This section gives an overview of the most important case law regarding ex post adjustments. First, we discuss some national case law as delivered in Belgium, The Netherlands and Germany, after which we elaborate on case law from the Court of First Instance in which the rejection by the Commission of ex post adjustments as proposed by Germany was found not acceptable.
Within the Netherlands, the issue of ex post interventions was considered in the ruling of the Administrative Court of the Council of State when it reviewed more than forty appeals from industries against the Dutch National Allocation decision for the period 2005-2007.46 In this ruling the Court also considered the legality of the National Allocation Plan, being the basis for the later National Allocation Decision. Some industries argued that the allocation method should not be based on historical production data, because that would be in conflict with Article 9(1) of the ETS Directive, the fifth criterion of Annex III to this directive (meaning that the plan shall not discriminate between companies or sectors in such a way as to unduly favour certain undertakings or activities in accordance with the requirements of the Treaty, in
46 Tijdschrift voor Milieu en Recht 2006, jr.n,. 53, Jurisprudentie Bestuursrecht 2005, nr. 291.
particular Articles 87 and 88 thereof), and with the preamble. They argued that the NAP should have incorporated the possibility of (upwards and downwards) ex post adjustments. The court, however, rejected the need to ask the European Court of Justice for a preliminary ruling on this matter, and followed the text of Article 11(1), which states that each Member State shall decide upon the total quantity of allowances it will allocate for that period and the allocation of those allowances to the operator of each installation. Furthermore, criterion 10 of annex III also indicates that the NAP shall contain a list of the installations covered by this Directive with the quantities of allowances intended to be allocated to each. As we shall see below, the Court of First Instance in its ruling on Germany v Commission annulled the decision of the Commission to reject the German NAP containing ex post adjustments. In view of this ruling, the interpretation of the Dutch Court and therefore its conclusion that there was no reason to ask for a preliminary ruling can be questioned. In contrary to the brief reasoning of the Dutch Court, we can find an extensive consideration in the ruling of the Court of First Instance, thereby conducting a literal, historical, contextual and teleological interpretation of the Directive when questioning the possibility of ex post downwards adjustments.
As far as we know, there is no German jurisprudence on ex post adjustments, which is as such no surprise. In their reaction to the rejection of the first allocation plan by the Commission, the German authorities did not execute possible or necessary ex post adjustments until the issuing of the judgment by the Court of First Instance in November 2007. We suggest that this is the reason that none of the enterprises confronted with (possible) ex post adjustments went to court, at least not until the end of 2007. After the judgment was issued, the UBA announced that the planned ex post adjustments would be enforced in due time. However, at that time the actual price of the allowances was and still is very low. Thus, although the German government was justified, in the end, ex post adjustments seem not to have had any real substantial impact in Germany. With regard to the ex post adjustments because of the closure of an installation, they won't have much impact in future, too.
We announce here some jurisprudence which concerns the regulations discussed above and might be relevant in a broader sense. As mentioned above, installations already in existence before 2003 were (for the period 2005-2007) allowed to choose whether they are treated as existing installations (and get their allowances on the basis of former production data) or are treated as new installations (and get their allowances on the basis of predictions and benchmarking) (§ 7 XII ZuG). In the last-mentioned case, the regulations about ex post adjustments for new installations would apply. German authorities argued that the (possibility of) a shortage of allowances, necessary to remain within the total cap of allowances allocatable (the so-called Erfullungsfaktor), would apply to both kinds of existing installations, independent of which allocation method they have chosen. However, the Bundesverwaltungsgericht decided that the Erfullungsfaktor only applies to the installations which did not opt for being treated as new installations.47 Another interesting judgment of the same day concerns the legality of the shortage of allowances (Erfullungsfaktor). The BVerwG argues that this possibility is not in breach of the Directive, the German constitution or other general law principles.48
The Belgian courts have not yet delivered much case law regarding emissions trading. However, the Highest Constitutional Court ruled an interesting case on 7 June 2007 with regard to the competence of the government to amend its allocation decision, for instance in cases of closure of an industry or in cases of decease of the GH permit.49 The company group Arcelor, producer of pig iron and steel in France, Spain, Germany and Belgium brought on 2 June 2005 an action against the Walloon region before the Highest Constitutional Court. Arcelor argued, besides other arguments, that the Walloon decree of 10 November 2004 providing for adjustments of the allocation of allowances inter alia in cases of closure infringed its fundamental rights to property. The Highest Constitutional Court ruled that a GHG installation could claim the ownership of an allowance that has been issued by the competent authority to the GHG installation, but it could not claim ownership of the allowances that had been addressed in a NAP to a GHG installation, but which had not yet been issued to that GHG installation. This judgment is interesting because for the first time a court ruled upon the legal status of a greenhouse gas allowance in terms of property rights. In fact, the court allows for ex post adjustments of the decisions of a national allocation plan, in circumstances as designated by law, for example in cases of closure or decease of the GHG permit.
4.3 EU: Court of First Instance
184.108.40.206 Essence of the case On 7 November 2007 the Court of First Instance ruled a very interesting case with regard to the original German draft NAP.50 The ruling concerned the acceptability in the German plan of the
47 BVerwG 16 October 2006, BVerwG 7 C 29.07.
48 BVerwG 16 October 2006, BVerwG 7 C 33.07.
49 Arrest van het Arbitragehof van 7 juni 2007, no. 92/2006.
50 T-374/04, 7 November 2004.
proposed ex post adjustments to the amount of allowances allocated to installations. As indicated above, Germany wanted to be able to withdraw allowances in cases where a company's production - and therefore emissions - turned out to be much lower than projected. The Commission said operators should be free to reduce their emissions by cutting production levels while keeping emission allowances. But in its ruling the Court of First Instance declared that the commission had 'misconstrued' the ETS Directive and that ex post adjustments did not contradict the essence of the trading scheme: 'The mere fact that the ex-post adjustments at issue are liable to deter operators from reducing their production volume and, therefore, their emission rates is not sufficient to call into question the adjustments' legality in light of the directive's objectives as a whole'.
First of all, the Court stressed that the Commission is empowered to verify whether the measures adopted by Member States are consistent with the criteria set out in Annex III to the Directive and with Article 10 thereof and, in carrying out that review it itself has a discretion in so far as the review entails complex economic and ecological assessments carried out in the light of the general objective of reducing greenhouse gas emissions by means of a cost-effective and economically efficient allowance trading scheme (Article 1 of ETS Directive and recital 5 in its preamble). The motivation of the Court's findings can be found in Article 249, para. 3 EC that states as follows: 'a directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods'. It follows that, when the directive in question does not prescribe the form and methods for achieving a particular result, the freedom of action of the Member States as to the choice of the appropriate forms and methods for obtaining that result remains, in principle, complete. Nevertheless, the Member States are required, within the bounds of the freedom left to them by the third paragraph of Article 249 EC, to choose the most appropriate forms and methods to ensure the effectiveness of directives.51 It also follows that, where there is no Community rule prescribing clearly and precisely the form and methods that must be employed by the Member State, the Commission has the task, when exercising its supervisory power, pursuant in particular to Articles 211 EC and 226 EC, of proving to the required legal standard that the instruments used by the Member State in that respect are contrary to Community law. The Court iterates that the European Commission has the burden of proving the
51 See Case C-40/04 Yonemoto  ECR I-7755, paragraph 58, and the case cited there.
extent to which the powers of the Member State and, therefore, its freedom of action, are limited in light of the above-mentioned conditions.52
Based on different interpretation methods of criterion 10 of Annex III of ETS Directive and taking the evaluation of the Commission's guidance into account, the Court concludes that, in its guidance, the Commission does not provide any additional explanation beyond the wording of the relevant provisions of the ETS Directive, with regard to the effect of criterion 10 of Annex III to the ETS Directive. Such explanation would be capable of supporting the validity of its interpretation that the ex post adjustments at issue are contrary to that criterion. Nor does the Commission guidance contain anything that helps to determine whether the Member State is able to change the individual allocation of the allowances after the adoption of its NAP or of the allocation decision under Article 11(1) of ETS Directive. The Court also stresses that after the national allocation decision has been taken, subsequent modification of the individual allocations of allowances is still possible, and therefore refers to the case T-178/05, United Kingdom v Commission 2005, ECR II-4807.
Furthermore, according to the Commission the ex post adjustments relating to the amount of allowances allocated to new entrants are contrary to criterion 5 of Annex III of ETS Directive which requires non-discrimination, since new entrants are unjustifiably favoured compared with operators of installations who are already covered by the German NAP, and who do not benefit from such adjustments. Criterion 5 of Annex III to Directive 2003/87 states that 'the [NAP] shall not discriminate between companies or sectors in such a way as to unduly favour certain undertakings or activities in accordance with the requirements of the Treaty, in particular Articles 87 [EC] and 88 [EC]'. As regards the prohibition of discrimination, paragraph 51 of the Commission guidance, concerning criterion 6 which relates specifically to new entrants, adds that the principle of equal treatment is the guiding principle relating to new entrants' access to allowances. Finally, paragraph 61 of the Commission guidance specifies that, 'in order to respect the principle of equal treatment, the methodology that a Member State uses in order to allocate allowances to new entrants should as far as possible be the same as the one used for comparable incumbents', while acknowledging, however, that 'adaptations may be made for justified reasons'.
However, according to the Court the Commission did not apply the principle of equal treatment correctly to the case at issue. Contrary to what the Commission believes, the German NAP provides for the application of ex post adjustments in respect not only of new entrants but also of certain operators of installations who are already present in the market and covered by the German
NAP (e.g. closure). Even more, the fact that a subsequent downward correction of the allowances is granted to an operator, deprives, according to the Court, the operator of its 'property' having commercial value.53 This cannot be seen as an advantage compared to other operators.
The ruling of the Court surprisingly enough stresses the fact that the downwards ex post adjustments as proposed by Germany could not have been rejected by the Commission. Within the original NAP, however, upwards adjustments were also foreseen. Finally, the court only reviewed downwards adjustments, as Germany explained that according to its implementing legislation only such adjustments would be possible.54 It is however interesting to note that the initial thought was to have a system of both upwards and downwards adjustments, based on actual production data.
One important reason for the outcome of the case is, strikingly enough, that the Commission failed to incorporate its condition to accept only ex ante allocation decisions in its first guidelines, except in cases of closures and new entrants. If the Commission were to have incorporated its strong view on ex ante allocations in its guidelines, the outcome of the case could have been different, although this would depend on the strength of the motivation by the Commission. As stated in the ruling, the Court would make the assessment.
For the moment, the Commission upholds its resistance against ex post adjustments. The Commission stated in its second guidelines, adopted before the ruling of the Court of First Instance:
The non-acceptance of ex-post adjustments is essential for the allowance market development. The Commission did not approve the so-called ex-post adjustments envisaged by a number of Member States for the first trading period. This plays a vital role in the development of an efficient and liquid allowance market. The good functioning of the allowance market depends crucially on a stable and predictable allocation for the entire trading period in order to create stable incentives for installations to reduce emissions. For compliance purposes, companies can use the full flexibility of the scheme, be it via the allowance market or via company-internal transfers across borders.55
The Commission thinks that it is premature to draw conclusions and identify best practice regarding new entrants and closures.56 In fact, the Commission has no convincing reasoning, let alone hard evidence, that would
54 Section 34.
justify its opinion of not allowing ex post adjustments, even though this would be ex post downwards and upwards adjustments as originally proposed by Germany. A more detailed analysis of the effects of ex post adjustments would be needed before adopting such a strong point of view and thus restricting the discretion of Member States. This current point of view of the Commission lacks sustainable motivation.
After all, the court ruling came too late to have any effect in practice yet. Nevertheless, with a view on the necessary revisions of the greenhouse gas trading scheme, the consideration of ex post adjustments is still relevant. However, the Commission did not incorporate ex post adjustments within its proposal on revisions of the ETS, as it firmly states that no ex post adjustments will be allowed. As we have seen before, the need for ex post adjustments is determined by the allocation method chosen: particularly in a cap-and-trade regime with free allocation on historical data, Germany, at least, felt the need for (downwards) ex post corrections, which view is supported by the Court of First Instance. What is relevant, thus, is how the allocation in the new regime will be done. The Commission proposes the use of benchmarks, e.g. a number of allowances per quantity of historical output. We first would like to see an elaborated explanation before being able to judge whether the exclusion of ex post adjustments is reasonable or even justifiable. If we understand this correctly, the Commission still wants to use historical data, meaning that allowances will be done possibly via a number of allowances per quantity of historical output, and that the emissions would no longer depend on historical emissions.57
In its teleological interpretation, the Court however expressed some interesting views regarding the question whether a (downwards) ex post adjustment mechanism linked to changes in production volume would run counter to the objectives of the ETS Directive. First, it says that the Commission has not put forward evidence or arguments capable of establishing that the ex post adjustments would harm the principal objective of the ETS Directive, namely the reduction of greenhouse gas emissions as a whole (sec. 134). The Court then incorporates the objectives of maintaining cost-effective and economically efficient conditions, and that the trading market must cause the least possible diminution of economic development and employment. The court recalls that a fall in production volume does not necessarily lead to a reduction in the overall emission rate. Consequently, the deterrent effect of ex post adjustments linked to falls in production volume is not to be seen as contrary
57 European Commission, Questions and Answers on the Commisson's proposal to revise the European Emissions Trading Scheme, sub 14. Memo-08-35, Brussels, 23 January 2008.
to the objective of maintaining cost-effective and economically efficient conditions. The Commission was even wrong in asserting that the encouragement of the use of more energy-efficient technologies . . . producing fewer emissions per unit of output was only a subordinate objective (sec. 139). The courts considers that
. . . investment in more energy-efficient technologies constitutes an instrument at least equivalent, if not superior, to that of reducing production volume, for the purpose of successfully reconciling the objective of substantially reducing emissions and that of safe-guarding cost-effective and economically efficient conditions both on the trading market and on the market for goods in question (sec. 139).
The Court rejects the view of the Commission that ex post adjustments discourage operators from investing in more energy-efficient technologies (para. 140). The Commission's argument that ex post adjustments are environmentally neutral or even harmful is thus not well founded. Moreover, the Court cannot see why the Commission does not follow the argument that ex post adjustments are needed to tackle the risk of over-allocation, because there is a natural tendency for operators to seek to obtain the greatest possible quantity of allowances. With ex post adjustments, linked to actual production data, overestimations made by operators can be corrected, and the mere fact that a competence to correct overestimations exists could have a preventive function.
The considerations of the Court upon the possible effects of a downwards ex post adjustment mechanism linked to production volumes are convincing, and should be taken into account for further consideration when reviewing the EU ETS scheme and even other emissions trading schemes. One possible point of view is that the reasoning of the Court does not preclude that even a system of ex post downwards and upwards adjustments, as formerly intended by Germany, could be in line with the Directive. The crucial point would be that the upwards adjustments may not impede the environmental goal of the directive, and thus may not endanger the overall greenhouse gas reduction goal. However, by ensuring in the national allocation plan that a maximum amount of allowances will be allocated, meaning that ex post upwards adjustments can no longer be granted when the total quantity of allowable emissions is reached, this concern seems to be addressed.
On the other hand, it is hard to predict how the Court would have judged or would judge the acceptability of ex post upwards adjustments. Article 29 of the directive establishes the possibility of granting extra allowances in case of a force majeure, and specifies that this can only be done after approval by the Commission. One interpretation could be that this article precludes, as such, any other upwards ex post adjustments (thus, ex post upwards adjustments without force majeure).
However, one could also argue that ex post adjustments, explicitly foreseen by the national allocation plan, and adequately designed in order to ensure that the total quantity of allowances in the specified trading period will not be breached, are not meant to be forbidden by this article. In this respect, we see that the Court of First Instance in its systematic interpretation of the Directive and, more specifically, in its reasoning regarding Article 29 of the Directive, links the article to the total quantity of the allowances as being mentioned in the national allocation plan.58 The Court then says that the possibility of an increase in the amount of individually allocated allowances bears out the proposition that a Member State is not permitted, in principle, to allocate additional allowances. The precise meaning of the wording 'in principle' is hard to interpret; one could say that this leaves the possibility that a specific and justifiable allocation method which is intended by a Member State could be found acceptable. In particular Article 249 EC Treaty, meaning that Member States would have the choice of form and methods, would support this point of view. So, in this view, an explicit downwards and upwards ex post system proposed in a national allocation plan would not necessarily be in conflict with Article 29 of the Directive. As a final observation, taking into account that the court could take another point of view, we consider that Article 29, as well, of the Directive should not be interpreted as a prohibition to include within a national allocation plan the possibility of upwards and downwards adjustments, as long as the total quantity is not endangered. Of course, we can imagine that such a system in itself raises new legal questions, notably regarding the method through which the total cap will be ensured. Obviously, such legal questions deserve further consideration.
Buzzi Unichem, an Italian private association, brought an interesting case before the European Court of First Instance.59 The appeal requests the annulment of Commission Decision of 15 May 2007 concerning the NAP notified by Italy for infringement of the EC Treaty and the principles and rules of law adopted in its application. The NAP must be altered so as to render no longer permissible rationalization measures which envisage that the operator may maintain part of the allocated allowances in the event of 'closure due to processes of production rationalization' (Article 1(4) and Article 2(4) of the Decision). According to Buzzi Unichem, the European Commission failed to
58 T-374/04, 2007, §107; here the reasoning refers clearly to 'derogation from the total quantity of allowances that is laid down'
explain the reasoning which led it to hold that the scheme was incompatible as 'ex-post adjustment'. The Court has not yet ruled upon this case. We can assume, however, that the Court will not review the substance of the claim, as it is expected to hold that the firm lacks standing in view of not having a direct and personal interest.60 The case again illustrates that ex post adjustments are deemed important enough to start legal procedures.
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