Innovation in Property Rights for Emissions Trading

This website provides a broad introduction to the legal character of emissions entitlements and the significance of their legal characterisation. It represents the outcomes of an Australian Research Council Discovery Project (ID: DP130100607) awarded in 2013.

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Current Methods for Characterising Entitlements

Issues with Unclear Legal Nature of Emission Entitlements

Issues with Unclear Legal Nature of Emission Entitlements

The legal uncertainty across these dimensions in turn affects emissions trading. Market actors feel more confident trading in a market where the rights, duties and liabilities in relation to the commodity being traded are clear. Market actors also need to feel confident that their property cannot be taken away by the government.

The Financial Markets Law Committee of the Bank of England released a report on the uncertain legal nature of emission entitlements, in which they stated:

It might be argued that the fact that trading in emission allowances is already taking place, and that market infrastructure is being developed, indicates that there are theoretical issues which will not, in practice, prevent the successful development of a market where the commercial interests of operators and financial institutions require it. The Financial Markets Law Committee does not believe that this is the case: the reason why these uncertainties have not so far impeded the early stages of the development of the market is simply that they have not been appreciated (Page 15, Paragraph 4.1)

The legal nature of an entitlement is also important in the context of inter-linking emissions trading schemes. Inter-linked schemes mean that emission allowances allocated in one jurisdiction are accepted in the other.

The different legal nature of entitlements presents a barrier to inter-linking. For instance, if country A recognised an emission entitlement as property capable of forming the subject matter of a trust and country B did not, then policy makers will have to compromise regarding the characterisation of entitlements.

The 3 key issues

What's the way forward?

What's the way forward?

We suggest that legislatures consider precisely outlining a holder's rights and duties in relation to an entitlement as well as the contexts in which the government may vary and terminate an entitlement.

Courts have various limitations on their ability to precisely scope the nature of rights and duties in an emission entitlement. They are limited to the facts of the case before them, and courts work within existing legal frameworks and concepts that are applicable to more traditional and established property relationships such as an owner of land.

The Copyright Act 1968 (Cth) outlines the nature and duration of copyright ownership, identifies acts that will or will not infringe the rights of a copyright owner as well as remedies and offences associated with infringement. A similar approach could be used for statutory entitlements .

One model to legislatively characterise entitlements stems from intellectual property law, and in particular copyright law. Similar to emissions trading schemes, intellectual property laws have to reconcile private interests (i.e. in reclaiming their investment into the art or innovation) with the public interest (i.e. in accessing the art or innovation).

The 6 Principles

Transferability - The 6 Principles

Transferability

When creating an emission entitlement, statutes should identify whether entitlements are designed to be transferable or non-transferable and expressly explain the policy rationale underpinning the transferability of an entitlement. This will help ensure that, where legal issues arise, courts make decisions consistent with legislative intentions.

Drafting Statuses - The 6 Principles

Drafting Statuses

Statutes should be drafted in a way that accounts for the different property relationships that exist between the holder to the government and the holder to third-parties. For instance, an entitlement may be “property” between the holder and a private third-party, but not between the holder and the government.

Regulations Management - The 6 Principles

Regulations Management

Statutes should identify whether derivative financial products can be created on the basis of an emission entitlement, and how such interests can be created. Regulation of emissions trading and trade in derivative products from emission entitlements should be coherent and collaborative. This will ensure that governance of emissions trading does not become too fragmented.

Limiting Liability - The 6 Principles

Limiting Liability

Government bodies can limit their liability by expressly stating that an entitlement is either: inherently susceptible to alteration, a revocable license or “not property”. However, statutes should carefully delineate the circumstances in which a government body can alter an entitlement. This gives the regulator flexibility to change the scheme as required, but helps preserve market confidence, as a regulator’s discretion is limited and exercised in a predictable, consistent manner.

Other Considerations - The 6 Principles

Other Considerations

Government bodies should consider whether and which:

  • Criminal offences will apply in situations of, for instance, theft of an emission allowances;
  • Remedies should be available for innocent third-parties or victims of a crime involving an emission entitlement;
  • Domestic laws apply to emission entitlements, for instance, insolvency, bankruptcy and succession laws;
  • Exceptional circumstances can form the basis of a government body cancelling an entitlement.

Duties & Liability Outline - The 6 Principles

Duties & Liability Outline

Where specifying the legal nature of entitlements, statutes should outline not only the rights, but also the duties and liabilities that holders and third-parties have in relation to the entitlement.

Towards an International Emissions Trading Scheme

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