EEP Amount - Emissions Annex Provision

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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions

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EEP in a Nutshell

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EEP in all its glory

Excess Emissions Penalty/EEP: Has the meaning given to it in the Directive.

EEP Amount: Means an amount (expressed as an amount per Allowance) that Receiving Party determines, acting in good faith and using commercially reasonable procedures, to be its total losses and costs which result from Delivering Party’s failure to deliver the Shortfall to the extent that those losses and costs are not reflected elsewhere in the definition of Receiving Party’s Replacement Cost and to the extent that those losses and costs relate to:

(1) any Excess Emission Penalty which Receiving Party must pay to the Relevant Authority in accordance with the terms of the Scheme; and/or
(2) if “EEP Equivalent” is specified to be applicable in the Annex to this Part [7] or the Confirmation for the relevant EU Emissions Allowance Transaction, any amount which Receiving Party must pay to a third party in respect of any such penalty payable to any other party (including a Relevant Authority) by that third party as a result of Delivering Party’s failure to deliver the Shortfall.

EEP Non-delivery: Has the meaning given to such term in Part (d)(xi) (Failure to Deliver (Alternative Method) – EEP Applicable).

EEP Risk Period: Means, in respect of an EU Emissions Allowance Transaction and any Delivery Date, a period of time prior to the first succeeding Reconciliation Deadline, as specified in the related Confirmation.

(d)(ii)(3) EEP Amount: Subject to the paragraph below, if “Excess Emissions Penalty” is specified to be applicable in the Annex to this Part [7] or the Confirmation for the relevant EU Emissions Allowance Transaction and as a result of Delivering Party’s failure to deliver the Allowances to be Delivered (in whole or in part) on the Delivery Date Receiving Party becomes liable to pay any EEP Amount, then Receiving Party shall provide to Delivering Party, upon its reasonable request, evidence to the reasonable satisfaction of Delivering Party:

(A) that Receiving Party has incurred an EEP Amount consequent on Delivering Party’s failure to deliver the Allowances to be Delivered (in whole or in part); and
(B) the extent to which the requirement for Receiving Party to pay any EEP Amount results from Delivering Party’s failure to make such delivery; and
(C) that Receiving Party could not have used Allowances to which it had title in any Holding Account(s) in any Registry in order to avoid or reduce its liability to pay any EEP Amount which it claims from Delivering Party as part of Receiving Party’s Replacement Cost.

Delivering Party’s obligation to pay any EEP Amount in accordance with “Failure to Deliver” under Part [7] of the Schedule to this Agreement is subject to Receiving Party’s overriding obligation to use its reasonable endeavours to avoid becoming liable for such EEP Amount or, when liable, to mitigate the payment obligation in relation to such EEP Amount and to allocate any such EEP Amount pro rata between all counterparties of Receiving Party that have failed to deliver Allowances to Receiving Party provided, however, that where Receiving Party confirms it has been unable to avoid becoming liable for any EEP Amount, it shall be for Delivering Party to show that it has been as a result of Receiving Party failing to use its reasonable endeavours to do so.


See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs

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Pro tip: for tons of information about EU ETS and EU financial services regulation see Michał Głowacki’s magnificent website.

Emissions trading documentation
ISDA: EU AnatomyEU Wikitext EU Nutshell (premium) • UK AnatomyUK Wikitext (to be merged into EU Anatomy)
IETA: IETA Master AgreementIETA WikitextIETA Nutshell (premium)
EFET: EFET Allowances AppendixEFET Allowances WikitextEFET Nutshell (premium)



The definition of Excess Emissions Penalty is more or less the same in all three emissions trading documentation regimes. Compare:
ISDA: Excess Emissions Penalty
IETA: Excess Emissions Penalty
EFET: Excess Emissions Penalty
Seeing as it is quite a fundamental part of the economic risk of Allowance trading, we should not be surprised to find that all three versions have a concept of EEP or Excess Emissions Penalty, nor that, per their Myers-Briggs personality types, ISDA has gone for quite unnecessary optionality, IETA has sort of followed suit, and EFET has gone for none, but laborious drafting of alternatives anyway. Hey ho.



ISDA defines itself up the wazoo, with EEP, EEP Equivalent, EEP Amount, EEP Non-delivery, EEP Payment, EEP Risk Period and Indemnifiable EEP — of course they did, didn’t they — whereas IETA is a relatively spartan Excess Emissions Penalty (and no EEP Equivalent — it just defines it in EEA Amount as “if this sub-paragraph (b) is specified in Schedule 2 (Elections) as applying”) and EEP Status, while EFET just has EEP and EEP Equivalent, but nothing else.

EEP Amount is pretty much the same between ISDA and IETA. EFET goes off on one.

What is is all about

Well, the basic point of an Emissions Trading Scheme is to require emitters to surrender Allowance credits to atone for their pollution, on main of being whacked with financial penalties for failing to do so on time. These are the Excess Emissions Penalties, so this is what it is all about, compadres.

Relevant for operators and those settling contracts with them, who have to worry about Reconciliation Deadlines and such messy practicalities.

An “Excess Emissions Penalty” is a penalty payment levied under the EU ETS on a end-user who is a Receiving Party under an Allowance Transaction, and who missed the deadline for surrendering Allowances as a direct result of a failure by a Delivering Party to transfer Allowances when due under that Allowances Transaction. Only likely to be relevant if (i) your counterparty is some kind of power station or carbon monster and (ii) the Transaction is due to settle just before April 30th in any year, when Allowances must be submitted.

An EEP Equivalent is an amount for which a Receiving Party becomes liable to a third party end user under a different Allowance Transaction — along the contractual chain, as it were — which is nonetheless occasioned by Delivering Party failing to settle a transfer of Allowances under this one.

Obe case is an actual penalty, the other one a delta-one derivative of a penalty, and both amount to the same thing. IETA and ISDA recognise this by wrapping “EEP Equivalent” into the concept of EEP Amount (optionally, at any rate, although it is hard to imagine when you wouldn’t apply the equivalent).

You would like to think EFET’s Carbon Squad would have done likewise, or at least come up with a better term than “EEP or EEP Equivalent” — which appears a mouthwatering 48 times in the document — to define it, especially since there doesn’t seem to be any optionality under the EFET.

At least, we suppose, they didn’t say, “EEP or EEP Equivalent as the case may, for the time being and from time to time, without limitation, be”.

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See also