With COP26 just last month and ESG at the top of the business agenda, ESMA’s recently released Preliminary Report on Emission Allowances and derivatives thereof, is timely. The report discusses the EU’s objective of reducing net greenhouse gas emissions after the European Commission (EC) asked ESMA to analyse the trading of emission allowances (EUA).
The document highlights some useful clarifications relating to EMIR reporting:
- Emission allowances are considered a financial instrument and therefore should be reported under EMIR
- Product Identification (2.6) – this field must contain an ISIN to identify the derivative
- Commodity Details (2.66) – This field should be populated with ‘EM’ for emissions – this is called out as crucial for emission identification, notably if the derivative is not highlighted as such within the aforementioned Product Identification field.
Looking ahead – EMIR Refit
ESMA will use EMIR Refit as an opportunity to increase the level of detail reported for such emission trades, including:
‘More granular classification of the commodity and emission allowances derivatives, including a breakdown between Certified Emission Reductions (CERs), Emission Reduction Units (ERUs), European Union Allowances (EUAs) and Aviation European Union Allowances (AEUAs).’
Coupled with other reporting requirements, such as the use of ISINs, enhanced lifecycle events, and transparent business activities of counterparties, which should increase ESMA’s market view into EUA.
ESMA plans to release its report on the trading of emission allowances next year, which is likely to lead to further clarifications for EMIR reporting and useful analysis regarding the important topic of net greenhouse gas emissions.