EU court rules against Commission on carbon market rules

The EU’s Court of First Instance has annulled a Commission decision that prohibits ‘ex-post‘ adjustments to the amount of carbon permits member-state authorities allocate to companies during the 2005-2007 emissions trading period. 

At issue is whether or not member states may revoke carbon permits from companies ex-post, meaning after an initial set of permits has been allocated and an emissions trading round has started.

In its National Allocation Plan (NAP) for 2005-2007, and in an apparent effort to prevent a surplus of permits on the market, Germany had requested the right to withdraw allocated permits in the event that a company had excess allowances to hand. The revoked permits would have been placed in reserve and made available to other companies joining the system at a later date.

The Commission, however, denied Germany’s request in a 7 July 2004 decision on the grounds that such readjustments would create uncertainty in the carbon market and discourage investment.

But in a 7 November ruling, the Court of First Instance argues that the Commission ‘misconstrued’ certain allocation criteria in the EU Emissions Trading Scheme (EU ETS) by treating the proposed ex-post adjustments as “contrary to the directive’s general system”.

“The mere fact that the ex-post adjustments at issue are liable to deter operators from reducing their production volume, and therefore their emission rates, is not sufficient to call into question the adjustments’ legality in light of the directive’s objectives”, the court explained in a statement.

For the moment, the extent to which the court’s decision will impact upon the 2008-2012 EU ETS trading period remains uncertain.

Germany has not sought to include a permit readjustment mechanism in its NAP for the second (2008-2012) trading period of the EU ETS, but 13 other EU member states have requested such a provision for the second round. 

The Commission, which rejected the requests by the 13 member states, has not yet given an official reaction to the court’s decision, nor has it announced its decision on whether or not to appeal against the ruling. 

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