Template:M summ EUA Annex Abandonment of Scheme

What happens if, in its infinite wisdom, the European Union decides that an Emissions Trading Scheme is a silly idea and we should just embrace a future as Venusians, or Scottish vintners or something similar. You may see people tinker around with this — our favourite is “... or there is a proposal to abandon the Scheme... ” which given its looseness (there’s always some wingnut from a minority in an some oil-burning pressure group proposing something like that) and the lack of consequences beyond the transaction should it happen or not happen — it isn’t like it is an illegality or something where you can go to prison if you blithely carry on — there really seems no sensible call for this.

What happens

LEAR: Now, behold these windy allowances
To whose young regulators
The storied mines of France and Burgundy
Once strove to submit; that airy scheme now lies abandoned.
Wherefore am I girdled around by these confounded dockets.
Must they exhaust me so?

Enter CORDELIA, strumming on a lute.

CORDELIA: ’Tis the point, Sirrah.
LEAR: Fair Cordelia!
CORDELIA: My Liege.
LEAR: Maketh thou an offer —
Rid me of these papery ghosts!
What will you take? And at what price? Speak.
CORDELIA: Nothing, my lord.
KING LEAR: Nothing!
CORDELIA: Nothing.
KING LEAR: Nothing will come of nothing: speak again.
CORDELIA: Well, pops, that’s hot air for you.

Shakespeare: King Edward Lear, II, ii

If there is such an abandonment, the annex allocates the loss by requiring the person writing the option refunding whatever has been paid by way of premium or forward purchase, putting the parties back in the position they would have been in had the transaction never existed. Thereby, whoever went long the EUA exposure is reset to zero: the Delivering Party has nothing and has to deliver nothing (yay), but has to give back to Receiving Party anything it had already paid in the expectation of getting something (boo, kind of, but fair enough); and where Delivering Party has bought a Put — being the right to sell something at a set price in the future if that happens to be more than the prevailing market price — Receiving Party has to refund that premium (boo) but equally doesn’t have to pay the strike for an asset that doesn’t exist anymore (yay).