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Emissions trading: Cross-sectoral correction factor ruled invalid
31.05.2016
In its judgment of 28 April 2016, the Court of Justice of the European Union (ECJ) in several connected preliminary ruling procedures (C 191/1, C 192/14, C 398/14 and C 391/14 to C 393/14) declared the application of the cross-sectoral correction factor (CSCF) for the free allocation of emissions allowances in the third trading period from 2013 to 2020 to be invalid.
The correction factor is the key mechanism for controlling emissions trading allowances. It ensures that the total of freely allocated emissions allowances for non-electricity generators throughout the EU does not exceed the maximum free allowance under Art. 10a(5) Directive 2003/87 (known as the cap for non-electricity generators or industry cap). According to Art. 4 and Annex II of Resolution 2013/448 by the EU Commission dated 5 September 2013, this was 94.27% in 2013 and will fall to 82.44% by the year 2020.
The judgment was not unexpected because the Opinions of the Advocate General Juliane Kokott on 12 November 2015 had already outlined this outcome to the proceedings and the Court ruled broadly in line with the final submission. However, the judgment is a blow to the industry concerned by emissions trading. At the start of the third trading period, it was generally assumed, especially based on the sparse amount of data, that the correction factor was set too high, i.e. the allowance volume was too greatly reduced. The Court now comes to the opposite conclusion, however, in other words that the maximum volume of emissions rights, which determines the free allowance (known as the industry cap), was set too high. In the Court’s view, the reduction of allowances should therefore have been even greater.
The Court has ordered a recalculation and redetermination of the correction factor within a period of ten months. Despite the invalidity of the correction factor, to protect legitimate expectations the allowances made until the end of February 2017 will remain unaffected.
It is advisable for plant operators which took legal action purely as a precaution against the allowance notifications at the beginning of the third trading period with the objection that the correction factor was incorrect, to initially wait, despite the Court’s judgment, until the EU Commission has made a new calculation in order to make a decision on a secure factual basis as to whether the objection should be retained or withdrawn. This is also advisable because other preliminary ruling procedures are still pending at the Court regarding the cross-sectoral correction factor, and it is worth waiting for their outcome.
Download the ECJ judgment of 28 April 2016
The correction factor is the key mechanism for controlling emissions trading allowances. It ensures that the total of freely allocated emissions allowances for non-electricity generators throughout the EU does not exceed the maximum free allowance under Art. 10a(5) Directive 2003/87 (known as the cap for non-electricity generators or industry cap). According to Art. 4 and Annex II of Resolution 2013/448 by the EU Commission dated 5 September 2013, this was 94.27% in 2013 and will fall to 82.44% by the year 2020.
The judgment was not unexpected because the Opinions of the Advocate General Juliane Kokott on 12 November 2015 had already outlined this outcome to the proceedings and the Court ruled broadly in line with the final submission. However, the judgment is a blow to the industry concerned by emissions trading. At the start of the third trading period, it was generally assumed, especially based on the sparse amount of data, that the correction factor was set too high, i.e. the allowance volume was too greatly reduced. The Court now comes to the opposite conclusion, however, in other words that the maximum volume of emissions rights, which determines the free allowance (known as the industry cap), was set too high. In the Court’s view, the reduction of allowances should therefore have been even greater.
The Court has ordered a recalculation and redetermination of the correction factor within a period of ten months. Despite the invalidity of the correction factor, to protect legitimate expectations the allowances made until the end of February 2017 will remain unaffected.
It is advisable for plant operators which took legal action purely as a precaution against the allowance notifications at the beginning of the third trading period with the objection that the correction factor was incorrect, to initially wait, despite the Court’s judgment, until the EU Commission has made a new calculation in order to make a decision on a secure factual basis as to whether the objection should be retained or withdrawn. This is also advisable because other preliminary ruling procedures are still pending at the Court regarding the cross-sectoral correction factor, and it is worth waiting for their outcome.
Download the ECJ judgment of 28 April 2016
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