UK wins legal battle on emissions allocation

The European Commission's refusal to consider the Government's bid to increase the UK's allocation under the EU emissions trading scheme has been overturned by the European Court of First Instance. The ruling casts uncertainty over the allocation process for the scheme's second phase.

The UK's court victory over the Commission is something of a Pyrrhic victory. The dispute has cast a shadow over the UK's Presidency of the EU and has done little to bolster the Government's claims to leadership on climate change.

The background to the case is as follows:

  • April 2004: The Government submitted a national allocation plan (NAP) to the Commission - one of the first member states to do so. It made clear that the plan was provisional and the total allocation was "subject to further revision in the light of ongoing work" on emission projections.

  • July 2004: The Commission approved the NAP, but specified that the total quantity of allowances should not be exceeded.

  • November 2004: The UK notified the Commission that it wanted to increase the total allocation from 736 to 756 million tonnes of CO2. The bid reflected a substantial increase in the Government's emission forecasts, following strong lobbying from industry.

  • March 2005: The Commission - under pressure to clamp down on generous allocations in many Member States - made clear it did not want to revisit the UK's NAP. The Government decided to allocate 736 million tonnes to allow British businesses to join the trading scheme but initiated legal proceedings against the Commission.

  • April 2005: The Commission issues a Decision confirming its view that the proposed amendment was "inadmissible".

    However, the court comprehensively rejected all of the Commission's arguments. In a ruling on 23 November, it concluded that it is up to member states to make the "definitive decision" on allocation, although this must be accepted by the Commission.

    Crucially, the court found that the Commission "could not restrict a member state's right to propose amendments". Such a restriction would make public consultation on the final NAP "purely academic".

    The court also rejected the Commission's claim that increasing the UK's allocation would destabilise carbon markets. It noted that "the proposed increase represented only 2.7% of UK allowances", and that the UK's application was submitted seven weeks before the opening of the market and at a time when the Commission had still not taken a decision on the NAPs of nine other member states.

    Even so, the carbon price dropped sharply from €22.8 to €19.6 per tonne on the day after the ruling - fuelled by speculation that Poland, Italy, Slovakia and Hungary, which still have not approved their final NAPs, might seek to follow the UK's example.

    The Commission will now have to consider the UK's amended plan and make a fresh decision. The amendment will need to be assessed against the Directive's criteria - the two most important require that allocation should not exceed installations' "need" and should be consistent with Kyoto Protocol targets.

    Given that the UK is broadly on track to meet its Kyoto target, the Commission may be forced to agree to the amendment. If so, the Government has made clear that the disputed 20 million tonnes will be handed out to the power generators (ENDS Report 362, pp 44-45 ), paving the way for ongoing high levels of coal burn, at least until 2008.

    The Commission declined to say whether it will appeal against the ruling or discuss the timetable for considering the amended NAP.

    The court's ruling may have important implications for the second phase of the ETS, which will run from 2008-12. Member states are due to submit NAPs to the Commission by the end of June 2006. But it now seems that they will be free to amend their NAPs right up until the second phase starts in 2008. This raises the prospect of prolonged jockeying between member states and industry lobbies.

    Ongoing uncertainty over the stringency of the collective allocation, and hence the carbon price, will also make it difficult for business to plan investment in low-carbon technologies.