Legal doubts are hiccup in CO2 reform

LONDON - A reported hiccup in a proposed tweak to the European Union’s carbon market is only a twist in a long-running and legally fraught effort to achieve deeper reforms, always more important than the latest contingency measure.

By (Reuters)

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Published: Wed 18 Jul 2012, 9:26 PM

Last updated: Fri 3 Apr 2015, 1:45 AM

The Emissions Trading Scheme, which caps the emission of powerplants and factories in 27 member states, oversees the issuance of allowances to pollute.

The big-picture problem for the European Commission is that its carbon market is swamped with these permits, following the financial crisis, depressing prices which it believes are now too low to motivate carbon cuts.

The proposed tweak is to delay selling emissions permits called EU allowances (EUAs) while the Commission considers a way to remove them permanently.

The reason for the backdoor route is that the Commission has now used up all its formal get-out clauses for deeper, structural reform.

The underlying legislation, the Emissions Trading Directive, did allow for changes in an anticipated way in advance of the upcoming 2013-2020 trading period.

But that was used up in 2008, before the scale of the impact of the financial crisis was clear.

One could pose the question, perhaps cruelly in hindsight, whether the Commission should have seen the scale of the financial crisis unfolding in late 2008 when the directive was agreed.

It didn’t, and the EU agreed a cap which has turned out to be too generous to industry: the scheme is structurally in glut until beyond 2020.

The EU did agree a review clause in the trading law, but that was also a weak hostage to fortune.

It inserted a paragraph saying that that countries could sharpen the scheme’s carbon targets, but only in the event of a global climate deal.

The Copenhagen climate summit collapsed without agreement the following year, setting in train the slow-motion carbon price collapse at near record lows on Wednesday.

Coal-dependent Poland has wasted no time referring to the clause whenever the Commission proposes tighter caps.


The next trading phase starts in just five months.

Contemplating now the need for rapid action, European Climate Commissioner Connie Hedegaard had hoped to sidestep the legal minefield of re-opening its carbon trading law by tweaking a related auctioning regulation instead, to delay the sale of EUAs.

The move involves nicety of EU law, and the difference between regulations and directives.

Amending regulations requires only approval of member state experts, rather than ministers, making for a more informal, streamlined process than under a directive.

Changing regulations also avoids national legislation, where each member state interprets and writes the changes into national law, a process taking two years or so.

Now, as reported by Reuters late on Tuesday, the Commission is actively considering whether it may still have to tweak the underlying directive after all.

Legal experts said on Wednesday tweaking a very small part of a directive - perhaps just a line confirming the Commission was able to modify the timing for auctioning - would still add several months delay but not require a lengthy re-opening of the law.

That may take approval beyond the start of the third trading phase in 2013, requiring a feasible back-dating of the changes.

It is early days, and the proposals will become clearer at a meeting of the Commission on July 25.

More importantly, the bigger question remains what structural reforms the Commission can swing past reluctant member states to retire surplus EUAs permanently.

Permanent removal of EUAs would effectively tighten the bloc’s emissions cap, and certainly require lengthy re-opening of the directive and approval of member states.

Last Thursday, the European Commission announced that it expected to raise 1.5 billion euros ($1.83 billion) for innovative low-carbon technologies from auctioning emissions permits in its carbon market this year: a palpable achievement.

On Wednesday, it was back to business as usual as regulators settled back into their day job of fending off legal objections to limit emissions, battle-scarred from successful skirmishes in the past with the steel industry and Poland.

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