Europe’s top court sides with Latvia in allocation dispute

Latvia is exempt from having to buy back millions of EU allowances (EUAs), after Europe’s top court ruled on Thursday against the European Commission’s appeal to change the country’s national allocation plan (NAP) from the last phase of the emissions market.

The NAP sets out how many emissions allowances could be sold or given to plants within a country, which was partly determined on historic emissions and the cap for the phase.

In phase II (2008-2012), Latvia had an annual NAP of 3.5m EU allowances (EUAs), one of the smallest in the EU’s emissions trading system (ETS). The country’s initial NAP request was declined, and Latvia submitted a new plan, which requested a significantly larger free allocation, of around 6.25m-7.76m EUAs, to the commission. This was also declined, but the commission failed to do so within the given three-month period.

Consequently, in 2011, the European General Court sided with Latvia on the grounds the commission had missed a 2007 NAP response deadline by one day, rendering the second plan’s allocation as binding ( see EDCM 22 March 2011 ).

The commission appealed the ruling, but the Court of Justice of the EU on Thursday ruled in favour of Latvia.

It also means that Latvia will not have to buy back some 14m EU allowances (EUAs), according to carbon analytics firm Tschach Solutions, now part of ICIS, in a briefing note on Thursday. Tschach added Latvia has already allocated the EUAs, so no new supply will hit the market.

Phase III allocation

Meanwhile, the final free allocation number for phase III (2013-2020) could still change.

The commission earlier this month said that phase III industrials will still receive some 43% of the phase cap (or 6.6bn EUAs) for free, with more available to new entrants, based on its analysis of most countries’ National Implementation Plans (NIMs). The NIMs lay out a country’s estimate for the amount of free EUAs it will hand out to industrial plants.

But the commission found the NIMs of Germany and the Czech Republic “not to be entirely compliant”, which led the commission to reject the submissions for now, until changes are made to bring them in line. As a result, the final allocation could still change.

Both the German government-run emissions body Deutsche Emissionshandelsstelle (DEHSt) and the Czech environment ministry told ICIS that rejection of their NIMs by the commission stems from differing interpretations of the rules for free allocations.

But the time frame surrounding resolution of the issue continues to be unclear, while the deadline for companies to surrender their 2013 emissions is 30 April 2014.

Uncertain time frame

The commission has previously indicated that it expects the uncertainty to be brief, even if it has added another step to the process. Countries in the EU ETS other than Germany and the Czech Republic were told they would receive their free allowances between one and three months after the country updates its allocation in the Union Registry. ( see EDCM 6 September 2013 ) – pushing the earliest possible time of allocation to the start of next week. However, the UK registry said that it expected the process to take two months and would only allocate the allowances to registry accounts around November. Registries from other countries, such as France, Poland and Spain, did not comment on when they would allocate the allowances by, when recently asked by ICIS.

Number of free EUAs

In Germany, 18 installations are under question regarding free emissions allowance amounts. Organisations affected include Luxembourg-headquartered steel manufacturer Arcelor Mittal and Austrian oil and gas company OMV.

The number of installations in Germany deemed not to meet EU regulations amounts to around 35m free EUAs in 2013, according to data from Tschach Solutions’ NIM Database. Germany has a total free allocation of 1.2bn EUAs from 2013 to 2020, according to the commission.

In the Czech Republic, the issue concerns two installations, one each belonging to the ArcelorMittal Ostrava and Evraz Vitkovice Steel. Both firms are Czech subsidiaries of global steel companies.

A total of 151,044 allowances are in question at the steel shop of Evraz Vitkovice Steel, the company said to ICIS, while the Czech Republic has a total free allowance allocation of 175m.

But these figures could still change, analysts have said, with a potential additional free allocation of over 30m EUAs for 2013, which could further push up the 2014 auction volume. Ben Lee/Marie-Louise du Bois