Europe’s highest court on Thursday (28 April) ruled that the European Commission’s calculation for handing out free carbon permits to industries was flawed, raising the prospect of higher costs for big energy users.
The Luxembourg-based European Court of Justice gave the European Commission ten months to draw up a new calculation method for handing out free carbon permits.
The decision followed a court advisor’s opinion in November that the ceiling was too high, when a calculation known as the correction factor was used to cap the total amount of allowances distributed to shelter industry from added energy costs they say could drive them out of Europe.
Discrepancies in the data provided by the bloc’s 28 nations on new industrial installations led to error, the court said, giving the Commission 10 months to review the policy.
“The maximum annual amount of allowances could be higher or lower than that thus far determined,” the court said in a statement.
The ruling will not be retroactive and will not affect the overall cap of the EU’s Emissions Trading System (ETS) but could lead to a slight cut in future free permits to industry from 2018.
“This ruling must serve as a shot across the bow of those again pushing for an over-supply of allowances to be simply given away,” said Bas Eickhout, a green member of the European Parliament.
A Commission spokesman said it would work diligently to implement the court’s ruling so as to reduce the uncertainty created by the ruling for market participants.
The legal challenge was brought by a group of refiners and chemical companies including OMV Refining & Marketing, Esso Italiana, Api Raffineria di Ancona, DOW Benelux and Borealis Polyolefine.
If the verdict leads to fewer allowances, as analysts expect, it will be a blow to the big polluters, who brought the case arguing they had received a smaller number of emission allowances than they believed they were entitled to.
Thomson Reuters Point Carbon said the potential reduction in permits lead industry to hoard them, boosting the market.
“Although this would likely be slightly bullish for prices, we think the effect will be very limited and short-lived,” Point Carbon’s Marcus Ferdinand said.
Benchmark EU Allowances (EUAs) – the ETS currency – were trading at around 6.50 euros a tonne on Thursday.
The ruling could impact proposals to reform the cap-and-trade system after 2020, according to EU sources, by leading to a change in the share of free permits put up for auction.
In the scheme’s current trading phase, which runs from 2013 to 2020, the majority of allowances – subsidies worth billions of euros – are to be sold via government auctions, with most of the remainder given for free to industry.
The correction factor has been the topic of heated debate in recent weeks, with industries united in opposing it.
They say it stripped them of promised permits, even to the cleanest plants, when applied to ensure the total allocations meted out by states do not exceed the maximum allowed under EU law.
An options paper, seen by Reuters, by the European Parliament’s lead lawmaker on the ETS reform called for deputies to share ideas on how to stop the CSCF kicking in after 2020.
Ian Duncan, a British Conservative MEP, who is drafting a report on the next phase of ETS trading for the European Parliament, called on the Commission to react swiftly.
"This ruling is significant because it will affect how many allowances are to be offered free during Phase 4. According to early analysis the share could have to move from 57% to 58%," Duncan said.
"The plans for Phase 4 are based on the same percentage of free allowances being offered as in 2013, but because that figure has now been declared invalid it makes it difficult for the Parliament to proceed until a solution is found," the ECR said in a statement.
"We suddenly find ourselves in legal limbo at a time of critical importance. The Commission needs to clarify the situation as quickly as possible," Duncan said.
The EU's Emissions Trading System (ETS), the world's largest, puts a cap on carbon dioxide emitted by large factories and other companies.
The firms can trade in quotas of these emissions -- the idea being to provide a carrot to improve energy efficiency or switch to cleaner sources so that they keep within the ceiling.
A large part of the quotas are free, partly to help European companies against international competitors.
- European Court of Justice: Press release on court judgement regarding ETS (28 April 2016)