May 2011
LEGAL BRIEFING: SETTING THE ETS CAP – THE SET ASIDE OF ETS ALLOWANCES
Summary and Conclusions
The recently published Commission Communication “A Roadmap for moving to a competitive low
carbon economy in 2050”, addresses several critical elements of climate policy at EU and national
level. The Communication refers to the set aside of EU ETS allowances during 2013-2020 preserving
the opportunities for future ambitious CO2 reduction target, enabling the recalibration of the ETS to
the impact of the implementation of the energy efficiency and the renewables target and ensuring the
efficiency and environmental integrity of the system.
Set aside of EU ETS allowances within Phase 3 of the ETS
ClientEarth considers that there is nothing in the ETS Directive 2003/87/EC that prohibits the
implementation of a measure to set aside emission trading scheme (ETS) allowances by postponing
the auctioning of some of the allowances from the early years of Phase 3 until a later date within the
same phase of the scheme. ClientEarth considers that such a measure should be adopted at EU level
in order to ensure that it applies in a harmonised and equal way by all Member States. The decision
to delay the auctioning of allowances is consistent with the Commission’s competence under 10(1) of
the EU ETS Directive 2003/87/EC to define the amount of ETS allowances to be auctioned. The
Commission would have the competence under this provision to adopt a decision establishing the
amount of allowances to be set aside from auctioning during the period 2013-2020.
However, complementary measures would need to be amended in order to ensure compliance with
the predictability objective required the ETS Directive 2003/87/EC. As the Auctioning Regulation (EU)
No 1031/2010 is legally empowered to determine matters concerning the timing of auctions, the set
aside measure should be reflected in it by amending its Article 14 following the Commission decision
or in its revision due in 2014. Similarly, the set aside of emission allowances and their auctioning
delay would need to be reflected in the EU Registry.
Justification
Setting aside the allowances is justified either as a way of tightening the cap in support of the
transition to higher greenhouse gas (GHG) reduction levels, or to recalibrate the ETS adjusting the
cap to the consequences of the implementation of renewables and energy efficiency targets or simply
to safeguard the efficiency of the system (as required under recital 5 and Article 1 of the ETS
Directive 2003/87/EC) undermined by the oversupply of permits during Phase 2 of the ETS.
The Set aside ETS allowances requires a future decision on their use within Phase 3
Once a set aside of allowances has been decided, a later decision would be required as to their future
use either to cancel, auction or carry them over to the following phase. However, a future decision
entails uncertainty regarding the moment it will be taken and its content which will depend on the
political situation. Complementary measures might reduce this uncertainty.
Cancellation of allowances set aside within Phase 3
Any cancellation of allowances would affect the ETS cap but most importantly the limitation under
Article 9 of the ETS Directive 2003/87/EC that the EU quantity of allowances can only decrease in a
linear manner by a 1,74% linear factor each year, which the Commission has estimated in 37,435,387
allowances. For that reason, the European Commission cannot take any unilateral decision after 2013
for cancelling the allowances set aside.
Cancellation of the allowances set aside during the period 2013-2020 could only be based on a review
of the ETS Directive 2003/87/EC or the adoption of a legislative act by the ordinary legislative
procedure modifying it. The wording of its Article 9 would have to be modified either to amend the
criteria for the definition of the EU ETS cap or to modify the linear factor or to allow an annual
decrease of the allowances higher than the linear factor on the basis of a Commission decision.
However the results of the legislative process would depend on the will and agreement between
Commission, European Parliament and Council (Member States).
An opportunity for a limited review in the near future of the ETS Directive 2003/87/EC is provided by
the need to adapt the ETS Directive 2003/87/EC to the changes under the Lisbon Treaty in the rules
for the adoption of implementing acts and delegated acts. ClientEarth considers that the recast of the
EU ETS Directive would be a second best option for enabling the Commission to tighten the cap.
However, the current political landscape does not indicate that a review of the EU ETS Directive
2003/87/EC would occur in the foreseeable future.
An opportunity for setting the EU ETS cap for 2013
ClientEarth proposes an alternative option that would not require amendments to the ETS Directive
2003/87/EC. The Commission could attempt to tighten the cap for 2013 simply via its publication
before 2013 of the absolute quantity of allowances pursuant to Article 9 of the ETS Directive
2003/87/EC. The Commission could decide to tighten the ETS cap for 2013 as it is the starting point
of Phase 3 from which the limitation of an annual decrease of 1,74% applies. Such an action would
ensure the respect of the Directive’s requirements of certainty and predictability.
ClientEarth argues that the quantity of allowances issued in accordance with NAPs for Phase 2
represent the starting point for the definition of the ETS cap and that Article 9 of the ETS Directive
2003/87/EC does not prevent up-to-date information from being taken into account. This provision
does not necessarily mean an exhaustive list of criteria for the definition of the ETS cap. This EU-wide
quantity of ETS allowances has been defined by Commission Decision 2010/384/EU, modified and
repealed by Commission Decision 2010/634/EU and complemented by Commission Decision
2011/149/EC under the recognition that future adjustments to the Community-wide quantity of
allowances for 2013 are still possible to reflect new information. Article 1 of the ETS Directive
2003/87/EC refers to the level of reductions that are considered scientifically necessary to avoid
dangerous climate change. It is broadly recognised that the current EU level of ambition for CO2
emissions reduction will not lead the planet to safe atmospheric concentrations of greenhouse gases
and to reach the 80-95% target by 2050 defined by the IPCC.
Furthermore, in light of the European Court of Justice’s jurisprudence (case Poland v. Commission T
183/07), the Commission is entitled to update the current decision on the ETS cap for 2013
unilaterally by adopting a decision defining the total quantity of allowances which would take into
account up-to-date information beyond the criteria for setting the cap established by Article 9 of the
ETS Directive 2003/87/EC as revised in 2009. Moreover, the Commission is required to ensure the
efficiency of the system, as recognised by the Court.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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1. INTRODUCTION
The EU ETS Directive 2003/87/EC1 establishes a scheme for greenhouse gas (GHG) emission
allowance trading within the EU in order to promote reductions of GHG emissions “in a costeffective and economically efficient manner”. It provides for the reductions of GHG emissions “to
be increased so as to contribute to the levels of reductions that are considered scientifically
necessary to avoid dangerous climate change”2. The Directive set up the rules for the definition
of the total amount of emission allowances to be issued for a given year under the EU Emissions
Trading Scheme (EU ETS). The EU ETS cap determines therefore the maximum amount of
emissions possible under the EU ETS.
The Commission Communication3 presenting the analysis of options to move beyond 20%
greenhouse gas reductions by 2020 considered introducing a set aside of emissions trading
allowances. The Communication proposes reducing 15% of the auctioning rights over the whole
phase 3 period representing 1.4 billion allowances.
It recognises that verified emissions in 2009 were 11.6% below 2008 emissions and that 5-8%
of unused allowances during phase 2 of the ETS would be carried over to the third phase of the
ETS (2013-2020). The Communication anticipates that recalibrating the ETS would generate an
increase of the auctioning revenue for Member States.
The recently published Commission Communication “A Roadmap for moving to a competitive low
carbon economy in 2050”4, (Commission Communication 2050 Roadmap) also refers to the need
for monitoring the impact on the ETS of energy efficiency measures implementing the 20%
target and for recalibrating the ETS by setting aside a certain number of allowances from the
part to be auctioned during 2013-2020.
In this Communication, the EU Emissions Trading Scheme (ETS) has been identified5 as a critical
tool in driving a wide range of low carbon technologies into the market. It considers that the ETS
would ensure that appropriate investments and operational strategies are applied by the power
sector in order to meet the 100% CO2 emissions reduction requirement by 2050 as well as by
the industrial sector where 83% to 87% of CO2 emissions should be reduced by 2050.
The legal arguments justifying the set-aside of allowances and an analysis of the legal
implications and other potential options for tightening the cap are discussed in this briefing as
follows.
1
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme
for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.
2
Article 1 of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003
establishing a scheme for greenhouse gas emission allowance trading within the Community and amending
Council Directive 96/61/EC as amended by Directive 2009/29/EC.
3
Commission, Analysis of options to move beyond 20% greenhouse gas reductions and assessing the risk of
carbon leakage COM 2010 265 (final), 26.5.2010, p.6.
4
Communication from the Commission “A Roadmap for moving to a competitive low carbon economy in 2050”,
COM(2011) 112 final, Brussels 8.3.2011, p.11.
5
Idem to note 3, p.6.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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2. LEGAL AND POLICY ANALYSIS
A. The set aside of EU ETS allowances within Phase 3 of the ETS
The Commission has proposed in the above mentioned Communications the introduction of a
measure to set aside emission allowances as a mechanism to delay auction of a specific amount
of allowances to future years in phase 3 of the Emission Trading Scheme (ETS).
ClientEarth considers that such a measure should be adopted at EU level in order to ensure that
it applies in a harmonised and equal way by all Member States. Such a decision can be taken by
the Commission as Articles 9 and 10(1) of the EU ETS Directive 2003/87/EC6 as amended by
Directive 2009/29/EC recognise the power to the Commission of determining the total quantity
of allowances at EU level as well as the number of allowances to be auctioned in the EU.
A Commission decision setting aside certain number of allowances would therefore be based on
the Commission power under Article 10(1) to define the estimated amount of allowances to be
auctioned based on the EU wide quantity of allowances determined according to Article 9 of the
ETS Directive 2003/87/EC.
Article 10(1) of the EU ETS Directive 2003/87/EC requires Member States “to auction all
allowances which are not allocated free of charge in accordance with Article 10a and 10c.”
Although, this provision could be interpreted as a legal obstacle to cancelling allowances before
auction or permanently withholding allowances from auction after the Commission has published
the quantity of allowances, the Directive does not dictate the timing of any particular auction or
a specific quantity of allowances for auction. It follows that article 10(1) does not represent a
legal obstacle to delaying auctions of some allowances until future years.
Similarly the linear reduction factor in article 9 of the revised ETS Directive 2003/87/EC is not a
legal obstacle for setting aside allowances. Indeed, the linear factor applies to the total quantity
of allowances, does not refer to the amount available for auction, and does not in real terms
dictate amounts to be auctioned in any given year. There is no legal impediment to delaying
auctions of some allowances until future years, provided this is done in such a way that does not
overly detract from the objective of predictability required in article 10(4) of the revised ETS
Directive 2003/87/EC.
We conclude that there is nothing in the ETS Directive 2003/87/EC that prohibits this
determination of timing from postponing the auctioning of some of the allowances from the early
years of phase 3 until a later date within the same phase or trading period of the ETS. By the
end of it, they may be either cancelled or auctioned or eventually carried over to the next phase.
The introduction of a measure purporting a delay of the auctioning of a specific number of
emission allowances would require the Commission to publish a decision defining the quantities
to be withheld, the distribution per Member State and the potential delay of auctions in the
calendar if necessary. Such delays would have to be fairly distributed across all Member States
as well as across all auctioning platforms.
The consequences of the postponement in the auctioning of the allowances should be reflected
in other measures complementing the Commission decision under Article 10(1). A reference in
6
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme
for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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Regulation EC 920/20107 might be needed in order to hold the allowances that have been set
aside in the Registry. An amendment to Article 14 of the Auctioning Regulation8 (either
introduced at the time of the adoption of the set aside decision or later in the Auctioning
Regulation review due in 2014) might be required to introduce the possibility to adjust the
auctioning calendar triggered by a Commission decision establishing the quantity of allowances
delayed for auction and potential adjustments to the auction calendar and quantities of
allowances available for auction in a given year. These references would reinforce the objective
of predictability enshrined by article 10(4) of the ETS Directive 2003/87/EC and recitals 6th and
8th of Directive 2009/29/EC.
Justification for a Commission intervention
The delay based on the set aside decision could be viewed as necessary to preserve the
possibility of tightening the cap so as to achieve the desired greenhouse gas reductions by 2020,
including the recalibration of the ETS to adjust to the impact of the implementation of the energy
efficiency target and the renewables target. In addition, this measure would enable a certain
responsiveness of the ETS within the early years of Phase 3 to ensure effectiveness of the ETS
system undermined by the oversupply of permits from overallocation of allowances under phase
1 and 2 of the ETS9. Recent research10 anticipates surpluses of a billion permits accruing to
industry as a result of overallocation and recession rather than active efforts to reduce
emissions. In its calculation Sandbag takes also into account the impact that these surpluses
have had in inflating the baselines from which the calculations under Phase 3 of the ETS have
been determined. Indeed under phase 3 the EU wide quantity of allowances issued each year
from 2013 is based on an annual decrease of 1.74% applied from 201011 to the average phase 2
total quantities of allowances issued by Member States in accordance with national allocation
plans (NAP). However the surpluses in Phase 2 pushed the average up by some 200 million
permits. By adjusting the baseline down it is estimated that Phase 3 total quantity of allowances
should be 1.4 billion tonnes smaller than the one currently proposed. The same figure is referred
to in the Commission Communication adopted in May 2010 referred to in note 3 in this briefing.
The research considers that a set aside of this scale would reflect the impact of the
overallocation during Phase 2 and would absorb the 1.8 billion stockpile of permits and offsets
credits expected to be carried over into Phase 3.
7
Commission Regulation (EU) No 920/2010 of 7 October 2010 for a standardised and secured system of
registries pursuant to Directive 2003/87/EC of the European Parliament and of the Council and Decision No
280/2004/EC of the European Parliament and of the Council, L 270/1, 14.10.2010.
8
Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and other
aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European
Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the
Community, L 302/1, 18.11.2010.
9
European Commission Communication published last May 2010 “Analysis of options to move beyond 20%
greenhouse gas emission reductions and assessing the risk of carbon leakage” recognises in page 7 the existence
of surplus Assigned Amount Units (AAUs) at national level that has been used as a source of funding
undermining the environmental integrity of the carbon market.
10
Sandbag’s research on the oversupply of permits in phase 2 from overallocation and recession can be found
at: Sandbag, Cap or trap? How the EU ETS risks locking-in carbon emissions, September 2010
(http://www.sandbag.org.uk/site_media/pdfs/reports/caportrap.pdf) and information in Sandbag’s blog
http://www.sandbag.org.uk/blog/2011/feb/21/targets-and-budgets-back-spotlight/
11
The Commission has estimated the linear factor in a decrease in absolute figures of 37,435,387 allowances.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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An intervention by the Commission in this sense could be justified under the wording of the EU
ETS Directive 2003/87/EC. Certainly the carbon market is meant to function on the basis of the
market forces. However, current implementation of the Directive is jeopardising the efficiency of
the ETS which is required under recital 5 and Article 1 of the ETS Directive 2003/87/EC. Recital 5
of the ETS Directive 2003/87/EC states: “This Directive aims to contribute to fulfilling the
commitments of the European Community and its Member States more effectively, through an
efficient European market in greenhouse gas emission allowances”. In addition, Recital 7 of the
EU ETS Directive 2003/87/EC requires that its provisions “contribute to preserving the integrity
of the market and to avoid distortion of competition”. At the moment, the carbon price is very
low due to the absence of scarcity of allowances (not due to the emission reduction efforts) and
a lower price is anticipated if the ETS is not recalibrated to take into account the impact of
emission reductions in other policies as required to achieve the 95% reduction target by 2050.
B. The set aside of EU ETS allowances requires a future decision on their use
within the trading period 2013 - 2020
Setting aside a certain number of allowances implies postponing a decision at a later stage
regarding what to do with them. Once the set aside has been executed, a decision would need
to be taken on whether to cancel or release them to auction within the trading period.
Indeed a decision on the allowances set aside has to be taken within the trading period. The
above mentioned Commission Communication analysing the options to move beyond 20%
published in May 2010 refers to the period 2013-2010 for the validity of auctioning rights. In
page 6 under the heading Recalibrating the ETS by "setting aside" a share of the allowances
planned for auction the Commission proposes “Reducing auctioning rights by some 15% over
the whole period 2013-2020”.
Article 13(1) of the EU ETS Directive 2003/87/EC on the validity of allowances states that
“allowances issued from 1 January 2013 onwards shall be valid for emission during periods of
eight years beginning on 1 January 2013”. Article 13(2) refers to the situation when allowances
which are no longer valid and have not been surrendered and cancelled in accordance to Article
12 of the EU ETS Directive 2003/87/EC shall be cancelled by the competent authority (in each
Member State). However Member States can issue allowances to replace any allowances held by
anyone and which were cancelled in accordance to this provision.
So if the Commission would set aside a certain number of allowances on the basis of article
10(1), a future decision would have to be taken about what to do with those allowances set
aside before end of 2020. For that reason, the above-mentioned Commission Communications12
refer to a political decision in favour of the set aside. There are several options:
a) The allowances could be cancelled at any time before the end of the period with the
consequence of tightening the cap. This option is discussed in the next section as it raises
questions regarding the legal basis for such a decision at EU level or how could it be
adopted.
12
See notes 2 and 3.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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b) The allowances could be re-introduced to the amount of allowances to be auctioned within
Phase 3 in one or several specific years before 2020. The consequence of this option would
be a decrease in the scarcity of allowances and therefore a lower carbon price, reducing
incentives for CO2 emissions reduction and investments in low carbon technologies,
renewable sources of energy or energy efficiency measures.
c) The allowances set aside could be carried over into the subsequent trading period. Article
13(2) of the EU ETS Directive 2003/87/EC allows for replacing allowances coming from
previous phases. They could be added to the allowances corresponding to the following
trading period either for auctioning or setting them aside as in previous trading period. The
Directive 2003/87/EC does not establish any rule for the Commission to define the EU wide
quantity of allowances for the new phase. Therefore there is not an opportunity for the
Commission to determine a tighter EU wide number of allowances in next phase absorbing
and taking into account the number of allowances set aside. The annual 1.74% linear factor
would continue to apply through the years after the end of phase 3. However Article 9
requires the Commission to review the linear factor and submit a proposal as from 2020 with
a view to the adoption of a decision by 2025. This could be a good moment to assess the
situation and decide what to do with the allowances set aside.
d) However, ClientEarth has argued13 that a Commission decision before 2013 would be the
clearest possible way for the Commission to adjust the quantity of allowances for Phase 3.
Next section of the briefing ClientEarth presents the legal arguments justifying a Commission
act to tighten the cap taking into account the new information on oversupply of allowances
in Phase 2, the information on the impact of the implementation of the energy efficiency and
the renewables targets without the need to modify the ETS Directive 2003/87/EC or adopt
another legislative act. A decisive action before 2013 would ensure the predictability required
by the carbon market. Indeed, a Commission could act setting a tighter cap than the one
currently proposed in order to take into account recent research14 reporting the existence of
surpluses of a billion permits accruing to industry as a result of overallocation rather than
active efforts to reduce emissions. An early Commission act would favour predictability in the
market as setting aside EU allowances would require a future decision with the uncertainty of
when it will be taken and it content depending on the political situation. This point is
discussed in next section of this legal analysis.
C. Legal options to tighten the cap: the cancellation of allowances
Cancelation of EU ETS allowances set aside during Phase 3 of the ETS
Once a set aside had been achieved via delay of the auctioning of a certain amount of ETS
allowances, a decision would need to be taken on whether cancelling or releasing them to
auction within Phase 3 or carrying them over to the following trading period either for auctioning
or maintaining their status of set aside allowances.
13
See ClientEarth briefing dated in June 2010: http://www.clientearth.org/commission-power-totighten-the-eu-quantity-of-allowances-for-2013
14
See note 7.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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We assume that the allowances are set aside at EU level and not in different portions at Member
State level. On this basis the decision on how to use them would also be taken at EU level any
time during the period 2013-2020. This section focuses on the option to cancel the allowances at
EU level during Phase 3 of the ETS. The decision would be taken at EU level and the actual
cancelation of allowances would probably be executed by the authority in charge of the EU
Registry.
A decision to cancel the allowances set aside would affect the EU wide quantity of allowances
under the ETS Directive 2003/87/EC.
The European Commission is empowered by Article 9 and 10(1) of the ETS Directive 2003/87/EC
to determine the absolute EU wide quantity of allowances and the amount of allowances to be
auctioned. The same power allows the Commission to amend these decisions if necessary. The
Article 9 decision defining the EU wide quantity of allowances is a Commission decision and
therefore does not need to be adopted through legislative procedure nor by adopting a nonlegislative act. Decisions on the EU ETS cap are to be adopted by the Commission unilaterally.
Similarly decisions defining the quantity of allowances for auctioning fall within the responsibility
of the Commission under Article 10(1) of the ETS Directive 2003/87/EC. Any decision on the
quantity of allowances for auctioning has to be taken by the Commission respecting the ETS
Directive 2003/87/EC rules.
As previously mentioned Article 10(1) ETS Directive 2003/87/EC only anticipates auctioning or
allocating for free the available allowances. Therefore cancelling allowances before auction and
after final publication of the EU-wide quantity of allowances is not foreseen in this provision of
the ETS Directive 2003/87/EC.
As required by Article 9 of the ETS Directive 2003/87/EC, the European Commission has already
published the total quantity of allowances for 2013 through Commission Decision 2010/384/EU
modified and repealed by Commission Decision 2010/634/EU and complemented by Commission
Decision 2011/149/EC. ClientEarth argues that the Commission legally has the competence to
modify it again. Under Article 1 of the ETS Directive 2003/87/EC the reduction of greenhouse gas
emissions should be increased so as to contribute to the levels of reductions that are considered
scientifically necessary to avoid dangerous climate change. Therefore it could be argued that
scientific information could justify a new decision amending the ones setting up the EU wide
quantity of allowances under the ETS Directive 2003/87/EC.
The same Article 1 of the ETS Directive 2003/87/EC refers to the possibility to implement a
stricter reduction commitment exceeding the 20% reduction target upon the approval by the EU
of an international agreement on climate change leading to greenhouse gas emission reductions
exceeding those required in Article 9 or leading to comparable greenhouse gas emission
reductions to those of the EU (as per article 28 of the ETS Directive 2003/87/EC). This situation
has not happened yet as the international agreement is still to be adopted. However nothing in
the wording of the Directive prevents the Commission to adopt another decision amending the
total EU-wide quantity of allowances without referring to the reduction CO2 target. Legally this
option is possible, however if it affects the CO2 reduction target the Commission would seek for
a political agreement to go beyond the current reduction target.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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The real limitation to tighten the cap lies in the reference to the linear factor under Article 9 of
the EU ETS Directive 2003/87/EC stating that the “EU-wide quantity of allowances issued each
year starting in 2013 shall decrease in a linear manner ... by a linear factor of 1,74%”. The
Commission in principle cannot take a decision after 2013 to reduce the quantity of allowances
by more than the 1,74% linear factor every year, which the Commission has estimated in
37,435,387 allowances15. Therefore, the Commission could only decide to tighten the total EU
wide quantity of allowances for 2013 as it is the starting point of phase 3. It could not modify
the cap unilaterally if the decision is taken after 2013 from when the decrease of allowances is
limited to 1,74% each year. That limitation does not exists prior to 2013 even if the 1,74% linear
factor applies since 2010 to determine the cap for 2013.
On this basis, during the period 2013-2020 if an EU high level political agreement to go beyond
20% is reached, the Commission would be able to cancel the allowances set aside by proposing
a review of the ETS Directive 2003/87/EC. It could propose modifying the wording of Article 9:
i)
ii)
iii)
either to amend the criteria for the definition of the EU ETS cap or
to modify the linear factor or
to allow ad hoc annual decrease of the allowances higher than the linear
factor on the basis of a Commission decision.
Similarly the Commission could decide to propose for adoption a legislative act amending the
ETS Directive 2003/87/EC and reducing the total available pool of allowances. The new
legislative act would provide the legal basis for the cancellation of those allowances set aside.
However the option to set aside allowances requires the political will of all EU Institutions and
creates uncertainty in the system as the final outcome would depend on the political situation.
The absence of predictability in this option would be contrary to the wording of the Directive and
would affect the carbon market.
An opportunity for a limited review in the near future of the ETS Directive 2003/87/EC is
provided by the need to adapt the ETS Directive 2003/87/EC to the changes in the rules
governing the adoption of implementing acts under Comitology and of delegated acts. Indeed,
by 2012 the Commission has to define the list of legislative acts that need to be amended and
how including via a review or recast process due to be finished by 2014. ClientEarth considers
that the recast of the EU ETS Directive would be a second best option for amending the Directive
and enable the Commission to tighten the cap.
However, the Commission could decide not to revise the EU ETS Directive 2003/87/EC and adopt
a legal act referring to the rules applicable from a specific date to the EU ETS Directive
2003/87/EC amongst others. As at the moment it appears unlikely that a review of the ETS
Directive 2003/87/EC will occur in the near future, it is desirable to consider other possible legal
avenues available to the Commission within the existing ETS Directive 2003/87/EC.
15
This amount is the 1,74% of the average annual quantity of allowances issued by the Member
States during phase 2.
Legal Briefing May 2011 Setting the ETS cap – the set aside of ETS allowances
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Tightening the cap for 2013
The current section purports that the Commission has competence to tighten the cap before
2013 and independently to setting aside ETS allowances. Furthermore the Commission does not
only have the competence but is required to act by the wording of the ETS Directive
2003/87/EC. The emissions trading scheme is a market based mechanism and, as such, its
functioning depends of the market forces. However the Commission is in charge of the efficiency
of the ETS. Recital 5 of the ETS Directive 2003/87/EC refers to the fulfilment of the reduction
commitments through an “efficient European market in greenhouse gas emission allowances”.
Similarly, Article 1 of the ETS Directive 2003/87/EC states that the EU scheme for greenhouse
gas emission allowance trading aims at promoting “reductions of greenhouse gas emissions in a
cost-effective and economically efficient manner”. The European Court of Justice16 has required
the Commission to preserve the efficiency of the market stating that the Commission is “required
permanently to ensure that the NAPs take account of the most exact and thus the most up-todate information possible ... while at the same time maintaining an efficient system of
greenhouse gas emission allowances”. (emphasis added)
It is broadly accepted that the current implementation of the Directive is undermining the
efficiency of the scheme (see section 2A of this briefing, p. 5 and 6). A Commission act adjusting
the baseline down for Phase 3 would reflect the impact of the overallocation during Phase 2,
absorb the permits and offsets credits expected to be carried over into Phase 3 and take account
of the impact of the implementation of energy efficiency and renewables targets.
As an alternative to amending the ETS Directive 2003/87/EC, the Commission could attempt to
tighten the cap for 2013 simply via its publication before 2013 of the absolute quantity of
allowances pursuant to article 9 of the ETS Directive 2003/87/EC. An early action by the
Commission would ensure the respect of the Directive’s requirements of certainty and
predictability (Recitals 6, 8, 11 and 29 of the ETS Directive 2009/29/EC).
Article 9 of the ETS Directive 2003/87/EC as amended in 2009 requires the Commission to
publish by 30 June 2010 “...the absolute Community-wide quantity of allowances for 2013
based on the total quantity of allowances issued or to be issued by the Member States in
accordance with the Commission Decisions on their national allocation plans for the period from
2008 to 2012” (emphasis added.). The Commission could decide to tighten the total EU wide
quantity of allowances for 2013 as it is the starting point of phase 3 from which the 1,74% linear
factor applies.
Article 9 of the ETS Directive 2003/87/EC gives the Commission the power to determine the total
EU-wide quantity of allowances by way a formal Commission decision which legally can be
amended by a subsequent Commission decision. This amount was defined by Commission
Decision 2010/384/EU under the recognition that future adjustments to the Community-wide
quantity of allowances for 2013 are still possible to reflect new information such as the results of
legal proceedings related to National Allocation Plans. This Commission Decision was repealed
and modified by Commission Decision 2010/634/EU which recognises several situations where
the Commission is entitled to revised the EU wide quantity of allowances, including the possibility
for the Commission to reflect additional information in future adjustments to the Union-wide
quantity of allowances for 2013. Nothing in this decision argues that these situations are the only
16
Poland v. Commission T 183/07 paragraph 118
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10
ones that could justify an adjustment or revision of the EU ETS cap. The Commission Decision
2011/149/EU adopted last 8 March 2011 setting the historical aviation emissions complements it.
Depending on the interpretation of ‘based on’ in Article 9 of the ETS Directive 2003/87/EC as
revised in 2009, it could be argued that the quantity of allowances issued in accordance with
NAPs for phase 2 represent the starting point and that it does not prevent up-to-date
information from being taken into account. It is clear that this sentence does not necessarily
mean an exhaustive list of criteria for the definition of the ETS cap. Indeed the Commission17
recognises that the figure determined is “based on the national allocation plans of Member
States for the period from 2008 to 2012 but also takes into account the extended scope of the
EU ETS as from 2013 as well as installations ‘opted in’ to the system by Member States from
2008 to 31 August 2010”. This clearly shows that Article 9 of the ETS Directive 2003/87/EC does
not include an exhaustive list of elements to determine the cap for 2013.
As mentioned above Article 1 of the ETS Directive 2003/87/EC refer to the level of reductions
that are considered scientifically necessary to avoid dangerous climate change. Furthermore, it is
broadly recognised that the current EU level of ambition for CO2 emissions reduction will not
lead the planet to safe atmospheric concentrations of greenhouse gases required by Article 1 of
the ETS Directive 2003/87/EC and reach the 80-95% target by 2050 defined by the
Intergovernmental Panel for Climate Change (IPCC)18. The requirements of the ETS Directive
2003/87/EC do not prevent the Commission from taking into account up-to-date information
additional to the quantity of allowances issued according to the NAPs for 2008-2012 and the
linear factor in the determination of the absolute Community-wide quantity of allowances to be
issued in 2013.
Indeed in support of this interpretation, recent jurisprudence from the European Court of
Justice19 in 2009 held that there was nothing in the wording of the ETS Directive 2003/87/EC (as
applied to Phase 2) or the nature or the objectives of the system that would prevent Members
States from modifying their data in National Allocation Plans (NAPs), and therefore modifying the
cap, to take account of new information received. Moreover, the Court recognised that Member
States have the right to carry out subsequent adjustments after the adoption of their individual
allocation decision. It should be noted that this option is not expressly mentioned in any of the
provisions of the ETS Directive 2003/87/EC. The Court also stated that the Commission is
“required to permanently ensure that the NAPs take account of the most exact and thus the
most up-to-date information possible in order to cause the least damage to economic
development and employment while maintaining an efficient system of greenhouse gas emission
allowances.” Again this latter requirement was not based on any provisions or criteria for
national allocation plans established in Annex III of the ETS Directive 2003/87/EC in relation to
Article 9(1).
17
Commission, “Questions and Answers concerning the second Commission Decision on the EU ETS
cap for 2013”, 22 October 2010
18
Commission Communication May 2010 referred to in note 2, page 5 ; Commission Communication
of March 2011 referred to in note 3, page 3.
19
Poland v. Commission T 183/07 paragraphs 114 to 119 and the jurisprudence mentioned in it – UK v.
Commission Case T/178/05 and Germany v. Commission Case T-374/04
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11
Therefore, ClientEarth considers conceivable that this principle could be applied by analogy to
the Phase 3 of the ETS Directive 2003/87/EC, informing the interpretation of the words ‘based
on’ in its Article 9, and argue that the Commission has the responsibility to take into account
latest up-to-date information in its determination of the total quantity of allowances, and the
subsequent estimate of the amount to be auctioned. Pursuing this line of reasoning, the
Commission would be entitled to adjust the cap/the Community-wide quantity of allowances for
2013 by taking into account new relevant information. This new up-to-date information could
include the results of pending legal proceedings, new data on allowances issued up to 2013 if
Member States decide to align them to real emissions, the new PRIMES 2009, the need to adapt
the cap to the impact of the implementation of the energy efficiency targets or the situation
generated by the oversupply of allowances in Phase 2 described by recent research20 and the
general recognition that surplus allowances are leading to a deflated price in carbon undermining
the efficiency of the system which is failing to drive necessary investments to reduce emissions
in a low carbon economy.
ClientEarth considers that the jurisprudence from the European Court of Justice has significantly
altered the landscape concerning modification of the ETS cap, notwithstanding the fact that the
case law in question concerned Phase 2 of the scheme. We consider that the pronouncements of
the European Court of Justice support the ability of the Commission to adjust the cap for 2013
on the basis of the most up to date information. The adjustments should be in line with the
objectives of the ETS Directive 2003/87/EC, including required environmental GHG reduction
benefits and the efficient functioning of the carbon market.
As stated in section A of this briefing, the Commission is justified to act to ensure the efficiency
of the ETS. The European Court of Justice also recognised the Commission as the body charged
with ensuring that the Community-wide quantity of allowances takes account of the most exact
and thus the most up-to-date information possible “in order to cause the least damage to
economic development and employment while maintaining an efficient system of greenhouse
gas emission allowances.” The only mechanism for the Commission to carry out this role is by
recognising it the possibility to take into account up-to-date information while defining the
Community-wide quantity of allowances starting in 2013.
At present this ruling is under appeal and arguments justifying a Commission decision to tighten
the cap for 2013 could only be used after the pending ruling is issued. However, as presented in
this briefing, the wording of the ETS Directive 2003/87/EC provides with sufficient justification
for the Commission to decide on a tighter ETS cap.
Contacts:
David Holyoake
Legal Advisor
t. +44(0)2074795973
e. [email protected]
Marta Ballesteros
Senior Lawyer
t. +32(0)2 808 34 67
m. +32 (0)495 265 990
e. [email protected]
20
Sandbag, Cap or trap? How the EU ETS risks locking-in carbon emissions, September 2010
(http://www.sandbag.org.uk/site_media/pdfs/reports/caportrap.pdf)
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