Where to now for market certainty?

Market confidence in the EU ETS is based in part on the extent to which the market forms the view that there is a capable regulator whose decisions are not subject to political interference or likely to be consistently overturned by judicial challenges. On 23 September 2009, that confidence took a potential blow when the Court of First Instance (CFI) issued its ruling in favour of Poland’s and Estonia’s applications for the annulment of the European Commission’s (Commission) decisions in respect of their National Allocation Plans (NAP).

Key points arising from the decisions for the market include:

  • The CFI has ruled on a number of pleadings. The most critical is the decision that the fixing by the Commission of the maximum level of the total quantity of allowances to be allocated by countries such as Poland exceeded its powers under the EU ETS Directive (Directive). Unless this is successfully appealed by the Commission (see below), there is now a risk that Poland and Estonia (potentially followed, in due course, by those other countries that challenged the Commission’s NAP decisions, being Bulgaria, Czech Republic, Hungary, Romania, Latvia and Lithuania) will seek approval of their NAPs, enabling the increased allocation of allowances.
  • A ruling of the CFI can only be appealed to the European Court of Justice (ECJ) on a point of law. It is not yet known whether the Commission will do so. Appeals must be lodged within two months of the notification of the CFI decision. As to the effect of any appeal, the general rule is that the lodging of an appeal does not have a suspensory effect (i.e. the CFI decision should take effect immediately). That general rule, however, is subject to a general discretion of the ECJ to order that the application of a contested act be suspended in circumstances where the ECJ considers that is required. It is not clear whether this discretion would be exercised.
  • In light of the amended Directive’s requirement that the Community-wide quantity of allowances from Phase III will be based on the Commission’s decisions on NAPs for Phase II, questions will now be raised as to how the Commission will deliver the certainty under the EU ETS, both for Phase II and into future Phases, that it had assumed it was able to deliver by taking a firm line in its review of Phase II NAPs.