope and approach

17

29  Please see Box 3 for more 
details on VAT issues.

30  Aviation was only included in 

the EU ETS as of 2012.

09 
In determining the audit scope and 
approach the Court focused on the 
fundamental issues of the system’s in-
tegrity and implementation. The audit 
did not examine the overall effective-
ness of the EU ETS. The objective of 
the audit was to answer the question 
‘Is the European Union Emissions 
Trading Scheme managed adequately 
by the Commission and the Member 
States?’ This was done by addressing 
the following sub-questions:

(a)  Is there an appropriate frame-

work for protecting the integrity 
of the EU ETS? In order to answer 
this question, the Court examined 
the appropriateness of market 
regulation and oversight rules 
that apply to emissions trading, 
the legal status and definition of 
allowances, and the Union Registry 
system for recording and disclos-
ing EU ETS data. This part of the 
audit focused on a range of meas-
ures in these areas, developed and 
proposed by the Commission since 
2011 including developments in-
troduced up to 30 September 2014. 
The audit scope did not include an 
assessment of national measures 
to address the risk of VAT carousel 
fraud29.

(b)  Is the EU ETS correctly imple-

mented? In order to answer this 
question, the Court examined the 
implementation of the EU ETS 
by the Member States and the 
Commission during phase II of 
the EU ETS. This part of the audit 
only concerned the implementa-
tion of the EU ETS for stationary 
installations30.

10 
The audit was carried out at both the 
Commission and Member State level. 
The work at Commission level exam-
ined how the Commission guided the 
implementation of the EU ETS by the 
Member States and whether it fulfilled 
its own obligations under the appli-
cable legal framework. Evidence was 
obtained from seven Member States. 
These were selected based on volumes 
and types of emissions. Visits were 
made to relevant authorities in five 
Member States (Germany, France, Italy, 
Poland and the United Kingdom). Doc-
umentary evidence was obtained from 
two others (Greece and Spain). The 
audit at Member State level focused on 
the allocation (NAPs) and surrendering 
of allowances, on systems for monitor-
ing, reporting and verification of emis-
sions and on sanctions applied in case 
of non-compliance. It did not cover 
auctioning, as auctioning was still only 
implemented at a very small scale and 
in a limited number of Member States 
towards the end of phase II.

11 
In addition, evidence was obtained 
through substantive testing of 
documentation available at national 
Competent Authorities relating to 
150 installations selected from these 
seven Member States, and an analysis 
of installation and compliance data 
obtained from the public EU Trans-
action Log (EUTL — see Box 2). The 
selected installations were not visited 
on-the-spot as the Court did not have 
access rights.

Observations

18

31  See for example 

COM(2010) 796 final.

32  Non-compliance buyers (or 
non-compliance traders) are 
entities participating 
voluntarily in the emissions 
market (e.g. traders, investors, 
individuals, financial 
intermediaries, etc.) as 
opposed to compliance 
buyers (operators required to 
participate by the legislation).

33  http://ec.europa.eu/clima/
policies/ets/oversight/
faq_en.htm, Ensuring the 
integrity of the European 
carbon market, FAQ, 
April 2014: ‘The rules [i.e. 
financial market rules] also aim 
to provide a safe and efficient 
trading environment to 
enhance confidence in the 
carbon market in the wake of 
a series of unfortunate 
fraudulent activities which the 
market has experienced a few 
years ago’. Also see 
COM(2010) 796 final, in 
particular chapter 1 
— Introduction.

The framework for 
protecting the integrity of 
the EU ETS

12 
In order to ensure sufficient liquidity 
in the emissions allowances market 
created by the EU ETS, and to establish 
a well-functioning mechanism con-
tributing to the achievement of the 
environmental objectives of the policy, 
the market ought to be safe and at-
tractive31 for non-compliance buy-
ers32, as well as operators (compliance 
buyers) who have an obligation under 
the EU ETS directive to participate in 
the scheme. It is therefore important 
to consider whether the integrity of 
the EU ETS is sufficiently protected 
to maintain stability and to ensure 
investors’ confidence in the market. 
Such protection requires appropriate 
market regulation and oversight as 
well as cooperation between regula-
tory authorities. Furthermore, the legal 
status and definition of allowances 
ought to be clear enough in order to 
contribute to stability and confidence 
in the market for emission allowances.

13 
The EU Registry (see Box 2) is a key 
element in protecting the integrity of 
the EU ETS, as it records and tracks all 
‘physical transactions’ of allowances 
and enables the disclosure of essential 
information to the market. In addi-
tion to the environmental value of the 
instrument, the financial stakes of the 
EU ETS are considerable. The value 
represented by all allowances and 
other compliance units held in the Un-
ion Registry is estimated at more than 
10 billion euro, depending on the price 
of those units and the time of meas-
urement. Furthermore, the integrity 
of the EU ETS ought to be sufficiently 
protected against the type of incidents 
that occurred between 2008 and 2011 
(i.e. reported thefts of allowances, VAT 
fraud schemes, and cyber threats such 
as phishing). It is therefore also es-
sential that effective procedures exist 
for controlling account openings and 
transactions occurring in the Union 
Registry.

Regulation and oversight of 
the emissions market were 
continuously improved by 
the Commission, but further 
progress is needed

14 
The Commission has recognised33 that 
enhancing market regulation and over-
sight and improving the security of 
the Registry were required to prevent 
recurrences of the security incidents 
(also see paragraphs 12 and 13, and 
Box 2) that occurred in phase II. The 
Commission developed a comprehen-
sive package of measures to address 
these risks (as discussed below in 
paragraphs 15 and 16).

Observations

19

2
x
o
B

The system of national registries and the Union Registry

During phase I and most of phase II, the Member States operated national registries with accounts in which 
emissions allowances and international credits could be held and transferred. In order to simplify the system 
and to allow the future linking of the EU ETS to other international emissions trading schemes, it was decided 
in 2009 by co-legislators to centralise the national registries in a Union Registry maintained and administered 
by the European Commission. In 2008–11, a number of security incidents occurred involving mainly VAT fraud 
and cyber-attacks. The migration of accounts and data took place in June 2012. Despite this centralisation of 
the registries system, Member States are still solely responsible for opening, managing and updating accounts 
in their national sections of the Union Registry. The Commission’s central administrator is not involved in 
the performance of these activities. An EU Transaction Log (EUTL) system checks, records and authorises all 
transactions initiated in the Union Registry to ensure that any transfer of allowances is consistent with EU ETS 
rules34. A public version of the EUTL makes relevant EU ETS data accessible to the public. The operation of the 
Registry (and the previous system of national registries) is governed by Commission regulations35.

34  http://ec.europa.eu/clima/policies/ets/registry/index_en.htm

35  This involves in particular Commission Regulations (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) and (EU) No 920/2010 of 7 October 2010 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 270, 14.10.2010, p. 1), Commission Regulation (EU) No 1193/2011 establishing a Union Registry from 1 January 2013 and amending 
Commission Regulations (EC) No 2216/2004 and No 920/2010 for establishing a Union Registry for the period ending 31 December 2012) and 
Commission Regulation (EU) No 389/2013 establishing a Union Registry for phase III.

 
Observations

15 
The need to improve regulation for 
the carbon market coincided with the 
process of revising the framework for 
financial markets regulation (MiFID/
MAD)36. This presented an opportunity 
for the Commission to consider the 
regulation of the carbon market in the 
context of the overall regulation of the 
financial markets. According to the 
Impact Assessment37 accompanying 
the MiFID review proposal presented 
in October 2011, the two main options 
considered by the Commission were 
to create a tailor-made regime for the 
carbon market, or to classify emission 
allowances as financial instruments 
and include them in the framework 
of MiFID/MAD regulation. The ques-
tion of which regulatory approach 
would be best suited to the emissions 
market was beyond the scope of this 
audit. Emissions derivatives38, which 
are estimated by the Commission to 
represent over 90 % of the carbon mar-
ket, are financial instruments and were 
therefore already regulated under 
MiFID and MAD in phases I and II of the 
EU ETS (2005–12). The secondary trad-
ing of spot emissions allowances was 
not. The Commission proposed in 2011 
that MiFID be extended and tailored 
to also cover the secondary trading of 
spot emissions allowances by expressly 
classifying allowances as financial in-
struments. This proposal was adopted 
in 201439 and also brings emission al-
lowances within the scope of the MAD/
MAR framework. These new rules will 
apply from January 201740.

16 
Other important measures taken 
by the Commission to enhance the 
integrity and security of the EU ETS 
included:

 — providing the Member States with 
the possibility to apply a reverse 
charge mechanism to address the 
value added tax (VAT) fraud (see 
Box 3);

 — additional security measures for 
the Union Registry to combat 
potential cyber-crimes and inter-
national credits recycling;

 — the integration of anti-mon-

ey-laundering provisions in the 
registry regulations, inspired by 
the anti-money laundering direc-
tive41; and

 — establishing conduct and partici-

pation rules for the primary market 
in the auctioning regulation42.

17 
These measures represent a significant 
improvement to the regulation of the 
carbon market, and indeed there has 
been a marked reduction in reported 
incidents in recent years. Despite these 
efforts, the Court however identified 
a certain number of weaknesses con-
cerning the introduction of the meas-
ures, and remaining issues which need 
to be considered in order to make the 
framework sufficiently robust. These 
are identified in the following sections.

20

36  MiFID and MAD are two key 

pillars of financial markets 
regulation. MiFID (markets in 
financial instruments directive) 
covers the provision of 
investment services in financial 
instruments, MAD (market 
abuse directive) covers market 
abuse.

37  Commission Staff Working 
Paper, Impact Assessment 
accompanying the document 
Proposal for a Directive of the 
European Parliament and of the 
Council on Markets in financial 
instruments (Recast) and the 
proposal for a regulation of the 
European Parliament and of the 
Council on markets in financial 
instruments of 20 October 2011 
(SEC(2011) 1226 final).

38  A derivative is a financial 

contract linked to the future 
value or status of the 
underlying asset to which it 
refers (e.g. the development of 
interest rates or of a currency 
value, or the possible 
bankruptcy of a debtor). (http://
europa.eu/rapid/
press-release_MEMO-12-232_
en.htm?locale=en)

39  Directive 2014/65/EU of the 

European Parliament and of the 
Council of 15 May 2014 on 
markets in financial 
instruments and amending 
Directive 2002/92/EC and 
Directive 2011/61/EU (OJ L 173, 
12.6.2014, p. 349).

40  From July 2016 for the market 

abuse regulation.

41  Directive 2005/60/EC of the 

European Parliament and of the 
Council of 26 October 2005 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). In 
2013 the Commission adopted 
proposals to update it and the 
European Parliament and the 
Council reached a political 
agreement at the end of 2014.

42  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 of the 
Council establishing a scheme 
for greenhouse gas emission 
allowances trading within the 
Community (OJ L 302, 
18.11.2010, p. 1).

Observations

21

3
x
o
B

The ETS market remains at risk to VAT fraud

In its General Report on Activities for 2009, Europol estimated that the loss to carbon credit fraud (through 
VAT carousel fraud) between June 2008 and December 2009 was approximately 5 billion euro. The ETS market 
was particularly vulnerable to this type of cross-border trading criminal activity. In response to the fraud 
incidents, a directive (2010/23/EU)43 was adopted to give Member States the possibility to implement a VAT 
reverse charge mechanism, putting the obligation to pay VAT onto the person to whom allowances or other 
compliance units are transferred. This provision has been prolonged until December 2018 (Directive 2013/43/
EU)44.

At the time of the audit, almost a third of the Member States had not implemented the reverse charge mecha-
nism for emission allowances. The risk of value added tax (VAT) fraud on EU ETS allowances is consequently 
still not fully addressed in the European Union.

Out of the five Member States visited by the Court, only Italy had not yet applied the VAT reverse charge 
mechanism at the time of the audit. The only trading platform for emission allowances in Italy suspended its 
operations of the emission allowances market in December 2010 due to observed anomalies in fluctuations of 
trading. Operations of the exchange were permanently shut down in March 2014. Bilateral trading of allow-
ances involving Italian accounts in the EU ETS Registry is of course still possible. The Competent Authority and 
the National Registry Administrator considered, at the time of the audit, that there was a material risk of VAT 
carousel fraud occurring in Italy due to the absence of the VAT reverse charge mechanism.

43  Council Directive 2010/23/EU of 16 March 2010 amending Directive 2006/112/EC on the common system of value added tax, as regards an 

optional and temporary application of the reverse charge mechanism in relation to supplies of certain services susceptible to fraud (OJ L 72, 
20.3.2010, p. 1).

44  Council Directive 2013/43/EU of 22 July 2013 amending Directive 2006/112/EC on the common system of value added tax, as regards an optional 

and temporary application of the reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud (OJ L 201, 
26.7.2013, p. 4).

 
Observations

Despite the qualification 
of emission allowances as 
financial instruments, the audit 
identified certain remaining 
issues related to regulation 
and oversight of the emissions 
market

18 
The Court examined how the Commis-
sion’s 2011 MiFID review proposal ad-
dressed the specificities of emissions 
trading. One of these specificities is 
the presence of compliance traders in 
the EU ETS emissions market (trading 
both spot allowances and derivatives). 
This market is now to a large extent 
a financial market, but is characterised 
by the participation of compliance 
traders and therefore requires care-
ful consideration when regulations 
are revised. The Commission’s review 
proposal included exempting EU ETS 
compliance traders from the require-
ment to obtain a MiFID authorisation45. 
The Court identified certain aspects 
in relation to the application of MiFID 
to the emissions market, which raise 
issues relating to its regulation and 
oversight and which have not been 
sufficiently analysed. These are set out 
in the following paragraphs.

19 
Compliance traders as well as certain 
other entities trading emissions allow-
ances46 will be exempt from obtain-
ing a MiFID authorisation under the 
revised MiFID framework. In particular, 
large compliance traders which often 
have substantial specialised trading 
desks, will be exempt if they trade on 
their own account47 for the EU ETS. 
Small entities trading spot emission 
allowances voluntarily on own account 
may also operate without MiFID au-
thorisation48. The Court considers that 
there is a risk to the market’s integrity 
if such entities abuse the exemption 
introduced by MiFID by engaging in 
trading activities not covered by their 
exemption. Furthermore, the Court 
identified a risk that the MiFID exemp-
tion of compliance trading entities 
might be abused by parties trying to 
acquire installations for the purpose 
of buying and selling spot emission al-
lowances without a MiFID licence. The 
Court found that the Commission had 
not sufficiently analysed the impact of 
compliance traders on the emissions 
market to demonstrate that any result-
ing risk of exempting groups of market 
participants was not significant.

22

45 

In order to provide investment 
services the investment firm 
needs to obtain an 
authorisation from the 
national regulator.

46  E.g. Article 2(1)(j)(i) of 

Directive 2014/65/EU relating 
to persons dealing on own 
account in emissions 
allowances or derivatives 
thereof.

47  And comply with the 

requirements set out in 
Article 2(1)(e) of 
Directive 2014/65/EU.

48  A 2012 expert’s report 

contracted by the Commission 
on the parts of the MiFID 
Impact Assessment relevant to 
the emissions market also 
referred to the potential 
implications of likely MiFID 
exemptions for smaller market 
actors, which may also have 
been involved in fraud and 
alleged theft of allowances, 
and who will not require MiFID 
authorisation, even if carbon 
allowances were classified as 
financial instruments.

23

49  Commission Staff Working 
Paper, Impact Assessment 
accompanying the document 
Proposal for a Regulation of 
the European Parliament and 
of the Council on insider 
dealing and market 
manipulation (market abuse) 
and the proposal for 
a Directive of the European 
Parliament and of the Council 
on criminal sanctions for 
insider dealing and market 
manipulation of 20.10.2011, 
SEC(2011) 1217 final.

50  Directorate-General of the 

Commission responsible for 
Climate Action.

51  Directorate-General of the 

Commission responsible for 
the internal market and 
services. As of 2015, DG 
Internal Market and Services is 
called DG Financial Stability, 
Financial Services and Capital 
Markets Union.

There are concerns regarding 
some elements of the suitability 
of the supervisory framework 
for the emissions allowances 
market

22 
As with any market mechanism, ap-
propriate market oversight is required 
to protect the integrity of the EU ETS 
(see also paragraph 12). This should 
involve the Commission consulting 
with national financial regulators as 
regards the functioning of the emis-
sions market, and considering the 
issue of regulatory cooperation in the 
emissions market. It is also important 
that a system of ongoing and effective 
cooperation concerning the function-
ing of the carbon market be estab-
lished within the European Commis-
sion, principally between the services 
responsible for EU ETS and financial 
markets regulation, namely DG Climate 
Action50 and DG Internal Market, Indus-
try, Entrepreneurship and SMEs'51.

Observations

20 
Furthermore, purely bilateral OTC 
trades, including trading of emis-
sion allowances, executed outside 
MiFID-regulated venues will remain 
outside the ambit of the revised MiFID. 
The ‘physical’ delivery of emission al-
lowances traded bilaterally between 
two parties requires both parties to 
hold an account in the EU ETS Union 
Registry. However, as discussed below 
in paragraphs 37 and 38, these ‘physi-
cal’ transactions in the Union Reg-
istry are not subject to supervision. 
This means that there may be actors 
operating in parts of the market with 
limited visibility for regulators and 
competent authorities. The classifica-
tion of emission allowances as financial 
instruments under MiFID will therefore 
not bridge this regulatory gap. Howev-
er, unregulated bilateral spot trading, 
relative to derivatives trading, accord-
ing to the Commission represents 
a small proportion (around 1 %) of the 
secondary emissions market.

21 
The Commission also proposed49 an 
exemption, subject to a threshold, for 
smaller market participants from the 
duty to disclose inside information un-
der revised market abuse rules (MAD/
MAR). The audit did not find evidence 
that the Commission sufficiently 
analysed the identity and behaviour of 
such participants and the information 
held by them, as well as their potential 
cumulative effect on the emissions 
market. The significance of this issue 
depends on how ‘smaller’ participants 
are defined, which had not yet been 
established at the time of the audit.

24

52  An expert’s report contracted 
by the Commission also 
identifies potential remaining 
gaps in the framework for 
supervision of the emissions 
allowances even after the 
adoption of the revised 
financial market regulations. 
Many different actors will 
share a part of the supervisory 
responsibility for the carbon 
market. This raises concerns 
over remaining gaps, 
potentially requiring further 
adjustments of the 
regulations, should market 
operation be disrupted.

53  Security interests are third 

party legal rights such as 
mortgages or other legal 
charges.

Observations

23 
Despite its cross-border nature and 
concerns expressed about fraud and 
other criminal activities (also see 
paragraphs 13, 14 and Box 2), the 
Court found that no EU level over-
sight of the emissions market has 
been established. National financial 
regulators can request their national 
administrators or the central admin-
istrator to provide information from 
the Union Registry on transactions in 
emissions allowances under restricted 
procedures defined in the registry 
regulation. However, the Court found 
that at the time of the audit, such 
practices were rarely used at the level 
of the Member States. Furthermore, 
the Union Registry does not register 
price or financial information related 
to transactions. As a consequence, 
national regulators cannot obtain a full 
picture in relation to any cross-border 
transaction they view as suspicious 
and have less information available in 
relation to transactions that might be 
suspicious. The Commission has no 
supervisory powers in this area (see 
also paragraphs 37 and 38). This in-
creases the importance of cooperation 
between national regulators to ensure 
that the trading of emissions allow-
ances is subject to an adequate level of 
supervision, and that the potential for 
abuse is kept to a minimum.

24 
The Court considers that there are 
no integrated procedures between 
national regulators for organising an 
EU-level supervision specifically for 
the emissions market, and that con-
cerns remain over the framework for 
supervision of the emissions market 
that will be in place once the revised 
MiFID and MAR take effect52. Within 
the Commission itself cooperation 
between DG Climate Action and DG 
Internal Market and Services is organ-
ised in an informal and ad hoc manner, 
which does not sufficiently facilitate 
a coordinated approach to monitor the 
emissions market. The existing formal 
procedures for inter-service consulta-
tion and making legislative proposals 
are not designed for coordinating the 
regulation and monitoring of the emis-
sions market.

Concerns related to the 
definition of allowances

25 
In order to function well, the emissions 
market needs sufficient liquidity (see 
also paragraph 12). In this respect, the 
operation of the emissions market 
could improve if there were more cer-
tainty over the EU-wide definition of 
allowances and if emission allowances 
were more commercially interesting 
for voluntary participants, for example 
by supporting the ability to create and 
protect secure and enforceable secu-
rity interests53.

Observations

26 
The EU ETS directive did not define the 
legal status of allowances. The descrip-
tion of allowances as fungible, dema-
terialised, tradable instruments in the 
EU registry regulation54 only explains 
some of the ways in which allowances 
can be used. Moreover, designating al-
lowances as financial instruments only 
clarifies how they should be treated 
under financial services legislation. It 
remains unclear what rights the hold-
ers of emissions allowances have. The 
audited Member States have different 
approaches to the legal status and 
nature of allowances. In France and 
the United Kingdom, the character-
istics of allowances are compatible 
with the legal attributes of property or 
are treated as such. However, in most 
of the Member States audited, there 
is no legal definition of emissions 
allowances.

28 
Moreover, it is currently not clear, from 
a legal and a practical point of view, 
whether emissions allowances can be 
used to support security interests, as 
is the case with traditional financial in-
struments of commercial value. There 
is no express provision for the registra-
tion of security interests in allowances. 
Under the EU registry regulation, the 
practical solution to register interests 
in allowances is by nominating ‘ad-
ditional authorised representatives’56, 
whose permission would be needed 
to perform transactions involving 
these allowances. An express EU-level 
provision that emissions allowances 
are capable of supporting the exist-
ence of security interests, and a regis-
tration mechanism for such interests, 
may increase the commercial value 
of emissions allowances for market 
participants.

25

54  Article 40(1) of Commission 
Regulation (EU) 389/2013.

55  The Court obtained two 

experts’ reports contracted by 
the European Commission; 
one on the parts of the MiFID 
Impact Assessment relevant to 
the emissions market (2012) 
and one on the interplay 
between the EU ETS Registry 
and post trade infrastructure 
(2013), which both identify 
similar risks to those identified 
by the Court.

56  Article 21(3) of Commission 

Regulation (EU) 1193/2011, and 
Article 23(3) of Commission 
Regulation (EU) 389/2013.

27 
The lack of legal certainty at EU and 
Member State level and the differ-
ent approaches taken means that 
legal problems arising are dealt with 
on a case-by-case basis. This further 
increases the risk for divergent legal 
definition and treatment, not just be-
tween Member States (most of which 
are yet to define allowances in their 
national legal systems), but within 
a single Member State’s national law 
as well. This issue of the absence of an 
EU-wide legal definition of allowances 
was already raised in several experts’ 
reports55 contracted by the Commis-
sion. However, the Commission has not 
taken any action to address the issue. 
The Court considers that greater clarity 
regarding the legal definition of allow-
ances has the potential to be benefi-
cial to the functioning of the market.

26

57  Commission Regulation (EU) 

No 920/2010.

have been included in the registry 
regulation and specify how national 
administrators should cooperate with 
relevant competent authorities in 
these domains, notably the financial 
intelligence units and law enforcement 
bodies. Given the high financial stakes 
and security risks, the successful op-
eration of the Registry requires sound 
governance structures, with appropri-
ate segregation of IT and business du-
ties in the internal organisation of the 
Commission and sufficient resources.

31 
The development of the security 
architecture of the Union Registry 
also took into account past incidents 
(see paragraph 13). The Court found 
that while the registry systems and 
processes improved over time, certain 
shortcomings remain as described in 
the following sections.

Observations

The systems related to the 
EU Registry for processing 
fundamental EU ETS 
information showed certain 
shortcomings

29 
The Union Registry is the electronic 
system for recording allowances 
and their ownership and processing 
fundamental EU ETS data for instal-
lations and trading entities (see also 
paragraph 13 and Box 2 above). Rules 
for account opening procedures are 
included in the registry regulation57 
and implemented by the national 
administrators. The account opening 
procedures for voluntary participants 
(e.g. for trading or investment purpos-
es) are particularly important, as they 
define the conditions under which 
entities other than compliance traders 
can set up an account to trade allow-
ances. In addition, once traders have 
access to an account, they can initiate 
cross-border transactions.

30 
The Union Registry has a high risk 
profile and its operation should 
therefore involve identification and 
targeted tracking of transactions, as 
well as controls and identification of 
account holders and balances. In order 
to support market integrity, rigorous 
account opening procedures should 
be implemented in a consistent way 
by all Member States, and cross-border 
monitoring of potentially suspicious 
transactions should take place to 
deter and detect fraudulent or crimi-
nal activities. Anti-money laundering 
and anti-terrorist financing provisions 

27

58  Know your customer (KYC) is 
the process used by financial 
institutions or other entities to 
conduct customer due 
diligence, (i.e. to carry out 
checks on customers in order 
to verify their identity, the 
identity of the beneficial 
owner, to understand the 
nature of the business 
relationship and to ensure that 
it is monitored on an ongoing 
basis). This is required in order 
to conform to due diligence 
and financial regulatory 
legislation, such as anti-money 
laundering (AML) and 
countering the financing of 
terrorism (CFT) (http://
ec.europa.eu/internal_
market/company/docs/
financial-crime/130205_
impact-assessment_en.pdf).

59  During the audit the Court 
was informed of only three 
such cases from Germany (1) 
and France (2), two of which 
applied to phase III.

Observations

Procedures for the opening of 
accounts were not sufficiently 
robust

32 
Following a series of serious incidents 
affecting the security of the Registries’ 
system between 2008 and 2011 (see 
paragraph 13 and Box 2), the security 
of the EU ETS was further enhanced 
in 2011. The rules for account opening 
and acceptance of authorised repre-
sentatives (i.e. so-called KYC58 checks) 
were significantly expanded. The 
registry regulation establishes rules 
for opening person holding accounts 
in the Union Registry and gives the 
grounds on which national administra-
tors may refuse to open an account for 
voluntary participants, notably if the 
person requesting the account open-
ing is under investigation for being 
involved in fraud involving allowances 
or Kyoto units, money laundering, ter-
rorist financing or other serious crimes 
to which the account may be an instru-
ment. Furthermore, Member States 
were given the possibility to define 
more detailed national rules for refus-
ing to open accounts in the Registry. 
There is also a requirement to share 
information between Member States 
on refusals to open accounts.

33 
Although the centralisation of the 
Registry System was introduced in 
June 2012 when the national regis-
tries were migrated to the new Union 
Registry managed by the Commission, 
the account management (and ac-
cess of individuals and legal entities 
to emissions trading accounts) is still 
the sole responsibility of the Member 
States and their national administra-
tors. Similar to the situation before 
centralisation of the national registries, 
the national administrators cannot 
access data from other Member States’ 
sections of the Registry.

34 
The Court identified many differences 
in processes, internal organisation and 
administrative capacity regarding the 
KYC-checks and risk profiling practices 
between Member States, with France 
and the UK as examples of Member 
States going beyond the minimum re-
quirements in this area. These Member 
States demonstrated extensive proce-
dures for risk assessments and detailed 
background checking.

35 
However, despite the strengthening of 
the framework for opening of accounts 
since 2011, the Court found that the 
following weaknesses persisted in 
most of the Member States visited:

 — requests for account openings 
were not being refused59, even 
when this would have been justi-
fied based on the criteria pro-
vided in the registry regulation for 
refusing to open an account (see 
paragraph 32);

 — information on suspicious ap-

plications for account openings 
was not shared between national 
administrators and the Commis-
sion in an effective way (e.g. due to 
the lack of a legal basis there is no 
permanent EU-wide list of refused 
account openings, this informa-
tion is only shared temporarily, 
and applications which were not 
formally refused but still interrupt-
ed because of suspicions of the 
national administrator, were not 
shared with other Member States 
as refused account openings);

Observations

28

 — most of the visited Member States 
did not use the option to develop 
national rules for account opening;

Transactions are insufficiently 
supervised and monitored at 
EU level

37 
Previous criminal events (see para-
graph 13 and Box 2) in the EU ETS have 
caused serious financial damage for 
Member States and some individual 
participants and posed a significant 
risk to the reputation of the EU ETS 
and the European Commission. This 
is also reflected in the reservation 
repeated by DG Climate Action in its 
2012 and 2013 Annual Activity Re -
ports produced since the centralisa-
tion of the Registry in 2012 (also see 
paragraph 41). Even if the Commission 
operates the EU Registry at central 
level, it has no legal basis to supervise 
and monitor transactions. There is no 
EU-level monitoring for potentially 
suspicious transactions in the Union 
Registry (see also paragraph 23). This 
situation could undermine the integ-
rity of the EU ETS.

 — internal procedures for account 

openings to verify that all required 
elements of the applications from 
prospective account holders had 
been collected were in many cases 
not duly documented or subject to 
a four-eye-principle (e.g. Germany, 
Italy, Poland); and

 — formal relations of Competent 

Authorities and national adminis-
trators with national financial intel-
ligence units or law enforcement 
bodies were still under develop-
ment and not operational at the 
time of the audit (notably Italy and 
Poland).

36 
Account opening procedures drive the 
access to the system by assessing the 
integrity of market participants. Coun-
tries which are less stringent in their 
checks for account openings may be 
targeted by individuals with criminal 
intentions. However, as regards these 
procedures, the registry regulation 
does not provide the Commission (in 
its role as central administrator) with 
the authority to enforce a coordinated 
implementation of the Member State 
systems.

29

60  According to the Commission, 
approximately 10 Member 
States at the time of the audit.

61  The Court’s findings are 
supported by an internal 
Commission report. For 
further information, see DG 
Climate Action Annual Activity 
Report 2013, Chapter 2.3 
Assessments of audit results 
and follow-up of audit 
recommendations. 

62  DG Climate Action Annual 
Activity Report (AAR) 2013, 
Executive summary: ‘The 
Reservation on reputational 
grounds related to remaining 
significant security weakness 
identified in the Union 
Registry for the Emissions 
Trading System (EU ETS) issued 
in the AAR 2010, 2011 and 2012 
is repeated in the AAR 2013. 
No reasonable assurance can 
be provided that the current 
security measures could 
successfully prevent a future 
attack. This security assurance 
is conditional to lifting the 
reservation’.

Observations

38 
Member States’ registry administrators 
have to inform the national authorities 
in charge of anti-money laundering 
(Financial Intelligence Units) about 
suspicions of money laundering or 
criminal activity. The Court considers 
that in order to do this effectively, ap-
propriate procedures should be devel-
oped to monitor potentially suspicious 
transactions. Since the centralisation 
of the Union Registry at the level of the 
Commission in 2012, Member States 
no longer have direct access to their 
national registry databases. Member 
States have difficulties in analysing 
cross-border transaction data. Some 
Member States60 cooperate on an ad 
hoc basis and develop common tools 
outside the Registry system. Although 
the Commission manages the central-
ised database, it cannot fully exploit 
the data it has at its disposal because 
of data protection and confidentiality 
issues. The Court considers that in this 
situation, in which Member States and 
the Commission face technical limita-
tions and data protection restrictions, 
the risks of abuse that have already 
materialised cannot be fully addressed.

Internal coordination issues 
and resource constraints 
hampered the management 
and development of the Union 
Registry

39 
As referred to in paragraph 30, the ef-
fective implementation of the Registry 
requires a careful assessment of objec-
tives and priorities and an adequate 
allocation of resources. In addition, 
adequate arrangements should be 
in place for the segregation of duties 
between IT and business duties within 
the responsible Commission service.

40 
During phase II of the EU ETS, the 
Court noted that the Commission 
has been actively involved in many 
important activities (see paragraph 16) 
aimed at increasing the maturity and 
credibility of the EU ETS.

41 
However, the Court considers that the 
organisational structure and avail-
able resources in the Commission 
services did not sufficiently facilitate 
the management and development of 
the Registry. The Court found that IT 
and business responsibilities were not 
adequately defined and segregated 
in the services of DG Climate Action 
responsible for the implementation of 
EU ETS. The descriptions of the func-
tions in DG Climate Action’s Registry 
team were generic and show overlaps. 
The Commission’s Internal Audit Ser-
vice already issued audit recommenda-
tions in this domain61. Although an ac-
tion plan for these recommendations 
was being implemented at the time of 
the audit, further progress is required, 
to increase the effectiveness of the 
Registry management and develop-
ment. In this context the Court also 
draws attention to the reservations 
raised by DG Climate Action in its An-
nual Activity Reports for 2012 and 2013 
regarding security threats to the Union 
Registry62.

30

63  On 18 July 2007, the 

Commission adopted 
Decision 2007/589/EC 
establishing guidelines for the 
monitoring and reporting of 
greenhouse gas emissions 
pursuant to the EU ETS 
directive, which applied and 
were updated during phase II 
(2008–12) (OJ L 229, 31.8.2007, 
p. 1).

64  Commission Regulation (EU) 
No 600/2012 of 21 June 2012 
on the verification of 
greenhouse gas emission 
reports and tonne-kilometre 
reports and the accreditation 
of verifiers pursuant to 
Directive 2003/87/EC of the 
European Parliament and of 
the Council (OJ L 181, 
12.7.2012, p. 1).

65  Article 16 of the 

Directive 2003/87/EC.

44 
The directive defined the European 
Commission’s role which includes the 
assessment of NAPs, giving guidance 
to the Member States, coordinating 
an exchange of information between 
Competent Authorities and moni-
toring, to a certain extent, Member 
States’ implementation.

45 
In order to enforce the correct sur-
rendering of allowances, appropriate 
sanction regimes should be in place 
which are effective, proportionate and 
dissuasive. The directive provided for 
a ‘100 euro’ penalty per ton of CO2e 
in cases where an operator did not 
surrender sufficient allowances to 
cover its emissions during the year65. 
Member States were also required to 
establish national penalty provisions 
for other types of infringements of the 
EU ETS rules.

Observations

The implementation of 
the EU ETS

42 
The implementation of the EU ETS 
started in 2005, but the first actual 
commitment period under the Kyoto 
Protocol ran from 2008 to 2012 (EU 
ETS phase II). The implementation of 
the EU ETS by Member States should 
involve the allocation of allowances 
to installations, the implementation 
of the NAPs and relevant rules by the 
Member States, emissions monitoring, 
reporting and verification procedures, 
including the accreditation or recogni-
tion of verifiers where applicable.

43 
The EU ETS annual compliance cycle in 
the Member States during phase II is 
described in Box 4. In this framework, 
the approval of monitoring plans is 
a key control as the correctness of 
the data and parameters included in 
these plans is of significant impor-
tance for reliable emissions report-
ing. The EU ETS directive and the 
Monitoring and Reporting Guidelines 
(MRG) issued by the Commission for 
phase II63 described the content of 
emission permits, monitoring plans, 
emissions reports, and to a certain 
extent, verification reports, as well as 
the deadlines by which they should be 
provided. They did not define which 
controls should be applied to them 
by the Competent Authorities. For 
phase III, the control framework was 
revised, and additional responsibilities 
for verification, and for accreditation 
of verifiers, were introduced64.

Observations

31

Global overview of the EU ETS Phase II compliance cycle

4
x
o
B

Competent Authority (CA)

Issue and review permits

Operator

Enforcement,
sanctions

Approve and check
Monitoring Plan

Implement Monitoring plan
(year round)

Annual Emissions Report

Submission for checking
and surrender allowances

Veriﬁcation Report

On-the-spot

Veriﬁer

Competent Authority: Member States assign one or more (i.e. regional) Competent Authorities responsible 
for the implementation of the EU ETS directive.

Permit and monitoring plan: in conformity with the ETS directive and the monitoring and reporting guide-
lines issued by the Commission, the Competent Authority adopts GHG emissions permits for the operators’ 
installations which include a monitoring plan describing the technical details of the installation and how emis-
sions will be monitored (i.e. by applying calculations and/or measurements) and reported.

Annual emissions report and verification report: based on the monitoring performed during the year, 
operators prepare an annual emissions report which is verified by an independent verifier contracted by 
them. The verifier checks the annual emissions report and issues a verification report inclusive of a verification 
opinion. These documents are sent to the Competent Authority before 31 March of the following year. The 
verifier also establishes a more detailed internal verification report which may be sent to the operator and/or 
the Competent Authority.

Surrendering of allowances: based on the figures in the verified annual emissions reports, the correct num-
ber of allowances is surrendered from the operator’s account in the Registry before 30 April of the following 
year.

Source: ECA’s analysis based on legislative framework and guidance on monitoring and reporting.

 
Observations

32

Member States’ systems for 
the recording and reporting 
of emissions during phase II 
of the EU ETS were not 
sufficiently developed

 ο

 ο

inspections by competent authori-
ties of installations;

reporting on the implementation 
of the EU ETS.

46 
The Member State systems for re-
cording and reporting emissions 
comprised:

 ο

 ο

 ο

procedures to ensure that emis-
sions of installations were correctly 
monitored;

procedures to ensure that emission 
reports of installations were cor-
rectly verified;

procedures to ensure the quality of 
work performed by verifiers;

47 
As the EU ETS was established by 
means of a directive under the Envi-
ronment heading of the Treaty, this 
policy area remains primarily the 
competence of the Member States. 
Consequently, they can implement 
the scheme in different ways, which is 
illustrated in Box 5.

5
x
o
B

Diversity of implementation models in the Member States

In Greece, the EU ETS is implemented centrally. The Competent Authority for the EU ETS is the Emissions Trad-
ing office of the Directorate-General of Environment, within the Ministry of Environment, Energy and Climate 
Change. It is responsible for most elements of the annual compliance cycle and issues the emissions permits, 
approves the monitoring plans, collects the verified annual emissions reports and communicates to the 
national registry administrator the verified emissions figures. It is also responsible for setting penalties and 
sanctions.

Italy also applies a centralised approach. A Committee is responsible for the implementation of the EU ETS, 
supported by a Technical Secretariat at the Environment Ministry in Rome. During phase II, the Committee 
was responsible for approving EU ETS permits, monitoring plans, for the reporting cycle, and for recognising 
verifiers.

Spain operates a largely decentralised implementation of EU ETS, in which the relevant authorities of the 
autonomous communities approve permits and monitoring plans, and also monitor the reporting cycle. The 
central Competent Authority under the Environment Ministry is responsible for the overall coordination of 
the implementation of the EU ETS in Spain and facilitates harmonisation by issuing guidelines and organising 
a dedicated coordination committee.

In Germany, in France and in Poland regional and/or local authorities were usually involved in issuing emis-
sions permits and approving and checking monitoring plans, whereas the national Competent Authority 
generally played a leading role in the emissions reporting chain and coordinating the overall implementation 
of the EU ETS.

 
Observations

33

49 
The Court found that procedures to 
approve monitoring plans were weak 
in most of the Member States audited, 
as illustrated in Box 6.

There were weaknesses and 
delays in procedures for 
approving monitoring plans

48 
The approval of installations’ moni-
toring plans is of key importance for 
issuing emission permits to installa-
tions, and to enable the future reliable 
reporting of emissions.

6
x
o
B

Weaknesses in procedures to approve monitoring plans

In France, there is no harmonised methodology at national level to analyse, control and approve the moni-
toring plans. Even within the same region approaches can vary depending on the controller (environmental 
inspector). In Poland, the audit found that the checks performed by the local authorities on the monitoring 
plans are limited to the desk-review of basic elements of the plans. No other more detailed checks are carried 
out on the installations to verify the reliability of the submitted data and ensure that the monitoring plans 
precisely reflect the situation of the installation.

In Germany, the Court found that during phase II of the EU ETS, there were differences between the Bun-
desländer in the way the rules for defining an installation were applied. In practice a certain installation site 
in one Bundesland could receive one single permit for the whole site including all of its facilities, whereas 
in other Bundesländer the site could be split up in several installations with separate permits. The size of an 
installation, defined in the permit, may have had an impact on whether the installation passed the threshold 
for participation in the EU ETS or not. Furthermore, during the first half of phase II, Bundesländer took different 
approaches to the approval of monitoring plans (or ‘concepts’ as they were called in Germany), with some of 
them approving the entire monitoring plan from the beginning of phase II and others only approving devia-
tions from the monitoring guidelines. A Court ruling66 later ordered harmonisation of approval practices ac-
knowledging that the approval of a comprehensive monitoring plan by the relevant authorities for the whole 
of phase II was important because it reduced the risk of erroneous emissions reporting.

In Spain, Italy and Greece, there were delays of up to 2 years in the creation and approval of monitoring plans 
for phase II, following the adoption of the phase II MRG in July 2007. According to the Competent Authorities, 
timeframes were too short to transpose the new rules into national guidelines or regulations and incorpo-
rate the new monitoring plan in the emissions permit before the start of the reporting period. In some cases, 
monitoring plans were not formally approved until 2010.

66  Bundesverwaltungsgericht 7 C 10.09 of 18.2.2010.

 
34

67  Decision 2007/589/EC.

68  The Court also found that 

none of the selected Member 
States used the possibility — 
provided by the guidelines — 
for Competent Authorities to 
evaluate the work of the 
verifiers by requesting and 
reviewing their internal 
verification reports. This is 
further explained in 
paragraphs 53 to 57.

Observations

The reporting of findings by 
verifiers lacked clarity and 
follow-up by Competent 
Authorities was limited

50 
The EU ETS directive gives Member 
States the general responsibility to 
ensure that emissions are monitored 
at installation level and verified in 
accordance with the rules set out in 
the EU ETS directive and the guide-
lines provided by the Commission67. 
The main steps related to monitoring, 
reporting and verification in the an-
nual compliance cycle of the EU ETS 
are shown in Box 4 above and were 
based, in phase II, on these guidelines 
and principles. In this context, checks 
of verified annual emissions reports 
received from operators are a central 
element of the control framework at 
the level of the Competent Authority. 
Based on its examination of the docu-
mentation related to 150 installations 
across seven selected Member States, 
the Court identified many differences 
in the approaches to the organisation 
of such checks and in their level of 
effectiveness.

51 
During phase II of the EU ETS, there 
was no standard template defining the 
mandatory content of a verification 
report. In the absence of such a tem-
plate or more specific guidance on the 
nature and content of such a report, 
many different formats and ap-
proaches were developed, which did 
not always enable a clear overview of 
verification findings and conclusions.

52 
The Court found that the evidence 
available at the Competent Authority 
on the correct performance of the veri-
fication was sometimes insufficient or 
unclear68. For example, there were lim-
ited descriptions of certain verification 
findings, and a lack of follow-up on 
previous year’s findings or results from 
remedial actions. In most of the se-
lected Member States, evidence could 
not be obtained of actions by the 
Competent Authorities prompted by 
repeated reporting of findings. Such 
repeated findings were for example 
related to not applying the required 
detail in the emissions calculations, 
not calibrating measurement or weigh-
ing devices at the required intervals or 
not using a laboratory with the correct 
accreditation. The Court found cases 
in most Member States where verifiers’ 
findings were repeated from year to 
year, without adequate information on 
the reasons, background or follow-up. 
However, the Court also identified 
many cases in most Member States 
where verifiers reported no findings at 
all, despite the complexity and size of 
individual installations or the relatively 
low level of experience with emissions 
monitoring and reporting under the 
EU ETS. Box 7 provides further detail 
on these findings.

Observations

35

7 Examples of lack of consistency in the reporting of verification findings
x
o
B

Germany applies a highly automated and standardised electronic system for submitting verified annual emis-
sions reports. This provided a clear view of the results of the verification work and the actual opinion of the 
verifier on the emissions figures, but did not provide detailed information on the methodology used and work 
performed by the verifiers. Moreover, the forms did not have specific text fields in the verifiers’ section requir-
ing the verifiers to list recommendations for improvements or to provide specific follow-up on findings and 
comments from previous year.

In France, the Competent Authority received a declaration of reasonable assurance on the annual emissions 
report from verifiers. In these declarations, the verifiers note their comments and issues of non-conformity. 
However, the audit found that some verifiers never reported any issues in their declarations even if the 
internal verification reports contained findings, and that the content of the declaration of assurance varied 
between verifiers.

The Italian national legislation foresees the use of specific reporting templates by verifiers. A high level of 
standardisation is therefore achieved in the reporting chain. However, the Court noted that in the majority 
of cases verifiers reported no findings. This contrasted with the example of the UK, where in the majority of 
cases verifiers reported findings.

In one case in Italy, a verifier reported many findings for the first 3 years. The documentation did not show 
how and whether all issues were resolved or whether the Competent Authority had intervened. However, for 
reporting year 2011 the operator contracted a new verifier which did not report any findings for that year.

In Poland, the Competent Authority uses an electronic database to cross-check reported emissions, but does 
not follow up findings, if any, reported in verifiers’ opinion statements.

 
36

69  The European cooperation for 
Accreditation or EA is an 
association of national 
accreditation bodies in Europe 
that are officially recognised 
by their national governments 
to assess and verify — against 
international standards 
— organisations that carry out 
evaluation services such as 
certification, verification, 
inspection, testing and 
calibration (also known as 
conformity assessment 
services) (http://www.
european-accreditation.org/
about-us).

70  Commission 

Decision 2007/589/EC, 
section 10.4.2(d), see also 
Box 4.

71  See Box 4 for more 

background information.

Observations

The quality of the work 
performed by verifiers was not 
sufficiently controlled

53 
The EU ETS directive and the associ-
ated guidelines for monitoring and 
reporting in phase II did not introduce 
clear-cut requirements for accredita-
tion of independent verifiers or for 
quality control on the work performed 
by verifiers. The directive specified the 
minimum competency requirements 
for verifiers, and the MRG included 
definitions of ‘verifier’ and ‘accredita-
tion’ and requested Member States to 
consider respective guidance issued by 
the European Cooperation for Accredi-
tation (EA)69. The MRG also provided 
the possibility for Competent Authori-
ties and accreditation bodies to evalu-
ate the verifiers’ internal verification 
report70. Member States had significant 
discretion in these areas, which was 
not conducive to the effective imple-
mentation of the guidelines. Opera-
tors did not therefore face the same 
requirements throughout the EU, and 
assurance obtained from verification 
activities was reduced.

54 
All Member States selected for the 
audit operated some form of accredi-
tation or recognition of verifiers for the 
purpose of creating pools of approved 
verifiers that could be contracted by 
the operators. In Italy, the recogni-
tion of verifiers was performed by 
the national Competent Authority. It 
established a list of 23 recognised veri-
fiers for the EU ETS in Italy, but did not 
perform periodic quality assessments 
or surveillance on their work. This 
model is discontinued in phase III. In 
other Member States audited, the ac-
creditation or recognition was issued 
by an existing accreditation or recogni-
tion body.

55 
The Court found that Competent Au-
thorities in the selected Member States 
relied heavily on the work performed 
by verifiers to obtain assurance regard-
ing the annual emissions reports. 
However, none of the Member States’ 
Competent Authorities performed 
specific controls of the quality and 
substance of the verification reports 
and associated documents, as they 
considered this to be the responsibility 
of the accreditation bodies. Similarly, 
none of the selected Member States 
used the possibility  provided by the 
guidelines to request verifiers’ internal 
verification reports71 and use these to 
evaluate their work.

56 
Moreover, in three (Germany, Poland, 
United Kingdom) out of five Member 
States visited, where verifiers were 
accredited by an independent body, 
there was a lack of coordination or 
regular exchanges of information 
between the Competent Authorities 
and the accreditation bodies concern-
ing the completeness and quality of 
verification reports and the assurance 
that could be derived from those. 
The Court notes that only Competent 
Authorities had direct and full access 
to verified annual emissions reports 
submitted to them. The Court consid-
ers that the findings presented above 
were in part due to the lack of provi-
sions on accreditation and (quality) 
control activities in the EU ETS frame-
work and the absence of an obligation 
for Competent Authorities to engage 
in reviews of the work done by verifi-
ers during phase II of the EU ETS.

37

72 

Integrated Pollution 
Prevention and Control (until 
2013), based on 
Directive 2008/1/EC of the 
European Parliament and of 
the Council of 15 January 2008 
concerning integrated 
pollution prevention and 
control (OJ L 24, 29.1.2008, 
p. 8), replaced by 
Directive 2010/75/EU of the 
European Parliament and of 
the Council of 
24 November 2010 on 
industrial emissions (OJ L 334, 
17.12.2010, p. 17).

73 

In the UK, the percentage 
inspection rate of installations 
reduced from approximately 
5 % at the start of phase II in 
2008, to approximately 1 % at 
the end of phase II in 2012.

60 
No centralised statistics of EU ETS 
inspections could be obtained in any 
of the selected Member States, except 
in the UK, where the number of visits 
gradually decreased73 towards the end 
of phase II.

There were shortcomings 
in the reporting on the 
implementation of the EU ETS 
by the Member States

61 
The Member States have an annual 
reporting obligation under Article 21 
of the EU ETS directive. Their annual 
reports on important aspects of the 
application of the directive should be 
submitted to the Commission. In addi-
tion to this mandatory annual report-
ing, the Court considers that Member 
States should inform the public at 
large of the national implementation 
of the EU ETS and its results.

62 
The Court found that Italy did not 
produce and submit to the Commis-
sion the required Article 21 reports for 
2010, 2011 and 2012 and that France 
only produced the report for 2012 after 
the Court requested it.

Observations

57 
In addition there was no rotation poli-
cy in force in any of the Member States 
to strengthen the independence and 
impartiality of verifiers. In France and 
Poland, the Court identified cases in 
which verifiers were not only involved 
in verification of the emissions reports, 
but also in developing the monitoring 
plan for the same installation or other 
related activities (such as inspections 
of installations for the Competent Au-
thority) which could lead to a conflict 
of interest.

On-the-spot inspections of 
installations were very limited

58 
The EU ETS directive and the MRG 
do not define which controls should 
be performed on the installations 
by the Competent Authorities. In 
particular, there was no requirement 
for on-the-spot inspections of instal-
lations by Competent Authorities in 
order to assess the implementation of 
the monitoring plan or the reliability of 
verified emission reports.

59 
With the exception of the United King-
dom, the Court found in the Member 
States visited that Competent Authori-
ties did not perform on-the-spot visits 
in the context of the EU ETS. Other 
types of visits to installations were of-
ten performed by government bodies, 
for example in the context of IPPC72 
permitting or waste and environmen-
tal legislation, which were considered 
to be of higher priority (e.g. Germany, 
France and Poland) but did not specifi-
cally address EU ETS issues. In Germa-
ny and in Spain, the Court identified 
some cases of regional Competent 
Authorities accompanying verifiers 
on-the-spot on an ad hoc basis.

38

74  Articles 9, 14, 19, 20, 21 and 30 

of the EU ETS directive.

75  COM(2005) 703 final of 
22 December 2005.

76  COM(2006) 725 final of 

29.11.2006.

77  Prepared by the DG Transport 
and Energy service of the 
Commission, based on the 
PRIMES-model.

78  European Energy and 

Transport Trends to 2030 — 
update 2005, prepared by the 
Institute of Communication 
and Computer Systems of 
National Technical University 
of Athens (ICCS-NTUA), Greece 
for the Commission. 
PRIMES-model is a general 
purpose model; it is conceived 
for projections to the future, 
scenario building and policy 
impact analysis. The model 
considers energy demand and 
supply technologies and 
pollution abatement 
technologies. The system 
reflects considerations about 
market economics, industry 
structure, energy/
environmental policies and 
regulation, which are 
conceived so as to influence 
market behaviour of energy 
system agents ( https://
ec.europa.eu/energy/sites/
ener/files/documents/
trends_to_2030_
update_2005.pdf).

Observations

63 
As regards other types of reporting to 
inform the public of the national im-
plementation of the EU ETS, Germany 
and Spain produced extensive annual 
reports on the EU ETS, including trend 
and sector analyses of emissions and 
compliance figures. However, Greece, 
France and Italy provided little spe-
cific public reporting on the national 
implementation and results of the EU 
ETS. The United Kingdom produced an 
annual national report on the EU ETS 
only until 2010.

There were gaps in the 
Commission’s guidance 
and monitoring of Member 
States’ implementation 
during phase II of the EU ETS

64 
For phase II, the Commission’s respon-
sibilities74 included an assessment of 
the Member State allocation rules laid 
down in the NAPs, giving guidance to 
the Member States and monitoring the 
implementation of the policy. These 
tasks for the Commission are mainly 
intended to ensure that the EU ETS 
correctly functions as a Europe-wide 
system, distortion of competition is 
avoided, and other issues of non-har-
monisation do not negatively impact 
the effective functioning of the EU 
ETS as a market-based tool to achieve 
emission reductions in the most 
cost-effective way. Stakeholder confi-
dence in the proper functioning of the 
EU ETS would be supported by regu-
larly disclosing detailed and relevant 
information on the overall implemen-
tation and functioning of the system, 
especially when it is implemented in 
a decentralised way.

The Commission’s assessment 
of phase II NAPs lacked 
transparency

65 
For phases I and II of the EU ETS, the 
Member States developed National Al-
location Plans stating the total quan-
tity of allowances they intended to 
allocate to operators. The Commission 
developed specific guidance for this75. 
The guidance included descriptions of 
the main criteria that drive emissions 
trends, such as GDP growth and car-
bon intensity, and ways to assess Mem-
ber States’ reduction potential. Based 
on the reduction potential and the 
emissions of an appropriate base year, 
an indicative cap could be calculated.

66 
After it had approved the first batch 
of ten phase II NAPs, the Commission 
issued a communication76 in 2006 in 
which it explained that it used the 
methodology presented in the Eu-
ropean Energy and Transport Trends 
to 2030 — update 200577 as the basis 
for carbon intensity and economic 
growth figures needed for calculat-
ing the emission caps. The results 
of this report were derived with the 
PRIMES-model78, developed by the 
University of Athens. However, this 
assessment method was not com-
municated in advance (i.e. in the NAP 
guidelines) to the Member States.

Observations

39

The Commission did not publish 
the annual implementation 
reports required under the EU 
ETS directive

70 
Article 21 of the EU ETS directive 
requires Member States to submit an 
annual report to the Commission on 
the application of the directive (also 
see paragraphs 61 and 62). Based on 
the reports submitted each year by 
the Member States, the Commission 
should publish a consolidated annual 
report on the implementation of the 
EU ETS directive within 3 months of 
receiving the reports from the Member 
States. In order to be able to publish 
such a report, the Commission should 
monitor the timely submission of the 
Member State reports that serve as 
input to the consolidated report, and 
it should develop methods to con-
solidate and exploit the information 
received in those reports.

71 
The Court noted that the Commission 
did not publish this annual implemen-
tation report during phase II of the EU 
ETS. This means that during phase II, 
there has been no comprehensive 
information made available by the 
Commission on the state of implemen-
tation of the EU ETS across all Member 
States.

67 
The Court found that the Commis-
sion had not been transparent in the 
decision to use the PRIMES-model as 
a basis for calculating the phase II caps 
and 2005 as the base year for these 
calculations, as Member States had set 
out to develop their NAPs based on 
the available NAP guidance without 
any mention of the PRIMES-model. 
This led to significant inefficiencies for 
the Member States as they had to re-
draft their NAPs using new criteria, and 
a lack of transparency in the prepara-
tion and the assessment of the phase II 
NAPs.

68 
In addition, in order to examine 
whether the phase II NAPs had been 
assessed in a consistent, fair, and 
equally detailed manner, the Court 
requested the Commission to provide 
its internal documents and working 
papers related to the assessment of 
the phase II NAPs.

69 
As the retention period for these docu-
ments had expired, the Commission 
services could only provide the tem-
plate for the checklists it used, and the 
completed checklists for two Member 
States. They could not provide com-
pleted checklists for the other Member 
States. In the absence of available 
documentation the Court was unable 
to conclude that the work done by the 
Commission to assess the NAPs was 
equally detailed and complete for all 
selected Member States.

40

79  Recital 8 of Directive 2009/29/
EC of the European Parliament 
and of the Council of 
23 April 2009 amending 
Directive 2003/87/EC so as to 
improve and extend the 
greenhouse gas emission 
allowances trading scheme of 
the Community (OJ L 140, 
5.6.2009, p. 63).

80  E.g. the monitoring and 

reporting guidelines (MRG) for 
phases I and II.

Observations

72 
Furthermore, the Court found that 
the Commission services did not 
adequately monitor the timely and 
complete submission of the annual 
implementation reports from Member 
States, or keep a consolidated record 
of the received information. The Com-
mission did not systematically exploit 
this source of information on the 
implementation of the EU ETS.

The Commission’s monitoring 
of the Member States’ 
implementation of the EU ETS 
was limited

73 
A harmonised implementation by 
Member States of the emissions trad-
ing system is imperative in order to 
better exploit the benefits of emis-
sions trading and to avoid distortions 
in the internal market79. The EU ETS 
is largely financed and implemented 
by the Member States acting under 
the discretion provided by the direc-
tive, and the Court recognises the 
Commission’s limited tools for enforc-
ing harmonisation. Nonetheless, for 
phase II of the EU ETS, the directive 
included a number of specific guid-
ance, monitoring and implementation 
responsibilities for the Commission. 
In order to know in which areas more 
harmonisation is required, the Com-
mission should adequately monitor 
implementation by the Member States.

74 
The Court found that in areas where 
the Commission actively sought 
harmonisation, for example through 
adopting guidelines80, results have 
been obtained to a certain extent. 
However, whenever the Commission 
did not adopt detailed guidelines, 
key aspects of implementation were 
not harmonised; for example, account 
opening (see paragraphs 32 to 36), 
transaction analysis (see para-
graphs 37 to 38), verification and ac-
creditation (see paragraphs 50 to 57), 
control frameworks and sanctioning 
regimes (see paragraphs 80 to 85).

75 
A consequence of the variety of imple-
mentation approaches followed by the 
Member States is that operators and 
other market participants in different 
Member States may be facing different 
requirements and rules (for example, 
concerning the legal status of allow-
ances; the application of sanctions; 
and the monitoring and verification 
regime), apart from those specifically 
defined in EU law or guidelines.

41

81  ERUs are Emission Reduction 
Units generated from Joint 
Implementation (JI) projects 
to reduce emissions, CERs are 
Certified Emission Reductions 
derived from Clean 
Development Mechanism 
(CDM) projects.

Observations

76 
One way to obtain insight on the level 
of harmonisation between Member 
States and to enforce the implemen-
tation of harmonised practices is the 
performance of on-the-spot inspec-
tions. The Court recognises that the 
Commission has no clear mandate to 
perform inspections at Member State 
level, but found that there is also no 
evidence that the Commission duly 
monitored and assessed the risks (for 
example, distortion of competition) or 
potential impact of diverging imple-
mentation practices on the effective 
functioning and integrity of the EU 
ETS. Although issues of non-harmoni-
sation could be considered a conse-
quence of implementing the EU ETS 
under a directive, the Court considers 
that the Commission’s monitoring 
of the level of harmonisation of the 
implementation in the Member States 
was limited during phase II of the EU 
ETS.

The exchange of information 
organised by the Commission 
between the Competent 
Authorities of the Member 
States on the implementation 
of the EU ETS was hindered by 
low participation

77 
The EU ETS directive provides that 
the Commission shall organise an 
exchange of information between the 
Competent Authorities of the Mem-
ber States concerning developments 
relating to issues of allocation, the use 
of ERUs81 and CERs in the Community 
scheme, the operation of registries, 
monitoring, reporting, verification and 
compliance with this directive.

78 
In 2009, a Compliance Forum (CF) was 
established in order to create a plat-
form where Member State Competent 
Authorities could exchange informa-
tion on their implementation of the 
EU ETS. The objectives of the CF cover 
the proper functioning of processes in 
the EU ETS compliance chain; assisting 
Member States in the implementation 
of EU ETS compliance requirements 
and processes; and promoting close 
and effective cooperation between the 
Competent Authorities in the Member 
States. The CF was one of the main 
mechanisms by which the Commission 
sought to ensure effective exchange of 
EU ETS information, which is essential 
in order to share best practices and im-
prove the management of the EU ETS.

79 
During phase II of the EU ETS, the CF 
operated four taskforces. Information 
discussed and developed in the CF was 
shared through a web-based facility 
available to all Competent Authori-
ties. Based on the minutes of these 
taskforces and interviews with Com-
petent Authorities, the Court found 
that despite the importance of the role 
of the Compliance Forum attendance 
by the Member States was low (with 
an average of less than six Compe-
tent Authorities per session) and only 
a very limited number of Competent 
Authorities (mostly the same) regularly 
participated in the taskforce meet-
ings. This reduced the possibilities to 
share information among Competent 
Authorities, an essential element to 
ensure that the objectives of the EU 
ETS are achieved.

Observations

42

Certain weaknesses were 
found in the national 
implementation of the EU 
ETS sanctioning regime and 
practices for surrendering 
international project credits

The wide variety of national 
penalty provisions between 
Member States potentially does 
not ensure a level playing field 
for operators

80 
In accordance with the EU ETS direc-
tive, Member States establish and 
implement national rules on penalties 
applicable to infringements of the EU 
ETS legislation. The EU ETS directive 
also provides for a specific EU-wide 
penalty for excess emissions, without 
prejudice to the additional penalties 
which Member States may define. This 
penalty amounts to 100 euro for each 
tonne of CO2e for which the opera-
tor has not surrendered allowances. 
As this penalty greatly exceeds the 
market price for allowances, it acts 
as an effective encouragement for 
installations to comply with the cap 
and surrender sufficient allowances. 
The Court notes that as regards the 
EU-wide obligation for installations 
to surrender the required number of 
allowances against verified emissions 
at the surrender deadline in April of 
each year, the EU ETS has a very high 
compliance rate (99 % according to 
publicly available information in the 
EUTL). The Commission cannot enforce 
penalties; this is the prerogative of the 
Member State.

81 
The Court found that the Member 
States had defined, in their respective 
national legislation, different types of 
infringements that could be identi-
fied and subsequently sanctioned by 
means of penalties or other measures 
(e.g. revoking or temporarily sus-
pending a permit), in addition to the 
‘100 euro’ penalty provided for by the 
directive. The Table shows a non-ex-
haustive list of national infringements 
and the corresponding penalties in 
some of the Member States audited.

82 
The types of infringements that can 
give rise to a penalty, and the cor-
responding penalty amounts or 
sanctions vary widely between the 
Member States. The Court considers 
that these non-harmonised practices 
potentially affect the level playing 
field for participants.

Observations

43

e
l
b
a
T

Non-exhaustive list of national infringements and the corresponding penalties in 
some of the Member States audited

Member State

Infringements
(non-exhaustive)

Fines € (£ for UK)
Min–Max

Imprisonment (months)
Min–Max

Germany

Omission to notify changes to the installation

5–50 000

N.A.

Operation without a permit

Other (5)

Operation without a permit

Non-compliance with the obligation to notify any modification 
to the character, the functioning or the size of the installation 
that would have a signficiant effect on the emissions or that 
would require changes to the monitoring

Spain

Not presenting an annual verified emissions report 

To intentionally withhold or change information in the applica-
tion for allowances

To deny access to the installation for the verifier

Non-compliance with the obligation to notify changes to the 
identity or the place of residence of the operator

Operation without a permit

France

Infringement of monitoring and reporting obligations

Omission to notify changes to the installation

Italy (2010)

Operation without a permit

Not declaring historical data

No declaration of closure

Operation without a permit

United Kingdom

Omission to notify changes to the installation

0

Infringements of monitoring and reporting obligations

Various other offences including use of false or misleading 
information

Source: Information obtained from relevant Member State Article 21 reports for phase II.

50 001–2 000 000

N.A.

10 001–50 000

0–150 000

0–75 000

25 000–250 000

2 500–25 000

1 000–100 000

On summary 
conviction 
5 000 
and on 
indictment

N.A.

0–24

0–6

N.A.

0–24

44

82  France (five cases), Greece 

(three cases) and the United 
Kingdom (one case). It was 
financially interesting for 
operators to surrender Kyoto 
Protocol project credits 
instead of European Union 
Allowances (EUAs), especially 
towards the end of phase II, 
when they were much 
cheaper than EUAs. Use of 
these project credits for 
compliance with the EU ETS 
was restricted in phase III. 
Consequently their use by 
operators increased 
exponentially towards the end 
of phase II — see Figure of the 
Annex.

Observations

There was a lack of 
consolidated information on 
the enforcement of penalties by 
the Member States

83 
In most of the Member States audited, 
with the exception of Germany and 
the United Kingdom, there was a lack 
of up-to-date information on the state 
of implementation or outcome of 
EU-wide penalties and the additional 
national penalties. There was incom-
plete information on the number of 
penalty procedures that had been 
initiated during phase II and success-
fully implemented (i.e. where payment 
was confirmed). The Court noted that 
Member States were often confronted 
with limitations in their own legal and 
administrative environment for the 
successful implementation of EU ETS 
penalties. Competent Authorities were 
either not empowered to impose sanc-
tions themselves (e.g. Italy) or needed 
to await the outcome of lengthy 
Court procedures and appeals (e.g. in 
Germany). This may have discouraged 
Competent Authorities from pursuing 
new penalty procedures. Furthermore, 
the absence of comprehensive report-
ing on the implementation of penal-
ties does not reinforce the dissuasive-
ness of such a system.

84 
The Court further found that the Com-
mission, for the purpose of monitoring 
the implementation of the EU ETS, 
does not maintain an EU ETS specific 
overview of national penalties and 
does not gather statistics on the appli-
cation of penalties throughout the EU.

85 
Overall, the Court could not assess the 
implementation of penalty procedures 
by the Member States, due to a lack of 
consolidated information at Member 
State and at European level.

Specific issues concerning the 
surrendering of international 
project credits

86 
The percentage limits for the use or 
surrendering of international project 
credits from Joint Implementation 
(JI — ERU) and Clean Development 
Mechanism (CDM — CER) (see Part I 
of the Annex for further background 
information) varied between the Mem-
ber States, but were established in the 
respective National Allocation Plans 
for phase II. If individual operators 
are allowed by their national Compe-
tent Authority to exceed the limit for 
surrendering international credits for 
their installations, this potentially af-
fects the level playing field for opera-
tors. In 6 %82 of 150 cases examined 
by the Court, the national percentage 
limits for surrendering international 
project credits were exceeded by op-
erators. Box 8 provides more detail on 
some of these cases:

Observations

45

8
x
o
B

Excess surrendering of international credits

In phase II, the limit for surrendering international project credits was expressed as a percentage of the total 
allocation for an installation.

In France, the EUTL did not reflect an increased allocation of allowances following production increases 
for five installations out of 20 examined for the years 2008–10. With the increased allocation, the absolute 
amount of international credits that could be surrendered had also increased. The operator used this opportu-
nity by surrendering more international credits. However, since the Member State failed to notify the Commis-
sion of these production increases and subsequent allocations from the national entrants’ reserve, the Court’s 
calculations of surrendered international credits based on EUTL data exceeded 13,5 %, which was the limit in 
France.

In the United Kingdom, the Court found one case where the limit for surrendering international project cred-
its was exceeded. When an operator closed one of its installations (for which an allocation had already been 
assigned), the operator was granted permission from the authorities to retain all allocated allowances for 
the closed installation and transfer the allowances with the corresponding limit of project credits (i.e. 8 %) to 
another of its installations. The Court calculated that the installation that received the transferred allowances 
surrendered more than the allowed 8 % of its allocated allowances in project credits. The Court found that the 
operator had only partially maintained the capacity of the closed installation and transferred it to the remain-
ing installation. Since the operator received permission to surrender project credits for the total amount of 
allocated allowances, the limit was exceeded. The Court found that this practice potentially gave rise to differ-
ent treatments of operators within the same sector.

 
46

83  European Commission Climate 
Action, ‘The EU Emissions 
Trading System (EU ETS)’ 
factsheet, available at http://
ec.europa.eu/clima/
publications/docs/
factsheet_ets_en.pdf.

Conclusions and 
recommendations

90 
Although there have been significant 
improvements to the framework for 
protecting market integrity (para-
graphs 14 to 17), notably through the 
inclusion of most of the spot market 
for allowances under the MiFID and 
MAD regimes, a number of weak-
nesses remain to be addressed in order 
to make the framework sufficiently 
robust, and to encourage investor 
confidence, to leverage the EU ETS as 
a tool of environmental policy.

91 
The audit found that there are remain-
ing issues in regulation and oversight 
of the emission market related to com-
pliance traders, bilateral OTC spot trad-
ing and smaller market participants 
(paragraphs 18 to 21), despite the 
qualification of emission allowances 
as financial instruments. Although the 
Registry was centralised in 2012, there 
is no EU-level oversight of the emis-
sions market and procedures for co-
operation involving national financial 
regulators and the Commission are not 
sufficiently clear (paragraphs 22 to 24). 
There is therefore a risk that market 
distortions or anomalies with poten-
tially serious effects are not appropri-
ately managed.

87 
The EU ETS is the cornerstone of the 
EU’s climate policy and is often quoted 
as the reference model for emerg-
ing climate change policy and emis-
sions trading schemes elsewhere in 
the world. This innovative scheme 
introduced in 2005 and progressively 
improved is now in its third phase of 
implementation. At European level, the 
goal of the EU ETS, as a market-based 
mechanism, is not just reducing emis-
sions in line with the cap, but also 
establishing a pricing mechanism for 
carbon. A higher price creates a great-
er incentive to invest in low-carbon 
technologies83. For the EU ETS to work 
as intended, it is also necessary that 
the integrity of the system is ensured, 
and that the scheme is correctly imple-
mented. Previous incidents including 
alleged theft of allowances and VAT 
carousel fraud further demonstrate the 
need for vigilance.

88 
The audit therefore assessed whether 
the EU ETS was managed adequately, 
by examining whether the framework 
developed for protecting the integrity 
of the EU ETS is sufficiently robust to 
enable the EU ETS to function well, 
and whether the EU ETS was correctly 
implemented in phase II.

89 
Overall the Court concluded that the 
management of the EU ETS by the 
Commission and Member States was 
not adequate in all respects. It was 
hindered by certain issues related to 
the robustness of the framework for 
protecting its integrity, and by signifi-
cant weaknesses in the implementa-
tion of phase II of the EU ETS.

Conclusions and recommendations

47

Recommendation 1

Recommendation 2

Remaining issues in emission market 
regulation and oversight should be ad-
dressed by the Commission in order to 
further improve market integrity. The 
Commission should:

(a)  in the context of the relevant fu-

ture review of the MiFID and MAR 
legislation, analyse the potential 
risks related to regulatory exemp-
tions for compliance traders and 
smaller participants on the emis-
sions market to determine whether 
action is required to address them;

(b)  ensure that taking account of the 
evolving EU financial markets reg-
ulation (e.g. MiFID and MAR) over 
the emissions market, the emis-
sions market is subject to adequate 
EU-level supervision;

(c)  strengthen the regulatory coop-
eration mechanisms to ensure 
improved market oversight.

92 
The Court considers that more clar-
ity in the legal definition of emission 
allowances could be beneficial to 
the functioning of the EU ETS mar-
ket (paragraphs 1 to 27). In order to 
support the liquidity of the emissions 
market, confidence is needed, particu-
larly from investment traders who are 
not obliged to continue participating 
in this market. More clarity regarding 
the creation and protection of security 
interests in allowances also has the po-
tential to contribute to a better func-
tioning of the market (paragraph 28).

The legal status of allowances should 
be further clarified in order to contrib-
ute to stability and confidence.

In this context, the Commission should 
analyse the benefits of treating emis-
sion allowances as property rights 
across the EU and consider how to 
provide an express registration mecha-
nism for security interests.

93 
The Union registry is a key tool for pro-
cessing and disclosing fundamental EU 
ETS data, and for ensuring the integ-
rity of the EU ETS market. Due to the 
significant financial stakes and wide 
range of participants, it has a high risk 
profile (paragraphs 29 to 31). In order 
for the market to be secured at EU lev-
el, and in light of the previous security 
incidents affecting the market, there 
is a need for a harmonised approach 
to risk management procedures. 
The security of the registry has been 
significantly improved over phase II of 
the EU ETS (paragraph 32). However, 
the procedures in most of the Member 
States audited to control the opening 
of EU ETS accounts, monitor transac-
tions, and cooperate with regulatory 
authorities are not sufficiently robust 
(paragraphs 33 to 38). As the Commis-
sion also cannot adequately monitor 
transactions due to data protection 
considerations, this represents a signif-
icant supervisory gap. At the Commis-
sion, the development and operation 
of the Registry has been a complex 
project which was hindered by inter-
nal coordination issues and resource 
constraints (paragraphs 39 to 41).

Conclusions and recommendations

48

94 
The Court concludes that significant 
weaknesses affected the implementa-
tion of the EU ETS in phase II. Member 
States chose to implement the EU 
ETS directive in different ways (para-
graph 47). There were weaknesses in 
the Member States’ implementation 
of the control framework. Systems for 
monitoring, reporting and verifica-
tion of emissions were not sufficiently 
harmonised nor implemented ef-
fectively (paragraphs 48 to 60). In 
particular, Competent Authorities did 
not sufficiently check the work per-
formed by verifiers, and performed 
limited on-the-spot checks at instal-
lation level. Some Member States also 
did not provide all required reports 
on the operation of the EU ETS (para-
graphs 61 to 63).

Recommendation 3

Certain aspects of the systems for 
processing fundamental EU ETS in-
formation (the EU Union Registry and 
related procedures) should be further 
improved.

The Commission should:

(a)  consider how effective cross bor-

der transaction monitoring can be 
developed and coordinated at EU 
level to mitigate risks of abuse and 
fraudulent activities;

(b)  identify appropriate measures to 

enhance the control framework 
and promote best practices by 
Member States on the opening of 
accounts to further mitigate secu-
rity and integrity risks, and ensure 
that these are implemented across 
the EU;

(c)  provide an appropriate structure 
for the IT and business duties in 
the relevant Commission service 
and ensure the good functioning 
of the registry system.

Member States should:

(d)  implement the controls identified 
at recommendation 3 (b); and

(e)  improve cooperation between 

authorities responsible for the Un-
ion Registry, and other competent 
authorities, notably financial intel-
ligence units and law enforcement 
bodies.

Conclusions and recommendations

49

95 
The Court found gaps in the Com-
mission’s guidance and monitoring 
of Member States’ implementation 
during phase II of EU ETS. The Court 
found that the lack of transparency in 
the Commission’s decision to use the 
PRIMES-model and 2005 as the base 
year to calculate phase II emission caps 
led to inefficiencies for the Member 
States and a lack of transparency in the 
preparation and the assessment of the 
phase II NAPs (paragraphs 65 to 67). 
In the absence of specific internal 
Commission documents related to the 
assessment of the NAPs, the Court was 
unable to conclude that the work done 
by the Commission to assess the NAPs 
was equally detailed and complete 
for all selected Member States (see 
paragraphs 68 and 69).

Recommendation 4

The weaknesses identified by the 
Court’s audit of the implementation by 
Member States of the control frame-
work in phase II, should be addressed 
during the implementation of the 
revised framework for phase III.

The Commission should:

(a)  consider whether further amend-
ments to the monitoring and re-
porting framework are required to 
strengthen the monitoring, report-
ing and verification of emissions;

(b)  require Competent Authorities to 
improve enforcement practices 
in order to give assurance on the 
quality of the control framework.

The Member States should:

(c)  implement coherent, effective 

control frameworks, including in-
spections, for monitoring, report-
ing and verification activities;

(d)  ensure better coordination and 

exchange of information between 
the Competent Authorities and Ac-
creditation bodies, to improve the 
quality of the verification process;

(e)  provide on time to the Commission 
the annual reports foreseen by the 
directive; and

(f)  regularly publish reports on the 

implementation and results of EU 
ETS to encourage transparency for 
operators and market participants.

Conclusions and recommendations

50

The Member States should:

(c)  ensure that representatives of 

Competent Authorities regularly 
attend meetings and participate 
in the exchange of information, 
experiences and knowledge on 
implementation issues.

97 
As regards the EU-wide obligation for 
installations to surrender the required 
number of allowances each year, the 
EU ETS has a very high compliance 
rate. Nevertheless, the Court noted 
that Member States defined a wide 
variety of penalty provisions for other 
types of infringements, which poten-
tially reduces the level playing field for 
operators (paragraphs 81 and 82). The 
Court could not assess the effective-
ness of the sanction systems of the 
Member States due to a lack of con-
solidated information at Member State 
and European level. The effective im-
plementation of penalties was some-
times hampered by limitations in the 
legal and administrative systems of the 
Member States (paragraphs 83 to 85). 
Furthermore, there were divergent 
practices concerning specific rules 
for the surrendering of international 
project credits (paragraph 86). These 
issues potentially affect the level play-
ing field for operators.

96 
The nature of the EU ETS as a mar-
ket-based mechanism requires the 
regular disclosure of detailed and 
relevant information on the imple-
mentation and functioning of the 
system. Although a lot of information 
is publicly available, the Commission 
did not publish one important piece of 
such information, the annual imple-
mentation report required under the 
directive (see paragraphs 71 and 72). 
Coordination and exchanges of infor-
mation between the Member States 
are also vital. The Commission has had 
a limited role in ensuring the harmoni-
sation of key controls in the implemen-
tation of the EU ETS by Member States 
(paragraphs 73 to 76). Various fora and 
working groups to share information 
were established and these provided 
essential support to Member States. 
However, their impact was limited to 
some extent by a relatively low level 
of participation by Member States 
(paragraphs 77 to 79).

Recommendation 5

During phase III, the level of guidance 
and information about the implemen-
tation of the EU ETS should be im-
proved. The Commission should:

(a)  improve its monitoring of the 

implementation by the Member 
States to identify areas where 
more harmonisation is imperative; 
and

(b)  publish regularly the required 

report on the implementation of 
the EU ETS, specifically addressing 
issues of non-harmonisation and 
resulting risks.

Conclusions and recommendations

51

Recommendation 6

The Member States should:

(b)  consistently apply the penalties 

defined at national level as well as 
the penalty foreseen in the Direc-
tive; and

(c)  keep up-to-date and accurate 

information on penalties applied.

The implementation of sanctions 
in relation to the EU ETS should be 
made more transparent. Up-to-date 
and accurate information should be 
available at Member State and EU level 
on the implementation and results of 
penalty procedures, and the Commis-
sion should better monitor enforce-
ment practises across the EU as well as 
the consistent application of national 
penalties.

The Commission should:

(a)  ensure that Member States keep 
up-to-date information on the 
application of all types of penalties 
(EU and national) and make ap-
propriate proposals and guidelines 
for increased transparency among 
relevant bodies.

This report was adopted by Chamber I, headed by Mr Augustyn KUBIK, Member 
of the Court of Auditors, in Luxembourg at its meeting of 15 April 2015.

For the Court of Auditors

Vítor Manuel da SILVA CALDEIRA
President

 
 
 
Annex

52

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Background information

PART I — International framework for emissions trading

1.  There is widespread scientific consensus that greenhouse gases generated from human activity and released 
into the atmosphere have a direct impact on the greenhouse effect, causing global warming and affecting 
the climate system. This consensus also holds that if global average temperature increases by 2 °C compared 
to the temperature in pre-industrial times, there is a much higher risk that dangerous and possibly cata-
strophic changes in the global environment will occur. Therefore, the international community recommends 
keeping warming below 2 °C by reducing these emissions1. 

2.  The European Union has shown international leadership in its actions to deal with climate change. It has 

committed itself to reduce GHG emissions under the 1997 Kyoto Protocol (see Box) to the 1992 UNFCCC that 
sets an overall framework for intergovernmental efforts to tackle the challenge posed by climate change.

Box — The Kyoto Protocol

The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 Febru -
ary 2005. 188 countries and one regional economic integration organisation (the European Union) have signed 
up to the protocol. Of the UNFCCC signatories only the United States has not ratified the protocol. The proto-
col set an objective for the 37 industrialised countries and the European Union: a binding reduction target of 
GHG emissions by an average of 5 % compared to 1990 levels over the 5-year period 2008 to 2012. The Kyoto 
Protocol introduced three market-based mechanisms to help meet these targets: emissions trading, the Clean 
Development Mechanism and Joint Implementation.

3.  The Commission’s long-term roadmap for GHG emissions aims at a reduction of 80 % by 20502. On 23 Octo-
ber 2014, the Council agreed on the 2030 climate and energy policy framework and endorsed a binding EU 
target of at least 40 % domestic reduction in greenhouse gases by 2030 compared to 19903. The EU ETS will 
continue to play a central role in achieving these objectives.

1 

See Intergovernmental Panel on Climate Change (IPCC), established by the United Nations Environment Programme and the World Meteorological 
Organisation in 1988 (www.ipcc.ch).

2  COM(2011) 112 final of 8.3.2011, ‘A Roadmap for moving to a competitive low carbon economy in 2050’.
3 

European Council (23 and 24 October 2014), Conclusions on 2030 Climate and Energy Policy Framework, SN 79/14.

Annex

53

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PART II — Supply and demand in the EU ETS during phase II (2008–12)

4.  The economic crisis, which started around 2008, strongly reduced industrial activity and emissions4. The 

demand for allowances in phase II was therefore lower than expected creating a surplus of allowances on the 
market (see Figure) and impacting on the carbon price, which fell from approximately 22 euros to 5 euros 
between the start of phase II in 2008 by the end of phase II in 2012.

Figure — Supply, demand and surplus for phase II of the EU ETS (2008–12)

1 047 945
442 283

1 779 687

Resulting surplus

q
e
-
₂
0
C
t
k
-

t
i
n
u
n
o
i
s
s
i

m
e
0
0
0
1

9 999 310

9 709 851

Demand

Supply

Phase II Freely allocated allowances

Phase II Veriﬁed Emissions

Phase II Auctioned allowances

Phase II Surplus

Phase II Surrendered Kyoto Units

Source: ECA’s analysis based on EEA ETS Dataviewer (June 2014) for stationary installations.

4 

The link between the economic crisis and the fall in emissions has been identified by the Commission (‘The state of the European carbon market in 
2012’, COM(2012) 652 final) and by extensive other sources (for example, the World Bank in its report ‘Mapping Carbon Pricing Initiatives’ of 2013).

 
 
 
 
 
 
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PART III — Debates on reform to mitigate surplus allowances and future perspectives

5.  Debates on further changes to the EU ETS and structural reform from 2020 onwards are still ongoing. In 

phase II, there was little flexibility in the system to respond to the changing economic situation, the reduced 
demand for allowances and the growing surplus. This was recognised by the Commission as weakening 
the effectiveness of the scheme. The Commission also considers that a higher market price would create 
a greater incentive to invest in low carbon technologies5. In an attempt to mitigate the effects of the sur-
plus of EU ETS allowances (identified by the Commission at almost 2 billion allowances at the start of phase 
III6) (see also Figure) and to strengthen the price signal on carbon emissions, the Commission issued in 2012 
a proposal for the ‘back-loading’ of auctions for phase III. The auctioning of 900 million allowances would be 
postponed until 2019–20. Back-loading would not reduce the overall level of allowances available, but would 
modify their distribution over the period. This legislative proposal was accepted by the Parliament and the 
Council during 2013. 

6.  In order to tackle the issue of the surplus and to strengthen the environmental impact of the scheme, the 
Commission considered that a sustainable solution to the imbalance between supply and demand was 
required. In January 2014, the Commission therefore proposed — together with the proposal for the 2030 
climate and energy package7 — structural reform measures for the EU ETS, with the introduction of a market 
stability reserve from 2021 to address the surplus of allowances already built up and to improve the system’s 
resilience to major shocks by automatically adjusting the supply of allowances to be auctioned. The legisla-
tive proposal is under consideration by the Council and the European Parliament.

5 

European Commission Climate Action, 'The EU Emissions Trading System (EU ETS)' factsheet, available at http://ec.europa.eu/clima/publications/
docs/factsheet_ets_en.pdf
6 
European Commission, DG Climate Action (http://ec.europa.eu/clima/policies/ets/reform/index_en.htm).
7  COM(2014) 15 final of 22.1.2014, ‘A policy framework for climate and energy in the period from 2020 to 2030’.

Reply of the  
Commission

55

Executive summary

II
The EU ETS is the cornerstone of EU climate policy. 
The system has put a price on carbon and emis-
sions from installations in the system are falling as 
intended: by 2012 they were down 19 % compared 
to 1990 levels.

The EU ETS delivers the necessary emission reduc-
tions at low cost. No other policy measure, be it 
taxation or regulation, guarantees this like emis-
sions trading does.

The success of the EU ETS has inspired others world-
wide and the Commission will continue to promote 
ETS as a policy measure.

III
While the Court focused the audit on phase II of 
the EU ETS (2008–12), many improvements are 
already in place for phase III (2013–20) and specifi-
cally address the observations noted by the Court. 
Such observations are thus appreciated as further 
support for the related developments already put 
in place for phase III and further food for thought in 
other cases.

IV
The Commission takes note of the Court’s 
conclusion.

The Commission stresses that in phase II the 
management of the EU ETS was hindered by some 
issues relating to the robustness of the framework 
for protecting its integrity. The fact that there were 
weaknesses in the implementation of the EU ETS 
in phase II is one of the important reasons for the 
careful considerations given to the new develop-
ments and improvements now being implemented 
in phase III.

V
Any significant remaining issues in emission mar-
ket regulation and oversight should be addressed 
where necessary in order to improve market 
integrity. To ensure that EU action is required and 
effective, the Commission assesses the impact of its 
policies and proposals at every stage, from proposal 
to implementation to review. An evaluation of the 
recently adopted rules on emission market regula-
tion and oversight, which are currently subject to 
ongoing implementation, may take place in the 
context of the reports to be submitted by the Com-
mission to the European Parliament and the Council 
in 2019 under Article 90 of MiFID II1 and Article 38 of 
MAR2.

V (a)
The Commission and the co-legislators thoroughly 
analysed potential risks regarding the regulation 
and oversight of the emission market related to 
compliance traders, bilateral over-the-counter 
(OTC) spot trading and smaller market participants 
during the adoption process for MiFID II (herein-
after referred to as ‘MiFID’), which contains there-
fore a well balanced regime for exemptions. The 
exemptions mentioned in Articles 2(1)(e), 2(1)(j) and 
Article 3(1)(e) of MiFID are subject to conditions and 
regulatory oversight and are not necessarily specific 
to emission allowances but apply equally to com-
modity derivatives. The reasons for the exemptions 
result from an assessment of the purpose of requir-
ing a MiFID authorisation (principally to protect 
clients of investment firms in cross-border transac-
tions) as well as their proportionality with regards 
to the costs of obtaining such authorisation versus 
its benefits for the exempted persons.

1  Directive 2014/65/EU of the European Parliament and of the 
Council of 15 May 2014 on markets in financial instruments and 
amending Directive 2002/92/EC and Directive 2011/61/EU.

2  Regulation (EU) No 596/2014 of the European Parliament and 
of the Council of 16 April 2014 on market abuse (market abuse 
regulation) and repealing Directive 2003/6/EC of the European 
Parliament and of the Council and Commission Directives 
2003/124/EC, 2003/125/EC and 2004/72/EC.

Reply of the Commission 

56

V (b)
The supervisory framework established by EU 
financial markets legislation, which is also used for 
all commodity derivatives traded in the EU (e.g. 
MiFID position reporting, MAR sets out far-reaching 
cooperation mechanisms) applies to the emissions 
market.

The regulatory cooperation mechanisms will come 
into full force and effect as of 2017.

V (c)
Analysis of the EU carbon market generally shows 
that the market has grown and matured, despite 
the facts that the legal status of allowances is 
not defined at EU level and that the creation and 
protection of security interests in allowances is not 
expressly provided for.

V (d)
Building on the progress made in phase II, the 
Commission will ensure continual improvements 
as required to maintain the security of the Union 
Registry to the highest standard.

The legislation does not provide for the Commission 
to monitor transactions in the Union Registry. The 
EU-level supervision of the European carbon market 
can be improved to detect abuse and fraudulent 
activities, but this issue is wider than the Registry 
which only records information about the physical 
transfers of carbon units and not the financial leg.

VI (a)
Commission regulations have been adopted to 
improve even more the effectiveness, efficiency 
and harmonisation of EU ETS monitoring and 
reporting and verification and accreditation in 
phase III.

VI (b)
Commission Implementing Decision 2014/166/
EU and an associated explanatory note have 
relaunched the system requiring Member States to 
submit annual ‘Article 21’ reports to the Commission 
on their implementation of the EU ETS directive. 
These reports are publicly available via the Euro-
pean Environment Agency’s ReportNet system.

VI (c)
The Commission recognises that there was some 
incompleteness in the submission of Article 21 
reports during phase II. Requirements are now 
being more rigorously implemented for phase 
III based on Commission Implementing Decision 
2014/166/EU.

VI (d)
The Commission continues to coordinate frequent 
exchanges with and between Member States in the 
form of well-attended meetings with published pro-
ceedings and consultations.

VI (e)
The Commission considers that it continues to play 
a major role in driving harmonisation of key con-
trols in the implementation of EU ETS through the 
regulatory framework and supporting guidance and 
templates as well as through appropriate confer-
ences, meetings and consultations.

VI (f)
Overviews of the EU ETS sanctioning systems within 
Member States are being acquired as part of the 
Commission’s Member State EU ETS compliance 
review studies and Commission Implementing Deci-
sion 2014/166/EU updating the system requiring 
Member States to submit annual ‘Article 21’ reports 
to the Commission on their implementation of the 
EU ETS directive.

In phase III, each operator can use international pro-
ject credits up to a certain limit, determined on the 
basis of the rules defined in Commission Regulation 
(EU) 1123/2013.

VII 1.
The Commission partly accepts the recommenda-
tions and agrees that any significant remaining 
issues in emission market regulation and oversight 
should be addressed in order to improve market 
integrity where necessary.

VII 2.
The Commission accepts the recommendation and 
will analyse the benefits of clarifying the legal sta-
tus of allowances.

Reply of the Commission 

57

VII 3.
The Commission accepts the relevant recommenda-
tions. The security of the registry system has been 
significantly improved since 2012 and the Commis-
sion will strive to further improve the system on the 
aspects identified by the Court.

mechanism. Several national registries were the 
target of IT attacks and security of the registry 
system was improved following the centralisation 
of operations in a single Union registry. Finally the 
regulation and oversight of the carbon market were 
strengthened.

VII 4.
The Commission accepts the relevant recommenda-
tions. The specific roles and responsibilities of all 
parties involved in EU ETS are clarified as the result 
of the Commission regulations on accreditation and 
verification and monitoring and reporting adopted 
for phase III.

VII 5.
The Commission accepts the relevant recommenda-
tions and that the level of guidance and informa-
tion about the implementation of the EU ETS as 
implemented in phase II could have been better. It 
considers that the situation has been duly improved 
for phase III.

VII 6.
The Commission considers the EU ETS sanctioning 
system effective. The penalty of €100 per tonne of 
CO2 emitted for which no allowances are surren-
dered by 30 April has a strong deterrent effect. This 
is in particular demonstrated by very high compli-
ance rate.

Member States should be transparent on the sanc-
tions that apply at the national level and should 
also publish the information on operators in breach 
of the surrender obligation.

The Commission accepts the relevant recommen-
dation and attaches importance to transparency 
between Member States’ Competent Authorities to 
maintain the very high compliance rate.

Introduction

Box 2
The EU ETS faced various risks which were 
addressed by specific actions. VAT carousel fraud 
in the carbon market was addressed by the pos-
sibility for Member States to apply a reverse charge 

15
The Commission notes that the Court has explic-
itly stated that the question of which regulatory 
approach would be best suited to the emissions 
market was beyond the scope of this audit.

The Commission considers that the remaining issues 
that ought to be considered for further regulatory 
action should be examined taking into account the 
regulatory framework for emission allowances once 
they become financial instruments in 2017.

16 - Reply to first indent
Upon the Commission’s proposal, the Council 
adopted Council Directive 2010/23/EU3, which 
provided (in Article 199a) the possibility to apply 
the reverse charge mechanism for the transfer of 
emission allowances. The application period of this 
directive was extended until 31 December 2018 4.

16 - Reply to third indent
Regulation (EU) 389/2013 (registry regulation) does 
not contain a direct reference to the substantive 
provisions of the anti-money laundering direc-
tive, but provides an ad hoc regime for national 
registry administrators based on a harmonised set 
of know-your-customer checks and other relevant 
requirements, which therefore establishes directly 
applicable EU-level harmonised rules in this area.

3  Council Directive 2010/23/EU of 16 March 2010 (amending 
Directive 2006/112/EC on the common system of value added tax, 
as regards an optional and temporary application of the reverse 
charge mechanism in relation to supplies of certain services 
susceptible to fraud (OJ L 72, 20.3.2010, p. 1)).

4  By Council Directive 2013/43/EU of 22 July 2013 (OJ L 201, 
26.7.2013, p. 4).

Reply of the Commission 

58

Box 3 - Reply to second paragraph
The Commissioners in charge of, respectively, the 
ETS and VAT policies sent a joint letter in June 2011 
to all Member States that did not yet apply the 
reverse charge mechanism, asking them to put 
national provisions in place. This demonstrates that 
the issue has been addressed at the highest pos-
sible level.

Box 3 - Reply to third paragraph
Italy’s legislation provides for the reverse charge 
mechanism for emission allowances as from 
1 January 2015.

18
Compliance buyers need to participate in the 
carbon market, if their emissions exceed their free 
allocations. They can buy through banks or invest-
ment firms, which are regulated under MiFID. MiFID 
(applied in conjunction with MAR and European 
market infrastructure regulation (EMIR)5) aims to 
improve market stability and integrity, including 
reducing systemic risks while considering cost-effec-
tiveness and proportionality of EU legislation.

19
The exemptions cover ‘non-financial’ entities that 
trade allowances. This is similar to exemptions in 
other rules on financial markets, e.g. exemption 
from the clearing obligation for non-financial coun-
terparties under EMIR, or those applying in com-
modity derivatives. They are not ‘blanket’ exemp-
tions but are subject to conditions and/or oversight 
by national competent authorities and also at EU 
level. In some cases the exemptions are national in 
scope and do not have any cross-border effects.

Even where entities are exempt under MiFID, many 
of them will nonetheless remain subject to obliga-
tions under MAR relating to insider trading and 
market manipulation.

The Commission’s proposal was endorsed by the 
co-legislators, who clearly approved and confirmed 
this approach and if anything, broadened the 
exemptions’ scope.

Taking into account the proportionality principle, 
the Commission considers that in relation to the 
objectives of the authorisation under MiFID; its 
respective costs versus their benefits; its regula-
tory burden, the exemptions for compliance buyers 
represent the least onerous means to achieve the 
desired outcome.

Furthermore, exempted entities would still be cov-
ered by the scope of MAR.

20
Concerning OTC derivatives, EMIR imposes obli-
gations on certain market participants that enter 
into derivatives trades, and as such they would be 
regulated6.

Several studies indicate that the share of OTC 
spot contract volumes which are not cleared were 
around 1 % in 2010. Analysis of available data on 
more recent market evolution supports the conclu-
sion that this share is likely even lower now7.

Moreover, purely bilateral OTC trades will still be 
covered by the scope of MAR, which explicitly 
specifies that it ‘applies to any transaction, order 
or behaviour concerning any financial instrument 
as referred to Article 2(1) and (2), irrespective of 
whether or not such transaction, order or behaviour 
takes place on a trading venue.’

5  Full name Regulation on OTC derivatives, Central 
Counterparties and Trade Repositories (Regulation (EU) No 
648/2012).

6  Almost all responses to the consultation by the European 
Securities and Markets Authority (ESMA) on the related draft 
clearing thresholds for application suggested that they should be 
increased, claiming that the non-financial firms pose negligible 
risk of a systemic nature to the financial system due to lack of their 
interconnectedness. The same can be said about non-financial 
firms when it comes to their trading in purely bilateral OTC spot 
emission allowances.

7  Commission computations based on Bloomberg New Energy 
Finance’s data on total EUA market size and its split by Auctions, 
Exchanges and OTC, coupled with estimate by London Energy 
Brokers Association (LEBA) on the share of OTC EUA trades which 
were for spot products in 2010, and with LEBA data for 2010–14 on 
share of OTC trades which were not cleared.

Reply of the Commission 

59

21
In October 2013, the Commission requested ESMA 
to provide advice to assist it on the content of the 
delegated acts required by some provisions of the 
MAR, including on the level of the thresholds in 
terms of carbon dioxide equivalent emissions and 
of rated thermal input.

The majority of the respondents to the related 
ESMA consultation argued that there is little or 
no relevant entity specific information that is not 
already published under other rules, notably the 
regulation on wholesale energy market integrity 
and transparency (REMIT).8

Any potential cumulative impact on the emissions 
market would only be material to the extent that 
a sizeable proportion of smaller market participants 
coordinated their activities, which would not only 
be an anti-trust matter subject to anti-trust supervi-
sion, but would also be difficult for them to sustain 
on account of their large numbers.

22
The Commission agrees that further work could be 
done on regulatory cooperation mechanisms in the 
supervisory framework for the emissions allow-
ances market. However the existing provisions on 
mechanisms will come into full force and effect only 
as of 2017. Therefore, any future work should focus 
on options to strengthen the existing systems, 
wherever needed based on a clear evaluation of 
the magnitude of any remaining risks to the EU ETS 
or the European carbon market and to do so in the 
most cost-effective and proportional manner.

23
The supervisory framework established by EU finan-
cial markets legislation is also used for all commod-
ity derivatives traded in the EU (e.g. MiFID position 
reporting, MAR sets out far reaching cooperation 
mechanisms). A review has not provided elements 
to support the position that this framework is not 
adequate for the emissions market compared to 
commodity derivative contracts generally.

8  Regulation (EU) No 1227/2011.

With respect to MAR, competent authorities exer-
cise their functions and duties stemming from MAR 
in collaboration with other authorities or with the 
market undertaking. MAR competent authorities 
are required to cooperate with ESMA, including 
with respect to the exchange of necessary informa-
tion, and with competent authorities of EU Member 
States.

As regards the Union Registry and the Commis-
sion’s powers, national financial regulators can 
obtain information on transactions in the Union 
registry from the relevant national administrator 
or the Commission as central administrator (which 
can provide data concerning several or all Member 
States), in accordance with Article 110(2) of Regu-
lation (EU) 389/2013. It is also worth noting that 
30–40 % of emission allowances futures are not 
held to maturity and therefore are not physically 
settled and hence not visible in the Union Registry.

24
The Commission notes that the supervision of the 
emissions’ market rests with national regulators. 
Integrated procedures between national regulators 
for organising EU-level supervision of the emissions 
market are established by the revised MiFID and 
MAR laying down detailed rules on cross-border 
cooperation between national competent authori-
ties and between them and ESMA and EU level as 
well as with third countries worldwide.

In addition an extensive surveillance, data report-
ing, and supervision framework (at national and EU 
level) will be implemented under the revised MiFID/
MiFIR9 and MAR/MAD regimes, applicable to emis-
sion allowances as of January 2017 and July 2016 
respectively.

The frequency and structure of the existing formal 
and informal contacts amongst services within the 
Commission are sufficient for and proportionate to 
the overall regulatory tasks.

9  Regulation (EU) No 600/2014 of the European Parliament and of 
the Council of 15 May 2014 on markets in financial instruments and 
amending Regulation (EU) No 648/2012.

Reply of the Commission 

60

25
The EU carbon market has grown and matured, 
despite the fact that the legal status of allowances is 
not defined at EU level. The factors driving liquidity 
are largely economic rather than legal in nature10.

The Commission believes that Directive 2003/87/EC 
and its implementing legislation notably Article 40 
of Regulation (EU) 389/201311, as well as the evolving 
framework for EU financial markets regulation12 pro-
vide the necessary legal underpinnings for a trans-
parent and liquid EU carbon market whilst ensuring 
the market’s stability and integrity.

26
In accordance with Article 345 of the TFEU, under 
Union law property law is the prerogative of the 
Member States. This is all the more so in relation 
to mandating the creation of property rights at EU 
level with respect to a class of assets where there 
are no pre-existing property rights in the Member 
States as the Court has found.

The existence of a specific property law regime of 
trading assets is very much the exception rather 
than the rule for the vast majority of assets being 
transacted including financial instruments. How-
ever, this does not mean that the normal princi-
ples of national contract and property law do not 
necessarily apply to transactions in such assets13. 
Directive 2003/87/EC and its implementing legisla-
tion govern all the important legal characteristics 
relating to the exercise of rights over allowances.

10  The Commission has already proposed to establish a market 
stability reserve (COM(2014)20) to address surplus allowances and 
improve the system’s resilience to major shocks by adjusting the 
supply of allowances to be auctioned, which is being discussed by 
the European Parliament and the Council.

11  Allowances may be held by anyone, but title can be determined 
by reference to the Union Registry since the record of the registry 
constitutes prima facie and sufficient evidence of title over an 
allowance.

12  As of 2017, emission allowances will have the status of financial 
instruments within the EU and be subject to the framework for EU 
financial markets regulation.

13  There is, for example, no specific legal regime for money held 
in a bank account. As such the account holder does not own the 
money in its account, but merely has a legal claim to it, yet this 
has not precluded the development of financial markets based on 
money not only within the EU but worldwide.

Rights to hold, transfer, surrender and cancel allow-
ances are fully guaranteed by Directive 2003/87/
EC and also fully supported by the Union Registry 
within which they can be exercised.

27
In the light of the foregoing, the Commission 
considers that legal interests are duly protected 
and allowances can be contested as civil matters 
in national courts. Nevertheless, the Commission 
will endeavour to analyse the potential benefits of 
further clarifying the legal status of allowances in 
EU law for the functioning of the EU ETS and the 
European carbon market.

28
The Commission will consider the legal and techni-
cal feasibility of facilitating the registration of secu-
rity interests in allowances, in the light of the public 
policy objectives of the EU ETS.

30
The Commission considers that the Union Registry 
introduced improvements to address past weak-
nesses identified under the decentralised phase 
II system of national registries. Additional actions 
were also taken subsequently in phase III of the EU 
ETS, following the revision of the EU ETS directive 
in 2009. No incident has been reported since the 
launch of the Union Registry in 2012 and data held 
in the Union Registry or the EUTL are provided to 
national law enforcement bodies during formal 
investigations or legal proceedings.

The Commission agrees that supervision of the 
carbon market can be improved. The Union Registry 
does not contain financial information and there-
fore data in the Registry would be of limited use to 
supervise financial transactions.

Furthermore in accordance with the relevant pri-
mary legislation and Regulation (EU) 389/2013, the 
Commission has no legal basis to perform analysis 
on the Member States’ data stored in the Union 
Registry.

The Commission has actively supported the Mem-
ber States in implementing cooperation with Finan-
cial Intelligence Units.

Reply of the Commission 

61

31
The Commission considers that the registry systems 
steadily improved over time and that many issues 
noted by the Court are addressed in phase III.

32
Regarding KYC-checks and practices, Regulation 
(EU) 389/2013 enumerates exhaustively the condi-
tions and documents for the opening of accounts of 
compliance participants. However the requirements 
for accounts of voluntary participants stipulate only 
the minimum requirements for account opening.

34
The requirements set by Regulation (EU) 389/2013 
for voluntary participants provide room for Mem-
ber States to apply appropriate risk assessment 
practices.

35 - Reply to second indent
Regulation (EU) 389/2013 lists what information 
on suspicious applications for account openings is 
shared between national administrators. The estab-
lishment of a permanent EU-wide list of refused 
account openings raises issues with regards to the 
legal framework on the protection of personal data.

36
Directive 2003/87/EC and Commission Regulation 
(EU) 389/2013 entrust the management of users’ 
registry accounts to Member States in line with the 
principle of subsidiarity. The role of the Commission 
as central administrator is to operate and maintain 
the Union Registry. The Commission coordinates 
the implementation of the relevant legal provisions 
by organising exchanges of information and best 
practices on know-your-customer checks, in par-
ticular within the Registry Administrators’ Working 
Group, with particular emphasis on methods and 
tools that can be implemented within the existing 
legal framework.

37
The supervision of the European carbon market at 
EU level could be further improved, including by 
using the relevant data from the Union Registry. 
However, the Union Registry only records informa-
tion about the physical transfers of carbon units 
and does not record any information about the 
financial leg of the transactions, which is not suf-
ficient to detect abuse or fraudulent activities.

38
The analysis of cross-border transactions was not 
possible before the migration to the Union Registry 
as national registries were operated by individual 
Member States and not consolidated.

In the current legal framework, the Commission is 
providing the Union Registry application, but does 
not have a role to actively supervise transactions in 
the Union Registry by exploiting the data held on 
behalf of the Member States.

41
The Commission considers that its organisational 
structure is adequate. The segregation of roles 
between business/policy owner and IT supplier has 
been implemented since 2014 in accordance with 
the relevant project management methodology 
and the resources and skills have been further opti-
mised to ensure an adequate internal organisation.

The implementation of the action plan following 
the IT audit by the Commission’s Internal Audit Ser-
vice addresses the identified weaknesses and will 
increase the effectiveness of the registry develop-
ment and management.

50
Box 4 in the Court’s report names the main aspects 
relevant to monitoring, reporting and verification. 
While some form of competent authority check of 
verified annual emission reports might reasonably 
be expected, Directive 2003/87/EC and implemen-
tation measures do not explicitly require this. Full 
duplication of verification would be counter-pro-
ductive including in terms of added costs.

Reply of the Commission 

62

51
Specified mandatory content and a standard tem-
plate for the EU ETS verification report are now in 
place for phase III. The legislation at the European 
level for EU ETS phase II did not allow for a standard 
template.

52
The Commission agrees that a lack of follow-up on 
verifier findings existed in phase II. For phase III 
operators are now required to submit an improve-
ment report for approval by the Competent Author-
ity concerning all non-conformities and recommen-
dations reported by the verifier. The Commission 
also published guidance directing verifiers on how 
to handle repeated findings.

Box 7
The verification report template now published by 
the Commission indicates the minimum that is man-
datory for inclusion in Member State verification 
report templates for phase III and includes specific 
provision for the verifier to note recommendations.

For phase III, additional responsibilities for accredi-
tation and verification and for national accredita-
tion bodies to carry out ongoing surveillance of 
the verifiers are in place. One of the main purposes 
of this ongoing surveillance is to check continued 
competence of the verifier looking out in particu-
lar for inconsistencies such as a verifier who never 
reports non-conformities or recommendations or 
between the internal verification documentation 
and the issued verification report.

accreditation bodies as well as competent authori-
ties to gain access to evaluate the verifier’s internal 
verification report. However, the need to ensure 
much greater harmonisation in EU ETS verification 
and accreditation is the main reason why Regula-
tion (EU) 600/2012 concerning EU ETS accreditation 
and verification has been adopted for phase III.

56
The roles of individual entities in EU ETS are based 
on their respective competences. Verifiers are 
foremost competent for verification (not the regula-
tory authorities). National accreditation bodies are 
competent and empowered to accredit verifiers 
(not the regulatory authorities). Designated com-
petent authorities are competent and empowered 
for general implementation of EU ETS (not verifiers 
or national accreditation bodies). Coordination 
between the different entities is important for pro-
moting effective implementation of EU ETS overall, 
but this needs to be proportionate according to 
competence and to avoid inefficient and coun-
ter-productive duplication and addition of costs.

57
The Commission considers that the situation 
reported where verifiers are involved in verifica-
tions as well as in the development of the monitor-
ing plans for the same site is a conflict of interest. 
Regulation (EU) 600/2012 (accreditation and veri-
fication regulation for phase III) is explicit on this 
subject and the issue is a prime area of concern 
for national accreditation bodies to consider and 
address.

53
The guidelines for monitoring and reporting in 
phase II included specific definitions for phase II 
concerning both the required ‘verifier’ (Section 2(5)
(m) of Annex I of Commission Decision 2007/589/
EC) and ‘accreditation’ (Section 2(5)(k) of Annex I of 
Commission Decision 2007/589/EC), before pointing 
to relevant European cooperation for Accreditation 
guidance. The guidelines also included provision for 

58
Directive 2003/87/EC and implementing measures 
do not define a requirement for on-the-spot inspec-
tions by the Competent Authorities. This retains 
flexibility for proportionate and efficient Compe-
tent Authority enforcement, including in relation to 
where and when inspections are most productive, 
avoidance of duplication of the verifier’s role, and 
ability to combine with other regulatory duties.

Reply of the Commission 

63

64
The Commission agrees that regularly providing 
relevant information on the overall implementa-
tion and functioning of the EU ETS is beneficial to 
stakeholder confidence in the system. The report-
ing foreseen by Directive 2003/87/EC, in particular 
in accordance with its Articles 10 and 21, addresses 
this need.

67
In the context of the assessment of the NAPs of 
Member States, the PRIMES model, as a widely used 
analytical tool was considered to be the best-avail-
able reference. In particular, the model was known 
by Member States, considered reliable and used by 
some Member States themselves when preparing 
the NAPs.

The Commission acknowledges that the guidance 
issued in December 2005 did not include an instruc-
tion to use 2005 emissions data. However, the 2005 
verified emissions were available to Member States 
since spring 2006 and thus well before the dead-
line for submitting the NAPs and well before most 
the NAPs were then submitted in practice. Taking 
into account the objective of the EU ETS, the Com-
mission had to assess the NAPs against the most 
up-to-date emissions data which was also under-
lined by the Climate Change Committee.

69
The Commission acknowledges that it could not 
submit completed checklists for all Member States 
to the Court. The administrative retention period for 
such documents has expired. However, a number of 
other documents have been provided to the Court, 
such as correspondence with the Member States, 
presentations and briefing sheets.

Nevertheless, the Commission believes that there 
are no reasons to believe that the assessment of 
the NAPs was in any way not equally detailed or 
incomplete.

In particular, all publicly available Commission 
Decisions on Member States’ NAPs have the same 
structure and provide an extensive justification of 
the reasons underpinning either the approval or the 
rejection of the NAPs in the recitals. For each aspect 
that should have been scrutinised by the Commis-
sion in accordance with Annex III of the directive, 
it is set out in detail whether the legal require-
ments have been complied with or not. They thus 
demonstrate that the Commission has carried out 
the assessment in the way mandated by Directive 
2003/87/EC for all Member States in the same way.

Common reply to paragraphs 71 and 72
The Commission recognises that ‘Article 21’ report-
ing concerning EU ETS implementation was not 
always complete in phase II. Requirements are now 
being more rigorously implemented for phase 
III based on Commission Implementing Decision 
2014/166/EU, so that the condition for the publica-
tion of a complete annual implementation report 
should be fulfilled in the future.

74
The Commission has further harmonised the 
implementation of EU ETS in phase III (therefore the 
revised EU ETS was adopted in 2009) and continues 
to consider options for possible further improve-
ments in the future.

76
The legal framework leaves the performance of 
inspections up to Member States as part of their 
general approach to regulatory enforcement and in 
respect to the subsidiary principle the Commission 
has no specific role to play.

Reply of the Commission 

64

77
The Commission continues to organise extensive 
exchanges of information with the EU ETS compe-
tent authorities of the Member States such as by the 
regular deliberations of the Climate Change Com-
mittee and its Working Group 3 dedicated to Emis-
sions Trading, ad hoc Technical Working Groups, 
forums such as the Accreditation and Verification 
Forum and the Compliance Forum with its associ-
ated Task Forces, and relevant groups such as the 
Registry Administrators’ Working Group. Proceed-
ings are usually shared electronically to assist those 
unable to attend meetings in person.

79
The Commission acknowledges the important 
additional role played by the EU ETS Compliance 
Forum and its task forces in harmonised implemen-
tation of EU ETS and the exchange of information 
on best practices between Member State compe-
tent authorities. Although attendance of national 
authorities was sometimes limited, the information 
discussed and developed in the Compliance Forum 
was shared through a web-based facility available 
to all Competent Authorities.

80
The high compliance rate is the best indicator of 
the deterrent effect of the EU ETS sanctioning 
regime, notably the EU-level penalty provision in 
the directive applicable in case of non-surrender of 
allowances.

Beside this EU-wide harmonised sanction, Member 
States determine and apply penalties to certain 
infringements, such as not submitting an emission 
report on time, on the basis of the relevant national 
legislation.

82
The Commission notes that variations with regard 
to the types of national infringements and penalties 
can be entirely justified taking into account national 
circumstances and administrative processes, all the 
more so when the co-legislators have decided to 
relegate the penalties under Article 16(1) of Direc-
tive 2003/87/EC to national competence under the 
principle of subsidiarity.

83
Overviews of the EU ETS sanctioning systems within 
Member States are being acquired as part of the 
Commission’s Member State EU ETS compliance 
review studies and Commission Implementing Deci-
sion 2014/166/EU updating the system requiring 
Member States to submit annual ‘Article 21’ reports 
to the Commission on their implementation of the 
EU ETS directive.

84
The Commission does aim to maintain an EU ETS 
specific overview of national penalties and statistics 
on the application of penalties. It has already taken 
a more systematic approach of the monitoring of 
the sanctioning system, by improving the ques-
tions put to Member States on the penalties in the 
context of the report under Article 21 of Directive 
2003/87/EC.

Member States authorities are responsible for the 
enforcement of the EU ETS provisions but the Com-
mission follows closely the implementation of the 
EU ETS directive in the Member States. When, in 
phase II, there were doubts about the legality of the 
application of the penalties, the Commission always 
followed up on these and had regular contacts with 
Member States where necessary. For example, the 
Commission consistently recalled that Member 
States could not reduce the fines applied in cases of 
non-surrender of allowances of €10014.

14  This interpretation of Article 16 has in the meantime been 
confirmed by the European Court of Justice.

Reply of the Commission 

65

86
In phase III of the EU ETS, operators can no longer 
use international credits directly to comply with 
their EU ETS obligations. Operators must first 
exchange their international credits for allowances 
which they can then use for compliance.

The number of international credits that an opera-
tor can exchange is limited. The rules for determin-
ing individual credit entitlements per installation 
and aircraft operator are set out in the Commis-
sion’s Regulation (EU) 1123/2013. Operators receive 
an entitlement for the period 2008–20, therefore 
their entitlement for phase III takes account of what 
they benefitted in phase II.

Box 8 - Reply to second paragraph
In phase III of the EU ETS, similar problems should 
not occur anymore. Please see Commission reply to 
paragraph 86.

Box 8 - Reply to third paragraph
In phase III of the EU ETS, similar problems should 
not occur anymore. Please see Commission reply to 
paragraph 86.

Conclusions and recommendations

87
At the time of introduction of the ETS, no practical 
experience existed at national or EU level. Hence, 
the Commission and Member States pursued 
a learning-by-doing approach that has led to steady 
improvements both in design and implementation.

With regard to EU ETS and VAT carousel frauds, 
in order to address VAT frauds, the Commission 
provided a legal basis for Eurofisc, a network for the 
swift exchange of targeted information on fraudu-
lent VAT transactions. Within this context the Mem-
ber States also look at new fraud trends and provide 
early warning to each other if new frauds emerge. 
The carbon emission trade is one of the sectors that 
is under close monitoring by Member States in this 
context. 

89
The Commission takes note of the Court’s 
conclusion.

The Commission stresses that in phase II the EU ETS 
was hindered by some issues relating to the robust-
ness of the framework for protecting its integrity. 
The fact that there were weaknesses in the imple-
mentation of the EU ETS in phase II is one of the 
important reasons for the careful consideration 
given to the new developments and improvements 
now being implemented in phase III.

91
Regarding the Court’s findings that there are 
remaining issues in regulation and oversight of 
the emission market related to compliance trad-
ers, bilateral OTC spot trading and smaller market 
participants, the Commission and the co-legislators 
thoroughly analysed potential risks during the 
adoption process for MiFID, which contains there-
fore a well-balanced regime for exemptions. The 
supervisory framework established by EU financial 
markets legislation, which is also used for all com-
modity derivatives traded in the EU (e.g. MiFID posi-
tion reporting, MAR sets out far reaching coopera-
tion mechanisms) applies to the emissions market. 
The regulatory cooperation mechanisms will come 
into full force and effect as of 2017.

Recommendation 1
The Commission agrees that any significant remain-
ing issues in emission market regulation and 
oversight should be addressed where necessary in 
order to improve market integrity. To ensure that 
EU action is required and effective, the Commission 
assesses the impact of its policies and proposals at 
every stage, from proposal to implementation and 
to review.

An evaluation of the recently adopted rules on 
emission market regulation and oversight, which 
are currently being implemented, may take place 
in the context of the reports to be submitted by 
the Commission to the European Parliament and 
the Council in 2019 under Article 90 of MiFID II and 
Article 38 of MAR.

Reply of the Commission 

66

Recommendation 2
The Commission accepts recommendation 2. It will 
analyse the benefits of clarifying the legal status 
of allowances and will also consider whether and 
how an express registration mechanism for security 
interests could be provided.

The EU carbon market has grown and matured, 
despite the fact that the legal status of allowances is 
not defined at EU level. The factors driving liquidity 
are largely economic rather than legal in nature.

Hence, the Commission has already proposed to 
establish a market stability reserve (COM(2014)20) 
to address surplus allowances and improve the 
system’s resilience to major shocks by adjusting 
the supply of allowances to be auctioned, which is 
being discussed by the European Parliament and 
the Council.

The Commission believes that Directive 2003/87/EC 
and Regulation (EU) 389/2013, as well as the evolv-
ing framework for EU financial markets regulation 
provide the necessary legal underpinnings for 
a transparent and liquid EU carbon market whilst 
ensuring the market’s stability and integrity.

93
The security of the registry has been significantly 
improved over phase III of the EU ETS. In addi-
tion to enforcing the regulatory requirements 
for opening accounts, the Commission promotes 
active cooperation and exchange of best practices 
between Member States. Since 2012, the continuous 
improvement of the Union Registry in accordance 
with the relevant project methodology required 
adjustments within the Commission.

Recommendation 1 (a)
The Commission accepts recommendation 1(a). 
The Commission and the co-legislators thoroughly 
analysed potential risks during the adoption pro-
cess for the revised MiFID, which contains therefore 
a well-balanced regime for exemptions. They will 
be subject to review in 2019 under the relevant 
legislation.

The exemptions mentioned in Articles 2(1)(e), 2(1)(j) 
and Article 3(1)(e) of MiFID are subject to conditions 
and regulatory oversight and, they are not neces-
sarily specific to emission allowances but apply 
equally to commodity derivatives. The reasons for 
the exemptions result from an assessment of the 
purpose of requiring a MiFID authorisation, (prin-
cipally to protect clients of investment firms in 
cross-border transactions) as well as their propor-
tionality with regards to the costs of obtaining such 
authorisation versus its benefits for the exempted 
persons.

Recommendation 1 (b)
The Commission accepts recommendation 1(b), 
as this takes into account the body of EU financial 
markets legislation which has been adopted and is 
currently being implemented.

Recommendation 1 (c)
The Commission partly accepts the recommenda-
tion 1(c). There are cooperation mechanisms in 
place, which the Commission considers adequate 
for the existing state of the emissions market. 
Commission services are present in the European 
Securities Markets Agency (ESMA) board/standing 
committees and working groups when policy issues 
are discussed and are in contact with the Agency 
for the Cooperation of Energy Regulators (ACER). 
However, the cooperation within the Commis-
sion is being further strengthened in the phase of 
implementation of the revised legislation. Con-
cerning other regulators and supervising authori-
ties (including agencies) and in the light of future 
market developments, the Commission will con-
sider options for promoting initiatives to strengthen 
further the regulatory cooperation beyond those 
mechanisms already in place.

Reply of the Commission 

67

Recommendation 3 (a)
The Commission accepts recommendation 3(a). 
The Union Registry does not hold all the relevant 
data for detecting abuse and fraudulent activities. 
However, under MiFID/MiFIR and MAR/MAD, a sig-
nificant data gathering exercise is already foreseen 
in relation to the financial side of transactions in 
allowances once these will have been fully imple-
mented in 2017.

Recommendation 3 (b)
The Commission accepts recommendation 3(b).

Recommendation 3 (c)
The Commission accepts the recommendation 3(c). 
As regards the structure, the Commission considers 
that it has already been implemented. Following 
an IT audit by its Internal Audit Service, the Com-
mission has further clarified the roles of the staff 
members and optimised the structure. The Commis-
sion is committed to ensure the good functioning 
of the registry system.

Recommendation 3 (d)–(e)
These recommendations are addressed to the Mem-
ber States.

94
Commission regulations adopted before the start 
of phase III improve the effectiveness, efficiency 
and harmonisation of EU ETS implementation in 
phase III. These regulations address the weaknesses 
described by the Court. Improvements relate to 
monitoring and reporting and verification and 
accreditation, confirming the roles and responsibili-
ties of all parties including competent authorities, 
operators, verifiers, national accreditation bodies 
and Member States.

Recommendation 4
The specific roles and responsibilities of all par-
ties involved in EU ETS are clarified as the result of 
the Commission regulations on accreditation and 
verification and monitoring and reporting adopted 
for phase III.

Recommendation 4 (a)
The Commission accepts recommendation 4(a).

Recommendation 4 (b)
The Commission accepts recommendation 4(b). 
Directive 2003/87/EC and implementing meas-
ures define the framework for enforcement. This 
approach retains flexibility for proportionate and 
efficient Competent Authority enforcement, includ-
ing in relation to where and when inspections are 
most productive, avoidance of duplication of the 
verifier’s role, and ability to combine with other 
regulatory duties.

Recommendation 4 (c)–(f)
These recommendations are addressed to the Mem-
ber States.

95
The Commission provided comprehensive guidance 
in the preparation and implementation of the NAPs 
for phase II. It acknowledges that this guidance did 
not include an instruction to use 2005 emissions 
data, which, however, has not affected the quality 
of the Commission’s assessment.

The Commission’s guidance and monitoring of 
Member States’ implementation of EU ETS is 
improved in phase III. Commission Implementing 
Decision 2014/166/EU and an associated explana-
tory note have relaunched the system requiring 
Member States to submit annual ‘Article 21’ reports 
to the Commission on their implementation of 
Directive 2003/87/EC. These reports are publicly 
available via the European Environment Agency’s 
ReportNet system.

Reply of the Commission 

68

96
The Commission recognises that ‘Article 21’ report-
ing concerning EU ETS implementation was not 
always complete in phase II. Requirements are now 
being more rigorously implemented for phase III 
based on Commission Implementing Decision 
2014/166/EU, so that the condition for the publica-
tion of a complete annual implementation report 
should be fulfilled in the future.

The Commission continues to organise extensive 
exchanges of information with the Member States’ 
EU ETS competent authorities such as by the regular 
deliberations of the Climate Change Committee 
and its Working Group 3 dedicated to Emissions 
Trading, ad hoc Technical Working Groups, forums 
such as the Accreditation and Verification Forum 
and the Compliance Forum with its associated Task 
Forces, and relevant groups such as the Registry 
Administrators’ Working Group, and by associated 
document-sharing facilities.

Recommendation 5 (a) 
The Commission accepts recommendation 5(a).

The harmonisation of EU ETS is substantial in 
phase III and the Commission is pursuing the moni-
toring of Member State implementation of the EU 
ETS more rigorously in phase III.

Recommendation 5 (b)
The Commission accepts recommendation 5(b) 
regarding regular publication of a report on the 
implementation of the EU ETS.

Recommendation 5 (c)
This recommendation is addressed to the Member 
States.

97
Overviews of the EU ETS sanctioning systems within 
Member States are being acquired as part of the 
Commission’s Member State EU ETS compliance 
review studies and Commission Implementing Deci-
sion 2014/166/EU updating the system requiring 
Member States to submit annual ‘Article 21’ reports 
to the Commission on their implementation of 
Directive 2003/87/EC.

Recommendation 6
The Commission considers the EU ETS sanctioning 
system effective. The penalty of €100 per tonne 
of CO2 emitted for which no allowances are sur-
rendered by 30 April has a strong deterrent effect. 
This is in particular demonstrated by the fact that 
each year around 99 % of the emissions are actu-
ally covered by the required number of allowances 
and the penalty therefore only applies to 1 % of the 
emissions reported.

Member States should be transparent on the sanc-
tions that apply at the national level for infringe-
ments other than the surrender obligation and 
should also publish the information on operators in 
breach of the surrender obligation. It is, however, 
important to note that according to Article 16(1) 
of Directive 2003/87/EC, Member States retain the 
right to determine sanctions and that variations 
between the level of the sanctions may well be 
justified taking into account the context in a given 
Member State.

The Commission attaches importance to transpar-
ency between Member States’ Competent Authori-
ties to maintain the very high compliance rate.

Reply of the Commission 

69

Recommendation 6 (a)
The Commission accepts recommendation 6(a). 
It will analyse in detail the information it receives 
through the EU ETS compliance review studies and 
the annual reports submitted by the Member States 
pursuant to Article 21 of the EU ETS directive and 
take action where deemed appropriate.

Recommendation 6 (b)–(c)
These recommendations are addressed to the Mem-
ber States.

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The EU ETS is the cornerstone of the EU’s climate policy and 
is often quoted as a model for emerging climate change 
policy in the world. The Court found significant weaknesses 
in implementation during phase II (2008–12) and problems 
with the robustness of the framework for protecting market 
integrity. Market regulation and oversight, the legal status of 
allowances, and systems for processing fundamental EU ETS 
information needed improvement. Member States should 
enhance their implementation of the control framework and 
sanctions. The Court makes a number of recommendations 
aimed at improving the integrity and implementation of the 
scheme.

EUROPEAN
COURT
OF AUDITORS