Implementation By Member States Introduction

The ETS Directive leaves quite an amount of discretion to Member States regarding the possibility of ex post adjustments, and it is interesting to see in what way the Member States sought to use this discretion and established ex post adjustment competences. By doing so, we need to take into account that, because of the strongly held view of the Commission to only allow ex post adjustments in case of closure and new entrants, Member States were reluctant to act against the view of the Commission.25 The case of Germany is an exemption, and leads to an intriguing outcome, meaning that the Commission

21 Article 44.2. of Registry Regulation.

22 Article 44.3. of Registry Regulation.

23 See for instance art. 47 of the Registry Regulation.

24 Article 62 of Registry Regulation.

25 For instance, in light of the difficulties with the Commission, Luxembourg decided not to include ex post adjustments in the second national allocation plan, EEA report 2007, pp. 55-56.

was unable to uphold its view against ex post adjustments. This case will be discussed in the next section. This section provides some examples from the legislative frameworks of The Netherlands, Germany and Belgium regarding the design of ex post adjustments.

3.2 The Netherlands

Contrary to most of the other Member States, the Dutch legislator did not address the possibility of closures for the first period running from 2005-2007. This means that in cases of closure, the allowances could simply be sold by the industry at hand. However, from 2008 onwards a competence is available for the government to withdraw the greenhouse gas permit in case of closure of the greenhouse gas installation, which means that after the withdrawal of the greenhouse gas permit, no greenhouse gas allowances can be transferred any longer to the account of the operator of the installation.26

The Act introducing the closure provision entered into force on 1 September 2007.27 Remarkably, there has been no discussion about the closure provision during the legislative process: the Council of State made no explicit comment on the legislative proposal from the government, and also the Second and First Chamber did not discuss possible comments or problems regarding the legislative proposal.

In fact, the closure provision concerns the situation where an installation cannot qualify any longer as a greenhouse gas installation. In such a case, the competent authority may withdraw the greenhouse gas permit.28 As soon as this permit has been withdrawn, it is no longer possible anymore to issue allowances to the account of the operator.29

The legislative provision does not explicitly deal with a part-withdrawal of the greenhouse gas permit: the competence only refers to the 'withdrawal of a permit'. Also, the explanatory memorandum to the legislative proposal does not elaborate on the possibility of withdrawing the permit specifically in case of closure of only a part of the installation.

As the closure provision is linked to the possibility of withdrawing the greenhouse gas permit, it is thus necessary for the competent authority to determine whether an activity can qualify as a greenhouse gas installation. Following Article 3 of directive 2003/87, the Dutch Environmental Management Act provides a definition of a greenhouse gas installation,

26 Kamerstukken II, 2005-2006, 30 964, and Staatsblad (2006, 611).

27 Staatsblad 2007, 295.

28 Art. 16.20 b Dutch Environmental Management Act.

29 Art. 16.35 Dutch Environmental Management Act.

complemented by a prescription given by an Executing Order.30 At the least, the following aspects are relevant for applying the competence to withdraw the permit. First, the definition of a greenhouse gas installation as given in the Act needs to be interpreted. An important condition following this definition is that it needs to be determined that 'activities are carried out'. At what exact point this is the case can, of course, be questioned, and, in practice, legal conflicts might occur. For example, is a continuation of only 10% of the activities enough to state that the activities are still being carried out?

Second, the description of a greenhouse gas installation as given by the Executing Order needs to be interpreted as well.31 In particular, the several thresholds being included in the Executive Order can lead to different interpretations and thus to uncertainty regarding the question of whether it can be concluded that the installation cannot qualify any longer as a greenhouse gas installation. Moreover, it is not clear how long the non-fulfillment of a certain threshold (like the thermal input of 20 MW) must last before it can be concluded that the installation is no longer to be viewed as a greenhouse gas installation and thus that the permit should be withdrawn. What would be an acceptable duration of non-fulfillment to the threshold criteria: one week, one month, a quarter of a year, or another period of time?

Besides the determination that the installation is no longer to be seen as a greenhouse gas installation in view of the legislative framework, there is also another circumstance in which the competent authority may decide to withdraw the permit: that is when the integrated permit as being regulated in chapter 8 of the Dutch Environmental Management Act has been withdrawn, which can also be a part-withdrawal.32 The Act gives much discretion to the authority to decide whether or not the permit will be withdrawn from the moment that an installation no longer qualifies anymore as a greenhouse gas installation. The Act says that the authority may decide to withdraw, but does not require it to withdraw in cases of closure. It is obvious that it is the intention of the legislator that the competent authority should withdraw in cases of closure, but this has not been firmly expressed within the Act. Furthermore, the authority should conduct its margin of discretion included in the competence to withdraw the permit in such a way that administrative law principles will be met and that thus any arbitrary and unlawful decision will be avoided. The principle of equality seems in this respect a very relevant principle. The competent authority could issue a specific guideline explaining in which

30 Art. 16.1 par. 2 and art. 16.2 Dutch Environmental Management Act, and Besluit handel emissierechten, art. 2.

31 Besluit handel in emissierechten zoals gewijzigd, art. 2.

32 Art. 16.20b par. 1a. The exact moment of the decision-making is not relevant here, but the moment at which this decision enters into force.

specific circumstances a permit will be withdrawn. Thus far, no specific policy has been announced regarding this competence.33

As long as the permit has not been withdrawn, the allowances should ultimately be issued to the account of the operator by 28 February annually. This issuance should be in conformity with the national allocation decision. The Dutch legislator assumes that the issuance of allowances is not to be seen as an administrative decision that can be appealed before the administrative court (a claim should be addressed to the civil court). However, whether this view is right can be questioned, and case law is needed to clarify this point.

In sum, it is fair to conclude that in practice the competent authority can face legal problems when it aims to withdraw a permit. Moreover, things get even more complicated as soon as the procedures for, on the one hand, the greenhouse gas permit and, on the other hand, the allocation of allowances are not fine-tuned. These procedures are totally different, with possibly different authorities (like in The Netherlands). Problems might especially arise when one of the procedures is not well-operated. Quite a few Member States, among which The Netherlands, have indeed failed to comply with the time-limit for the allocation procedure for the second trading period, meaning that the deadline for transferring allowances in 2008 has been exceeded. It is not unthinkable that some operators will feel damaged by the late decision-making, and that they will try to hold the authority responsible for not delivering the national allocation decision and the issuance of the allowances in the year 2008 according to the dates set by legislation. This might for instance be at hand in the hypothetical case where the decision to withdraw a permit has been issued on a date after 29 February 2008, while the national allocation decision still had to be adopted and thus the allowances could not have been transferred yet. In such a case the former operator has a disadvantageous position, because, if the government had been issuing allowances before 1 March and before the withdrawal of the permit, he would have been able to get (and to sell) those allowances. This specific case shows that procedures to withdraw the greenhouse gas permit are not to be seen isolated from the allocation procedure, and that co-ordination between both procedures is indicated.

3.3 Germany

3.3.1 Introduction

Contrary to Dutch law, German law for the first trading period contained a rich variety of ex post adjustments. Generally speaking, only lowering of issued

33 The draft national allocation plan only gives a very short explanation about the closure provision on p. 20 and p. 36.

allowances is possible. When considering German law, one has to know that the final rules for the period 2005-2007, which are laid down in the Zuteilungsgesetz 2007 (hereafter ZuG 2007) and the Zuteilungsverordnung 2007, significantly differ from those the Court of First Instance has passed his judgment on. Without going into much detail, withdrawal of an allocation decision during the first trading period was possible in six situations,34 each following different rules. These are:

1. closure or substantial reduction of production capacity (§ 9 ZuG 2007);

2. lower production after a transfer of allowances to a different installation of the same operator (§ 10 ZuG 2007);

3. general rule on lower production of installations (§ 7 IX ZuG);

4. lower production of installations which began to work in 2003 or 2004 (§ 8 ZuG 2007);

5. lower production than foreseen of newcomers (§ 11 ZuG 2007);

6. lower production of cogeneration installations, producing combined heat and power (CHP) (§ 14 ZuG 2007).

Upward adjustments are forbidden in all cases. Such upward adjustments were intensively discussed within Germany, but more broadly on the EC-level, too. However, in the end, and different from the draft allocation plan the CFI ruled on, the German law did not contain any possibility for ex post increase of allowances. We do not know whether Germany chose to go ahead with the allocation process in a way the Commission insisted on, and did not want to delay the allocation process in order to incorporate the outcome of the appeal against the decision of the Commission, or whether there were other reasons to change the draft allocation plan in that sense.

3.3.2 Some details

The rules for those six cases of possible adjustments are, roughly speaking, as follows:

(a) If operation of an installation terminates, the operator is obliged to return the allowances allocated, but not yet handed out.35

34 To a certain extent the division into six reasons for ex post adjustments is ambivalent. For example, the Umweltbundesamt subdivides in a different way into five reasons. We think the subdivision chosen here offers the most clarity for the reader not common with the German Zuteilungsgesetz.

35 The rule that the operation of an installation is deemed to have terminated when its emissions during the year in question are less than 10% of the average annual emissions recorded during the base period, mentioned in case T-374/04, has not become law in the end, but was eliminated in the last phase of the parliamentary discussion.

(b) Upon application, allowances allocated to a closed installation are not withdrawn where the operator commences operation of a new installation within a period of three months (and in some cases within two years) from closure of the old installation. In such a case, the allowances are allocated for four years on the basis of the historic emissions of the closed installation and then, for a period of 14 years, their allocation is calculated on the basis of a compliance factor of 1, this rule having the objective of encouraging operators to close their obsolete and inefficient installations. If the actual production happens to be lower than the production of the installation which was closed, restitution of allowances for the corresponding difference has to be made.

(c) A general rule on major decreases of production capacity, which was not discussed in the judgment of the CFI, is to be found in § 7 IX ZuG. According to this rule restitution has to be made for allowances already handed out if the actual production is more than 60% lower than the average yearly production the allocation was based on. In earlier drafts of the German Act, this rule counted only for new installations and recently started installations. In the definitive law, this rule applies generally to all installations, including old ones.

(d) The amount of emission allowances allocated to installations that began to operate in 2003 or 2004 had to be adjusted if the actual production volume fell below the production volumes which were declared for the purposes of calculating the amount of allowances that was initially allocated. When the tranche of allowances for the following year is issued, the quantity of allowances will be proportionately reduced.36

(e) The amount of emission allowances allocated to new entrants who started to operate after 1 January 2005, or increase in the production capacity of existing installations had to be adjusted according to whether, in the course of operation of the installation in question, the actual level of activity is below the level of activity which was declared for the purposes of calculating the amount of allowances that was initially allocated. When the tranche of allowances for the following year is issued, the quantity of allowances will be proportionately reduced.

36 In the judgment of the CFI of 7 November 2007 (T-374/04) about the German allocation plan the possibility of an increase of allowances is mentioned, if the actual production capacity in the cases (c) and (d) is higher than predicted. However, only the draft German act mentioned such an ex post increase of allowances. In the definite act the possibility of an upward-adjustment was deleted.

(f) Cogeneration installations, producing combined heat and power (CHP) (Kraft-Wärme-Kopplung) receive emission allowances by way of a special allocation (Sonderzuteilung) in the first allocation year according to the actual volume of electricity production. The amount of allowances may, however, be subsequently corrected on the basis of the volume of electricity production that is established in the following year.

Common to all six cases of ex post-reduction of allowances is that allowances that are withdrawn will be transferred to the new entrant reserve. Furthermore, it is important that all existing installations may opt to be treated as newcomers (§ 7 XII ZuG). Thus, every operator may choose between grandfathering on the basis of historical data (§ 7 ZuG) and grandfathering on the basis of his/her own predictions and benchmarks, combined with more far reaching possibilities of ex post adjustments (§ 11 ZuG), as described here under (e). According to the Federal Environmental Agency (Umweltbundesamt, hereafter UBA), many operators have chosen the last option mentioned.37

Motivation for and discussion about introducing ex post adjustments

The reasons given for the introduction of the ex post adjustments were diverse. On the one hand, the German government posited that the functioning of the emissions trading system itself urges some ex post adjustments. That would, for instance, be the case for new (d and partly b) or nearly new (c) installations, where grandfathering on the basis of historical data is not possible. Grandfathering is usually based on historical data, with several possibilities for correction factors. Providing allowances without payment only on the basis of predictions of the owner of the installations, is, from a market-oriented point of view, an imperfect instrument, which requires the possibility for an ex post correction. In such cases, ex post adjustments prevent these installations from getting far more allowances than they need. That could otherwise interfere with the functioning of the market and could prevent the drivers of the installation concerned from taking emission reduction measures. Other arguments were justice and acceptance. It would not be fair, and could cause competitive distortion, to provide generous allowances to the drivers of new installations generously, on the basis of their own predictions only, whilst deducting the allowances of the drivers of existing installations on the basis of hard production facts. It could distort competition, too, if high premiums (in the form of allowances which are no longer needed) were to be paid for closures of installations.

37 Ziesing (2007, p. 201), 3254.pdf.

The rules for ex post adjustments were intensively discussed during the drafting of the statute. Major changes have been made to the legislative draft. For example, the draft contained the possibility of an ex post increase of allowances in cases where the production of new installations is significantly higher finally than the driver of the installation predicted.

Many changes have been made to the detailed conditions for applying the ex post rules. However, the whole system of allocation of allowances is highly coherent. Thus, changes in the details of one rule can easily disrupt this coherence. This has been the case, at least to some extent. An analysis of the allocation rules, written on the request of UBA, concludes that, in the end, at least some of the reasons for ex post adjustments are not consistent which each other and 'poorly rational'.38 Generally speaking, this report is not principally against any ex post adjustments, but is in the end quite critical of the need and the effects of this instrument. First of all, according to this report, ex post adjustments principally do not fit into the existing EU-emissions trading system, with its strong emphasis on ex ante assessments. That was the main argument for the Commission's decision to reject the German allocation plan, too. Secondly, some of the adjustments hinder the price-incentives for lowering emissions. Thus these ex post adjustments are not only principally contradicting the system, but are even actually diminishing its results. The report differentiates here between different ex post adjustments. Whilst the rules for new entrants and nearly new installations (d and e) seem to have almost no negative effect on price-incentives, the general 60%-rule on lower production volume (c) seems to have. The authors of the report do see good alternatives for most (but not all) of the situations where ex post adjustments are used and therefore recommend the revision of the ex post rules for the following allocation periods.39 In that respect the report refers, for example, to Denmark and the UK, where special methods of benchmarking were used as an alternative for ex post adjustments.40 However, on the other hand, the same report is critical about too many differentiated and process-oriented instead of product-oriented benchmarks as a basis for allocation of allowances for new installations. The author argues that differentiated (process-oriented) benchmarks also contravene the price-incentives of the trading system.41

38 Ziesing (2007, p. 202 and p. 184), fpdf-l/3254.pdf.

39 Ziesing (2007, p. 202 and p. 196), fpdf-l/3254.pdf.

40 Ziesing (2007, p. 196),>.

41 Ziesing (2007, p. 182),<

3.3.3 Withdrawal of the greenhouse gas permit?

German law does not include rules for the withdrawal of the permit. This is not that strange, because German law does not even use the instrument of a special permit. To fulfill the requirements of the directive, § 4 I Treibhausgas-Emissionshandelsgesetz asks for a permit to emit greenhouse gases and § 4 II-IV sum up the conditions for granting and for the content of the permit. However, Article 4 VI Treibhausgas-Emissionshandelsgesetz states that such a permit is an integral part of the environmental permit for each installation covered by the directive, respectively, the German Treihausgashandelsgesetz, has to have. §§ 17-21 Bundesimmissionsschutzgesetz contain a detailed regulation about adjustment and withdrawal of permits, which applies here, too. However, withdrawal or adjustment of permits as a means of regulating the amount of allowances is not needed and was not a point of discussion in Germany until now, because there are enough sufficient less interventionist possibilities for adjusting only the amount of allowances, and not the permit itself.

The second allocation plan for the period 2008-2012 and its regulation

In the meantime the allocation of allowances for the second trade-period had to take place. Therefore, a new Zuteilungsgesetz 2008-2012 came into force in August 2007, thus some months before the CFI ruled about the rejection of the first allocation plan by the European Commission. That may explain why nearly all possibilities for ex post adjustments have been eliminated. The possibility of a single ex post adjustment remains. If an installation closes down, restitution must be made for all allocated or even issued allowances corresponding with the period after closure (§ 10 I Zuteilungsgesetz 2012). This obligatory ex post adjustment is even stricter than the corresponding Article 9 I ZuG 2007, which left allowances already issued. Thus, in an extreme case, the operator of an installation which closed down almost immediately after allowances for a calendar year were issued, could retain allowances corresponding to unrealized emissions of nearly an entire year. This 'far reaching generosity'42 has now been corrected. As has been said, all other ex post adjustment rules have been diminished. It seems that the rejection of the first German allocation plan by the Commission, although unlawful, has had its proposed effect.

3.4 Belgium

In Belgium's federal system, the implementation of the EU ETS is compli

Vierhaus (2005).

cated because of the different levels of government. In accordance with the division of power, responsibility is spread between the federal state and the Flemish, Brussels and Walloon regions. Each of these authorities defines its own priorities for environmental and climate change policy and implements its own relevant actions. With regard to the transposition of EU ETS and given the division of powers in Belgium, the regional authorities have the competence to draft an allocation plan for GHG installations on their territories and to allocate allowances and to grant a GHG permit to them. Below we will discuss relevant rules on the federal level and within the Flemish region, with an emphasis on practical difficulties with the adjustment of the registered allowances within the formal registry.

3.4.1 The federal state

The federal state is competent to regulate the national registry on emission trading. The European Regulation No. 2216/2004 has been transposed by the Royal Decree of 14 October 2005. The registry operates on the basis of the national allocation plan table, which is based on the NAP. In cases where ex post adjustments of the already taken allocation decision are deemed necessary, the national registry entry has to be modified as well. However, the current Royal Decree (which has not yet been adapted to the amended European Regulation) is not very flexible towards facilitating ex post adjustments. We give two illustrative examples in the following paragraphs.

A transfer of the operator account is only allowed in cases where all activities of the GHG installation are to be transferred from one company to another (e.g. in case of merger of full acquisition by another GHG company). When activities are only partially transferred (e.g. transfer of a branch which includes the GHG installation), the allocated allowances cannot be transferred to the account of the other company. This means that the new company that took over the GHG branch will not automatically have the right to claim these allowances, which belong to the first GHG company that sold its GHG branch to the company that took it over. In practice the first GHG company will take the initiative to sell its allowances to the new company. But issues might rise if the GHG company is not willing to do so.

In case of an erroneous surrender of allowances by a company, it is not always possible to correct this mistake. This can be illustrated by the following case: two sister companies, both operating a GHG installation, opened separate accounts. One of the GHG installations requested a prolongation of its GHG permit. The regional competent authority assessed that both GHG installations had to be considered as one technical environmental entity, as being regulated by the Decree on general environmental policy of 5 April 1995 ('milieutechnische eenheid').43 Consequently, the regional competent authority suggested merging both accounts. However, if the environmental permit (which embodies the GHG permit) does not cease, the holding operational account cannot close down. Nor was it possible to let both accounts merge, because a transfer of accounts is only allowed in case of transfer of activities, which was not the issue. Following the suggestion of the regional competent authority, one of the GHG installations surrendered too many allowances, thinking it had to surrender them as a technical environmental entity. However, the federal competent authority was not able to return the erroneously surrendered allowances. The European Commission even confirmed to Belgium that an ex post adjustment in such cases was not possible.44 The regional competent authority sought another solution to correct the mistake, and allowed a rectification through the emission monitoring report.

3.5 The Flemish Region

The Flemish legislation to implement the EU ETS is the Decree of 2 April 2004 on the promotion of rational energy use and the Executive Order of 4 February 2005, which lays down the basis of the Flemish emission trading rules. The legislation establishes a GHG permit scheme, which has been incorporated into the environmental (IPPC) permit. The allowances are allocated to GHG installations, which are listed in the Flemish NAP. This allocation is based on benchmarking in combination with historical emission of production data.

Initially the Flemish legislation foresaw during the first trading period in (previous) Article 14, §4 of the Executive Order of 4 February 2005 the possibility by the competent authority of making ex post adjustments downwards to the allocated emission rights in the following cases:

1. in cases where a GHG installation which holds a GHG permit no longer requires a GHG permit through modification of the installation;

2. in cases of annulment or expiration of a GHG permit (incorporated in the environmental permit). According to Flemish law (Vlarem I) an environmental permit can become lapsed in cases where the operation of an IPPC installation (thus a GHG installation) ceases for more than two consecu-

43 Implementing the IPPC directive (Directive 96/61/EC concerning Integrated Pollution Prevention and Control (IPPC), OJ L 257, 10 October 1996, pp. 26-40. The IPPC Directive has recently been codified by Directive 2008/1/EC of the European Parliament and of the Council of 15 January 2008 concerning integrated pollution prevention and control.

44 Not published, on file with author Schurmans.

tive years, also in case of fire, and in cases when the operation has not begun within three years of the date that a GHG permit was granted; 3. in cases where a GHG permit has been suspended. A suspension is ordered by the civil court or the Highest Administrative Court in case the permit is unlawful.

In these cases, the issued allowances will be annulled.

According to Article 21 of the Executive Order of 4 February 2005 a GHG installation could also request the annulment of its emission allowances. Emissions allowances that have been annulled (at the initiative of the GHG installation, or at the initiative of the competent authority) are no longer valid.

These cases are listed exhaustively. This means that in no other cases would ex post adjustments be allowed. In practice, this leads to some practical issues. For example, if a competent authority erroneously allocated the allowances (e.g. based on erroneous information about the GHG installation), the authority has no competence to correct the amendment. The European Commission communicated in several cases that such corrections were not allowed. The only solution to solve such situations is by amending the NAP, which had to be communicated and approved by the European Commission.

On 7 December 2007 the Executive Order was modified45 in order to establish a regulation for mergers and acquisitions together with the possibility of ex post adjustments. The GHG installation has a duty to notify the situation (e.g. merger) to the competent authority which will make the agreed adjustments based on information about the GHG installation. However, it must be emphasized that the adjustments cannot lead to an increase of allowances, except in a case where the merged GHG installation can prove that it falls beneath the scope of new entrants. A new entrant in the second trading period 2008-2012 will be considered as a modification of the nature or function of a GHG installation by physical enlargement of the GHG installation or an increase of the permitted capacity of a GHG installation, which in any of the forementioned cases has the consequence that the CO2 emissions of the GHG installation increases with at least 10% or increases with at least 50.000 ton per year compared to the average of the reported CO2 emissions of the last three years of the GHG installation.

The amended Executive Order also iterates that the competent authority can stop issuing the allowances in cases of annulment, expiring, decease or decline of the environmental permit (which incorporates the GHG permit). The

45 Belgisch Staatsblad, 27 December 2007, which entered into force on 27 December 2007.

allowances will then not be issued in the following calendar years of a trading period. The GHG installation at issue still has to fulfil its GHG duties (reporting, monitoring, etc.) in the year where the decision has been taken to stop delivery of emission allowances. The competent authority will not stop issuing the allowances in cases of closure, no matter what the reason for closure is (for example bankruptcy, or closure on voluntary basis). The reason can be found in the fact that in case of closure, the GHG permit does not cease immediately. It will cease in cases where the operation has ceased for more than two consecutive years. During that period, the curator can still activate the operation of the bankrupted GHG installations. Thus, to avoid being in breach with freedom of trade, the legislator decided not to cease the allowances in cases of closure.

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