Fungibility Event - Emissions Annex Provision

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Part of the extended fan fiction universe, a “Fungibility Event” is something that someone in the market, well, made up.

Would Phase 3 Allowances ever be ineligible for surrender in Phase 4? Technically yes; practically no. Article 13 of the EU ETS Directive requires Member States to issue replacement Phase 4 Allowances to those poor souls stuck with stale Phase 3 Allowances — they are generally valid for eight years from issue). The result, as the Michał Głowacki’s excellent site remarks, is

“Emission allowances will no more be replaced between periods, but will be valid indefinitely.”

Therefore elaborate provisions to provide what happens in an Allowance Option or Allowance Forward should Phase 3 Allowances become ineligible, (we have seen this described, oddly, as a “Fungibility Event” though clearly it is not that — the instruments are not and never have been “fungible”), feel the product of a surfeit of caution.

One — even the most chicken-lickenish legal eagle — generally does not cater in one’s contracts for future changes in law, unless there is a real apprehension that the change is in contemplation and likely to come about — if legislation is before the house, or a case on appeal to the Supreme Court: that sort of thing.