Brussels, 02/07/2015 (Agence Europe) - Between 2008 and 2012, the European Commission and the member states did not adequately manage all aspects of the EU emissions trading system (EU ETS), which was set up by Directive 2003/87/EC, says the European Court of Auditors in a report published on 2 July.
Since it was put in place in 2005, the EU ETS, the flagship market instrument of the EU's climate policy to reduce greenhouse gas emissions at as low a cost as possible, has certainly seen continuous improvements introduced at the initiative of the Commission. This is acknowledged by the Court of Auditors in special report 6/2015 on the integrity and implementation of the EU ETS during the second trading period, or phase II (the current phase III covers the period from 2013 to 2020).
The Court highlights problems, however, affecting the framework put in place to protect the integrity of the emissions allowances market and serious weaknesses in implementing the system, potentially damaging to both the security of transactions and the environmental effectiveness of the EU ETS. The Court recommends that the Commission resolve the issues raised with regard to market regulation and oversight; give a clearer legal definition of emission allowances to bring stability and to instil confidence; improve the system put in place to process fundamental ETS data, such as the EU registry and corresponding procedures.
The report and its recommendations are timely, as the Commission is in the process of preparing the long-term review of the EU ETS for after 2020 and intends to bring forward a proposal for phase IV before the summer (see other article).
“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”, said Kevin Cardiff, the Court member responsible for the report. A lot is at stake, “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”, he observed.
With regard to the framework, the Court of Auditors noted that, even after the inclusion of the market in ETS allowances in the scope of the European directives for financial instruments (MiFID) and market regulation (MAR regulation on market abuse), some issues remain in relation to compliance traders, bilateral over-the-counter spot trading and smaller market participants. The audit also found: - no oversight of the emissions market established at EU level and insufficient cooperation involving national regulators and Commission, preventing an overall view of the market; - distortions and anomalies with potentially serious effects which may not be being appropriately managed; - a lack of clarity in the legal definition of emission allowances; - high risks presented by the EU registry; - a need for tighter controls over account opening and improved monitoring of transactions.
As for implementation, the auditors found that 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, and a lack of transparency in its assessment of national allocation plans. Auditors also note that 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. The audit also highlighted the limited impact of consultation and coordination fora between the Commission and member states due to the low level of participation by the latter.
The Commission had a limited role, auditors noted, in ensuring the harmonisation of key controls in the member states' implementation of the system. The auditors state that they were unable to assess the effectiveness of the diverse sanction systems due to a lack of consolidated information at member state and EU levels. The market stability reserve, due to come into play in 2019 to remedy surplus allowances on the market, did not fall within the scope of the report. (Aminata Niang)