The emissions trading complicates sometimes things the were quite simple so far.
This contention (burdened, some may say, with obviousness) is, however, properly reflected in a practical situation where one heat producer undergoes the significant capacity reduction, or partially or even entirely ceases its operations and the supplies of the heat to the district heating pipelines are taken over by another heat producer which, in turn, must invest in new capacities (which consequently constitutes significant capacity extension in the meaning of the European Commission’s Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of 27 April 2011).
The legal measure commented upon in this post:
the European Commission’s Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of 27 April 2011 (“Decision”)
If there were no free emissions allocations, making arrangements between these two – let’s assume independent legal entities - having its object to safeguard the supplies of the heat for the living needs of households - could concentrate mainly on the schedules for switching directions of the heat flow so that consumers were not exposed to excessive inconveniences. In a number of Member States the arrangements in question are also the subject of interest and concern of municipalities which are burdened with responsibility for district heating planning and safeguarding the needs of households in that regard.
What occurs to allocations of emission allowances in such a situation? The previous heat producer (let’s describe him as ‘Installation A’) being incumbent installation received CO2 allowances to cover projected emission needs that ultimately won’t materialise. The prospective heat producer (let’s describe him as ‘Installation B’) will have to increase generation without having free carbon credits in a volume reflecting this increase.
Where it comes to the third trading period the legal treatment is harmonised across the Union because the Decision contains detailed provisions regulating the issue.
As was reminded in the post ‘Benchmarks Decision of the Commission – rules on closures specified’, pursuant to the Decision, an impact on the installation’s allocation of EUAs have, generally, three categories of events:
1) the change to an installation’s capacity (Articles 20 and 21 of the Decision),
2) the change to an installation’s operation (Article 22 of the Decision), and
3) the change to an installation’s activity level (Article 23 of the Decision).
Without repeating the detailed considerations it suffices to observe that the rule is in the described situation the Installation A gets no free allocation as of the year following the cessation of operations (the case in which it entirely ceases its operations) or the allocation to the installation shall be adjusted accordingly as of the year following the one during which the capacity reduction took place (the case in which it significantly reduces its capacity).
Article 22(4) of the Decision:
‘Where an installation has ceased operation, the Member State concerned shall not issue emission allowances to this installation as of the year following the cessation of operations.’
Article 21(3) of the Decision:
‘The allocation to the installation shall be adjusted accordingly as of the year following the one during which the capacity reduction took place or as of 2013, if the significant capacity reduction took place before 1 January 2013.’
The Installation B, in turn, undergoes hypothetic significant capacity extension, which, in principle, is an event initiating procedure for allocation to new entrants.
Article 20 of the Decision:
’Allocation as new entrant following a significant capacity extension
1. Where an installation has had a significant capacity extension after 30 June 2011, Member States shall, upon application by the operator and without prejudice to the allocation to an installation pursuant to Article 10, determine on the basis of the methodology set out in Article 19 the number of free emission allowances to be allocated, in so far as the extension is concerned.
2. Member States shall require the operator to submit together with the application evidence demonstrating that the criteria for a significant capacity extension have been met and to provide the information referred to in Article 17(3) to support any allocation decision. In particular, Member States shall require the operator to submit the added capacity and the installed capacity of the sub-installation after having had a significant capacity extension verified as satisfactory by a verifier, in accordance with the requirements set out in Article 8. Member States shall consider this installed capacity of the sub-installation after having had a significant capacity extension as the sub-installation's initial installed capacity when assessing any subsequent significant capacity change.’
The said problem is, furthermore, practically focused on the risk that the Installation B could eventually get no allowances for the extended capacities, since the reserve for allowances could be, in the meantime, exhausted (for particulars see: ‘First come, first served – is this the best formula for the allocation of free allowances from the 5% reserve?’).
The significant conclusions are:
1. The Installation B has no guarantee that it receives free carbon credits for heat supplies that were taken over from the Installation A and this fact should be accounted for in the mutual arrangements;
2. Considering that the free emission allowances are allocated in advance for a given year (till the end of February) and allocations adjustments take place ex post - as of the year following the year in which the said changes occurred (in the year T + 1 ) - the Installation A retains carbon credits allocated for the year T (‘T’ meaning the year in which Installation A significantly reduces its capacity or ceases its operations partially or entirely), notwithstanding changes in the level of its emissions.
The above points don’t relate to the second trading period, because the Decision’s subject matter is laying down ‘transitional Union-wide rules for the harmonised free allocation of emission allowances under Directive 2003/87/EC from 2013 onwards’ (Article 1). In the second trading period 2008 – 2012 the above-described rules are not harmonised across the Union and are regulated by the national laws.