Template:M comp disc EUA Annex Abandonment of Scheme

There is something elemental and even mystical about a contractual scheme that contemplates its own non-existence, but when an instrument is a product of the law, and has no continuing existence but for the continued onward existence of the law, this is the place you find yourself. The law prescribes what should happen should the law change. This is rather like sober me leaving messages for drunk me to pay attention to later.

The Abandonment of Scheme is a classic use of a rare, but among connoisseurs, prized close-out valuation technique: the “then I woke up and it was all a dream” method where, if things don’t work out, everyone just forgets the whole thing happened.

ISDA’s crack drafting squad™ was keen on this in the 1992 ISDA but, till the Emissions Annex came along, hadn’t really revisited it for the seemingly very good reason it is barking mad. But the Carbon Squad™ appears to have thought otherwise.

No “abandonment of scheme” in IETA or EFET Emissions docs

Unlike the ISDA Emissions Annex, neither IETA nor EFET Annex provide for “abandonment of scheme” as a contract disruption scenario.

These, we gather are regarded by industry insiders as “an anomaly” — though these are the same Carbon Squad personnel who don’t find anything anomalous about the “then I woke up and it was all a dream” means of resolving ongoing settlement disruptions, suspensions and force majeure — so make of that what you will.

They take great heart from the EU’s “Fit for 55” green transition initiative, which indicates how committed the EU is to its ETS which, after all, has faced down existential and credibility crises before now. So these carbon ninjas loftily opine — and, for the sake of their consultancies, hope and pray— the EU ETS is here to stay and we don’t really need Abandonment of Scheme language anymore ISDA thank you very much so help me.

The JC tends to agree, but on a different basis: an EU ETS Abandonment is really just an event that sends the market value of an emissions allowance to zero. Think of it like an insolvency event for carbon credits. If you treat an abandoned allowance as a zero-value instrument that need not be delivered, but transactions otherwise carry on, then you don’t need the language.