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There are arguments that EUAs should be classified as "property" and "intangible property" at common law.

 




The recent judgment of the England and Wales High Court Case No: HC10C00532 between Armstrong DLW GMBH and Winnington Networks Ltd of 11 January 2012 (the source: http://www.bailii.org/ew/cases/EWHC/Ch/2012/10.pdf) contains an interesting attempt at defining the theoretical characteristics of the emission allowances on the ground of the common law and the Directive 2003/87/EC. Considering this judiciary analysis in the context of recent regulatory developments in California and Australia may bring us closer to the harmonisation of approaches adopted so far as well as reducing the risks of regulatory gaps and competing or diverging claims. From juristic point of view the risk of wrongly formulated petitions is also not negligible.


There was no dispute between the parties to the said dispute that EUAs are capable of constituting, and do constitute, property as a matter of law. What was in issue, however, was their precise nature and characterisation as property and in particular  whether the "common law proprietary claim" was available in respect of property of the nature of an EUA.

In paragraph 48 the judge presented the following views on the precise nature of EUAs:

“As a matter of substance, I do not consider that the holder of an EUA has a "right" which he or she can enforce by way of civil action. It is not a "right" (in the  Hohfeldian sense) to which there is a correlative obligation vested in another person. It does not give the holder a "right" to emit CO2 in this sense. Rather it represents at most a permission (or liberty in the Hohfeldian sense) or an exemption from a prohibition or fine. But for the entitlement to the EUA, the holder would either be prohibited from emitting CO2 beyond a certain level or at least would be required to pay a fine if he did so. In this way, the holding of the EUA exempts the holder from the payment or that fine.”

The features of EUA (as a creature of the European Union Emissions Trading Scheme) considered in the said judgment vital for the determination on emission allowances legal nature are that as a matter of form an EUA exists only in electronic shape, it is transferable automatically by electronic means within the registry system. Under the ETS legislation it is transferable under the terms of the ETS Directive. It has economic value, first because it can be used to avoid a fine, and secondly, because there is an active market for trade in EUAs. Each EUA has its own unique number and can be located by reference to that number.

Analysing these features the judge considered EUA as "property" at common law, since in particular “It is definable, as being the sum total of rights and entitlements conferred on the holder pursuant to the ETS. It is identifiable by third parties; it has a unique reference number. It is capable of assumption by third parties, as under the ETS, an EUA is transferable. It has permanence and stability, since it continues to exist in a registry account until it is transferred out either for submission or sale and is capable of subsisting from year to year.”

Furthermore, according to the said judgment EUA should be considered "intangible" property.
In re Celtic Extraction [2001] Ch 487 concerned waste management licences granted pursuant to a statutory scheme for waste management under the Environmental Protection Act 1990. The issue was whether such a licence constituted "property" for the purposes of s.436 Insolvency Act 1986. Section 436 provides that “"property" includes money, goods, things in action, land and every description of property wherever situated ... "

Pursuant to the judgment, applying the three fold test identified by Moritt LJ in In re Celtic Extraction leads to the conclusion that an EUA is certainly "property" and intangible property under the statutory definition there in place.

First, there is, here, a statutory framework which confers an entitlement on the holder of an EUA to exemption from a fine. Secondly, the EUA is an exemption which is transferable, and expressly, under the statutory framework. Thirdly the EUA is an exemption which has value.

Moreover an EUA is also capable of forming the subject matter of a trust and thus something in which equitable ownership can be held. There is a close analogy between the exemption conferred by milk quota and the exemption conferred by an EUA. Accordingly an EUA constitutes "property" and it is "intangible property".




Under the California cap-and-trade scheme however an emission allowance means only ‘a limited tradable authorization to emit up to one metric ton of carbon dioxide equivalent’ and in no way constitutes property or a property right.

Final Regulation Order California cap-and-trade scheme (Subchapter 10 Climate Change, Article 5, Sections 95800 to 96023, Title 17, California Code of Regulations, Article 5: CALIFORNIA CAP ON GREENHOUSE GAS EMISSIONS AND MARKET-BASED COMPLIANCE MECHANISMS expressly states in § 95820 (c) that a compliance instrument issued by the California scheme ‘does not constitute property or a property right’:

‘Each compliance instrument issued by the Executive Officer represents a limited authorization to emit up to one metric ton in CO2e of any greenhouse gas specified in section 95810, subject to all applicable limitations specified in this article. No provision of this article may be construed to limit the authority of the Executive Officer to terminate or limit such authorization to emit. A compliance instrument issued by the Executive Officer does not constitute property or a property right’.

What is the substantiation of this legal concept? The Staff Report: Initial Statement of Reasons Release Date: October 28, 2010 (which contained § 95820 (c) in the same wording as the Final Regulation Order) explains the reasons for such an approach in the following manner:

“Additionally, the Executive Officer retains the right to revoke the authorization contained in the compliance instrument. Finally, compliance instruments do not constitute property or carry property rights. ...

It is necessary for the Executive Officer to retain authority to terminate or limit the “authorization to emit” so that in the case of fraud or market manipulation, ARB has a mechanism to protect the market. Additionally, property rights cannot attach to the compliance instruments because, in the event of federal preemption in the cap-and-trade market or other conditions, California must have the ability to revoke the compliance instruments without creating a loss to the people of California.”

It seems thus that the regulatory uncertainty at the State legislature level with respect to the federal legislation as well as the prudence with respect to the risks of misuse the future experimental cap-and-trade Californian market decided about the contained regulation of the emission allowances nature as a “limited tradable authorization to emit” and not a property right.

On the other hand, the as was indicated in ‘Emissions allowances – are they property rights? Australia and California regulators’ views’ Australian ‘Exposure Draft of the Clean Energy Bill 2011, Commentary on Provisions’ of 28 July 2011 in the very heading (on the page 96) states ‘A carbon unit is a property right’. The Australian draft legislative text further explains in points 3.49 and 3.50 that, ‘A carbon unit issued by the Regulator is personal property and, subject to the requirements of the mechanism, transmissible by assignment (that is, as a result of some form of agreement to transfer the units to another person), by will (that is, as part of a deceased person‘s estate) and by other forms of transfer permitted by law. ...
This will promote confidence in the integrity of carbon units and reduce uncertainty for their holders, and further promote confidence in the development of the market for carbon units.’





The European Cement Association Cembureau draws the attention to the fact that the Court's analysis the said Armstrong DLW GMBH and Winnington Networks Ltd judgment  may have broader implications than compensating victims of theft (Cembureau Eurobrief December 2011/January 2012 www.cembureau.be).
According to the said organisation ‘It would indeed seem possible to counter that any taking away EUAs that have been allocated would amount to an infringement of property rights even if such taking was carried out by a public authority.’

This consideration can have even greater significance against the background of the above-cited reasons for the Californian concept consisting in refusing to grant emission allowances the property right feature.

It is however noteworthy that contrary to the Californian and Australian schemes, where the regulators expressed their views on the legal nature of emission allowances directly and explicitly in the legislation creating cap-and-trade systems, under the European Union Emissions Trading Scheme the elaborations on this issue are the matter of judicial precedents. Moreover, given the multiple national legal orders of Member States the said judicial views on the – so important – issue, may diverge.