UKELA CLIMATE CHANGE WORKING GROUP
RESPONSE
Consultation Paper on the Implementation of the EU Emissions
Trading Scheme (“Consultation Paper”)
____________________________________________________________________________________
UKELA: Climate Change Working Group Response; 2 October 2003
James Harries
EU Emissions Trading Scheme,
DEFRA
3/F3Ashdown House
123 Victoria Street
London SW1E 6DE
2 October 2003
By Email and Post
Dear Sirs
Consultation Paper on the Implementation of the EU Emissions Trading Scheme: United
Kingdom Environment Law Association (“UKELA”) Climate Change Working Group
Response
As chairperson of the UKELA Climate Change Working Group, I have pleasure in enclosing the
response of the Working Group to the above Consultation Paper.
If you or any of your colleagues would like to discuss any aspect of our response please do not
hesitate to contact me. My direct dial telephone number is 0207 859 1172, fax number 020
7638 1112 or e-mail address helen.loose@ashursts.com.
I would like to thank you on behalf of the UKELA Climate Change Working Group for the
opportunity to respond to the Consultation Paper.
Yours faithfully
Helen Loose
Chairperson, UKELA Climate Change Working Group
cc:
Mark Brumwell – S J Berwin, UKELA Working Group Co-ordinator
____________________________________________________________________________________
UKELA: Climate Change Working Group Response; 2 October 2003
UKELA CLIMATE CHANGE WORKING GROUP RESPONSE
Consultation Paper on the Implementation of the EU Emissions Trading Scheme
(“Consultation Paper”)
The Climate Change Working Group of the United Kingdom Environmental Law Association
(“UKELA”) would like to thank DEFRA, DTI and the Devolved Administrations for Scotland, Wales
and Northern Ireland for giving it the opportunity to offer its views on the Consultation Paper. We
believe that this is a very important development in the national, EU and international efforts to
address the issue of climate change brought about by the emission of anthropogenic greenhouse
gases. We also strongly support the European Union in their plans to develop a functioning transnational European emissions trading scheme ("EETS") and agree that it will be important to ensure
that the UK and other Member States are able to play a strategic role in the development of the
international trading scheme under the Kyoto Protocol.
Our answers to a number of specific questions raised in the Consultation Paper are set out below.
We would point out, however, that we have not sought to address each question in the Consultation
Paper but only those where we felt we were placed as environmental lawyers to make a meaningful
response.
SPECIFIC QUESTIONS
1.
ALLOCATION TO SECTORS AND INSTALLATIONS
Question 6: Different methods of allocation to sectors
Question 7: Different methods of allocation to installations
The Basis of the EU Emissions Trading Scheme
1.1
The primary objective of the European Emissions Trading Scheme ("EETS") Directive is the
protection of the environment.
1.2
The mechanism in the EETS Directive which should serve this objective is the trading of
emissions allowances such that Member States determine appropriate caps on emissions
and industry decides where the greatest and cheapest emissions reductions can be
achieved driven by the need to comply with the caps set.
1.3
The discretion allowed to Member States in their allocation of emissions allowances is not
absolute. It is subject to at least two key limitations:
3
1.4
(a)
BAT: most installations subject to the EETS will also be subject to the full application
of the Integrated Pollution Prevention and Control regime ("IPPC") from 2007. This
includes the requirement to adopt ‘best available techniques’ ("BAT") to prevent
pollution – notwithstanding the disapplication of emissions limit values contained in
the EETS Directive;
(b)
Recital 7A and Annex III criteria: these include an obligation to base allocations of
allowances on the potential, including technological potential, to reduce emissions.
This has direct relevance to the method of allocation of allowances at sector level and
installation level and, consequently, to Sections 6 and 7 of the questionnaire contained in
Annex B to the Consultation Paper.
IPPC and BAT
1.5
The IPPC Directive imposes general principles governing the basic obligations of the
operator of an IPPC installation. Under this requirement:
“Member States shall take the necessary measures to provide that the competent
authorities ensure that installations are operated in such a way that:
(a)
all the appropriate preventive measures are taken against pollution, in particular
through application of the best available techniques;
(b)
no significant pollution is caused;” 1
1.6
The greenhouse gases ("GHGs") covered by the EETS Directive, including carbon dioxide,
fall within the definition of pollution.2
1.7
IPPC permits must include all measures necessary for compliance with the above
requirement “in order to achieve a high level of protection for the environment as a whole”. 3
1.8
IPPC permits must set emission limit values ("ELVs") for installations emitting pollutants in
‘significant quantities’.4 In its State Aid Approval of the UK Emissions Trading Scheme
("UKETS"), the Commission stated that this obligation requires the setting of ELVs for
significant emissions of GHGs.
1
2
3
4
Article 3 of the IPPC Directive
Each of the greenhouse gases falls within the definition of ‘substance’ in Articles 2(1) of the ETS Directive.
Their anthropogenic climate change effects fall within the definition of ‘pollution’ under Article 2(2). This is also
the basis of the amendment to the IPPC Directive to be introduced under Article 26 of the ETS Directive. This
interpretation is also consistent with the Commission’s paper “Non-paper synergies between the EC emissions
trading proposal and the IPPC Directive”, dated 22 January 2002
Article 9(1) of the IPPC Directive
Article 9(3) of the IPPC Directive
4
1.9
The EETS Directive is to amend the IPPC requirement to set ELVs such that no ELVs
should be made in any IPPC permit in respect of emissions of any GHG which is subject to
regulation under the EETS Directive (except to the extent necessary to avoid local pollution
effects).5 Under the amendment, Member States will also be able to relax the IPPC energy
efficiency requirements but only in respect of combustion units and other units emitting
carbon dioxide on the site. Member States will not be permitted to disapply ELVs or relax
the energy efficiency requirements in respect of installations opted out of the EETS. 6
1.10
Notwithstanding the IPPC amendment to be introduced, the EETS Directive must be applied
‘without prejudice to any requirements pursuant to Directive 96/61/EC’ [the IPPC Directive]. 7
1.11
Consequently, whilst ELVs may not be set in an IPPC permit with respect to GHG emissions
covered by a permit under the EETS Directive, this does not remove the IPPC obligation on
Member States to ensure that installation-specific BAT is applied.8
1.12
The obligation under EU law to ensure regulated industry uses BAT to prevent pollution
applies from 30 October 1999 in respect of 'new' installations. In respect of 'existing'
installations, the EU obligation must be applied if such an installation undergoes 'substantial
change' and for all others by 30 October 2007.
1.13
The UK has chosen to phase in implementation of the IPPC Directive with the last activities
to be subjected to IPPC regulation from 2007. Consequently, under UK law, 'existing'
installations should be subject to the BAT requirement in respect of GHG emissions from
their relevant phase-in date prior to 30 October 2007 or as a result of an earlier 'substantial
change'.
1.14
Therefore, notwithstanding the provisions of the EETS Directive we believe the following
issues may arise,
(a)
(b)
(c)
5
6
7
8
the UK will remain subject to a specific legal obligation under the IPPC Directive to
apply BAT to any GHG emissions, including emissions of carbon dioxide;
failure to require ‘new’ installations to apply BAT to GHG emissions, will be an
immediate breach of EU law;
failure to require ‘existing’ installations to apply BAT to GHG emissions, will be in
breach of EU law from 30 October 2007 or from the earlier date such installations
undergo ‘substantial change’;
Article 26 of the ETS Directive
ibidem
Article 2(2) of the ETS Directive
Foundation for International Environmental Law and Development final report “Assessment of the relationship
between emissions trading and EU legislation, in particular the IPPC Directive”, dated 31 October 2002, prepared
for the Dutch Ministry of Housing, Spatial Planning and the Environment Directorate of Climate Change and
Industry
5
(d)
(e)
1.15
failure by the relevant UK regulatory authorities to apply BAT in respect of GHG
emissions will also be open to challenge under UK law from the dates referred to
above or earlier phase-in date;
failure to apply ELVs to installations that have opted out of the EETS and that are
‘new’ installations or ‘existing’ installations that have undergone ‘substantial change’
will be in breach of the IPPC Directive. Failure to apply them to ‘existing’ installations
that have opted out but have passed their phase-in date will be open to challenge
under UK law.
The Government will need to assess whether (and what) techniques are being used by
regulated installations to avoid or reduce carbon dioxide and other GHG emissions. In a
number of sectors, where increases in carbon dioxide emissions are directly correlated to
increases in product (e.g. electricity) output, BAT must involve techniques which reduce
absolute emissions or emissions relative to output (e.g. by including useful heat recovery
from a thermal power station).
BAT
1.16
For the purpose of the IPPC Directive "best available techniques" means "the most effective
and advanced stage in the development of activities and their methods of operation which
indicate the practical suitability of particular techniques for providing in principle the basis for
emission limit values designed to prevent and, where that is not practicable, generally to
reduce emissions and the impact on the environment as a whole". 9
1.17
"Techniques" includes "both the technology used and the way in which the installation is
designed, built, maintained, operated and decommissioned".
1.18
"Available techniques" means "those [techniques] developed on a scale which allows
implementation in the relevant industrial sector, under economically and technically viable
conditions, taking into consideration the costs and advantages, whether or not the
techniques are used or produced inside the Member State in question, as long as they are
reasonably accessible to the operator".
1.19
"Best" means "most effective in achieving a high general level of protection of the
environment as a whole".
1.20
In determining the best available techniques, special consideration has also to be given to a
number of criteria listed in Annex IV to the IPPC Directive.
1.21
BAT is not an absolute requirement to adopt the most sophisticated techniques or
technology but rather it is a requirement to balance the costs and benefits of techniques or
technology reasonably available to an operator of an installation.
9
Article 2(11) of the IPPC Directive
6
1.22
BAT is therefore a dynamic concept which requires regular review. For an operator of an
installation, however, the cost benefit analysis should avoid the need for constant upgrading
of abatement equipment.
Recital 7A and the Annex III criteria
1.23
In drawing up its National Allocation Plan, the UK is bound to ensure that the allocation of
allowances is consistent with, amongst other things, the potential to reduce emissions.
1.24
Recital 7A states: "Member States should have regard when allocating allowances to the
potential for industrial process activities to reduce emissions."
1.25
Member States must apply the criteria set out in Annex III to the EETS Directive. 10 The last
amendment to the EETS Directive introduced an additional requirement to ensure that no
more allowances should be allocated than is likely to be needed for the strict application of
the criteria in this Annex.11
1.26
Paragraph 3 of Annex III states: "Quantities of allowances to be allocated shall be consistent
with the potential, including the technological potential, of activities covered by this scheme
to reduce emissions. Member States may base their distribution of allowances on average
emissions of greenhouse gases by product in each activity and achievable progress in each
activity."
1.27
This requirement could be interpreted either (i) to limit the reductions in emissions that may
be required to what is technically possible or (ii) to require an assumption that operators will
adopt available techniques and technology.
1.28
What we consider is apparent is that:
1.29
10
11
(a)
it is likely to be wholly inconsistent with this requirement to disregard available
technologies and techniques to reduce emissions - where potential, including
technological potential, exists to reduce emissions this should be reflected by a
reduced allocation of allowances;
(b)
we query whether the distribution of allowances to individual operators needs to
reflect the potential for that operator to reduce emissions from a particular installation
– under the EETS, the distribution can be averaged out over the activity sector.
Paragraph 1 of Annex III states: "…Prior to 2008, the quantity of allowances shall be
consistent with a path towards achieving or over-achieving each Member States’ target
under [the EU burden sharing agreement] and the Kyoto Protocol” (emphasis added).
Article 9 of the EETS Directive
Paragraph 1 of Annex III of the EETS Directive
7
1.30
Read together, allocation under a National Allocation Plan could be interpreted as only
requiring no action by operators of affected installations if the Member State is likely to meet
its targets under the burden sharing agreement and there is no potential to reduce
emissions. Consequently, even assuming that the UK is on track to meet its burden sharing
agreement target, it could be argued that it must require over achievement on the target by
ensuring that potential to reduce emissions is exploited.
BAT and 'potential to reduce emissions'
1.31
The IPPC requirement to apply BAT to reduce GHG emissions exists in parallel with the
EETS. The EETS Directive does not allow for the weakening of the application of the IPPC
except for the disapplication of ELVs. 12 All installations subject to IPPC regulation must
apply BAT and, in consequence, it appears that the scope for trading only legitimately exists
in respect of achievement beyond BAT. The minimum entry point for emissions trading
(and, the minimum potential to reduce emissions) may, therefore arguably, be what affected
installations should be achieving if they were applying BAT.
1.32
The UK can therefore arguably apply a lower minimum entry point than BAT in its National
Allocation Plan only in respect of:
(a)
combustion plant falling below the 50MW threshold for regulation under IPPC;
(b)
'existing' IPPC installations that have not undergone 'substantial change', although
this would only be legitimate under EU law during the first compliance period (20052007) and would be inconsistent with UK law in respect of any such installations that
have passed their phase-in date under the relevant PPC Regulations.
1.33
ELVS for significant GHG emissions should be set for any installation which is already
subject to IPPC regulation and which the Government allows to opt out of the EETS during
the first compliance period.
1.34
Notwithstanding any projections that the UK may be on track to meet its burden sharing
agreement targets, requiring 'no action' is not a legitimate option under EU law for the UK.
1.35
For the purpose of the National Allocation Plan, however, the UK could assess the 'potential
to reduce emissions' through the application of BAT across an entire sector rather than at an
installation-by-installation level. This would not exclude potential conflict with the IPPC
Directive but the potential for conflict might only be marginal.
Conclusion
1.36
12
Consequently, to maintain environmental integrity, for the sake of administrative simplicity
and to reduce the scope for legal challenge, consideration should be given to the following
approach:
Article 2(2)and paragraph 4 of Annex III of the EETS Directive
8
2.
(a)
for the first allocation plan:
(i)
proper application of BAT is considered the minimum performance
requirement in the allocation of allowances to any installation subject or that
will be subject to IPPC regulation;
(ii)
the actual assessment of what is BAT, for the purpose of the National
Allocation Plan, may be based on a whole-sector approach;
(iii)
if 'potential to reduce emissions' is not taken into account, the Government
should address this, including its justification, expressly in the National
Allocation Plan;
(b)
for each subsequent 5 year compliance period, an updated application of BAT could
be considered the minimum performance requirement for all activities subject to IPPC
regulation; and
(c)
the UK Government should continue to engage in the process of the development
and review of the National Allocation Plans of other Member States to ensure that
BAT is applied as the entry point in other Member States both to ensure that the
environmental integrity of the EETS is maintained and that UK industry is not
prejudiced.
TREATMENT OF NEW ENTRANTS
Question 11: Should new entrants be differentiated? Or should all new entrants be
treated in a similar fashion?
2.1
As a first point we think it is important that the issue of new entrants and closures is a linked
question and they cannot be considered in isolation from each other. This is particularly true
when one considers the EETS across the whole Community. If there is a situation where new
entrants receive a free allocation and plant closures are allowed to keep any allocated
allowances for a period (particularly if the majority of the allocation has been given upfront at
the beginning of a period) one could see perverse results. See further discussion of this in
paragraphs below. Therefore we think there is a strong argument for the UK Government to
liaise with other Member States to ensure there is a degree of co-ordination between
Member States on how they treat the related questions of new entrants and closures to
minimise the possibility that operators can obtain a double allocation within any period for the
same production capacity.
2.2
The fundamental question in respect of new entrants (installations receiving permits after 31
March 2004) is whether they should be required to buy allowances from the market or
alternatively be allocated allowances from a set-aside. The Consultation Paper suggests
that in considering this issue it may be helpful to treat new entrants as falling into separate
categories, namely:
9
(a)
existing installations not included in the National Allocation Plan, whether by
ignorance or error;
(b)
planned installations which start operating after 31 March 2004; and
(c)
unplanned installations.
2.3
UKELA considers that where existing installations are omitted from the National Allocation
Plan due to error on the part of the Government, remedies other than the allocation of
allowances should be available, for example, financial compensation. However, omission
through owner/operator ignorance of the new regime should not be rewarded by the
allocation of allowances. However, we acknowledge that in some cases it may be difficult in
proving whether the omission of an installation from the National Allocation Plan was due to
an error by Government or the owner/operator.
2.4
We also felt that it would be inequitable to treat planned installations and unplanned
installations differently by allocating allowances only to planned installations, given, for
example, that there is no assurance that installations will become operational as planned,
and that there will almost certainly be some unplanned installations that commence operation
before planned installations. We consider that it would be more helpful simply to divide
installations into two categories, existing and new.
2.5
On the question of whether both unplanned and planned installations should receive
allowances, we note that:
(a)
setting aside allowances for allocation to such installations will have an impact on the
allowances available for immediate allocation under the National Allocation Plan;
(b)
although the information available about planned installations will provide some
indication, the amount of allowances placed in any set-aside will inevitably be no
more than a broad estimate and may not be sufficient to cover the needs of planned
and unplanned installations;
(c)
the time during which a planned or unplanned installation will be exposed to the cost
of buying allowances on the market for all of its emissions is in most cases likely to
be considerably less than the full 3-year period from 2005 to 2007, and the
installation can seek inclusion in the National Allocation Plan for the following period.
However, if unplanned and planned installations are not to receive allowances from a
set-aside for all of their emissions, this cost exposure may have an impact on the
timing within which such installations are developed and become operational;
(d)
the arrangements (which may be prejudicial to the UK economy) that must be
implemented if unplanned and planned installations are to receive allowances from a
set-aside will be more complex and are likely to create more uncertainty than would
10
otherwise be the case (for example, due to the need to include arrangements for the
recycling of any unused allowances in the set-aside);
(e)
at some point all installations will have to pay for allowances. Why should
installations established now or in the next few years be at an advantage compared
to those installations established further down the line? It is likely that installations
will one day view the need to obtain allowances as an expense just like taxes; and
(f)
whatever proposals are implemented in the UK they should not disadvantage UK
installations compared to those in other Member States.
2.6
Our recommendation is therefore that no category of new entrant should receive a free
allocation of allowances. If this recommendation is implemented it will be imperative to
ensure that there is some liquidity in the market for allowances, so as to ensure that a barrier
is not created to new entrants by absolute non-availability of allowances (as opposed to the
price on the market of allowances). It may be possible to assist in creating this liquidity by an
appropriately timed auction of allowances. Notwithstanding whether allowances are
allocated to new entrants free of charge or at a cost, it appears that an amount of allowances
will need to be set aside in the National Allocation Plan for new entrants.
2.7
The Consultation Paper also asks the question of whether new entrants should be treated
differently? We think that this is potentially dangerous as any differentiated treatment could
give rise to complaints from those operators who feel they have been treated unfairly as
against other operators who have obtained a more generous treatment. This could give rise
to legal challenges and uncertainty other the validity of any allocation or the rules going
forward which would be unsatisfactory for market certainty in this new and emerging market.
In particular we would have in mind challenges under Articles 87 and 88 of the EC Treaty.
However there may be legitimate policy reasons for trying to encourage or support certain
types of technology which are still emerging and are more energy efficient such as Combined
Heat and Power ("CHP"). We think this would be legitimate and less exposed to legal
challenge if it were based on commonality of approach to all new entrants. For example one
approach which has been proposed is to make it clear that all new combustion installations
will get a free allocation which will be benchmarked against the most and common efficient
technology - in which case a new entrant CHP plant would get a generous allocation relative
to its actual emissions whereas a new coal plant may get an allocation which will be much
lower than its actual emissions. We feel such an approach if warranted by public policy
objectives would be less open to legal challenge because in effect all new entrants would be
treated the same.
11
3.
CLOSURES
Question 12: Should allowances that have been attributed to installations in the
National Allocation Plan that close during the first phase of the scheme be allocated
or withheld from installations?
3.1
Allowing operators of installations that close during 2005 to 2007 to benefit from the full 3year allocation of allowances for those installations may provide an incentive to close 'dirty'
plant and achieve a net reduction in emissions of CO 2, provided that closure of such
installations does not simply displace emissions into a non-regulated sector. However a
worrying potential consequence of not adjusting targets in the event of significant changes in
activity or closures of facilities is that the environment integrity of the EETS could be
jeopardised as a result. For example, this may make it possible for a company to close down
a facility, move the production to some other country, potentially resulting in greater
emissions and still retain its allowances under the EETS. Our view is that the approach of
permitting allowances for closed installations (assuming satisfactory measures can be
implemented to avoid increases in emissions of CO2 due to displacement of emissions) may
nonetheless be preferable to providing, on closure of an installation, for withholding of any
allowances allocated to that installation but not yet issued. The latter approach would create
incentives for installations to remain open so as to continue to receive their allocation of
allowances and again, this may have a detrimental affect upon the environment. One
possible solution may be to allocate a portion of allowances to closed installations (e.g. 50%)
so as to avoid excessive retention of allowances by closed installations whilst incentivising
the closure of 'dirty plants'.
3.2
Notwithstanding operators of installations that close during 2005 to 2007 being allowed to
benefit from the full 3-year allocation of allowances for those installations, it will be necessary
to develop a precise legal definition of permanent closure of installations so as, for example,
to ensure that installations that are effectively closed do not succeed in obtaining allowances
under the National Allocation Plan for the period following 2007. In developing this definition
it will be necessary to bear in mind that it is common for generators to mothball their plant
(i.e. close it down temporarily) where the cost of generating electricity becomes uneconomic.
In addition some generators actually operate for very few hours each year and only generate
when market price is extremely favourable.
3.3
Furthermore a facility which has totally closed down should not be allocated with allowances
after 2007, particularly if it has moved the relevant production (and, therefore, activity) to
another country. For example, one could then see a situation arising where a company
closes down its facilities in the UK, moves the relevant production to another Member State
and joins the EETS in that other country. In that case, it may be in an enviable position of
being awarded allowances for the same activity and, therefore, the same emissions under
two schemes in two different countries. We would suggest that minimum safeguards and
checks are put in place to prevent, at the very least, this worst case occurring.
12
3.4
We believe that if the Member States of the European Union can agree to the same rules for
new entrants and closures, the possibilities for gaming, (i.e. decisions being made by
companies based only on eligibility for allowances rather than economic or other valid
reasons) are likely to be significantly reduced.
4.
INTERPRETATIONAL ISSUES
Question 19: What are your views on the proposed approach to interpretation?
4.1
The Consultation Paper requests comments in respect of two issues concerning
interpretation, namely:
(a)
whether the Integrated Pollution Prevention and Control: a Practical Guide ("IPPC
Guidance Note") and other guidance used in the UK for the purposes of the IPPC
legislation can be used as the basis for guidance notes for the EETS (in particular,
relating to the definition of installation and operator); and
(b)
whether the proposed definition of 'combustion installation' set out in the Consultation
Paper is appropriate.
4.2
Our comments with respect to each of these issues are set out below. We have approached
each of these issues from a general perspective and therefore acknowledge that there may
be certain circumstances that fall outside this general approach and which may need to be
considered on a case-by-case basis (e.g. a process/facility which does not fall squarely
within the definition of 'combustion installation'). There obviously needs to be certainty and
clarity in the legislation and rules for the EETS in the UK. However, an element of flexibility
should be retained, and a purposive approach taken in the regulations as it is impossible for
Government to legislate for every eventuality.
4.3
We also endeavoured to ascertain whether UK courts and/or the European Court of Justice
have already considered any of these interpretation issues but unfortunately there does not
appear to be any relevant judicial guidance with respect to the definition of 'installation' or
'combustion installation'.
Use of the IPPC Guidance for the implementation of the EETS in the UK
4.4
In our view the IPPC Guidance Note can provide a basis for the guidance notes under the
forthcoming EETS legislation in the UK, and indeed, it is the intention of the EETS Directive
that Member States co-ordinate EETS procedures with those used for the purposes of IPPC.
There are obviously synergies between the two systems which means that such an approach
is practical (i.e. both systems are concerned with 'installations' and the prevention of pollution
via emission targets, both systems are to be enforced by the same regulators in the UK and,
13
importantly, there is a large overlap of the industrial sectors covered by both the EETS and
IPPC systems).
4.5
There are however differences between the EETS and IPPC systems which mean that the
guidance on IPPC will need revision before it can be applied to the EETS. The main
differences include that:
(a)
(b)
(c)
(d)
4.6
the EETS Directive only covers specific activities whereas the IPPC is more
comprehensive;
the EETS Directive will only cover carbon dioxide for 2005 -2007 whereas the IPPC
deals with a more comprehensive range of air emissions as well as emissions to
water and land, and energy efficiency;
under the EETS, any installation identified as operating within the Annex I activities
will be subject to a emissions cap, however, they will also be eligible to receive
valuable trading rights (whilst the IPPC is purely a regulatory regime with no
associated valuable rights); and
the EETS will apply to all eligible installations as at January 2005, however, not all
installations may be governed by IPPC as at that date. Therefore, flexibility should
be included in the rules to take account of issues which might arise due to this
mismatch of implementation dates (e.g. a potential issue is that measures taken to
meet EETS requirements such as the fitting of new equipment for the purposes of
emissions reductions could constitute a 'significant change' and trigger the
implementation of IPPC on an installation earlier than under the statutory timetable).
With respect to the definition of 'installation', IPPC defines an installation as comprising not
just the relevant unit carrying out the regulated activity but also any location where directly
associated activities which have a technical connection with the regulated activity and which
have an effect on pollution are carried out. For the purposes of the EETS Directive, it is
however only required that the activity specified in Annex I of the Directive is covered and
that its carbon dioxide emissions are included within the trading scheme. From a practical
perspective it makes sense to use the same definition of installation for both the IPPC and
EETS scheme however we query whether the inclusion in the definition that 'associated
activities' are caught will result in any real benefits or disadvantage for such installations. It
may also provide a competitive disadvantage if other Member States use the guidance
differently and chose to ignore "associated activities".
Definition of 'Combustion Installation'
4.7
The proposed definition for combustion installation as set out in the Consultation Paper
effectively contains three parts (as indicated below), each of which needs to be considered
for its appropriateness with respect to the EETS. The definition of 'combustion installation'
suggested in the Consultation paper is as follows:
14
'(Part 1) the burning of any fuel in an appliance designed for the production of
energy (Part 2) for use by or in another appliance (Part 3) but does not include the
burning of fuels where the products of combustion are used directly as an
integrated part of a production process'.
4.8
By way of background, the term combustion installation appears as a subheading under the
category ‘Energy Activities’ in Annex I of the EETS Directive. Other industrial activities
appearing with it are ‘Mineral oil refineries’ and ‘Coke ovens’. In our view the category
‘Energy Activities’ should encompass all industrial processes which are characterised by the
fact that energy (whether electricity, steam or heat) is produced from a combustion process.
This view is in line with the statement made by the European Commission in its common
position No 28/2003 that ‘the scope of the emissions trading scheme includes energy, heat
and steam production of installations above 20 MW’. We recognise however that this will
potentially capture many more installations and may therefore affect the task of implementing
the regime. We would again suggest that the Government ensure that its approach is in line
with that supported by the majority of other Member States.
4.9
Part 1 – 'the burning of any fuel in an appliance designed for the production of energy'
We believe that Part 1 of the definition of 'combustion installation' is appropriate and
achieves the intention of the EETS Directive as discussed above, namely to capture carbon
dioxide emissions from energy activities. In support of this view we would comment that the
court in the case British Steel plc v Commissioners of Customs and Excise 13 was prepared to
consider the technology and design of an installation and stated that in most circumstances it
is the nature of the process which is important and not the intent of the user. In this case the
court was considering whether heat arising as an incidental consequence of another process
(being the use of oil as a reducing agent) resulted in the company losing its exemption from
excise duty.
4.10
Part 2 – 'for use by or in another appliance'
We believe that in requiring that the energy produced is used by or in another appliance is an
unnecessary qualification. The defining quality of the definition is that energy of a particular
type is produced. This definition should not be negated by, for example, a) the use of the
energy in the same appliance or b) by its non-use through venting to atmosphere, (i.e. as
steam and/or heat). In addition, the qualification that the energy must be used by or in
another appliance could potentially lead to confusion as to whether the general electrical
generation and supply industry will fall within the EETS even though it is one of the largest
contributing sectors to carbon dioxide emissions.
13
Court of Appeal, The Times 12 May 1999 (reported 19 th May 1999)
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4.11
Part 3 – 'but does not include the burning of fuels where the products of combustion
are used directly as an integrated part of a production process'
In relation to the qualification in Part 3 of the definition, we are not convinced that excluding
carbon dioxide resulting from the burning of fuel as part of a 'production process' is
necessary and it may lead to confusion and result in some processes that produce electricity,
steam or heating not being caught by the proposed definition (e.g. the use of sulphur units
which are employed to extract sulphur from products produced in the combustion of fuel oil
containing sulphur). As stated above, the defining fact is that fuel was used to produce
energy. Therefore whether or not such energy is used in a production process should not
dictate that the carbon dioxide emissions from that combustion activity are within the EETS.
However, it is acknowledged that the deletion of this exclusion may lead to practical issues
(such as verification and monitoring), although the 20MW threshold will apply so as to
exclude small individual combustion activities. In addition, Government has proposed in its
Consultation Paper concerning the Draft Implementing Regulations (dated 15 September
2003) that a 'light touch' be applied to combustion installations which have previously been
unregulated (i.e. greater than 20MW but less than the IPPC 50MW limit) and that such
installations be allowed to 'pool' together. This approach seems appropriate (at least for
2005-2007) and may assist in helping to reduce administrative burdens on such installations.
5.
LEGAL STATUS OF ALLOWANCES
5.1
It is our view that it will be extremely important to clarify the legal nature of the allowances
which will be issued to participants of EETS (e.g. bonds, chose in action, bills of exchange,
negotiable instrument, documentary intangible etc), however, this issue was not specifically
raised in the Consultation Paper. A related issue is the rights of ownership associated with
them. It will be critical to clarify or give some guidance on both of these issues, particularly if
the legal community is to be able to advise its clients with confidence in relation to trading
transactions and the financial community is to develop complex financial products to help
participants of the EETS manage their risks. The UKELA Climate Change Working Group
would be happy to work with Government and its lawyers to address this issue.
5.2
By way of background it is important to define what we mean by property and then look at
the uncertainties which arise if this property or legal nature of the allowances is left uncertain
or unclear. The legal analysis below is taken from a University College London (UCL) class
outline prepared by Anthony Hobley.
(a)
The word "property" is not a term of art but takes its meaning from its context.
Decided cases can only give an indication of the characteristics of "property" e.g.
Celtic Extraction Ltd & Bluestone Chemicals -v- Environment Agency [1998] CA.
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(b)
Before a right or an interest can be admitted into the category of property, or of a
right affecting property, it must be definable, identifiable by third parties, capable in its
nature of assumption by a third party, and have some degree of permanence or
stability - Lord Wilberforce, National Provincial Bank Limited v Ainsworth [1965] AC
1175.
(c)
In the case of Commonwealth of Australia v WMC Resources Ltd [1998] 152 ALR 1
the court was called upon to decide whether or not a permit to explore for petroleum
in an area in the continental shelf granted under the Petroleum (Submerged Lands)
Act 1967 was property within the meaning of the Consequential Provisions Act which
required the Commonwealth to provide "just terms" for any acquisition of property.
The court cited with approval the test applied by the court below:
"the rights ... were clearly identifiable, assignable, stable, potentially of very
substantial value, and not, because of their statutory foundation defeasable".
(d)
The Court of Appeal in Celtic Extraction Ltd and Bluestone Chemicals v Environment
Agency was called upon to consider whether or not a waste management licence (in
simple terms a right to deposit waste material into a hole in the ground) was property
for the purposes of s436 of the Insolvency Act 1986. The court developed three tests
which need to be satisfied if such a permit can be considered to be property:
1. there must be a statutory framework conferring an entitlement on one who
satisfies certain conditions even though there is some element of discretion
exercisable within the framework;
(e)
5.3
2.
the permit must be transferable;
3.
the exemption or licence will have value.
For further examples of judicial tests on what constitution property, see also:
(i)
cases of the European Court of Justice in relation to whether or not a
licence/permit is property protected by Article 1/1 of the European Convention
on Human Rights - Predin v Sweden (1991) 13 EHRR 784 (Commission
Report), at para 48;
(ii)
"Comment, Tradable Emissions Programs: Implications under the [US]
Takings Clause"; Susan A Austin; 26 Env. L. 323 (1996) (arguing that most
revocations or restrictions on credits would not implicate the Takings Clause).
However, is asking whether or not an allowance is property or not the right question? We feel
that there is little doubt that the UK courts would conclude the allowances are a property right
and at the very least apply the protections for holders under Article 1 of Protocol 1 to the
European Convention on Human Rights should any Government try to revoke them during
their expressed duration.
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5.4
We think the more important question is what type of property interest are the allowances
(e.g. regulated investment, bonds, chose in action, bills of exchange, negotiable instrument,
documentary intangible) and what consequences flow from this. The consequences which
we feel that are still uncertain are how will the Financial Services Agency treat these for the
purpose for the Financial Services and Markets Act 2000. What tax treatment will flow from
the nature of these allowances as discussed below. How will the allowances be treated on an
insolvency or winding up by any insolvency practitioner? Will this treatment be the same
across all Member States e.g. will capital gains tax be payable in some Member States but
not others? A lot of market uncertainty and therefore transaction costs could be avoided if all
these issues are clearly spelt out in the implementing regulations and also if the approaches
to these questions are co-ordinated across all Member States.
6.
TAXATION
6.1
An important issue, not raised in the Consultation Paper, is that of taxation (as referred to
above). Potential participants are currently being required to join the EETS, not knowing the
tax consequences. Guidance may be required from Government as to the tax consequences
on the EETS participants (such as that which was given by Treasury with respect to the
UKETS). It should also be considered how the different tax schemes in each of the Member
States will achieve harmonised tax treatment of EETS allowances.
We would like to thank the Government again for giving us the opportunity to respond to the
Consultation Paper.
United Kingdom Environmental Law Association Climate Change Working Group14
2 October 2003
14
Edited and compiled by Michelle Turner and Helen Loose – Ashurst Morris Crisp for the UK Environment Law
Association, Climate Change Working Group with special thanks to Colleen Nelson - Norton Rose; Bruce Jerrit;
Aidan Thomson - Barlow Lyde & Gilbert; Anthony Hobley - Baker & McKenzie; Peter Hawkes - Baker &
McKenzie; Donovan Ingram - CMS; Tom Bainbridge – CMS; Anna McCann - Baker & McKenzie; Michael
Hutchinson - Mayer Brown Rowe & Maw; Elaine Johnson -Mayer Brown Rowe & Maw and Ed Allathan -BPB.
18