The admissibility of changing individual allocations – enforceability and closure rules
Tuesday, 01 June 2010 21:29


To put it briefly - in that regard the diversity isn’t desirable.

 

The "Article 10a(19) of the Directive 2003/87/EC (as amended by the Directive 2009/29/EC as of 2013) in describing the rules for a “Transitional Community-wide rules for harmonised free allocation” reads:

 

“No free allocation shall be given to an installation that has ceased its operations, unless the operator demonstrates to the competent authority that this installation will resume production within a specified and reasonable time. Installations for which the greenhouse gas emissions permit has expired or has been withdrawn and installations for which the operation or resumption of operation is technically impossible shall be considered to have ceased operations."


The Article 10a (20) provides also that the Commission shall, as part of the measures adopted under Article 10a(1), “include measures for defining installations that partially cease to operate or significantly reduce their capacity, and measures for adapting, as appropriate, the level of free allocations given to them accordingly.”

 

The problem outlined in the above mentioned provisions is linked, among other things, to the question that appeared already in the first and second trading period – namely ex post adjustments.

 

In the second trading period the issue of admissibility of changing individual allocations is regulated only at a national law level (especially in the national allocation plans of each EU Member State), and the Directive 2003/87/EC in the actual wording does not provide for a specific closure rules.

 

The interesting review of the national allocations plans in that regard can be found among papers prepared by the technical staff of the FASB and the IASB for discussions at a public meetings (published in the Internet at the website of the IASB). These papers refer to the information that “Generally, national allocation plans revoke allocations prospectively so that participants do not receive allowances subsequent to closure.” They also state that the allocation plans, however, differ as to whether clawbacks apply to excess allowances. Under the majority of EU allocation plans, participants retain excess allowances for the compliance period in which closure occurs.

 

The staff of the IASB cites the provisions of the national allocation plan of the United Kingdom which explains why no clawback applies to excess allowances. The allocation plan aims at limiting the administrative burden on government, regulators and operators. In the UK a clawback rule was not deemed cost-beneficial in light of the small number of closures expected during the commitment period.

According to the said papers “While the majority of EU allocation plans do not include clawback features, a small number of EU allocation plans do specify clawback rules.”

The German allocation plan requires participants to return excess allowances upon closure. Excess allowances are the allowances from a participants’ allocation that are not needed in order to offset emissions up to the point when closure occurs.

 

The Court of the First Instance in the judgment of 7 November 2007 in Case T-374/04 (Federal Republic of Germany v Commission of the European Communities), contrary to the European Commission’s stance, decided on the general admissibility of ex post adjustments (i.e. measures for the subsequent change of the amount of allowances allocated in the NAP to individual installations).

 

The issue relates not only to the NAPs but also to the other provisions of the relevant national laws. The Article 32 of the Polish Law of 22 December 2004 on the greenhouse gas and other substances emission allowances trading (Journal of Laws No 281, item 2784, as amended), differentiates, for instance, between situation when the production from the liquidated installation is transferred by the operator to the new installation and the situation when it isn’t. In the first instance the transfer of the production entails the transfer of the allocated allowances (in the proportional part), and the second effects in the cancellation of the allowances.


So, the above mentioned instances illustrate the wide variety of solutions adopted in the analysed area by the national legislatures when implementing the Directive 2003/87/EC.

 

This diversity (triggered off in the first and the second trading period by the absence of relevant provisions in the body of the Directive), albeit making possible to respect national politics and particular conditions, creates, however, some difficulties in areas which – as it seems from the perspective of the Common Market - should be treated harmoniously.

 

The closure rules appear, for instance, of great importance to the accounting for emission allowances, in particular to the question of whether, and when, the right to future instalments of allowances meets the definition of an asset.

 

The definitions of an “asset” used by international standardisation bodies, apart from mentioning “future economic benefits”, emphasize the aspect of “control” exercised by the entity over the resource at issue. And that control – as regards the certainty and enforceability of the right of the individual installation to the future installments of allowances foreseen in the NAP – in the legal scheme of the EU ETS is a little bit enigmatic.

 

It follows, for instance, from the provisions of the Directive that allocations to the individual installations should be made till the end of February of each calendar year. But, as appeared in practice, there occur sometimes situations where allowances are issued to the accounts of the installations later – for different reasons (problems relating to the linking the CITL with ITL as was the case in 2008, the court’s procedures when the NAP wasn’t finally approved by the Commission – see the current case of some Member States, etc.).

 

I haven’t noted the media release yet announcing that an operator of an individual installation decided to brought the government into the court for the late issuance of allowances. It is quite surprising taking into account the strong secondary market and real damage, the firms can potentially suffer as a result of the said delay. Such an uncertainty can bring into question the enforceability of the right to future installments, even though the issue of the closure of the installation is not touched.

 

IASB and FASB working staff is right in his contention that enforceability of a right to an allocation will also depend on a jurisdiction’s legal system. Under specific jurisdictions entities may, or may not, have the ability to enforce statutory rights by a court. The staff mentions also an important information that some statutory schemes accept and even communicate that the allocation decisions are enforceable.

 

I don’t know, whether the market participants in EU ETS “view existing allocations as virtually certain” (as was mentioned in the cited documents of the IASB) but, as was evidenced in practice, at least the dates of the specific allocations are uncertain. Additional risks in that regard flow from specific provisions of particular jurisdictions and, of course, provisions of NAP’s regulating the issues of enforceability of allocations and admissibility of ex post adjustments.

 

Taking into account actual risks, the provisions of Articles 10a(19) and 10a(20) of the Directive 2003/87/EC (as amended by the Directive 2009/29/EC as of 2013) cited at the outset of this article, can be seen as a move in the right direction.

The uniform criteria for defining installations that partially cease to operate or significantly reduce their capacity, and the clear determination of the influence of these changes on the level of free allocations given to the said installations, will help businesses in the proper planning – especially in multi-national scale.

 

Regardless of the content-related characteristic of the future legal measures adopted by the Community bodies, as a result of a uniform legislation at least a level playing field across different EU Member States will be achieved.

The accounting problems will probably be also easier to resolve.

 

 

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