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Guidance Document n°7 on New Entrants and Closures – important clues on the definition of ‘physical change’ made in the installation in the context of free allocation of carbon credits - Page 2
Legal Alert
Monday, 03 October 2011 05:29

 

Debottlenecking could also lead to a significant capacity extension if:

- The debottlenecking process involves one or more physical changes: changes to the programming of machinery or planning of production alone can never lead to significant capacity changes.

- The physical change(s) lead to an increase in activity level of the relevant subinstallation.

- The activity level of the relevant sub-installation is sufficiently increased to meet one of the two thresholds above.

 

Heat benchmark sub-installations can have a significant extension in capacity if - after one or more physical changes at the heat producing facilities, the increased  export of heat to non-ETS heat consumers allows the heat benchmark sub-installation concerned to match one of the two above mentioned quantitative criteria or - after one or more physical changes at the heat consuming facilities (within the installation), the increased consumption of heat allows the heat benchmark sub-installation concerned to match one of the two above mentioned quantitative criteria.

 

Guidance Document n°7 gives also three illustrative examples for above-mentioned principles.

 

Example of a new sub-installation that is a significant change in capacity

 

An installation produces a benchmarked product and has no sub-installations outside the product benchmark sub-installation. In 2016, the installation makes a physical change allowing it to provide excess heat to a nearby swimming pool. Heat delivery to the swimming pool constitutes heat export to a non-ETS entity which should be covered by a heat benchmark sub-installation. This new sub-installation is the result of a physical change and should therefore be regarded as a significant capacity extension and receive allocation accordingly.

 

Example of a change that is not a significant change in capacity

 

A bricks producer initially has no sub-installations outside the bricks product benchmark subinstallation. In 2014, the installation starts to produce pavers without making any physical changes to the installation. Pavers are not covered by the product definition for the bricks benchmark. The production of pavers is therefore not covered by the bricks product benchmark sub-installation.

 

Since no significant change was involved, the start of paver production is not regarded as a significant change in capacity and receives no allocation. If the start of paver production leads to a decrease in activity level of the bricks product sub-installation in the production of bricks, it could lead to partial cessation (see section 6)

 

Example of a change that is not a significant change in capacity since it is not the result of a physical change

 

ETS installation A contains a heat benchmark sub-installation that covers its own heat consumption. In addition, it provides heat to ETS installation B. Both installations A and B are not deemed to be exposed to a significant risk of carbon leakage. Installation B will go out of scope of the ETS. Installation A will not receive allowances for this change. Although the activity level of its heat benchmark sub-installation would increase this is not the result of a physical change.

 

It is noteworthy that the Guidance Document n°7 contains numerous referrals to the section 6.4 of the Guidance Document n°2 and as a result these documents need to be read jointly.

 

In my opinion the practical examples presented in the Guidelines: first - with pavers and bricks and second – about the installation B that goes out of scope of the ETS are, however, not clear enough. Evidently too many nuances exist as regards the issue and it is difficult to set up the unambiguous line distinguishing the two fields, in which first leads to free allocation and the second does not. Isn’t really starting the production of pavers instead of the bricks the physical change in the meaning of the Benchmark Decision? If the Guidelines are right asserting that such a change does not qualify for a free allocation, it seems that such a interpretation leads to effects which are not just from the point of view of common logic.

 

The practical example considered is concluded with the contention that the start of paver production is not regarded as a significant change in capacity and receives no allocation. Furthermore, if the start of paver production leads to a decrease in activity level of the bricks product sub-installation in the production of bricks, it could lead to partial cessation.

The entrepreneur conscious of the said provisions would be very careful in taking the decision on changing the product from bricks to pavers, since it risks loosing free emission allowances and in effect potential economic loss.

Such a regulatory approach from the wider economic perspective evidently prefers the preservation of the manners of production that have been applied so far and discriminate against the flexibility in reacting to the changing market conditions. Being mindful of the significance of such a flexibility for the overall success in business, it is doubtful whether the above-described regulatory approach serves the best interests of the economy as a whole.


 



 

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