The New Registries Regulation1 was born off the back of a number of significant events affecting the EU Emissions Trading Scheme (the “EU ETS”) – its impending transition from Phase 2 to Phase 3, the introduction of new types of allowance units for aviation operators (AUEAs), the impact of VAT fraud committed by criminal elements and of course, the cyber theft of carbon credits from national registries. The regulation seeks to address some aspects of all of the above points.

The details of those market challenges are, by now, very well known. The question is, has the New Registries Regulation done enough to give the market the confidence it needs to go back to business as usual? This article will explore the extent to which comfort can be drawn from the changes introduced by the New Registries Regulation.

What the New Registries Regulation does

The New Registries Regulation changes are operational, functional, technical, administrative and legal. The backdrop to most of these changes are the recent challenges faced by the market and a discourse on why each of the changes was therefore necessary, is beyond the scope of this article. It suffices to say, that the intention of the Commission is that the changes will restrict, if not completely prevent, the recurrence of those events. Without a doubt, many of these changes will improve the environment in which the market operates. For example, ensuring that Europol has ‘read-only’ access to all accounts will allow a quicker response to block the onward delivery of stolen carbon credits, or requiring all Member States to enforce a minimum standard of known your customer (KYC) requirements with their account applicants will reduce the chances of fraudsters gaining access to the system. However, outside these sorts of administrative or operational changes, for the purposes of this article I will concentrate on the structural and legal changes introduced by the New Registries Regulation. I examine below the most significant of those changes to assess whether confidence can or should be generated by them.

The consolidation of the registry infrastructure

On 20th June 2012, the accounts that previously existed in the separate and distinct national registries for the EU Member States2 and those of the other European Economic Area (EEA) countries linked to the EU ETS, were migrated (the Migration Event) into a single European Union Registry (hereafter, the Union Registry). In parallel, the national registries for those EU Member States were consolidated into a single IT platform that nonetheless ensured that each Member State’s registry was uniquely identifiable and protected from each other and maintained a direct connection to the International Transaction Log (the ITL)3.

This migration and consolidation event achieves a number of objectives including, cost and efficiency savings for Member States who no longer have to pay separate software licence fees to maintain individual licences, commonality of functionality and technical standards applied by all Member State registries now offering the same service and functional tools. Most significantly, from the perspective of the Member States, it ensures that the EU ETS is not hostage to the outcome of the international negotiations regarding a second commitment period under the Kyoto Protocol, for which the registry infrastructure may or may not need to be maintained beyond 2015.

The Migration Event now means all trading of EU Allowances (EUAs), AEUAs, Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs) can take place in a single registry.4 There are a number of advantages to this. For example, previously events relating to one national registry, such as its failure to maintain its Kyoto eligibility requirements, did not impact other national registries. This placed the account holders in the affected registry at a disadvantage to other EU ETS participants as any transfers from their accounts to other accounts outside their registry were blocked by the United Nations. With all accounts sitting within a single Union Registry, transfers between, for example, a French account and a German account5 would not be automatically blocked as the transfers would not be treated as a transfer between two national registries for the purposes of the ITL.

Other advantages include, improving the security of the EU ETS by removing potential weak points of entry for cyber thieves targeting Member State registries that did not implement the necessary software upgrades other Member State registries had. By bringing all emissions trading under a common IT functionality, it avoids any one Member State account being treated as more or less secure than the other. Although this process has led to a loss, for some Member State registries (e.g. the UK registry), of more advanced functional features and optionality than those enjoyed by other Member States, it is hoped that the Commission will, through future software upgrades, return some of that functionality to all account users in the Union Registry in time. However, how responsive the Commission will be (in contrast to some pro-active Member States) to such requests relating to enhanced functionality remains to be seen.

The Migration Event has therefore, given the Commission control over the software and security standards applicable to the EU ETS’s carbon credit settlement process. Given past experience, this is probably the best way of reducing the risk of uneven security standards in the EU ETS. In the short term, this has come at the sacrifice of greater functionality and technical advances for some account holders, however, in the long-term it should prevent weaknesses in the system caused by the particularities of the way individual Member States maintained their respective registries. Arguably, this will remove the practice of forum-shopping between Member State registries based on functional differences and will concentrate the analysis of the advantages of one Member State registry account over another, to a purely legal one (e.g. does being subject to the laws of the UK give an account holder greater or lesser legal rights or protections compared to the laws of another Member State?).

Notwithstanding the fact that all emissions trading in the Union Registry can now take place in a single registry, the New Registries Regulation does not address the issues arising from the application of different Member State laws. By moving all emissions trading to a single location, the Commission had the opportunity to simplify the conflicts of laws analysis otherwise applicable to cross-border emissions transactions, by narrowing it to the laws of a single jurisdiction (e.g. the laws of Luxembourg because that is where, I understand, the EUTL and the Union Registry servers are maintained). However, the artificial construct deployed under Article 10(5) New Registries Regulation, maintains the fiction of the application of the laws of individual Member States based on the whether the account in question has been subject to the supervision of a particular Member State. Therefore, on questions such as the applicable laws to how title in carbon credits will pass, the conflicts of law analysis will continue to apply where the transfer was from, for example, a French account to a German account within the Union Registry.

The hiding of serial numbers

From the perspective of the Commission, the intention behind concealing the serial numbers of carbon credits held in an account, was to create fungibility between carbon units of the same type. For example, an AEUA issued by Greece should not be treated any differently than an AEUA issued by the UK. Similarly, because one EUA should be treated as indistinguishable from another EUA, in the event that someone had an EUA stolen from their account through a phishing attack they need not seek to attach proprietary individuality to that particular stolen unit of an EUA as any other EUA returned to the victim should suffice to address any loss.

The Commission’s motive in adopting this approach was fundamentally driven by the suspension, by market participants, of trading in spot carbon credits in the EU ETS following the 2010/11 spate of cyber-thefts. The difficult issue of addressing what, if any, legal rights were retained by the victims of the thefts and the liability, if any, faced by any good faith purchaser of the stolen carbon credits had led to market participants assessing the risks of participating in the spot market as outweighing the benefits of remaining involved. Faced with the clamour for certainty and in the face of the publication of details of the stolen carbon credits, the Commission opted for, what they perceived as the easier remedy – hiding the serial numbers so account holders wouldn’t know that the carbon credits they received were stolen and forbidding the publication of details of any carbon credits by making that information confidential. In short, the message to the account holder was, “what you don’t know doesn’t hurt you”.

As most legal commentators would probably agree, the real issue stems from the absence of a uniform cross-border agreement amongst Member States, on the identification, at law, of the type of property rights that should be attributable to a carbon credit. For example, it may be treated as a movable intangible property in one Member State but treated as a ‘good’ in another Member State. In the absence of common agreement as to how proprietary rights in carbon credits should be applied in each Member State, different Member State laws will provide different answers to questions such as: can security be validly taken over carbon credits, what rights does a creditor have to the return of carbon credits it has credited to an account of a clearing house in the event of the clearing house’s insolvency, or more fundamental questions such as, how legal title passes to a carbon credit - on transfer or on payment? None of these issues are resolved by the hiding of serial numbers or by deeming carbon credits to be fungible. If anything, they make the legal analysis of carbon credits even more challenging in a number of circumstances. For example, in the legal analysis of whether a security interest can be enforced over a carbon credit, that enforcement becomes questionable where the carbon credit is commingled and indistinguishable from other carbon credits held in an account.

The inherent problems that arise from the uncertainty surrounding the legal nature of a carbon credit continue and therefore, this begs the question whether the concerns that caused spot market to be suspended also continue? What the hiding of the serial numbers, along with making the information about the carbon credits confidential, does is in fact make the impact of any theft more difficult to self-detect. The victims no longer can point to an identifiable unit that has been stolen (although these can still be identified by the National Administrator and Europol who can see the serial numbers for the unit), the recipient cannot ascertain whether what he is receiving is stolen (he must wait to be informed by the National Administrator or law enforcement agencies) but may find units in his account or his entire account suddenly frozen or the recipient cannot, absent assistance from the courts or the National Administrator, even identify who delivered the stolen carbon credits to them.

Therefore, does the restriction on the ability to identify, check or be aware of the receipt of stolen allowances without the intervention of the National Administrator or law enforcement authorities give market participants comfort that the fundamental legal issues with receiving stolen allowances have now gone away? Judged purely on the basis of the hiding of the serial numbers or making the details of the serial numbers confidential, the answer would be no. However, when combined with the effect of Article 37 (discussed below), a different answer could emerge.

The Article 37 protection to buyers in good faith

Of all the provisions in the New Registries Regulation, Article 37 is the most significant in terms of its legal content. The main provisions are as follows:

  1. Article 37(2) grants evidentiary status of title to the carbon credits held in an account in the Union Registry. This evidence is however prima facie only and can be displaced by evidence to the contrary. The benefit of this provision is that robust evidence to the contrary (e.g. specific laws of a Member State) will be necessary to displace the assumption of title offered by Article 37(2). By analogy to a land or property register, just because an entity’s name does not appear in the register does not prevent an interest in the property arising but it does mean that the person who’s name does appear, may trump the other person’s interest where they have completing claims.
  2. Article 37(3) limits any remedy for a claim at national law seeking recovery or restitution of carbon credits to be “in kind” only. The meaning of this is unclear but may be better understood when read in conjunction with sub-paragraphs (a) and (b) of Article 37(3). In particular, Article 37(3)(a) provides that a finalised transfer of a carbon credit cannot be reversed pursuant to any remedy that might exist under the laws of any Member State. In effect, a judge in providing a remedy to a victim of a stolen allowance cannot, as part of his order, declare the transfer of the carbon credit to the current holder was invalid and therefore should be reversed. Article 37(3)(a) however, does not prevent a judge from ordering that the current holder should be required to deliver an equivalent number of carbon credits to the victim of the theft. Arguably, if all carbon credits are fungible, this should provide an effective remedy for the victim of the theft. Article 37(3)(b) makes it clear that the intention of the provision is only to ensure finalised transactions cannot be unwound (i.e. analogous to the effects of the Settlement Finality Directive6 for transfer orders in payment and securities settlement systems) but not to prevent the ability for a victim of a theft to pursue any remedies they may have against the holder of their carbon credits under national laws.
  3. Finally, Article 37(4) gives a purchaser and holder of a carbon credit who has acted in good faith title to the carbon credit free of any defects in title of the person who transferred it. On the face of it, the impact of this provision appears to give the holder of a stolen carbon credit the ability to gain good legal title to the carbon credit even where its seller did not have good title himself. Of course the buyer must prove that he has acquired it in “good faith” and that he has paid for it (even if the amount of the payment does not appear to be a material requirement). This is clearly a powerful provision to assist an innocent purchaser. The strength of this protection however, is eroded by (i) the uncertainty of the meaning of good faith, which is likely to be different in each Member State7, (ii) the uncertainty as to the precise approach applicable to determining the law relating to proprietary issues (e.g. lex fori or lex locirei sitae etc.), and (iii) the ability expressly maintained by Article 37(3)(b) above, to allow the victim of the theft to pursue claims, available under the laws of individual Member States, against an innocent purchaser (other than those that might require the return of the carbon credits stolen). For example, the availability of Article 37(4) would not have prevented the claims pursued in Armstrong v Winnington from arising as the remedies pursued there were equitable in nature and not proprietary.


The New Registries Regulation and the migration to the Union Registry clearly reduces the risk for market participants in the EU ETS. However, it is probably fair to say that much of the reduction arises through operational or functional changes introduced rather than through any legal certainty provided by the New Registries Regulation. The use of a single settlement platform means that there is no individual software or technical weak point in the system but it also means that when affected, the entire market is likely to be affected. It is hard to imagine that this, in itself, will mean that a cyber-theft will categorically never again occur. If, and when it does occur, the issues market participants will have to grapple with will continue to apply, even if, hopefully it will only be rarely. Making the information regarding serial numbers confidential and hidden helps reduce panic but doesn’t remove the fundamental risk of legal claims arising. Article 37(4) does however, give the good faith purchaser a defence to a claim that may or may not succeed depending on the law of the relevant Member State and the nature of the claim brought. This has lead to the OTC market developing a standardised contractual remedy in its trading documentation to deal with the passing down the chain of contracts, claims arising through the delivery of stolen carbon credits.

The final measure of the benefit of these changes will not be in the success of the contractual remedy developed in the OTC market. With the volume of transactions now executed on-exchange, the final measure will be in the way the exchanges and clearing houses address this risk.

This article was originally published in the International Emissions Trade Association (IETA) annual Flagship publication IETA Greenhouse Gas Market 2012 on October 1.