Explanatory Note on Clearing and Banking

Explanatory note on Clearing and Banking

1. Background Commission Regulation 920/2010 provides modalities for the accounting of the assigned amount units (AAUs) which have been transferred to a deposit account so that Member States having a Kyoto Protocol registry issue phase II general allowances. The main modalities are called clearing and banking, whose objectives are summarised in the recitals below:

(6) Each registry established in accordance with Article 6 of Decision No 280/2004/EC should issue assigned amount units (hereinafter AAUs) pursuant to Decision 13/CMP.1, whereas allowances should be issued in the Union registry. Registries established in accordance with Article 6 of Decision No 280/2004/EC should ensure that they keep a deposit of AAUs that is equal to the amount of allowances issued by them in the Union registry in order to ensure that any transactions with allowances may be followed up with corresponding transfers of AAUs via a clearing mechanism at the end of each period.

(7) As Member States have no influence on the amount of allowances that account holders will choose to bank in their registries, any potential future international limitations on the banking of AAUs that serve as deposit for issued allowances would cause serious difficulties for those registries where a disproportionate number of such allowances are held. In order to ensure that the risks Member States face in this regard are shared equally among all Member States, the clearing mechanism should be set up in a way that upon its completion, an amount of AAUs is held in the Union registry's clearing account that is equal to allowances to be banked from the 2008-12 period.

(14) Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community ( 2 ) required that Kyoto units or allowances backed by Kyoto units surrendered by aircraft operators shall only be retired up to the quantity equal to domestic aviation emissions. However, as Member States cannot influence the choice of aircraft operators as to whether they surrender Chapter II allowances or units that may be retired, a centralised surrendering and redistribution system should be set up that guarantees that units surrendered by aircraft operators that may be retired are collected and used first of all to cover the domestic aviation emissions of all the Member States in an equal way. Member States should decide at a later stage how to use any units thus collected that may be retired.

The modalities for the clearing are set out in art. 52, 53, 54, 55 and 56 whereas the provision regulating banking is art. 57, which implements art. 13 of the ETS Directive.

The purpose of banking is to organise the end of life of the allowances valid for the second period of the EU ETS. The banking provisions provide on the one hand, for the replacement of all such allowances held in users' account by allowances valid for the next period and on the other hand for the deletion of all such allowances that are not subject to replacement under art. 57.

This version of the note only concerns MS with a KP registry.

1 2. Clearing The objective of the clearing is twofold:

- to ensure that MS with a KP registry hold in their deposit account a quantity of AAUs that corresponds to the quantity of general allowances surrendered by operators in this Member State since their last EU ETS retirement.

- to ensure that the ETS central clearing account contains a quantity of AAUs at least equivalent to the quantity of general allowances banked to phase III.

The clearing mechanism relies on 2 main parameters, the minimum deposit quantity (MDQ) and the clearing value (CV) as explained below.

a. The minimum deposit quantity (MDQ) The MDQ was initialised (during migration) to the quantity of general allowances issued in the Union Registry (UR) for MS having a KP registry. The MDQ sets the limit for the transfers out of the deposit account. No transfer resulting to a deposit account holding below the MDQ is authorised. The MDQ can vary under certain conditions as summarised below;

The MDQ increases when:

- New general allowances are issued (art. 52.2).

The MDQ decreases when:

- General allowances are deleted following a reduction (downwards correction) of the quantity of general allowances issued (art.52.3.a);

- General allowances are surrendered by aircraft operators and an equivalent number of AAU is transferred (not from the deposit account) to the aviation surrender set aside account (art.52.3.b);

- General allowances are deleted and equivalent cancellation of KP units (AAUs,ERUs,CERs) is executed (art.52.3.c);

- General allowances are deleted after 30 April 2013 (art.52.3.d).

Note that transfers of general allowances between MS have no impact on the MDQ.

b. The clearing value (CV) The CV determines the quantity of AAUs that is transferred from the deposit account to the central clearing account (CCA) for MS with a positive CV or the quantity of AAUs that is transferred from the central clearing account to the deposit account for MS with a negative CV.

The CV is calculated by deducting from the MDQ the quantity of general allowances surrendered by operators in that MS.

2 c. Timeline Action Date

Phase II functionalities disabled, in particular surrender of phase II 1 May allowances, CERs and ERUs

COM determines for each MS the amount of general allowances surrendered 2-4 May by aircraft operators and the amount of general allowances voluntarily deleted and notifies the figures to MS

MS cancel KP units for general allowances voluntarily deleted (art. 55.1) 5 May

MS delete allowances which are not to be banked, in particular remainders of 6-8 May the new entrants' reserves (art. 55.2)

MS transfers AAUS to the aviation surrender set-aside account for general 13 May allowances surrendered by aircraft operators (art. 54.1)

COM determines MDQ and CV for each MS and sends overview to MS 13-24 May

COM confirms determination of the CV and notifies MS(art. 56.2) 3 June

MS with CV>0 transfer from deposit account to ETS central clearing account 4-7 June (CCA) (art. 56.5)

COM transfers from CCA to MS deposit account with CV<0 (art. 56.6) 10-14 June

COM transfers Kyoto units from the aviation surrender set-aside account to By 30 MS (art. 58) September

d. Conclusion of the clearing process After the clearing, it is expected that MS with a KP registry hold a quantity of AAUs in their deposit account which corresponds to the quantity of allowances surrendered by operators (which need to be retired for KP compliance) plus a quantity of AAUs relating to operations listed in art. 52.3 (operations for which no KP actions is required or KP actions have already been made).

The central clearing account contains a quantity of AAUs corresponding to general allowances to be subject to banking.

The aviation surrender set-aside account contains a quantity if AAUs to be distributed to MS according to their domestic aviation emissions under KP.

e. Example MS with a KP registry: 10000 general allowances issued in the Union Registry among which 4000 in NER.

Holding of the Deposit account = 10000 AAUs, MDQ = 10000

3 In this example we also consider that among the general allowances issued, 500 were surrendered prior to migration but not converted to AAUs (anomaly which concerns a few MS).

Usage of allowances MDQ

Issuance of 10000 general allowances (4000 in NER) 10000

Net inflow of general allowances in accounts No change administered by this MS = 1000

Delete of 500 allowances to correct the anomaly above Minus 500

(applicable to a few MS only)

Voluntary deletion of 2000 allowances: No Change

Surrender 2500 by operators No Change

Surrender 1500 by aircraft operator: No change

Allocation of 2000 from the NER No change

5 May: set aside of 1500 KP units Minus 1500

5 May: KP cancellation of 2000 units Minus 2000

8 May: deletion Minus 2000

Situation before clearing 4000 CV

CV = MDQ – general allowances surrendered by operators 4000 1500 (6000 – 4500 = 1500)

After clearing Deposit holding

Recalculation of MDQ 0 8500

The clearing value indicates that 1500 AAUs must be transferred to the ETS Central deposit account.

The situation after the clearing is as follows:

The MDQ is recalculated in accordance with art. 52.4, MDQ = 4000 – 2500 – 1500 = 0

In conclusion:

1. Given the MDQ = 0, all remaining AAUs in the deposit account are available to the MS (in total 8500), out of which:

a. 2500+500 must be retired against EU ETS emissions; 4 b. 2000 are available since other KP units have been cancelled;

c. 1500 are available since other KP units have been transferred to the set aside account;

d. 2000 are available because the corresponding allowances have been deleted.

Note: with regards to allowances that will be banked (in total 2500), the AAUs are on the CCA, the quantity corresponding to the net inflow is due to be transferred by another MS.

3. Banking As provided by art.57, the objective of the banking is to replace on all users account all allowances valid for the second period of EU ETS by allowances valid for the third period of EU ETS. General allowances valid for EU ETS phase II will be replaced by general allowances phase III whereas aviation allowances phase II will be replaces by aviation allowances phase III.

Users' accounts are defined as follows (in reference to table I-I of Annex I):

o operator holding accounts,

o aircraft operator holding accounts,

o person holding accounts,

o trading accounts.

Note that banking will be executed on the accounts above unless the account was opened by a MS or the account is closed.

All other types of account (central management accounts and national holding accounts) are not banked, any allowance held on those accounts will have been deleted (see part 2 above).

Timeline It is expected that the banking will take place between 17 and 28 June. The duration of suspension of transfers should be limited to 5 working days. The exact timing is still to be determined.

Action (all actions by COM) Date

Suspension of access to the Union Registry (in particular no pending T0 transaction of phase II allowances is authorised during banking, they should be all completed or terminated before the banking is executed)

Determination of the list of accounts and quantity of allowances to be banked T0 – T0+1 – notification to MS

Execution of the replacement (2 steps: deletion of phase II allowances and T0+2- T0+6 5 issuance of phase III allowances in the same account)

Restore access to the Union Registry T0+7