Legal nature of emission allowances as a property rights
Monday, 13 February 2012 22:53


There are arguments that EUAs should be classified as "property" and "intangible property" at common law.

 




The recent judgment of the England and Wales High Court Case No: HC10C00532 between Armstrong DLW GMBH and Winnington Networks Ltd of 11 January 2012 (the source: http://www.bailii.org/ew/cases/EWHC/Ch/2012/10.pdf) contains an interesting attempt at defining the theoretical characteristics of the emission allowances on the ground of the common law and the Directive 2003/87/EC. Considering this judiciary analysis in the context of recent regulatory developments in California and Australia may bring us closer to the harmonisation of approaches adopted so far as well as reducing the risks of regulatory gaps and competing or diverging claims. From juristic point of view the risk of wrongly formulated petitions is also not negligible.


There was no dispute between the parties to the said dispute that EUAs are capable of constituting, and do constitute, property as a matter of law. What was in issue, however, was their precise nature and characterisation as property and in particular  whether the "common law proprietary claim" was available in respect of property of the nature of an EUA.

In paragraph 48 the judge presented the following views on the precise nature of EUAs:

“As a matter of substance, I do not consider that the holder of an EUA has a "right" which he or she can enforce by way of civil action. It is not a "right" (in the  Hohfeldian sense) to which there is a correlative obligation vested in another person. It does not give the holder a "right" to emit CO2 in this sense. Rather it represents at most a permission (or liberty in the Hohfeldian sense) or an exemption from a prohibition or fine. But for the entitlement to the EUA, the holder would either be prohibited from emitting CO2 beyond a certain level or at least would be required to pay a fine if he did so. In this way, the holding of the EUA exempts the holder from the payment or that fine.”

The features of EUA (as a creature of the European Union Emissions Trading Scheme) considered in the said judgment vital for the determination on emission allowances legal nature are that as a matter of form an EUA exists only in electronic shape, it is transferable automatically by electronic means within the registry system. Under the ETS legislation it is transferable under the terms of the ETS Directive. It has economic value, first because it can be used to avoid a fine, and secondly, because there is an active market for trade in EUAs. Each EUA has its own unique number and can be located by reference to that number.

Analysing these features the judge considered EUA as "property" at common law, since in particular “It is definable, as being the sum total of rights and entitlements conferred on the holder pursuant to the ETS. It is identifiable by third parties; it has a unique reference number. It is capable of assumption by third parties, as under the ETS, an EUA is transferable. It has permanence and stability, since it continues to exist in a registry account until it is transferred out either for submission or sale and is capable of subsisting from year to year.”

Furthermore, according to the said judgment EUA should be considered "intangible" property.
In re Celtic Extraction [2001] Ch 487 concerned waste management licences granted pursuant to a statutory scheme for waste management under the Environmental Protection Act 1990. The issue was whether such a licence constituted "property" for the purposes of s.436 Insolvency Act 1986. Section 436 provides that “"property" includes money, goods, things in action, land and every description of property wherever situated ... "

Pursuant to the judgment, applying the three fold test identified by Moritt LJ in In re Celtic Extraction leads to the conclusion that an EUA is certainly "property" and intangible property under the statutory definition there in place.

First, there is, here, a statutory framework which confers an entitlement on the holder of an EUA to exemption from a fine. Secondly, the EUA is an exemption which is transferable, and expressly, under the statutory framework. Thirdly the EUA is an exemption which has value.

Moreover an EUA is also capable of forming the subject matter of a trust and thus something in which equitable ownership can be held. There is a close analogy between the exemption conferred by milk quota and the exemption conferred by an EUA. Accordingly an EUA constitutes "property" and it is "intangible property".



 

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