A multi-jurisdictional challenge to a Commission Decision governing the allocation of free allowances to industrial operators under the European Union Emissions Trading Systems (the EU ETS) has resulted in the Commission Decision being quashed by the Court of Justice of the European Union (CJEU). Free allowances allow operators to match their emissions of carbon without having to purchase the allowances at auction, or buy them from other operators who have reduced their emissions, or who for other reasons have a surplus of allowances. The result of the court judgment is that the Commission will have to prepare a new Decision so that the amount of future allocations of free allowances under the scheme can be re-calculated.

A member of industrial operators across the EU had brought legal proceedings challenging the Decision, complaining that their allocation of free allowances for the third phase of the scheme, which runs from 2013-2020, was too low. Under the rules set out in the Directive for allocating the amount of allowances allocated free to industrial operators (as opposed to being auctioned) the Commission was required to calculate a cap of the total number of allowances allocated free to those operators (the Industrial Cap) and if necessary apply a correction factor (the Cross-Sectoral Correction Factor) to reduce the provisional allocations of allowances which would have been made to such operators on the basis of past emissions, so that they fell within the Industrial Cap.

The operators complained that in making this calculation, the Commission had fixed the Industrial Cap too low, as a result of misinterpreting the rules, and had accordingly applied too high a Cross-Sectoral Correction Factor.

The procedure by which the Decision was challenged was cumbersome. Case law of the CJEU establishes that only in certain very restricted cases where they have direct standing before the Court itself can businesses challenge legislation directly before it. Nevertheless, Community Law requires them to have a remedy if they are challenging the lawfulness of acts of Community institutions. Accordingly, in a case such as this, operators are obliged to bring their challenges before national courts, and challenge, not directly the lawfulness of the relevant Community Act, but the lawfulness of the national implementing measures. However, national courts cannot examine the legality of the Community Act on which such measures are based, but must refer the matter to the CJEU for a preliminary ruling. In this case references were made by national courts in Austria, the Netherlands and Italy. National proceedings were also brought elsewhere, notably in the UK, but no further references were made, on the ground that the issues had already been raised sufficiently.

The CJEU confirmed that in respect of the standing issue, the correct procedure had been followed by these operators who were represented in the reference proceedings by bringing national proceedings rather than attempt to sue directly in Luxembourg.

Sadly for the operators, on the substantive issues before the Court, the CJEU did not accept the various arguments put forward on behalf of the operators. Instead, it followed the previous opinion of the Advocate General which was delivered in November last year. According to that opinion, the determination of the Industrial Cap by the Commission had in fact been too high.

This was because, in applying a provision requiring an enlargement of the Industrial Cap to take account of emissions from installations which had only joined the system in Phase III , the Commission had taken account of data from Member States which in some, but not all cases, had also included emissions in respect of the same activities by installations that had been covered by the Scheme before 2013.

As was made clear by the Advocate-General’s opinion, the drafting of the Directive left much to be desired in terms of clarity, and there were significant differences in the various different language versions of the text. The solution which she proposed and which was ultimately adopted by the Court, was that which best served the purposes of the Directive in discouraging carbon emissions from relevant plant.

Accordingly, the Commission Decision was annulled, but not for the reasons put forward on behalf of the operators. The Commission was ordered to prepare a new decision within ten months of the decision, and future allocations will therefore need to be made on the basis of a lower Industrial Cap and therefore a higher Cross-Sectoral Correction Factor.

The operators who brought the proceedings can take some comfort from the fact that, in the interests of legal certainty, the declaration of the CJEU will not take effect until the end of the ten month period from the date of delivery of the judgment. That means that measures adopted prior to the expiry of that period, on the basis of the annulled provisions, cannot be called into question.

Nevertheless, it appears that the judgment will inevitably result in a reduction in the amount of free allowances allocated in future, both in Phase III and Phase IV of the EU ETS . That will be welcomed by those who have complained that the EU ETS has been ineffective due to too low a carbon price.

As far as the operators are concerned, many of the litigants were operators in sectors at risk of carbon leakage (i.e. competition from similar industries based in countries where the EU ETS or similar trading schemes do not operate). They will have to hope that the Commission and Member States will agree on the need to support them against the threat of that competition.