PRESS BACKGROUNDER
SUPERVISION OF THE MARKET IN CO2 ALLOWANCES
BACKGROUND
On account of their history, or their youth in some cases, commodities markets have
been less regulated than financial markets. For several years now, however, we have
seen a phenomenon of financialisation of these commodities markets, becoming
investment markets in some sectors. Given the lack of transparency surrounding certain
transactions, the size, volatility, complexity and concentration of these markets can
therefore give rise to excessive speculation which can in turn engender systemic risk.
In the light of these issues of prime importance, France has made supervision of these
markets one of the priorities for its G20 presidency.
Concerning markets in CO2 allowances more specifically, their volume has grown
dramatically since the turn of the century, becoming increasingly like financial markets
by their characteristics. Not only professionals, but also private individuals invest in
these markets in which the underlying are increasingly perceived as financial assets,
just like shares or bonds. In 2009 in Europe as a whole, the scale of trading on these
carbon markets exceeded €65 billion for a volume equivalent to 5 billion tonnes of CO2.
This represents almost two-thirds of worldwide carbon asset trading.
In the light of this context and given that investor protection is the primary mission of the
financial market regulator, it appeared crucial to apply rules inspired by those on
financial markets to the CO2 market, and thus to apply good regulation practice from
the financial world: combating market abuse, regulating intermediaries, etc.
MAIN ISSUES AND PRIORITIES
What is the purpose of carbon markets?
To meet their commitments, the industrialised nations that signed the 2003 Kyoto Treaty
have introduced a variety of instruments to control their greenhouse gas emissions. The
political objective was to reduce the said emissions by 5% from their 1990 levels by
2012. The creation of an emissions allowance market was the preferred method in
Europe.
Nationally, the market works as follows: under an allowance allocation scheme, the
State makes an advance allocation to industries and businesses of greenhouse gas
emission certificates – or allowances – corresponding to their emissions quota. At the
end of an annual production cycle, these operators must return the number of
certificates corresponding to their recorded emissions to the dedicated returns account
opened with the registry held by the Caisse des Dépôts. Those operators whose
emissions are likely to exceed their allowance have the possibility of buying additional
certificates from those who are in the opposite situation. These transactions, which may
be conducted at the end of the annual production cycle or in the course of it, according
to the needs foreseen by the operators, form the basis of a market between operators
as varied as industrialists, energy producers and financial companies.
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Where are CO2 emissions traded in Europe? What type of regulations are there
in Europe on the organisation of CO2 allowance auctions?
CO2 allowances are traded on several stock exchanges in Europe, such as Bluenext in
France, for example. These trading activities concern the allowances themselves (spot
market) and future derivatives.
For the regulation of European auctions, the principle that has been retained is that of
a common although not a single platform for the EU within the framework of the
European Commission regulation on the auctioning of CO2 emission allowances.
These auctions will be organised within the framework of a regulated market.
What are the consequences of the Law on Banking and Financial Regulation
(LBFR) of 22 October 2010 on the secondary market in CO2 allowances?
The LRBF, based on the recommendations of the Prada Report, enhances the
transparency of trading which will now be supervised more effectively. The LBFR thus
makes the AMF the supervisor of this new regulated market and its operators. The law
also provides that the AMF and the CRE [Commission de régulation de l’énergie] must
work together on the question of CO2 allowances, which has resulted in the signature
of a memorandum of understanding on the exchange of information, control and
supervision of markets in greenhouse gas emission allowances, electricity, natural gas
and their derivatives. In short, this agreement makes the CRE the competent authority
on questions of coherence between the fundamentals and spot markets, and the AMF
the competent authority for the operation of the market in allowances and their
derivatives.
What are the objectives of the cooperation between the AMF and the CRE, and
what are the expected benefits?
This agreement organises cooperation between the two regulators, not only on CO2
allowances, but also on electricity and gas markets.
In practical terms, this cooperation will result in the exchange of information and
assistance between the AMF and the CRE within the framework of their control and
supervision mission. The purpose is that the two authorities should share their
respective information and expertise to identify risk factors on these markets.
The scope of the protocol concerns supervision of the following products:
- greenhouse gas emission allowances and derivatives in which such allowances are
the underlying;
- electricity and derivatives in which electricity is the underlying;
- natural gas and derivatives in which natural gas is the underlying.
This agreement is one of the applications of the Law on Banking and Financial
Regulation defining cooperation between the two regulators on the carbon market.
- This law allows admission of emissions allowances to trading on regulated financial
instrument markets and grants powers to the AMF to supervise the CO2 spot market.
- It extends the mandate of the CRE to include supervision of transactions carried out
in CO2 allowances by energy market participants, and to analyse their coherence with
the economic and technical factors underpinning energy markets.
With this agreement, France is the first European country to anticipate the provisions of
the draft European Regulation on Energy Markets Integrity and Transparency (REMIT)
which the European Commission has just made public.
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What will the status of Bluenext be?
Bluenext is a candidate to organise auctions, but cannot do so at present as it is not a
regulated market. Bluenext is an MTF (multilateral trading facility), which is to say a
market with more “streamlined” rules, although it has decided to apply certain regulated
market rules voluntarily. The AMF is currently preparing to examine the application file
for approval to transform Bluenext into a regulated market in early 2011. The final
decision on this approval is in the hands of the Ministry for the Economy, Finance and
Industry. Other operators have also announced that they are candidates for the
organisation of this platform. The AMF will be controlling this market very closely and is
currently in the process of amending its General Regulation to adapt itself accordingly.
This status will then enable the French market to position itself on the European level
when the allowances that have hitherto been allocated free of charge are auctioned on
a platform which will have to present every guarantee of security required by the
European Commission.
Who are the operators the AMF will be supervising?
The first task of the AMF will be supervising the members of Bluenext, which is to say
the companies currently subject to emissions allowances, such as GDF-Suez, EDF,
Véolia, etc. and those that will be becoming subject to them in the future, such as Air
France [the aviation sector is to join the European carbon market on 1st January 2012].
The AMF will also be responsible for supervising the financial intermediaries that are
also members of Bluenext.
What will be the geographical scope of the AMF?
The geographical scope of the AMF will be France. All market participants and members
will fall within that scope by nature.
On the question of auctions, however, the AMF will not be doing everything: it is the
Auction Monitor, a specific authority, which will supervise the operation of auctions and
the information supplied to “investors” by the States. The AMF will therefore have only
a partial role on the primary market (meaning the market in emissions), while it will play
a full role in regulating the secondary market. The regulation applicable to the
secondary market will be published in the second half of 2011 by the European
Commission.
What sort of system can be envisaged in the future on the European level?
It can be noted that with its Law on Banking and Financial Regulation, France is taking
the lead on this issue in Europe, and it can be hoped that the European Commission
will draw inspiration from this to some extent. For example, it could be appropriate for
the ESMA [European Securities and Markets Authority], the new European authority for
financial markets, to have responsibility for the regulation and perhaps, one day, the
supervision of this market on the European level, once it has become a truly single
European market.
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FOR FURTHER INFORMATION
In France:
- Memorandum of understanding on the exchange of information, control and
supervision of markets in greenhouse gas emission allowances, electricity, natural gas
and their derivatives.
- Draft General Regulation of the Autorité des marchés financiers, “Book VII –
Regulated markets admitting emissions allowances to trading” - Public consultation
open until 24 December 2010.
- The priorities of the French Presidency of the G20:
http://www.economie.gouv.fr/christine-lagarde/edito-g20.html
- Report by Michel Prada on CO2 market regulation:
http://www.minefe.gouv.fr/services/rap10/100419rap-prada.pdf
In Europe:
- Directive 2009/72/EC concerning common rules for the internal market in electricity:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0055:0093:EN:PDF
- Directive 2009/73/EC concerning common rules for the internal market in natural gas:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0094:0136:EN:PDF
- Regulation (EU) n°1031/2010 on the auctioning of CO2 emission allowances:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:302:0001:0041:EN:PDF
- Proposal for a regulation on energy market integrity and transparency: entry into force of
the regulation no later than 2012, after its adoption by the European Council and
Parliament:
http://ec.europa.eu/energy/gas_electricity/markets/doc/com_2010_0726_en.pdf
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