Market Oversight Part 1 European Context Alistair Ritchie Supporting the Design and Implementation of Emissions Trading Systems in China - 中欧碳交易能力建设项目 Beijing, 19 th September 2014 This project/programme is funded by the European Union Project implemented by ICF International together with Sinocarbon, SQ Consult and EcofysCurrent status Well-functioning China National ETS Road maps Cap setting Allocation MRVA Registry Market oversight Capacities built over time Supporting the Design and Implementation of Emissions Trading Systems in China - 中欧碳交易能力建设项目BACKGROUNDA well functioning market for emissions allowances 1 A well – functioning market for emissions allowances and offsets provides a common plat for all firms compliance operators to balance supply and demand of emissions and consequent reductions, and to establish a single market – clearing price. Firms can then respond to this market price to make abatement choices and to become either buyers or sellers of allowances or offsets, depending on each firm’s emissions reduction costs relative to the market price. The market may also provide a central location for firms to transact business without having to seek out one another individually.A well functioning market for emissions allowances 2 It is important that ETS markets exist and provide market- clearing prices not just for current emission allowances or offsets, but also for emissions allowances and offsets into the future, as companies face investment decisions with long- term emissions consequences. In addition to establishing the market clearing price, to achieve low compliance costs, markets should also provide relatively easy access to transactions at these prices for all participants facing mitigation decisions. Significant explicit or implicit transaction costs will prevent otherwise desirable trading activity from taking place. Such inefficiencies are undesirable in any market.Why use the market to trade Example Compliance Operator for illustration purpose only Operator A Reduce Cost €10/tonne Identify GHG Reduction opportunities Carry out emissions reduction project TRADE Trading Price € 20/tonne allowance Market Operator B Reduce Cost €30/tonne Identify GHG Reduction opportunities No cost effective project on site Carbon Registry Allowances Allocated 1000 allowances Annual Report – 800 allowances SELL 200 allowances Trading Compliance Allowances Allocated 1000 allowances Annual Report – 1200 allowances BUY 200 allowancesTHE EU ETS MARKET DEFINITIONS PRIMARY MARKET SECONDARY MARKET TRADING PRODUCTS TRADABLE UNITS MARKET ACTORSDefinitions Exchange – A marketplace in which shares, options, futures and other derivatives on stocks, bonds, commodities, and inds are traded. Trading plat – An electronic trading plat is a computer system that can be used to place orders for financial products over a network with a financial intermediary or counterparty, such as a brokers, market makers, investment banks or stock exchanges. Over The Counter OTC – A bilateral transaction between a client and a bank, negotiated privately between parties Forward – Calculation uses ination known now to infer where an asset will trade in the future Option – An agreement between two parties that gives the holder buyer, the right but not the obligation to buy or sell a specific instrument at a specified price on or before a specific future date. The Primary Market Under any carbon market, a mechanism is needed to introduce emissions allowances and offset credits into the marketplace. This entry point is the primary market. EU ETS Primary Market Free allocation – Market transparency; – Optimal market participation; – Prevention of manipulation; – Fraud and other abuses.EU ETS Market Oversight Rules Carbon markets to be covered in full by financial markets rules – Auctions market abuse framework and rules against money laundering apply; auction plats to be regulated markets in MiFID sense – Secondary market allowances to be covered by the reviewed Markets in Financial Instruments Directive and Regulation MiFID/MiFIR and Market Abuse Directive and Regulation MAD/R with necessary adjustments – Allowances to be classified as a new, separate category of financial instruments for MiFID and cross-referring legislation Why rely on financial market rules Two well-known and tested frameworks to enhance carbon oversight – MiFID/MiFIR – applies to trading venues, professional traders and intermediaries – deals with organisation and transparency of markets – benefits investor protection, market integrity and efficiency – MAR/MAD – applies to all market participants – sets out framework against market manipulation and insider dealing Efficiency gains – in development and in implementation - for authorities and for market participants Appropriate adaptations to carbon market specificities foreseen and mptions from MiFID for ETS compliance buyers REFERENCESFurther ination For more ination see http//ec.europa.eu/clima/policies/ets/overs ight/index_en.htm http//ec.europa.eu/internal_market/securiti es/index_en.htm