A French Legal Perspective.
As the European Union doubles down on its commitment to reducing greenhouse gas emissions, EU Emission Trading System (EU ETS) allowances have become not only an environmental tool but also a valuable financial asset. While in 2017, the price of a carbon credit (one ton of CO₂) was around €5–7, by the end of 2020, prices had increased to around €30–€35 per ton. They continued increasing dramatically in 2021, reaching over €60 per ton and finally €90 in 2022 and currently remain on the high side.
These allowances, which grant companies the right to emit a specific amount of carbon dioxide (COâ‚‚) or equivalent greenhouse gases, are now being eyed as potential collateral in financial transactions in certain countries. But what does it mean to take security over EU ETS allowances, and what should companies and financial institutions be aware of?
The EU ETS operates as a cap-and-trade system, where a cap is set on the total emissions allowed within the system (this cap is reduced over time, meaning that total emissions fall), and companies receive or purchase allowances that permit them to emit a certain amount of CO₂. As the EU tightens emission caps, these allowances have grown in value, transforming them into assets that can be traded or used as security in financial deals. These allowances are traded on a robust market, offering companies both a way to comply with emission caps and an opportunity for financial maneuvering. Given their value, it’s no surprise that companies and financial institutions are exploring ways to use these allowances as collateral in financial transactions. They have gained an extrinsic value beyond their intrinsic value.
For companies holding significant amounts of EU ETS allowances, leveraging these assets to secure loans or other financial obligations might seem like an attractive option. However, the process of taking security over such allowances raises technical legal issues.
