The propositions of the European Commission tabled on 25 July 2012 for fixing the seemingly ailing EU ETS price-setting mechanisms reveal the hidden truth (somewhat unpleasant for the creators of the EU ETS original legal documentation), namely the fundamental flaws consisting, among others, in ex-ante method of cap-setting, insensitive to any subsequent macro-economic changes, the current deep financial and economic crisis including. How the EU ETS carbon price could be capable to stimulate investment in hi-tech green know-how, while the overall allowances cap is unresponsive to fluctuations in real economy?
The fundamental contradiction appears to be intrinsic to EU ETS scheme methodology – either the system is market-based with the free interplay of the supply and demand for the benefit of the environment or the higher-ranking purpose of the whole thing justifying market intervention is to stimulate structural industrial change. The absence of the clear determination as regards priorities causes the current efforts appear schizophrenic.
Whilst the Commission asserts that its proposal is not a market intervention, these contentions are not convincing in light of the assessment of the overall documentation tabled.
From the legal point of view the documentation presented does not seem excessively elaborate given the range of methodological novelty applied and due to this fact it seems the whole concept to be prone to legal challenges with future outcomes of such potential judicial disputes not easy to predict.
The lack of consequence and legal certainty is clearly visible in the regulatory approach with respect to the Auctioning Regulation.
Whilst the Commission published the Auctioning Regulation on 12 November 2010, it was amended in July 2011 already. Amendment related to early auctions to accommodate hedging demand and allowed for the auctioning of 120 million allowances before 2013, with corresponding reductions in the 2013 and 2014 volumes by 60 million allowances each.
The current legislative initiative is intended to run in the opposite direction and consists in back-loading of a certain amount of allowances (the volumes to be determined yet).
Among most salient objectives of the ETS Directive was to provide much greater regulatory foresight and stability with regard to crucial regulatory parameters. These intentions have been voiced notably in the introduction of a linear factor that provides a default cap even beyond 2020 (which will apply pending any change to the ETS Directive).
It should be recalled that the ETS Directive requires the Commission to adopt a regulation on timing, administration and other aspects of auctioning to ensure that it is conducted in an open, transparent, harmonised and non-discriminatory manner. Notably, the transparent and non-discriminatory character of such chaotic moves can be legally debatable given often contradictory interests of various businesses and industry branches.
Four separate issues seem key from legal perspective:
1) whether changing the directive in the form of a decision is legally effective,
2) how the provision regarding the backloading of allowances influences on the remaining parts of the ETS Directive,
3) what are the rules under which the European Commission will acquire knowledge that the carbon market does not function properly (in particular, what are the sources of data),
4) how many times the auction calendar and auction volumes could potentially change.