Emission trading in Germany has significantly increased in recent years. International banks, financial services firms, brokers, investors and trading companies have set up their emission trading activities and some of them are considering the development of trading activities in the German market due to the amount of industrial activity there. Even if the predictions for the carbon price development remain bearish due to lower levels of industrial production following the financial crisis, the emission trading market plays an important role in achieving the targets set out by the Kyoto Protocol.
Several recently established CO2 exchanges organise and facilitate international trade, inter alia, the European Climate Exchange (ECX), Nordic Power Exchange (NordPool) in Norway, the European Energy Exchange (EEX) in Germany, BlueNext in France and the Energy Exchange in Austria (EEXA). Likewise, several associations have developed master agreements for emission trading (eg, the International Emissions Trading Association (IETA), the International Swaps and Derivatives Association (ISDA) and the European Federation of Energy Traders (EFET). In Germany, the German Framework Agreement (Deutscher Rahmenvertrag – DRV), published by the Bundesverband deutscher Banken, has an important role as it is often used for emission trading activities by German banks.
Most of the trades in Germany are documented by master agreements which provide special rules for, inter alia, spot trades, forwards, swaps, repo/maturity swaps and options. The trading documentation usually concerns the following types of allowances: EU allowance (EUA), Certified Emission Reduction (CER) and Emission Reduction Unit (ERU) (the Allowances). However, as master agreements establish a long-term relationship the parties may use single trade agreements for single transactions. Such trading documentation is often based on the single trade agreement provided by IETA.
In order to set up emission trading activities in Germany it is essential to understand certain peculiarities of the German emission trading system. Furthermore, it is important to know that certain trading activities in Germany are subject to authorisation and supervision by the Federal Supervisory Authority (Bundesaufsicht für Finanzdienstleistungen – BaFin).