Created in 2003 by Directive 2003/87/EC , the European carbon market is the European Union's ("EU") flagship policy to promote reduction of greenhouse gas ("GHG") emissions. Emission allowances, which once merely granted permission to industrial facilities to emit GHG, have now transformed into financial instruments.
While trading in derivatives of emission allowances fell under the scope of the Markets in Financial Instruments Directive (MiFID 2004/39/EC), uncertainty remained until recently as to the status of the emission allowances themselves.In the wake of a series of fraudulent practices that occurred in spot secondary markets in emission allowances as well as value-added tax, or VAT, fraud, the European Commission decided to take steps to dispel this uncertainty and brought emission allowances fully under the MiFID scope by classifying them as financial instruments in the "MiFID II" Directive 2014/65/EU of May 15, 2014. Additionally, the classification of emission allowances as financial instruments in MiFID II allowed for the sanction mechanisms of the 2014 Market Abuse Directive and Regulation ("MAD/MAR") to apply to emission allowances.
In France, the legislature never specifically classified emission allowances as financial instruments. Pursuant to the French Environmental Code, an "emission allowance" is defined as "a unit of account representing the emission equivalent of one ton of carbon dioxide" (art. L.229-7), and emission allowances constitute "movable property" (art. L.229-15). However, they do not fit under the French Monetary and Financial Code definition of "financial instruments," even though this code places the French Financial Markets Authority ("Autorité des Marchés Financiers" or AMF) in charge of the supervision of emission trading alongside its supervision of usual financial instrument trading.
On June 21, 2016, the French Law reforming the market abuses repression system (Loi n° 2016-819 réformant le système de repression des abus de marché ) was adopted into French law, in replacement of MAD/MAR.
On June 23, 2016, the French government issued an ordinance regarding financial instruments markets (Ordonnance n° 2016-827 relative aux marchés d'instruments financiers), which transposed MiFID II/MiFIR. This new definition will enter into force on January 3, 2018. These two acts modify the French Monetary and Financial Code to integrate emission allowances within the scope of investment services, as well as in the provisions governing investment service providers, and strengthen the AMF's oversight over the allowances.
Even more recently, on December 9, 2016, the Sapin II law (Loi n° 2016-1691 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique) further strengthened the control and investigation powers of the AMF over emission allowances.
These reforms continue the French tradition of classifying emission allowances in a hybrid category parallel to financial instruments. The legislator thus picks and chooses which provisions of the Monetary and Financial Code apply to emission allowances, as if they were financial instruments, and which do not. This approach is consistent with the European texts insofar as MiFID II classifies emission allowances as financial instruments only for the purposes of applying the EU financial markets regulation, not for the purpose of dealing with the legal nature of emission allowances.