On April 29, 2015, the Court of Justice of the European Union (ECJ) gave its judgment concerning penalties for failing to surrender sufficient emission allowances under Article 16(3) of the EU Emissions Trading Scheme (EU ETS) Directive 2003 (2003/87/EC) when the shortfall is only identified after the annual deadline for surrender.

The ECJ ruled that a national regulator should not impose penalties on an EU ETS operator if subsequent verification by the regulator (after the deadline for surrender) established that the operator had mistakenly understated its emissions and surrendered insufficient allowances. (Bundesrepublik Deutschland v Nordzucker AG (Case C 148/14).)

Legal background

The EU Emissions Trading Scheme (EU ETS) is the principal mechanism for the EU to reduce its emissions of greenhouse gases (GHGs). It is a cap and trade scheme that seeks to reduce GHG emissions by requiring operators of installations in certain energy-intensive sectors to surrender an equal number of GHG emission allowances (EUAs) as the total emissions of carbon dioxide (CO2) (and some other GHGs) from the installation for that year, based on a verified report calculating the total emissions. Article 16 of the EU ETS Directive 2003 requires member states to impose penalties on EU ETS obligated operators for non-compliance. Article 16(3) provides that:

"Member states shall ensure that any operator who does not surrender sufficient allowances by 30 April of each year to cover its emissions during the preceding year shall be held liable for the payment of an excess emissions penalty. The excess emissions penalty shall be EUR 100 for each tonne of carbon dioxide equivalent emitted by that installation for which the operator has not surrendered allowances. Payment of the excess emissions penalty shall not release the operator from the obligation to surrender an amount of allowances equal to those excess emissions when surrendering allowances in relation to the following calendar year."

Facts

Nordzucker AG is a German sugar beet refinery that is subject to the EU ETS. It submitted an independently verified report on its annual GHG emissions which discounted the GHG emissions from an ancillary system used to dry the beet pulp for animal feed, in line with existing guidance. Nordzucker then surrendered EUAs for that year based on that discounted figure. After the annual time limit for surrendering EUAs had expired, the German EU ETS regulator found irregularities in Nordzucker's report methodology. As a result, Nordzucker corrected its report to include the GHG emissions attributable to the ancillary sugar beet pulp drying system. Consequently, Nordzucker belatedly surrendered additional EUAs to cover that ancillary activity. The German EU ETS regulator nonetheless sought to impose a financial penalty on Nordzucker of EUR106,920 for being in breach of its obligation to surrender sufficient EUAs to cover the preceding year. Nordzucker objected, and the German court referred the question to the Court of Justice of the European Union (ECJ) for a preliminary ruling.

The ECJ's judgment is sensible, acknowledging that the initial report had already been independently verified before the further verification by the German EU ETS regulator. The regulator's proposed approach would have been particularly punitive, bearing in mind that the company acted to correct the error once it was made aware of it.

Read the full case here.