European Union: The Making Of Emissions Trading Laws – Understanding The EU Legislative Process


Unlike most traded commodity markets, the market for trading carbon credits or emissions allowances in the EU is not one based on its utility, usage or consumption. A carbon credit is not used in manufacturing processes or consumed like power or grain. Its market is entirely an invention of policy as implemented through legislation and regulation with a view to reducing the carbon emissions in the EU. Any demand for a carbon credit or emission allowance ("allowances"), is also therefore a creation of those legislative and regulatory processes. That process has left the EU Emissions Trading Scheme ("EU ETS"), today in its third phase,1 moribund with an over-supply of allowances.2

Although the EU ETS is a relatively new market, it has certainly had its share of teething problems. Some of these problems (e.g. VAT fraud and addressing security aspects from carbon registry hacking incidents) have been through a lack of foresight on the part of the European Commission (the "Commission") and the member states. Others, such as the over-supply problem, have been as a result of a combination of fewer allowances required through financial crisis-induced lower industrial output, and the lack of ambition on the part of the developed world (including the member states) to take on more stringent caps for its emissions output. In the case of each of these problems, the Commission's response has been to propose more legislation to tweak, amend or revise its original legislation. We have seen three versions of a 'new' Registry Regulation3 between 2009 and 2011, and have just had a fourth new version in May 2013. As the Commission proposes various 'fixes' or applies band-aids to the various problems it has to address, it sometimes builds on bad policy with more bad policy. The inclusion of the aviation sector within the EU ETS and the subsequent 'temporary' exclusion for one year only, springs to mind as a good example of the Commission's "band-aid" approach to legislative intervention. "Two wrongs don't make a right" seems an apt description of much of the legislation recently introduced, including some that has been designed to have retrospective effect.

Therefore, how does a participant in the carbon market manage risk and uncertainty arising from a volatile and unpredictable legislative process? Unlike any other market, in the EU ETS it becomes essential to understand the legislative process as part of the toolkit of risk management, used by risk managers looking after traders. The importance of understanding the legislative process and the price volatility that can be triggered from a knee-jerk reaction to minor steps in the legislative process, was most visibly seen in the Commission's recent proposal known as the 'Backloading' proposal.4 We will use the 'Backloading' proposal as an example to illustrate the legislative process followed in the EU ETS. This client alert seeks to demystify the labyrinth that is the EU rule making process in the EU ETS.5

The Codecision Procedure

The most commonly used procedure for making law in the EU is the codecision procedure.6 In the last legislative term (2004- 2009) a total of 447 codecision files were concluded. The first half of the seventh parliamentary term (2009-2011), confirms the trend of first reading agreements: 136 codecision files (78%) were concluded at first reading, 32 (18%) at second reading and 7 (4%) at third reading. With the considerable extension of the scope of the procedure under the Treaty of Lisbon, the number of codecision files is expected to increase in the future.7

Diagram 1 (below) provides a high-level overview of the codecision procedure (a more comprehensive flow diagram has been included at Appendix 1). The majority of EU legislation will not require that the full nine stages of the process be utilised. If the proposed legislation is well supported by the EU Parliament and the Council of the European Union then it is possible that that it will become law after having completed only stages one to five.

Stage1: The Commission Proposal

The Commission has the right of initiative under the codecision procedure.8 The European Parliament (the "Parliament") and the Council of the European Union (the "Council") then examine the proposals and suggest amendments before voting on whether the law should pass. Although there are several ways in which the Parliament and the Council can examine laws, the most common method is the codecision procedure. The Commission will place its proposal before the Parliament and the Council simultaneously.

Stage 2: First Reading in the Parliament

The European Parliament delivers an opinion at first reading.

This opinion is prepared at two levels:

  • At parliamentary committee level
  • At plenary level

Parliamentary Committee

When the Commission text reaches the Parliament, the parliamentary committee responsible (the "lead committee"), is named along with any other committees that are asked for non-binding opinions. Within the lead committee, the political groups' coordinators designate a rapporteur entrusted with the drafting of the report containing the proposed amendments, if any, put forward by the Parliament. The parliamentary committees meet several times to study the draft report prepared by the rapporteur, as well as amendments put forward by other MEPs. These parliamentary amendments, as well as those suggested by the individual committee, are put to the vote in the lead committee, on the basis of a simple majority. Only the lead committee9 will have a binding vote, and a simple majority is needed to approve the report before the Commission's proposal can progress.

During the equivalent committee process of the "Backloading" proposal, EU carbon prices slid 40%10 after the Industry, Research and Energy Committee (ITRE) opposed plans to support the proposal (in January), even though the ITRE's role was only advisory and the vote was non-binding. This perhaps suggested an overreaction by the market or a limited understanding of the EU legislative process, or perhaps, a little of both. The lead committee11 subsequently voted in favour of the proposal with a stronger-than-expected margin.12

Adoption in Plenary

Once the report is adopted at committee level, it then goes to plenary, as both the "Backloading" and "Stop-the-clock"13 proposals did on 16 April 2013. Additional amendments to the report, including amendments adopted in the parliamentary committee, may be tabled by political groups and put to the plenary's vote. Ahead of the vote, the rapporteurs and shadow rapporteurs present their report, followed by the relevant Commissioner.14

In the first reading, following the opinions at the committee and plenary levels, a simple majority (i.e., majority of MEPs present during the vote) is required to adopt the amendments, either on an amendment-per-amendment basis or "en bloc."

First Reading in the Parliament – Examples of Process

In focus:
"Backloading" Proposal

Rejected by a narrow margin
334 in favour
315 voting against
63 abstaining

"Backloading" Proposal The "Backloading" proposal, as referred to in the media, conjoins two separate stages; only the first stage was subject to a plenary vote on 16 April 2013. The first stage, to amend the EU ETS Directive, did not receive the simple majority needed to take it to stage 4 of the legislative process. This has derailed the Commission's stage 2 plans to implement the amendment to the "Auctioning Regulation."15

With the rejection of the Commission's proposal, the Commission could choose to maintain the proposal by going back to the lead committee for amendment to try and gain a position of support at committee level. Recent reports suggest that this will happen, perhaps following the German government's support for the proposal. The Commission has not formally withdrawn its proposal, as it took the confusion caused during the voting process16 on 16 April to conclude that the proposal may not be "dead in the water." When introduced the Backloading Proposal will start from stage 2 above.

In focus:
"Stop-the-clock" proposal

Support by a large margin
577 in favour
114 voting against
21 abstaining

"Stop-the-clock" Proposal In contrast, during the same parliamentary session the Parliament voted in favour of and adopted the 'Stop-the-clock' proposal. The result of the plenary vote is already being negotiated with the Council (see stage 4 below) and majority support and adoption by the Council without amendment seems very likely.

Stage 4: First Reading of the Council

The Council examines the Commission's initial proposal in parallel to the Parliament. This work is conducted within specific working parties, made up of representatives of the member states and chaired by the representative of the member state holding the presidency. The Commission attends these meetings and can provide expert advice. The Council, however, only finalises its position once it has sight of the Parliament's first reading amendments and the Commission's resulting amended proposal.

If the Parliament has not adopted any amendments to the Commission's proposal and the Council accepts the Commission's proposal without alteration, the act will move on for its second reading in the Parliament.

Even if the Parliament has introduced amendments, if they are uncontroversial then the Council can choose to approve the amendments by qualified majority (see Diagram 2) and just as in the scenario set out above, the outcome is an early first-reading agreement.

However, not all legislative proposals have a smooth ride through the codecision procedure, especially if they have been passed by only a narrow margin in the Parliament's plenary vote. If the Council wishes to make amends to the adopted Parliament text, two sub-options are possible and are explored more fully in Appendix 1: a second reading will only be required if the Council position is not in line with the Commission's amended proposal, then unanimity will be required to adopt its Common Position. The Council may amend the Commission proposal only by acting unanimously (except in Conciliation). However, in order to facilitate the Council's vote with qualified majority, the Commission often amends its original proposal just before the adoption of the Council's Common Position.17

During the whole first reading stage, neither the Parliament nor the Council are subject to any time limit by which they much conclude their first reading.

Stage 5: Communication of the Common Position

The next stage is a Commission communication on the Council Common Position, which is forwarded to the Parliament in tandem with the Council Common Position, and explains why the Commission has decided to support or oppose the Council Common Position. The Commission also comments on the Council's reaction to Parliament's amendments which it had supported in plenary at the first reading.

Informal Trialogues

When the co-legislators are seeking to conclude an agreement at first reading, it is often the case that they organise informal tripartite meetings attended by representatives of the Parliament (rapporteur and, where appropriate, shadow rapporteurs), the Council (chair of the working party), and the Commission (department responsible for the dossier and the Commission's Secretariat-General).

Stage 6: Second Reading in the Parliament

A three-month time limit18 is imposed for the Parliament to take action on the basis of the Council Common Position. After the three month period to allow for scrutiny, provided there have been no objections passed, the legislative act can then be then submitted directly for the signature of the Presidents and Secretaries-General of the Parliament and of the Council, and is published in the Official Journal, ending the procedure.

It is likely that the "Stop-the-clock" proposal, first proposed on 20 November 2012 and passing its first Parliamentary plenary vote on 16 April 2013 will move forward without amendment and become law by July 2013.

However, as demonstrated by the "Backloading" proposal, not all proposed legislation will follow stages one to five of the codecision procedure without challenge. If the Parliament suggests amendments to the Council position at first reading then the proposed legislation will move on to stages six to nine of the codecision procedure (See Diagram 1).

Final Stages (stages 7 to 9): Second Reading by the Council, Commission Opinion, Conciliation Procedure and Third Reading

The Council has a further three months19 to approve the Parliament's second reading text. The adoption procedure is broadly similar to that at first reading, but with substantial restrictions on the nature of the amendments that can be tabled at second reading.20 The plenary will make its position known on the basis of the amendments included in the recommendation adopted by the parliamentary committee and any amendments tabled in plenary by political groups. The plenary will then need to adopt amendments by absolute majority.21

If the Council, voting by a qualified majority on the Parliament's amendments (see Diagram 2), and unanimously on those which have obtained the Commission's negative opinion, approves all of the Parliament's amendments no later than three months after receiving them, the act is deemed adopted.

In all other cases, Conciliation must be initiated, the Conciliation Committee having to be convened within six weeks.22 Conciliation is rare in practice (see Appendix 1).

Distinguishing Codecision from Comitology

An important distinction must be drawn between when the codecision procedure is used to create new laws, exemplified by the "Stop-the-clock" and "Backloading" proposals, and when there is delegation to the process of "comitology". Comitology is an example of EU implementing procedure, used when legislation has already been passed by codecision but requires further amendment to be fully implemented, exemplified by the new "Registry Regulation."23

The "comitology" procedure applies to the adoption of measures of general scope designed to apply essential provisions of basic instruments, or if specified, to adapt, delete or amend certain non-essential provisions of that basic instrument. The Comitology Regulation24 sets out uniform conditions for the implementation of legally binding European Union acts, those acts ("basic acts") are to confer implementing powers on the Commission.

It is for the legislator, in accordance with the criteria laid down in the TFEU,25 to decide in respect of each basic act, whether to confer implementing powers on the Commission. A basic act may provide for the application of the advisory procedure or the examination procedure, taking into account the nature or the impact of the implementing act required. The new Registry Regulation is an example of the examination procedure. The latest incarnation of the Registry Regulation was put to vote in the EU Climate Change Committee (the relevant comitology committee) on 24 January 2013, and it received a majority vote in favour. It was then forwarded by the Commission to both the Council and the Parliament, which have up to three months to oppose the measure. The measure was adopted, after the three-month period lapsed, on 2 May 2013.26


The lessons learnt by the participants in the EU ETS are mostly through hard and often painful experience. Price volatility has often been extreme and, as a commodity to invest in, allowances have often not provided a risk-worthy return. In a market created by legislation, an understanding of how the EU goes about making the laws, regulations and rules that allow the EU ETS to exist and operate is therefore key to the market's ability to attract investment in low-carbon abatement technology, and in altering the behaviour of large emitters.

As a policy measure, the concept of cap-and-trade as the best tool to achieve a price on our carbon emissions is being challenged in the EU, at a time when other countries (e.g., Australian, South Korea and Kazakhstan) and regional schemes (e.g., California and Quebec) are adopting their own cap-and-trade schemes. The EU ETS, as the oldest and largest international scheme, has an important climate leadership role to play and its trials and tribulations will be lessons to others.

For risk managers, a better appreciation of the significance of the price volatility driven by EU ETS legislative and regulatory activism will enable them to do their jobs more effectively. The problem for the market is that there are no market tools to hedge against the unpredictability of the legislator, although the effectiveness of lobbying as a tool in the EU legislative process, as seen in the "Backloading" proposal, appears to be increasing.


1. The EU ETS's third phase commenced 1 January 2013, and will run until 31 December 2020.

2. On aggregate, the EU ETS in Phase III is forecasted to remain significantly oversupplied until after 2020, with the peak predicted to be reached around 1500-2000 Mt in 2015-2016, followed by a decline to 1000-1500 Mt by 2020. Source: IETA briefing on the EU's Emissions Trading Scheme

3. Commission Regulation (EC) No. 406/2009, Commission Regulation (EU) No. 920/2010 and Commission Regulation (EU) No. 1193/2011.

4. This proposal was to amend Directive 2003/87/EC (the "EU ETS Directive") to clarify the timing of auctions that may be carried out in the EU ETS and therefore, to empower the Commission to then amend Commission Regulation (EU) No. 1031/2010 (as amended, the "Auction Regulation"). The Commission would thereby, instead of an even distribution of auctioned allowances throughout the third phase, create an artificial scarcity in the first three years of the phase by reducing the available allowances for auction and skew the availability near the end of the phase by increasing the numbers auctioned in 2018 and 2019.

5. This note does not seek to be a comprehensive guide on all the EU processes available for making laws but only those that are most commonly used in the context of the carbon markets.

6. The codecision procedure itself is a framework for negotiations between the Council and the European Parliament set out in Articles 250 and 251 Treaty establishing the European Community (the "TEC").

7. The Treaty of Lisbon expanded the scope of codecision to reach 85 activity areas, from 44 activity areas under the Treaty of Nice. Source: European Parliament Guide to how the Parliament co-legislates under the Treaty of Lisbon, January 2012

8. In specific cases laid down in the Treaty, legislative proposals can also be submitted on the initiate of Member States, on a recommendation by the European Central bank, or at the request of the Court of Justice. In these cases certain provisions concerning the role and prerogatives of the Commission do not apply (Article 294 (15) Treaty on the Functioning of the European Union (the "TFEU").

9. Also sometimes called the "regulatory committee"

10. Source:

11. In the context of the "Backloading" proposal, this was the Environment, Public Health and Food Safety Committee (ENVI)

12. 48 votes in favour and 16 against.

13. The "Stop-the-clock" proposal is a proposal from the Commission to temporarily make available to airline operators derogation from its compliance with the EU ETS for those international flights that land or take off in the EU but originate or end outside the EU. This proposal was necessary due to the increasing opposition to the extra-territoriality of the EU ETS brought to bear by the governments of Russia, China and the United States because of the compliance obligations on its airlines.

14. This refers to the case where the report has been adopted in parliamentary committee with a 90% majority and the rapporteur requested that it report be voted in plenary without further amendment or debate.

15. In preparation for the next step a draft amendment had been placed before the Climate Change Committee on 23 January 2013 but became redundant given the result of the plenary vote.

16. A proposal to formally adopt the earlier legislative resolution rejecting the Commission's "Backloading" proposal did not pass as there was insufficient support. This has given rise to confusion as to whether there is a clear position among MEPs.

17. While this is not explicitly laid down in the Treaty, it is widely accepted that acting by a qualified majority the Council may reject the Commission proposal as a whole. On the other hand, the Commission may decide at any time during the first reading wither to withdraw or to alter its proposal (Article 293(2) TFEU).

18. The time limit starts to run form the official receipt of the amendments resulting from Parliament's second reading (with a possible one-month extension if agreed).

19. With a possible one-month extension if agreed.

20. Amendments must introduce a compromise between the positions of the co-legislators, must concern a part of the Common Position which did not appear in, or is substantially different from, the Commission's initial proposal and seek to take account of a new fact or legal situation which has arisen since the first reading. If new European elections have taken place, the rules for first reading will apply.

21. An absolute majority requires more than 50% of all members, irrespective of the number of those voting.

22. With the possibility of a further two-week extension if agreed.

23. Commission Regulation (EU) No 389/2013 of 2 May 2013

24. Regulation No. 182/2011

25. in accordance with Article 291(2) of that Treaty

26. Where a basic act is adopted under the ordinary legislative procedure, either the European Parliament or the Council may at any time indicate to the Commission that, in its view, a draft implementing act exceeds the implementing powers provided for in the basic act. In such a case, the Commission shall review the draft implementing act, taking account of the positions expressed, and shall inform the European Parliament and the Council whether it intends to maintain, amend or withdraw the draft implementing act (Article 11 Regulation (EU) No. 182/2011).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.