On 23 September 2009, the European Court of First Instance annulled the European Commission's decision to lower the carbon emission quotas in Estonia and Poland for Phase II of the EU Emissions Trading Scheme (EU ETS). The Court ruled that by imposing a cap on emission allowances to be allocated to member states, the Commission exceeded its national allocation plan revision powers under the EU ETS Directive. This development, which resulted in a fall in EUA prices, will be of interest to all stakeholders involved in the EU ETS and in the emissions trading market.
Ahead of Phases I (2005-2007) and II (2008-2012) of the EU ETS, Member States were required to propose National Allocation Plans (NAPs) setting out how many CO2 emission allowances would be allocated in each phase to their different industry sectors that are covered by the scope of the EU ETS. The NAPs then had to be approved by the Commission ahead of the start of the relevant phase.
In 2006, Estonia and Poland notified the Commission of their allocation plans for Phase II of the EU ETS. However, in 2007, the Commission decided that these plans were incompatible with the criteria set out in the EU ETS Directive and reduced the total annual quantity of CO2 emission allowances proposed by Estonia and Poland by respectively 47.8% and 26.7%.
Following the Commission's decision, Poland and Estonia, supported by a number of other Member States, brought actions against the Commission for annulment of its decision.
The Court of First Instance decided the following:
- Under the EU ETS Directive, the Commission only has the power to reject a NAP if it can establish that a plan is incompatible with the criteria set out in the Directive. However, in this instance, the Court held that the Commission's grounds for rejecting Poland's and Estonia's NAPs were the reliability of the data they used. This exceeded the Commission's competence as it could only reject NAPs on the grounds of incompatibility with the Directive.
- The Commission could not ignore the data used in the NAPs submitted by Poland and Estonia and replace it with its own data obtained through its own methods.
- According to the EU ETS Directive, Member States have the margin of manoeuvre to draw up their NAPs, therefore, the Commission does not have the right to impose a single way of assessing NAPs for all Member States.
- It is for each Member State, not the Commission, to decide on the total quantity of allowances it will allocate for the relevant phase in accordance with the Directive and by imposing allowance ceilings above which a NAP would be incompatible with the assessment criteria, the Commission effectively took over the Member States' role.
- The Commission failed to sufficiently explain in what way the choice of the method of economic analysis and the data used by Poland in drawing up its NAP were contrary to Community law.
- In its decision relating to the Estonian NAP, the Commission did not include a 'reserve' of allowances in the total quantity of allowances to be allocated. Therefore, the Commission did not properly examine the NAP submitted by Estonia and, consequently, infringed the principle of sound administration.
The Commission intends to appeal the decision and has two months to do so. An appeal process could take more than a year.
Effect of the decision
If this decision is upheld, the arrival on the emissions trading market of a substantial additional amount of EU emission allowances (EUAs) in Phase II of the EU ETS could have a significant negative impact on EUA prices as well as potentially affecting stakeholders' confidence in the integrity of the EU ETS and the clarity of its rules. It is also worth noting that alongside Poland and Estonia, a number of other European countries had originally objected to their revised NAPs for Phase II and may seek to appeal the Commission's revisions to their plans.
To read the full decision of the Court of First Instance, please click here
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 25/09/2009.