The absence of stating the reasons for the current delay in allocation of emission allowances in 2013 as well as the lack of the concrete new date when the allocation will be possible are among the main shortcomings of the European Commission's communication on the issue.



The fundamental change in the rules of the EU ETS as from 2013 consisting in the allocation of free emission allowances to the heat-benchmark sub-installations principally for the consumption of the heat (and for the production thereof in exceptional cases only) necessitates the careful examination of technical connections in the context of the allocation rules.



Changes in heat flows between installations made after 30 June 2011 may significantly impact the level of free allocation of permits and, pursuant to the rules governing the EU ETS as from 2013, it may be sometimes effected in quite surprising way.



Installation's capacity reductions need always be considered in the context of potential EUAs allocation. 



The basic need is the acknowledgment whether the extent of the engagement falls within the scope of the verifier’s accreditation. This should done with the help of Annex I to the V&A Regulation which specifies the relevant codes of activity groups for the scope of accreditation for verifiers.



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.



Determining the second carbon leakage list of sectors and subsectors exposed to significant list of carbon leakage will in the coming months be an important process, interested parties should not overlooked. At the outset of the said procedure it may be useful to briefly summarise the basic legal environment for the issue.



Impact Assessment accompanying the new M&R Regulation underlines that as of 2013 the term “biomass” will mean biomass, bioliquids and biofuels within the meaning of Renewable Energy Directive 2009/28/EC including sustainability criteria for biofuels and bioliquids.

Important to note that the first reference to “biomass” constitutes “EU ETS biomass”, the second reference refers to the Renewable Energy Directive 2009/28/EC definition of biomass, while the reference to sustainability criteria is only intended in connection with biofuels and bioliquids deemed sustainable in accordance with Directive 2009/28/EC; NOT other forms of (solid or gaseous) biomass.


There are the key considerations as pursuant to Annex IV of Directive 2003/87/EC and Article 38(2) of the new M&R Regulation the emission factor of biomass is zero.


The above legal developments mean, however, that comparing the current legal status of the biomass under the EU ETS rules with that in the third trading period (as of 2013) an important change to a definition of zero-rated biomass will follow i.e. requirement for biofuels and bioliquids to meet sustainability criteria contained in Directive 2009/28/EC in order to qualify for zero rating.


The question may be posed, how the Commission intends ‘to provide legal certainty to the Member States, the power generators concerned and the market on the quantity and terms of the transitional free allocation in the situation, where the issue is not decided yet due to required and not made State aid assessments?



Another regulatory switch? Are biomass power plants in jeopardy?



Unlike the previous versions of the Guidelines, in the final text the 40% threshold for the production increases and decreases in the definitions for baseline output and baseline electricity consumption, is not relevant.

In effect of the changes made in that regard, the installations will have greater flexibility in planning production without being restricted with stiff and cut-off 40% threshold.


It is possible that a non-ETS heat consumer becomes an ETS heat consumer and vice versa. The legal effects for such changes are specified in the guidance document.


The question that is today particularly vital for the CO2 trading community: do elaborations of the ITRE Committee included in the Compromise Amendment No 18 have any direct impact on the current trading conditions with respect to CO2 allowances?



With respect to the Emissions Trading System the Draft Report ‘acknowledges that the carbon price is very much lower than was originally envisaged and is failing to provide the necessary investment stimulus’, and proposes to recalibrate the ETS before the commencement of the third phase by setting aside allowances to restore scarcity.

The Draft Report presents also some other quite revolutionary theses, notably the modification of 1.74% annual linear reduction factor, the reserve price for the auction of allowances, reducing greenhouse gas emissions from agriculture, time limits for new sources of electricity generation emitting more than 100g CO2/kWh and border adjustment measures requiring importers of products in carbon leakage sectors to purchase allowances – all of them of potential fundamental impact on European industries.



The emissions trading complicates sometimes things the were quite simple so far.

This contention (burdened, some may say, with obviousness) is, however, properly reflected in a practical situation where one heat producer undergoes the significant capacity reduction, or partially or even entirely ceases its operations and the supplies of the heat to the district heating pipelines are taken over by another heat producer which, in turn, must invest in new capacities (which consequently constitutes significant capacity extension in the meaning of the European Commission’s Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of 27 April 2011).




The free allowances as of 2013 will be allocated on a first come, first served basis – this simple and short assertion produces, however, significant business and legal risks, in particular whether the pool of allowances in the 5% reserve does suffice for all interested in new investments (for instance in high-efficiency cogeneration).



The unknown capacity utilisation factor (differing across Member States), the first come, first served rule as regards allocation from the new entrants reserve and the flexible grounds for the rejection by the European Commission of the preliminary total annual amount of emission allowances submitted by the Member States – all these circumstances cause that the potential investors have no legal certainty how to valuate the relevant factors and have to assess in their projections the risks stemming from this fact.


Article 27 of the Directive 2003/87/EC (as amended by the Directive 2009/29/EC) allows for the exclusion of small installations (subject to equivalent measures) from EUETS.

These small installations will have a chance to avoid administrative burdens and costs (resulting from the participation in the scheme) only, if governments act quickly. 30 September 2011 is a key deadline in that matter.

The Decision does not use the word “predominantly” in the context of the special allocation procedures for private households and does not contain explicit provisions that would enable the differentiation of factual circumstances with 25 apartments and 2 shops from 25 apartments and 3 shops.