The obligations imposed on entities covered by the European Union Emission Trading Scheme (EU ETS) are divided into certain trading periods (phases of the EU ETS), which are differentiated by specific rules regulating, among others, how the requirement to surrender emission allowances is shaped.
Judgment of the European Court of Justice of 21 June 2018, Republic of Poland v European Parliament and Council of the European Union, Case C-5/16
119 Second, the various amendments made to Directive 2003/87 show that, on a number of occasions, legislative and non-legislative measures, which were incidentally not contested by the Republic of Poland, changed the availability of allowances during a trading period.
120 By way of example, Article 1(9) of Directive 2009/29, which amends Article 9 of Directive 2003/87, started the annual linear reduction of allowances during ‘the period from 2008 to 2012’.
121 Article 1 of Decision No 1359/2013/EU of the European Parliament and of the Council of 17 December 2013 amending Directive 2003/87 clarifying provisions on the timing of auctions of greenhouse gas allowances (OJ 2013 L 343, p. 1), which amended Article 10(4) of Directive 2003/87, provides that ‘where an assessment shows for the individual industrial sectors that no significant impact on sectors or subsectors exposed to a significant risk of carbon leakage is to be expected, the Commission may, in exceptional circumstances, adapt the timetable for the period referred to in Article 13(1) beginning on 1 January 2013 so as to ensure the orderly functioning of the market’ .
122 Lastly, Article 1 of Commission Regulation No 176/2014 provided for a reduction during the period 2014-2016 in the volume of allowances to be auctioned in each given year.
123 Consequently, as was observed by the Advocate General in point 42 of his Opinion, no guarantee was given, either on the adoption of Directive 2003/87 or on the adoption of Directive 2009/29, which amended it, that the operation of the ETS as originally described would remain unchanged or could be modified only at the end of a trading period.
124 That conclusion is also evident from the specific characteristics of the ETS.
125 First, as has been recalled in paragraph 112 above, the ETS is a complex scheme in the context of which the Court has recognised that the EU legislature has the power to have recourse to a step-by-step approach in the light of the experience gained where it is called on to restructure it (see, to that effect, judgment of 16 December 2008, Arcelor Atlantique et Lorraine and Others, C‑127/07, EU:C:2008:728, paragraph 57).
126 Second, it must be noted that, as the defendant institutions submit, the ETS, as the principal instrument of the European Union’s climate policy, is a permanent instrument that is not limited in time and that produces its effects beyond either individual or collective trading periods.
127 The trading periods, which were adopted in order to align the ETS with the expiry dates laid down in the relevant international instruments, cannot prevent the legislature from intervening in that instrument itself if it becomes apparent that the latter is no longer capable of achieving the aims for which it was established.
128 Consequently, not only can an interpretation of Directive 2003/87 that the legislature could change the rules relating to the ETS only at the end of a trading period not be justified on the basis of the directive itself, but it would also be contrary to the Court’s case-law on the ETS.
Four trading periods of the EU ETS were designed so far: the two, which are concluded and settled, the one that is still ongoing (till 2020) and the the fourth, set up for the years 2021 - 2030.
They are governed by the EU ETS Directive and the secondary legislation.
First trading period
The first trading period (or phase 1) lasted from the launching of the EU ETS in 2005 until the end of 2007 (sometimes called the pilot phase, or the pre-Kyoto period).
Second trading period
The second trading period began in 2008 and ended in 2012 (coinciding with the first commitment period under the Kyoto Protocol).
In the second trading phase the EU ETS covered more:
- GHGs (nitrous oxide emissions from the production of nitric acid were included by several Member States),
- sectors (the aviation sector was included into the EU ETS in 2012, but only for intra-European flights) and
- countries (three new, non-EU, countries accessed the EU ETS: Iceland, Liechtenstein, and Norway).
Moreover, the following modifications were introduced to the EU ETS in the second phase:
- banking allowances from phase II to phase III was allowed;
- the proportion of free allocation fell to around 90 per cent, with several countries auctioning the remaining 10 per cent;
- the EU ETS cap was lowered by 6.5 per cent compared to 2005;
- the penalty for non-compliance reached the level of €100/tCO2;
- emission reduction credits generated by the Clean Development Mechanisms (CDM) and Joint Implementation (JI) were accepted for compliance but a limit was imposed of, broadly, 1.4 billion tonnes of CO2 equivalent;
- the structure of National Allocation Plans (NAPs) underwent a procedure of simplification and transparency through the setting up of a guidance document by the European Commission.
The distinctive feature of the phase 1 and phase 2 was the amount of allowances to be allocated for free to industry was decided on national level.
Third trading period
In turn, the main difference between phases 1 and 2 and the current phase 3 (2013-2020) is that there is no free allocation for electricity production (with some exceptions for electricity modernisation in the new Member States pursuant to Article 10c of the EU ETS Directive) and that the free allocation to industry is based on EU harmonised rules outlined in the Benchmarking Decision.
The EU ETS in the third trading phase established:
- the centralised registry system (the single European Union Registry),
- the single EU-wide cap on allowances (the Member States no longer required to prepare NAPs, the cap is subject to the Linear Reduction Factor (LRF) of 1.74 per cent annually),
- the auctioning as the default system to allocate allowances,
- the option for the EU Member States to grant transitional free allocation for the modernisation of electricity generation,
- the carbon leakage list (entitling installations on the list in to a higher share of free allowances),
- the EU-wide harmonised rules and performance benchmarks for the free allocation of allowances,
- the Market Stability Reserve (MSR),
- the new fund (NER300, with the purpose to fund the development of specific low-carbon technologies).
Fourth trading period
The upcoming phase IV will start in 2021 and run until 2030. The declared aims of EU ETS phase IV are:
- to increase the pace of emissions cuts,
- to establish better-targeted carbon leakage framework, and
- to provide funds for low-carbon innovation and energy sector modernization.
Significance of trading periods
The concept of dividing the EU ETS operating rules into separate trading periods, was adopted, according to the view expressed by the European Court of Justice in the judgment of 21 June 2018, (Republic of Poland v European Parliament and Council of the European Union, Case C-5/16), in order to align the EU ETS with the expiry dates laid down in the relevant international instruments (Kyoto Protocol etc.).
However, the above construct cannot prevent the legislature from intervening in the EU ETS rules if it becomes apparent that the latter are no longer capable of achieving the aims for which they were established.
The Court’s view expressed in the above judgment is, therefore, that the legislature has the power to change the rules relating to the EU ETS not only at the end of a trading period, but anytime in between.
According to the Court the opposite view would be false not only on the basis of interpretation of the Directive 2003/87 itself, but it would also be contrary to the Court’s previous case-law on the EU ETS (see box for the relevant quote).