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Category: Judgments of the European Court of Justice


It seems unbelievable, that in the construction of the European Emission Trading Scheme occurred such a glaring and  - potentially burdened with severe consequences – error in law.

 

Let’s analyze possible future legal scenarios, that are evoked with the judgment of the Court of First Instance of 23 September 2009 in Case T‑183/07 the Republic of Poland against the European Commission.

 

The reaction of the Commission


From legal point of view the first reaction of the European Commission after the publication of the judgment of the Court of First Instance of 23 September 2009 in Case T‑183/07 the Republic of Poland against the European Commission (hereinafter referred to as “Judgment”) is disappointing.


In the statement of 24 September 2009 IP/09/1355 relating to the Judgment, Commissioner Stavros Dimas expressed the view, that:


„[...] the Commission has to take new NAP Decisions in respect of Poland and Estonia. The originally notified national allocation plans cannot therefore be deemed to be accepted as a result of today's judgements.

Consequentially and ahead of these decisions, those countries are not allowed to issue any additional allowances beyond those created in the EU ETS registry system.

In preparing new decisions the Commission would base itself on the best available data. In this context the importance of verified emissions for 2005 to 2008 should be noted. In the light of these data, it would appear unlikely that there would be any material difference concerning the total number of allowances consistent with the terms of the Directive. The actual 2008 emissions in Estonia and Poland correspond closely to those anticipated in the Commission Decisions on the Estonian and Polish NAPs [...].”


The above mentioned statement was probably issued in order to steady the market in emission allowances, where after the Judgment some “nervous” movements of prices were observed.


Some citations from the reasoning of the Court

Nevertheless, such an opinion of the Commissioner doesn’t explain same accusations, which were directed by the Court towards the Commission in the matter of the general procedure of approval of National Allocation Plan’s.


It seems, that the rank and the burden of considered accusations required a more analytical approach – taking particularly account of  basic principles of legal order.


Let’s mention some citations from the reasoning of the Judgment:


“[...] such a reasoning does not explain the reasons why the Commission set aside the said data used by the Republic of Poland”,


“[...] the Commission did not set out any justification in the contested decision to explain in what way the method of economic analysis used by the Republic of Poland was not reliable.”,


“The mere claim by the Commission that, as recital 8 of the contested decision shows, its own calculations lead to the most reliable results is not sufficient [...]”,


“Nor has the Commission in any way identified in the contested decision the data entered in the NAP which it regarded as ‘less reliable’.”,


“Since the Commission does not challenge either the fact that the data entered in the NAP had formed the subject of a report to the UNFCCC or the fact that, as the Republic of Poland states, it reviewed those data itself, the Court considers that it cannot a priori be excluded that those data have a certain degree of reliability. Consequently, it was for the Commission, at the very least, to explain in what way those data entered in the NAP by the Republic of Poland were not reliable and, therefore, could be rejected in accordance with Article 9(3) of the Directive.”,


“[...] the Commission has not explained in what way the data entered in the NAP were not reliable.”
,


“[...] the Commission has not provided anything in the contested decision capable of sufficiently explaining in what way the choice of the method of economic analysis and the data used by the Republic of Poland were contrary to Community law.”,


“[...] Commission exceeded the powers conferred upon it [...]”


The set of the above opinions affirms some concerns expressed sometimes by the member of the public in Poland, that EU ETS is introduced by the Commission in the way, that doesn’t take into account opinions and arguments presented by individual Member States.


One of  most important arguments presented in the judicial procedure by the Commission, was, that excessive number of allowances would risk a collapse of the greenhouse gas emissions trading market”.


Such an argument – resulting, as it seems, from a belief, that the right purpose justifies all means - met a decisive reaction from the Court, which stated:


“Even if that argument were well founded, it cannot justify maintaining the contested decision in force in a community governed by the rule of law such as the Community, since that act was adopted in breach of the distribution of powers between the Member States and the Commission, as defined in the Directive.”


We must admitt, that the Court appeared to be insensitive to arguments of economic nature, which in that case could, in the judicial opinion, pose a threat to the system of the rule of law.


It is however surprising, that the Commission had no legal arguments (or they were unconvincing) and it expected legal acceptation and protection for a “rendered facts”.


How should a new NAP to be drawn up and approved


Leaving however aside the said considerations ad casu, let’s try to analyze the reasons of the Court Judgment and discover some thesis and conclusions of a general nature, which can direct and guide us in a further procedure for a final approval of a NAP.


Importance of the Court assessments derives – inter alia - from the fact, that they were adopted by two – different - compositions of judges, in two different cases: of Poland and of Estonia (judgment relating to Estonia was delivered on 23 September 2009 in Case T-263/07).


First, it should be reminded, that the Court Judgment a
nnulled the Commission Decision C(2007) 1295 final of 26 March 2007 concerning the national allocation plan for the allocation of greenhouse gas emission allowances notified by Poland for the period from 2008 to 2012 in accordance with Directive 2003/87/EC, in which the Commission recognized the inconsistency of the Polish NAP with some of the criteria of the Annex III to the Directive and in an indirect manner reduced the total quantity to be allocated for the Community scheme by the sum of 76.132937 million tonnes CO2 equivalent of allowances per year (the formula of the judgment relating to Estonia is analogous).


So, by virtue of the Judgment the decision of the Commission is  eliminated from legal order.

Therefore, there is no doubt, that as a effect of a Judgment, Commission is obliged to adopt a new decision on the matter.


In the subsequent media releases it was envisaged, that the probable, future scenario may consist also in preparing by Poland and Estonia of a new NAP’s. Such a requirement in our opinion may be justified only by some of the reasons of the Judgment.



Principle of equal treatment


The important matter – one of the crucial to the case – was the issue of equal treatment of member states. It appeared however, that Commission erred in law in relation to the principle under consideration here.


In this case, it was undisputed that, on the basis of the equal treatment principle, the Commission assessed the NAP having regard to its own data obtained on the basis of its own method of assessment.


The Court emphasized, that principle of equal treatment of Member States doesn’t require, that the Commission adopted and used the same method of the NAP’s assessment in relation to all member states.


As the Court stated:


„[...] it should first be noted that application of the principle of equal treatment between the Member States cannot have the effect of modifying the allocation of powers between the Member States and the Commission, as provided for by the Directive, in accordance with the principle of subsidiarity [...]”,


and


“Therefore, since the Directive does not clearly and precisely prescribe the form and the means which must be used for the purposes of its transposition, it must be held that, in maintaining that, by virtue of the equal treatment principle, it was under a duty to select and apply a single method of assessing NAPs for all the Member States in order to attain the objective pursued by the Directive, the Commission exceeded the margin for manoeuvre conferred upon it by the Directive.”,


finally:


“To allow the Commission to use a single method of assessing NAPs for all the Member States would amount to acknowledging it as having not only a veritable power of uniformisation in the context of implementing the allowance trading system, but also a central role in the drawing up of NAPs.”


The central role in the drawing up of NAPs, according to the Court considerations, is entitled however  to Member States – not the Commission.


What are the effects of the Court findings as regards to final emissions caps for the companies in the Member States?


In our opinion, the reasoning of the Court entails the necessity of applying by the Commission in the future procedure the individual method of assessing of NAP’s. So, contrary do the resent practice of the Commission, there is now no possibility to avoid a detailed analysis of individual parameters of the plan.


Furthermore, a possible argument, that the economic model used in drawing up the plan, is inconsistent with the model adopted (and used) by the Commission, wouldn’t be effective.


It seems however, that the reasoning of the Court can be read more generally - as an idea to take account in the Commission decisions on the approvals of NAP’s, of individual socio – economic conditions of a particular Member State, as well as a degree of carbon intensity of a particular economy.


Such a approach was promoted by the negotiators from e new Member States for a long time ago.


In addition, should be noted the clear-cut priority, which the Court awarded to the principle of division of powers between Member States and the Commission in comparison with the principle of equal treatment.


In other words we can say, that in no circumstances the principle of equal treatment can justify infringement by the Commission on the sovereignty of the Member State.


The accusation towards the Commission in that regard apparently was estimated as a severe, since the Court showed a bit of malice saying, that the Commission “may sufficiently ensure equal treatment between the Member States by examining the plan submitted by each of them with the same degree of diligence”. Leave this without comment.



When a NAP is up-to-date


This matter is especially important, because it determined, that arguments of the Commission failed (see assertion of the Court: [...] the Commission’s argument that, by virtue of the principle of equal treatment between Member States, it could not take account of certain updated data in the NAP must be dismissed as unfounded”), but on the other hand  caused, that a new Member States (which appealed from the Commission’s decisions) can be now the only one, where in order to prescribe actual cap for emissions, there should be taken into account disadvantageous (lowered by a global recession) emissions figures for 2008.


Let’s recall, that the issue of admissibility of adjustments in NAP after the Commission had approved it, was contentious.


It is clear, that in the third settlement period (2013-2020) energy – climate package (adopted in December 2008) has restricted such possibilities.


In the second settlement period (2008 – 2012) the Commission also had tried to introduce the said rule (having taken into account the stability of the cap-and-trade system), nevertheless, following the case law, appeared some gaps in this policy (see: the issue of admissibility of ex post adjustments analyzed in other our articles) and finally, actual Judgment of the Court in practice annulled that rule in the second settlement period.


It should be noted, that according to the Court considerations:


„[...] the Commission is required permanently to ensure that the NAPs take account of the most exact and thus the most up-to-date information possible in order to cause the least damage to economic development and employment, while at the same time maintaining an efficient system of greenhouse gas emission allowances.”


If an NAP was based in part on incorrect information or erroneous evaluations relating to the level of emissions in certain sectors or certain installations, the Member State in question would have to be entitled to propose amendments to the NAP, including increases to the total quantity of allowances to be allocated, in order to address those problems before they produced market repercussions.


The Court emphasized – having regard to the case law, the wording of the Directive and objectives of the system established by it – that a Member State has possibility, following the Commission’s decision adopted in accordance with Article 9(3) of the Directive, to modify the data contained in its NAP in order, for example, to take account of new information received.


Taking into account above considerations of the Court, it is probable, that in the further procedure of approving the NAP emission figures relating to verified emissions for 2008 will be very important.


But consequently, if the recession pass by and these figures take more advantageous for carbon dependent companies shape, the Court findings will be the base for a new scrutiny and adjustment of a NAP.


The division of powers between the Community and Member States in a field of environment


This issue is maybe not so controversial as that mentioned above, but nevertheless is worth reminding. The Court considered, that in this case forgot of the matter also the European Commission.


The matter is, that in a field, such as that of the environment governed by Articles 174 EC to 176 EC, where the Community and the Member States share competence, the Commission has the burden of proving the extent to which the powers of the Member State and, therefore, its freedom of action, are limited.


The Commission failed to do this in the case.


So, in the possible future contentious issues relating to the division of powers between Member States and the European Commission in the matter of the functioning of the European Emission Trading Scheme and broadly speaking – climate politics – Member States are in a favorable position in a trial.


They can require the Commission – if the latter pursue to challenge the national politics - to prove inconsistency of the legal act with the Community law.


It is worth remembering, since taking into account rigorous Community climate politics and possible economic and social effects thereof, many of disputes can appear in the near future (but unnecessarily ending in a court).


Error in the assumption


It seems, that, if European Commission intended already in 2008 to centralize the procedure for the allocation of allowances – as it was done in the third settlement period (2013-2020) – an error in the Directive was made, where there wasn’t sufficient legal basis for this.


The administrative practice of the Commission could not substitute for a sufficient legal basis.


As the Court unambiguously emphasized, the Commission in fixing a maximum level for the total quantity of allowances to be allocated in the contested decision, exceeded the powers conferred upon it pursuant to Article 9(3) of the Directive.


The Commission limited itself to substituting its own data for those contained in the NAP, without in any way reviewing the compatibility of the latter with the criteria set out in the Directive


The Court explained, that: “the Commission thus did not content itself, before the adoption of the contested decision, as it was entitled to do, with comparing the data in the NAP with those which it had obtained from its own assessment method, for the purpose of assessing the compatibility of the former with the criteria set out in the Directive. On the contrary, the review method which it used amounts, in practice, to allowing the Commission itself to draw up its own reference NAP in a totally autonomous manner, and to assess the compatibility of the notified NAPs not having regard to the criteria set out in the Directive but, first and foremost, having regard to the data and results obtained from its own method.”


As noted the Court in the case relating to Estonia “the drawing up of a national allocation plan, designed to attain the aims of the Directive and complying with the criteria set out in Annex III, requires the Member State to carry out several complex economic and ecological assessments, particularly as regards the policies and the specific measures to be adopted at the national level in order to attain the said objectives, but also as to the measures which should be applied by economic operators."


Those assessments are essentially prospective, since the Member State must predict the evolution of emissions in its territory many years in advance.


Furthermore at the stage of prognosis such choices in principle are neither correct nor incorrect.


The outline of the correct procedure


Summing up, it follows from the reasons of both judgments (of Poland and of Estonia), that, according to the Court views, the procedure envisaged in the Article 9 (3) of the Directive should consist in:


1) Member State drawing up the NAP should choose:


a. policies, means and methods to be applied,

b. data as a basis for prognosis of future changes in emission figures;


2) the tasks of the Commission are:


a. to verify the reliability and coherence of all aspects of the plan drawn up by the Member State,

b. to review whether those elements constitute all of the factors to be taken into consideration,

c. to review whether those data are capable of supporting the conclusions which are drawn from them.


From the reasoning of the Court (in particular relating to Estonia) follow some guidelines for the Commission – to use in the course of the above outlined procedure:


1) the Commission should compare the data in the NAP with those which it had obtained from its own assessment method, for the purpose of assessing the compatibility of the former with the criteria set out in the Directive,


2) in reviewing choices of the Member State, the Commission must respect the margin for manoeuvre which the Member State has and, and in so far as the latter bases its reasoning on credible and sufficient data and parameters for analysis, having regard to the criteria in Annex III, it cannot reject its national allocation plan,


3) the Member State could validly choose different data as the starting-point for its forecasts,


4) the Commission’s approach, amounting to taking the view that only the data chosen by itself could be used for the purposes of drawing up a national allocation plan, deprives the Member States of all margin of manoeuvre in that regard and is inadmissible.


It follows from whole of the above considerations, that there can be some concerns relating to the term of issuing of allowances for 2010 (28 February 2010). In the case of further disagreement between some Member States and the Commission in that matter, the time is lacking for the drawing up a new NAP and the review and approval of it by the Commission. Especially, when the Commission would like to take into account – during the review of NAP - all the guidelines made by the Court. 


As is apparent, the administrative practice applied by the Commission so far in relation to the method of assessing NAP’s, was very simplified. According to the case law, such an approach can’t be continued. As a effect, the procedure of approving NAP will be more time-consuming.


So, let’s hope, that applications for the annulment of the Commission decisions relating to other Member States, that still aren’t ruled on by the Court, will be decided in the near future.

But first of all it’s time and starting point for hard negotiations.


The above outlined „first impressions” relating to the Judgment of course don’t cover all problems and issues. We will return to this topic.

 

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The landscape after the judgment – prognosis of legal effects and further scenarios

Copyright © by Michał Głowacki 2009

www.emissions-euets.com

The landscape after the judgment – prognosis of legal effects and further scenarios

Copyright © by Michał Głowacki 2009

www.emissions-euets.com