Emissions Trading, Greenhouse Gas Emissions, National Allocation Plans : Case T-374/04

The Court of First Instance has annulled yet again a Commission decision that sought to oblige a member State to stick to the total amount of allowances of greenhouse gas emissions. In Case T-374/04 Germany v. Commission it held that the Commission was wrong to prevent Germany from foreseeing the possibility of ex post reductions in greenhouse gas emissions once it national allocation plan ("NAP") had been notified pursuant to Directive 2003/87/EC.

Directive 2003/87/EC of the European Parliament and of the Council of October 13th, 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC sets up a Community scheme for greenhouse gas emission allowance trading in order to reduce such emissions. Each Member State must develop a national plan for the allocation of greenhouse gas emission allowances (‘NAP’), in accordance with certain criteria set out in the directive. The NAP must state the total quantity of allowances that the Member State intends to allocate and how it proposes to allocate them. The first NAP, for the three-year period beginning on January 1st, 2005, had to be published and notified to the Commission by March 31st 2004 at the latest. Under the directive, the Commission has three months to reject a NAP, in whole or in part, if it is incompatible with the criteria laid down by the directive. All amendments made to the NAP by the member State must be approved by the Commission.

Germany duly notified its NAP for the period 2005-2007 to the Commission. Its NAP allowed, in certain specified cases, a reduction in the amount of allowances allocated to an installation in the course of an allocation period. The Commission adopted its decision declaring that the ex post adjustments/reductions in the German NAP were incompatible with the criteria laid down in Annex III to Directive 2003/87/EC. Germany then asked the Court of First Instance to annul that decision.

The Court of First Instance agreed with Germany that the ex post reductions in emissions in the NAP were compatible with Directive 2003/87/EC.

The judgment is quite a complex one but in essence the Court of First Instance held that nothing in Directive 2003/87/EC prevented ex post adjustments of allocations given to installations and that it was possible for member States to change the allocations given to new entrants during the course of the emission trading period.

It seems clear that the German system would not have increased the overall quantities of allowances. It would have led however to changes in the total allowances during a given trading period which would perhaps not have been conducive to creating a robust emission trading market. The question remains whether Directive 2003/87/EC lays down the right rules to set up a proper and effective emissions trading market or whether it should be modified.

For a previous post on emissions trading, see here.

For those interested in the more general aspects of judicial review, the Court of First Instance repeated its classic statement of the standard of review of measures taken consequent upon complex economic and policy assessments. The Court stated at paragraph 81 that Community judicature conducts a full review as to whether the Commission applied properly the relevant rules of law, whose meaning must be determined in accordance with the methods of interpretation recognized by the case-law. On the other hand, the Court of First Instance cannot take the place of the Commission where the latter must carry out complex economic and ecological assessments in this context. Thus, the Court must confine itself to verifying that the measure in question is not vitiated by a manifest error or a misuse of powers, that the competent authority did not clearly exceed the bounds of its discretion and that the procedural guarantees, which are of particularly fundamental importance in this context, have been fully observed (see, Case T-13/99 Pfizer Animal Health v Council, paragraphs 166 and 171; Case T-70/99 Alpharma v Council, paragraphs 177 and 182; and Case T-392/02 Solvay Pharmaceuticals v. Council, paragraph 126).

One of the elements the Court of First Instance took into account to judge the legality of the Commission's decision in this case was some guidance on the application of Directive 2003/87 which the Commission itself had issued and published. Thus, the Court was led to examine whether the decision in question complied with the guidance that the Commission had previously adopted. The Court repeated that in certain circumstances such guidance could have legal effects.

It held in particular that by adopting rules of administrative conduct designed to produce external effects and announcing by publishing them that it will henceforth apply them to the cases to which they relate, an institution limits the exercise of its own discretion and cannot depart from those rules. Should it do so, the institution in question may commit a breach of general principles of law, such as the principles of equal treatment, of legal certainty or of the protection of legitimate expectations. As a result, such rules of conduct of general application may produce legal effects and that, in particular, the administration may not depart from them in an individual case without giving reasons that are compatible with the principle of equal treatment (interestingly, the Court referred to the position of the Commission guidelines on the method of setting fines in competition matters, Joined Cases C-189/02 P, C‑202/02 P, C‑205/02 P, C-208/02 P and C-213/02 P Dansk Rørindustri and Others v Commission , paragraphs 209 to 211; see also, with regard to guidelines adopted by the Commission on State aid, Case T-16/96 Cityflyer Express v Commission, paragraph 57), provided that such an approach is not contrary to other superior rules of EC law. Specifically in the fields of agriculture, health and the environment, the Court has recognized that the EC institutions may lay down for themselves guidelines for the exercise of their discretion by way of measures not provided for in Article 249 EC, in particular by communications, provided that they contain an indication as to the approach to be followed by those Community institutions and do not depart from the Treaty rules (see Pfizer Animal Health v Council, paragraph 119, Alpharma v Council, paragraph 140).

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