A few remarks on transparency of the EU ETS regulatory practice having regard to the European Commission's communication of 25 January 2013
Saturday, 26 January 2013 21:00

 

The absence of stating the reasons for the current delay in allocation of emission allowances in 2013 as well as the lack of the concrete new date when the allocation will be possible are among the main shortcomings of the European Commission's communication on the issue.

 

 

The European Commission's communication of 25 January 2013 stating that allocation of 2013 carbon permits will be delayed and companies covered by the EU’s Emission Trading Scheme will not receive their allocation of free CO2 allowances for 2013 by the end of February, as required by the EU ETS Directive, brings many doubts.

 

Given the reasons of legal certainty and efficient functioning of the EU ETS mechanics the strict observance of law should be the highest priority especially on the side of the European Commission, which does not show mental reservations when it comes to suing Member States for infringements and the delayed implementation of the EU law.

 

The end of February as the time-frame for allocation of emission allowances is clearly set by  the 2003/87/EC Directive and the current case is among many in the past where this provision was ignored by the EU and Member States executives.

 

Such a practice evidently does not strengthen the respect for the EU law, not to mention the practical consequences and difficulties facing participants that had legitimate expectations for the timely 2013 allocation. This communication is not a good prognosis for the beginning of the third trading period and adds to the multiple of recent negative regulatory occurrences in the field of EU ETS.

 

It is, however, symptomatic that the European Commission has not given any justification for the delay which occurred.

 

The above communication of 25 January 2013 recalls that under the current rules Member States draw up national implementation measures (NIMs) which set out the amount of free allocation for each eligible installation operating on their territory for every year between 2013 and 2020 and the EU ETS Directive mandates the European Commission to scrutinise and ensure the correct application of these rules by each Member State.

 

Furthermore, Article 10(a)(5) of the ETS Directive contains a rule for the maximum amount of allowances that may be handed out for free each year. If the preliminary allocation through NIMs exceeds the maximum amount of allowances available, a 'cross-sectoral correction factor will have to be applied. If this were to be the case, free allocation to all installations across the EU would be reduced by the same proportion to ensure equal treatment.

 

It is paradoxical that in spite of the intensive work on benchmarks’ methodology for many months past, a number of workshops, the issuance of the 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 accompanied by the entire set of guidelines, the precise answer on how many emission allowances each  installation would be allocated for free as from 2013 is – for legal reasons – still impossible.

 

Until the European Commission establishes the need and value for the cross-sectoral correction factor the situation does not change.

 

The situation could have been anticipated (see Enigmatic cross-sectoral correction factor – worries about final allocation) but reasonable market participants could expect that the time period for the establishment of the need and value for the cross-sectoral correction factor stretches between 30 September 2011 (deadline for publication and submission of National Implementation Measures by Member States) and 28 February 2013 (final allocation date for 2013).

 

It occurs that the situation is even more complicated and on 28 February 2013 the issue of allocation still won’t be cleared.

 

The key task for the European Commission is now to determine whether a correction factor would need to be applied as from 2013. The information that the process will not be concluded in time for installations to receive free allowances by the end of February ads to the current regulatory mess that the scheme experiences (for instance on account of the issue of back-loading).

 

The current stance that the Commission “aims to conclude the overall process as soon as possible in order to provide industrial installations and all other market participants with certainty” .

 

The expression in the statement above “as soon as possible” is decidedly too little to bring certainty to the emissions market. Much more concrete time-frames in that regard can reasonably be expected from the EU executive if the EU ETS rules are to be treated seriously.

Interestingly, as a result of the said delay, installations currently are not cognizant of the exact volumes of the free allocation under Article 10a of the Directive 20013/87/EC as regards the entire third trading period (2013 - 2020), and not only 2013 vintage.


In the above communication the Commission also recalls in fine that, in contrast to other years, allowances handed out this year may not be surrendered in respect of 2012 emissions.

 

In that regard, however, the rule indicated is a simple consequence of the fact that the inter-period borrowing is not allowed under the EU ETS. For rules on borrowing applying in other cap-and-trade scheme see Borrowing of carbon units under EU ETS, California and Australia emission trading schemes.

 

 

 

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