EU Emissions Trading System - framework for protecting market integrity and implementation of ETS need further improvements
A report published today by the European Court of Auditors i (ECA) finds that the Commission and Member States did not adequately manage all aspects of the EU Emissions Trading System i (EU ETS), which is a main element of the EU climate and energy package. While the auditors noted continuous improvements introduced at the initiative of the Commission to protect the integrity of the EU ETS as a market-based mechanism, some issues still had to be addressed to further improve market integrity. The system also suffered from significant weaknesses in implementation in phase II (2008-2012). The report recommends improvements to market regulation and oversight so as to increase investor confidence and leverage the EU ETS as a tool of environmental policy.
“The EU ETS is the cornerstone of the EU’s climate policy. It has been progressively improved since its introduction ten years ago. But still more could be done in a number of areas, such as controls on the opening of ETS accounts, the monitoring of transactions, market supervision and the verification of emission levels at installations. Our recommendations can help the Commission and Member States improve market integrity and implementation of the system, making it a stronger tool for achieving climate change targets by 2020 and beyond,” commented Kevin Cardiff, the ECA Member responsible for the report. “Given the considerable financial stakes involved in the multi-billion euro carbon market, previous security incidents, and the goal of promoting real action to reduce greenhouse gas emissions, improvements are needed to the framework for protecting market integrity, and the system as a whole needs to be better implemented.”
The current reform of the ETS (introduction of a "market stability reserve”) and related debate focus on its effectiveness and on how to deal with the surplus stock of allowances, which was not in the scope of this report.
Our audit shows that attention has to be given to market integrity and implementation so that the EU can be more confident that this flagship policy is fully equipped to deliver on emission reductions and low carbon technologies. The auditors found that the Commission's and Member States' management of certain aspects of the EU ETS, particularly during phase II, was not entirely adequate. There were problems with the framework for protecting the market in allowances, and also problems with the actual implementation of the system.
Concerning the framework, even after the inclusion of the market in ETS allowances in the scope of the European Directives for financial instruments and market regulation, some issues remain in relation to compliance traders, bilateral over-the-counter spot trading and smaller market participants. No oversight of the emissions market has been established at EU level and cooperation involving national regulators and Commission was found to be insufficient, which could imply that distortions and anomalies with potentially serious effects are not appropriately managed. The auditors noted a need for a clearer legal definition of emission allowances and the creation and protection of security interests in allowances, which could help the market to function more effectively. Further progress is also needed regarding the high-risk Union registry for processing fundamental ETS data: in particular tighter controls over account opening and improved monitoring of transactions. Nevertheless, the report acknowledges that there has been a marked reduction in reported incidents in recent years.
The auditors detected important weaknesses in Member States' and the Commission's implementation of the system. In particular, systems for monitoring and reporting on emissions were insufficiently implemented and harmonised in phase II, with gaps in the Commission's guidance and monitoring of Member States, as well as a lack of transparency in its assessment of national allocation plans. Some Member States did not provide all the required reports on the operation of the system, and the Commission did not publish the required annual implementation report, while the impact of consultation and coordination fora between the Commission and Member States was limited due to the low level of participation by the latter.
The Commission had a limited role in ensuring the harmonisation of key controls in the Member States' implementation of the system. The auditors were unable to assess the effectiveness of the diverse sanction systems due to a lack of consolidated information at Member State and EU level, and warn that divergent practices between the Member States concerning the rules for surrendering international project credits could potentially affect the level playing field for operators.
Press release: EU Emissions Trading System - framework for protecting market integrity and ETS's implementation need further improvements - say EU Auditors
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Special report No 6/2015: The integrity and implementation of the EU ETS 