Adjudicating Europe

Two decisions of the Court of First Instance back in September stirred the waters of the European Union Emissions Trading Scheme (ETS). But why is this important?

We are coming closer to some sort of a climate change deal covering the period after 2012, when the Kyoto Protocol expires. Whatever the specifics of the agreement are, many will carefully study the EU experience with the Emissions Trading Scheme when designating their policies for emissions reduction. The United States, in particular, will want to benefit from the EU approach in regulating the ETS.

The position of the Court of First Instance (CFI) and the European Court of Justice (ECJ) is one of the important aspects of the EU regulation of the ETS. The main point of argument before the CFI and ECJ has always been the scope of powers of the European Commission to amend National Allocation Plans (NAPs) under Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community.

The CFI has reminded us the universal application of the principle of subsidiarity to policy areas where the Member States and the Community share competences (art. 5 of the Treaty on the European Community). In the case of ETS, this applies to the power to decide the total quantity of allowances which a Member State will allocate. The power to allocate is reserved to the Member state itself, as was already shown in the case Germany v. Commission. In the two new decisions – Estonia v. Commission and Poland v. Commission, the Court reminds to the Commission that “the Commission’s task was to verify the legality of the national allocation plan while respecting the margin for manoeuvre granted to the Member State in the implementation of the Directive in the context of the drawing up of that plan” (Estonia v. Commission, para. 75).

But again, why do these new decisions matter? The problem is that, as Josephine Van Zeben has rightly pointed out, sudden changes to the fabric of the EU ETS and sudden releases of information have had significant, and mostly negative, impacts on the price of the allowances (EUAs). Any annulment of a Commission decision on a National Allocation Plans will affect the market (a 10% drop in EUA futures was evident for the period 22 – 25 September 2009) – just as the decision itself did (see the research by Waldemar Rotfuß, Christian Conrad, and Daniel Rittler).

That is why the annulment of the two Commission decisions should be viewed as an outright failure for the ETS. Such annulments hinder the functioning of the ETS market itself, and paint a picture of unreliability for cap-and-trade schemes.

Now, more than ever, the European Commission needs to tightly coordinate its work on National Allocation Plans with Member States as to evade, when possible, such legal action.

- Vihar Georgiev