EU Court of First Instance rules that the European Commission exceeded its powers in imposing a ceiling on carbon allowances for member states.

On 23 September 2009, the Court of First Instance overturned the European Commission’s decision to lower the carbon emission quotas for Poland and Estonia for the trading period from 2008 to 2012.

Introduction – The European Union’s Emissions Trading Scheme

Under the European Union’s Emissions Trading Scheme (EU ETS) governments of member states must propose national carbon dioxide (CO2) emission limits for their industries for the five year period from 2008 to 2012. These limits must then be approved by the European Commission (EC).

Following an over-allocation of allowances in the initial European emissions trading period from 2005 to 2007, which led to a market-price collapse in 2006, the EC has subsequently tightened the limits for member states.

Cases Brought Against the European Commission

In February 2007, Slovakia was the first EU member state to commence legal proceedings against the European Commission. Many Central and Eastern European member states view the EC’s proposed CO2 limits as too low and “discriminatory”, and they fear that these limits will damage their economies by preventing their industries from achieving the same success as those in western Europe. Member states have also expressed concern that they are not consulted by the EC with regard to the data and methods used to calculate the CO2 limits.

In 2007, the EC sought to reduce the levels of emissions set by Poland and Estonia, stating that they were too high, by cutting the number of annual emission allowances the countries were going to give out to 26.7 per cent and 47.8 per cent less than their respective national plan proposals. This decision was annulled by the Court of First Instance (CFI), Europe’s second highest court, which held that “By imposing… a ceiling on allowances to be allocated, the Commission exceeded its powers”. The CFI stated that the Commission has “very restricted authority” to review the quotas and had erred in law when dismissing the quotas solely on the grounds of unreliable evidence. Accordingly, the EU member states alone had the power to take final decisions fixing the quota.

The EC now has two months to appeal. Spokeswoman Barbara Helfferich has stated that “the Commission will take all possible action in order to protect the integrity of the European-wide market of allowances and minimise the legal uncertainty created by these rulings”.

Future of the Carbon Market

In the wake of this decision, prices of EU allowances were down by 3.9 per cent at 13.20 euros (USD 19.54) a tonne. It is feared that further downward pressure will be applied to carbon prices if extra allowances are issued by the EC and allowed to enter the market, as the carbon market depends on a tight cap on emissions.

The emission levels of only four member states have received approval from the EC, which has requested reductions for the remaining 23 member states. Several member states have objected to their quotas, and cases are currently pending from Bulgaria, Czech Republic, Hungary, Latvia, Lithuania and Romania. It is thought that the supply of CO2 allowances could be boosted by an extra 79 million tonnes a year, if these cases are successful.

The fledgling carbon market could be seriously undermined if the EC is forced to review its quotas.