Emission trading and financial services regulation in Germany at a glance

Publication | May 2009


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).

EU Emission Trading System as implemented in Germany

The European Emissions Trading Directive 2003/87/EC (EU ETS Directive) defines the structural elements of the European Trading Scheme (EU ETS) and is part of the implementation efforts of the European Union in respect of the targets set by the Kyoto Protocol. The EU ETS Directive was implemented into German law by, inter alia, the Greenhouse Gas Emissions Trading Act (Treibhausgas-Emissionshandelsgesetz – TEHG) and the Allocation Act (Zuteilungsgesetz 2012 – ZuG 2012). The TEHG provides the main framework for emission trading activities and consists of both regulatory and institutional elements. The ZuG 2012 lays down allocation rules based on the German National Allocation Plan II (NAP) for the second commitment period (2008-2012).

Legal nature of Allowances

The legal nature of Allowances has not been defined by German law and is the subject of controversial discussions in the German legal literature. Even though Allowances are often compared with commodities, the main position is that the Allowances are subjective public law rights (subjektive öffentliche Rechte) and therefore considered to be immaterial assets. However, for the sale and purchase of Allowances this uncertainty is in practice not particularly relevant: the general provisions of the German Civil Code (Bürgerliches Gesetzbuch – BGB) regarding purchase contracts apply.

Transfer of ownership

A transfer of ownership of Allowances takes place by mutual agreement to transfer (Einigung) and subsequent registration (Eintragung). The agreement for transfer of ownership is usually contained in the sale or trading contract, although subject to certain conditions precedent. The registration of the Allowances in the register is conclusive of the transfer of ownership. It triggers a protection of good faith (Gutglaubensschutz) in favour of the registered owner, meaning that the register shall be deemed to be correct once the registration of the Allowances has taken place. This protection, however, does not apply in case the recipient of the allowance has knowledge of the incorrectness of the register at the date of allocation.

It should be noted that according to the German law principle of abstraction (Abstraktionsprinzip) the sale and the transfer of ownership are two separate contracts, even if in most cases both contracts are entered into at the same time. However, this differentiation is not merely academic since a defect in one contract does not automatically nullify or affect the other.

Restrictions on the right to transfer

The German trading register at the German DNA (Designated National Authority), the Deutsche Emissionshandelsstelle, does not reflect restrictions on the right to transfer. Typical transfer restrictions are that the account holder might be subject to account blocking due to the delayed submission of an annual emission report or the lack of legal capacity due to the account holder’s insolvency. In the latter case, the insolvency administrator is the only person authorised to dispose of the account holder’s assets, which include the Allowances. Trading contracts often provide that the defaulting party has to pay compensation in cash in case of a failure to deliver, which may also include an Excess Emissions Penalty (EEP). An EEP is usually defined as a financial payment required to be made to an authority if an operator does not fulfil his obligation to surrender the required Allowances in time.


The only way to take security under German law over an Allowance in a German account is an assignment by way of security (Sicherungsabtretung) which requires a simple contract between the respective parties. However, as the restriction cannot be registered, the assignor still has the full legal capacity to transfer the encumbered Allowances to a third party. Alternatively, the Allowances have to be transferred to the assignee’s account which weakens the transferor’s position. Detailed provisions for the retransfer have to be agreed, especially if the transferor needs the relevant Allowances for compliance purposes.

In case of cross-border transactions, the traded Allowances may validly be encumbered under a foreign law. However, any foreign law rights may become worthless or void once the Allowances have been transferred to a German account. Most trading contracts require the seller’s representation that the Allowances are free of any encumbrances.


In line with the Kyoto Protocol, when buying Allowances, German operators (or counterparties) will only accept Allowances which can be used for compliance purposes. This is not the case for CERs and ERUs from nuclear plants, land use (Landnutzung), land use change (Landnutzungsänderung), forestry (Forstwirtschaft) and for projects where the parties are not part of Annex 1 of the Convention of the United Nations on Climate Change (Rahmenübereinkommen der Vereinten Nationen über Klimaänderungen) dated 9 May 1992. German operators are entitled to credit CERs and ERUs up to 22 per cent of the EUAs that were allocated to them according to the NAP.

Financial services regulation

Anyone, be it an individual or corporate investor, or an industry operator, is allowed to invest in all types of Allowances. It is, however, crucial to understand the circumstances under which trading in Allowances is subject to German financial services regulation.

The applicability of German financial services regulation has severe consequences. First of all, a banking or financial services licence is required. To obtain a licence, several requirements have to be met; inter alia, the directors of the institution must have a qualified financial services background. Furthermore, costs are involved for obtaining the licence and for ongoing supervision. Moreover, the rules of the Market in Financial Instruments Directive (MiFID), as implemented into German law, are applicable. These include inter alia client information, best execution, client categorisation and reporting requirements.

Applicability of German financial services regulation

The German Banking Act (Kreditwesengesetz – KWG) and the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) are applicable if financial services are provided in financial instruments in Germany, and if no exemptions are available.

Financial instruments

Allowances can be traded as derivatives or on a spot basis. Pursuant to an express provision of the TEHG, the Allowances themselves are not financial instruments. Financial services regulation is therefore not applicable to spot trades in Allowances. Furthermore, OTC (over-the-counter) derivatives which provide for mandatory physical settlement where the underlying certificates have to be delivered to the contracting party, do not qualify as financial instruments.

However, financial services regulation might be applicable to derivative products that are either cash-settled or exchange traded. Derivatives relating to Allowances may qualify as financial instruments if they:

  • are cash settled (mandatory or optional), rather than physically settled; and/or
  • are traded on a regulated market such as the EEX or an multilateral trading facility (MTF); and/or
  • meet the criteria of Article 38 paragraph 1 of the Commission Regulation 1287/2006 for derivative contracts that are considered comparable to derivatives traded on a regulated market. The criteria for comparability include the conditions for trading, clearing and settlement, and standardisation.

Services in Germany

German financial services regulation applies to the extent that financial services are offered in Germany. If the provider of the services has its registered office outside Germany, the following applies: in the view of the BaFin, financial services are generally offered in Germany if the provider targets the German market in order to offer banking products or financial services repeatedly and on a commercial basis to German companies and/or German resident individuals.

Financial services

Typical financial services which are related to Allowances are:

  • commission trading in the trader’s own name for the account of third parties;
  • trading for own account as a service for third parties;
  • purchase and sale of financial instruments in the name of a third party for the account of the third party;
  • brokerage of transactions for the purchase and sale of financial instruments for clients in the name of the clients; and
  • trading for own account without any service for third parties.


Exemptions from the regulations are available for trading in carbon derivatives if certain conditions are met. The requirements depend on the type of financial service rendered, the scope of the trading activity and the relation to the trading activity of the company’s main business. In particular, exemptions are available if the company is dealing on its own account. The BaFin has issued guidelines as to when such exemptions apply. Furthermore, the BaFin has the authority to grant general exemptions from the financial services regulation.


Despite sinking carbon prices and the financial crisis, emission trading still provides benefits for being a player involved in this market. The EU ETS is the world’s largest greenhouse gas emissions trading system; the German regulations provide for a reliable legal framework for trading activities within this system with counterparties from all EU Member States. Furthermore, the US – after China the country with the highest carbon dioxide emissions – is expected to adopt some form of cap and trade scheme which could be linked in a global emission trading system.

As the Kyoto Protocol is due to expire in 2012, the world will look to Copenhagen in December 2009, when a global climate deal to succeed the Kyoto Protocol is expected to be struck.


For further information, please contact:


Frank Herring
Partner – Financial services

Jochen Terpitz
Partner – Energy

Kevin Quennet
Associate – Energy

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