Carbon allowance trading has been successfully used within the European Union as a tool to combat climate change since 2005. Governments or companies issue such allowances at both national and international level to create incentives for industry to reduce greenhouse gas emissions and develop more sustainable practices by setting a price. The principle: companies that keep their emissions below a specific limit can sell their surplus allowances to companies that do not meet their emissions targets. In this way, a market is created for the certificates to be traded. Trading CO2 certificates is a positive step in the fight against climate change. However, acquiring such certificates and their sale is not without risk. For example, there are always cases of fraud in this area, such as the theft of certificates through phishing, but also violations of tax law.
To provide our clients with the legal certainty they need, the German law firm Schlun & Elseven offers competent and committed legal assistance. Our lawyers are well-versed in all relevant areas of law that this legally complex topic encompasses. Regardless of whether you as an entrepreneur need support and advice for the acquisition or trading of environmental certificates, whether you have tax law questions regarding the handling of the certificates or require representation in the event of an accusation of an environmental offence – our lawyers are at your side with their excellent expertise and many years of experience.
We look forward to working with you.
The EU Emissions Trading System (EU-ETS)
The EU Emissions Trading System (EU-ETS) was established in 2005 as part of the Kyoto Protocol. Its members are the 27 EU Member States plus Norway, Liechtenstein, Iceland and the United Kingdom of Great Britain. Switzerland has also been a member since 2020. The EU ETS covers emissions from around 11,000 installations in the energy sector and energy-intensive industries across Europe, which account for about 40 percent of greenhouse gas emissions in Europe. Intra-European aviation is also part of the EU ETS. The EU ETS is intended to serve as an incentive for companies to reduce their greenhouse gas emissions. For this purpose, the EU ETS uses the so-called cap-and-trade principle. A specific upper limit, the so-called cap, determines how much emissions may be emitted. These emission allowances can be freely traded on the market. The Member States then issue corresponding emission allowances to the installations concerned. This is done either free of charge or by buying the allowances at auction. One allowance, in turn, permits the emission of one tonne of carbon monoxide equivalent CO2 eq. This allocation technique should lead to the companies concerned significantly reducing their emissions.
Trading CO2 Certificates
Trading in CO2 certificates is primarily carried out via auction platforms. These platforms are organised on a national level. Essential CO2 exchanges at the European level are, for example, EEX (Germany), ECX (USA), Bluenext (France) and Nordpool (Norway, Denmark, Sweden, Finland). Every member of the EU ETS has access to the auction platform – companies, joint ventures, public institutions and investment firms authorised under EU law. Investment firms are admitted if they have a registered account that records trading and the firm’s emissions level and stores the corresponding allowances. Trading via the online platform offers the great advantage that anyone authorised to trade can access the platform. This makes it possible to use the trade quickly and without considerable effort. Another advantage is the transparency of the auction platforms. The state monitors the individual trading steps, and the processes can be traced. In addition to trading via online auction platforms, there is also the possibility of trading CO2 certificates on the privatised, unregulated market. This market is called the over-the-counter market (OTC market).
In contrast to online trading, the data of the OTC market is not published, making it difficult to trace the certificates. It is also difficult to check the pricing here. This method of trading is much more susceptible to attempted fraud.
Our experienced legal experts will be happy to advise you on how to make your company more climate-friendly with the help of CO2 certificates. In doing so, our team of experts will ensure that special features of all relevant areas of law are considered accordingly. Our lawyers specialising in German criminal law, environmental law and tax law, will provide comprehensive advice on your legal options and support you in choosing a suitable climate strategy for your company.
Criminal Law Risks of Trading with CO2 Certificates
As mentioned at the beginning, trading in CO-2 certificates is risky. It is particularly easy to become a victim of fraud when acquiring the certificates or to make oneself liable to prosecution by negligently or even intentionally disregarding the requirements for trading or acquisition. Especially in tax law, it is essential to keep a close eye on the legal peculiarities to avoid exposing oneself to the risk of becoming liable to prosecution for tax evasion. The situation is further complicated because the legal nature of ETS allowances is not clearly defined, and the various member states have adopted different regulations regarding the legal status of CO2 allowances. Consequently, there is no uniform legal basis, so the significant legal differences from Member State to Member State give rise to additional risks for acquisition and trading. In Germany, the certificates take a hybrid form. They consist of both administrative law elements and private property rights. Not in all Member States, the property rights are also part of them. For example, in Germany, a bona fide acquisition according to Section 932 BGB (German Civil Code) of the certificate is entirely possible. At the same time, such a regulation does not exist in other Member States. If the bona fide acquisition of a certificate is not possible due to the different legal situation of the member state, the consequence is that the acquirer of a non-legitimised certificate does not obtain ownership of it, which in turn means that they cannot realise any sales proceeds.
As an internationally active, multidisciplinary law firm, we are familiar with the legal particularities of the EU ETS member states. Thanks to our excellent expertise and many years of experience, we guarantee our clients the best possible service so your company is always legally secure.
CO2 Trading on a Blockchain Basis
A possible solution to the risks mentioned above and security problems could be trading CO2 certificates on a blockchain basis. Through the blockchain process, the data is digitised, and each is assigned its own digital identity. All certificates are marked accordingly and thus offer the possibility of traceability. The certificates become forgery-proof through a guaranteed proof of authenticity. Blockchain enables secure data exchange and could significantly reduce existing security risks. Data is stored so the certificates cannot be changed and are recorded in a forgery-proof audit trail. This system of certificate storage allows Member States to easily track the transactions they carry out, thus minimising the risk of fraud.
This procedure is used only sporadically in practice. Here, too, the problem arises as to how the ownership of the certificates can be protected. As a rule, the mere token issuance does not establish a legal relationship and, consequently, no legal claims against the other contracting party.
Together with our IT specialists, we will clarify whether blockchain-based CO-2 trading suits your company. Our multidisciplinary expertise enables us to consistently achieve the best solution for your company, both technically and legally.
Practice Group: German Environmental Law
Practice Group:
German Environmental Law
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