Borealis et al. v. Environmental Protection Agency of Sweden

Summary:

Operators of greenhouse gas emitting installations challenged Swedish government's 2013 allocation of free allowances under Directive 2003/87/EC of the European Parliament and of the Council, which established the EU Emissions Trading Scheme (EU ETS). The European Court of Justice answered a number of referred questions related to the proper calculation of free allowances for the hotel metal industry.

During the third trading period of the EU ETS, from 2013-2020, sectors other than the electricity generation sector receive a limited number of emissions allowances for free (allowances in the electricity generation sector are all auctioned off). In November 2013, the Swedish Environmental Protection Agency determined the final amount of free emission allowances to be allocated for the third trading period of the EU ETS. Eight operators of greenhouse gas emitting facilities brought an action to invalidate the decision, and a Swedish court referred a number of legal questions to the European Court of Justice. The claimants first took issue with the correction factor that the EU had adopted according to Article 15(3) of Decision 2011/278 and set forth in Article 4 and Annex II of Decision 2013/448. The correction factor is applied to set the number of free allowances allocated to non-electricity generators in the event that the bottom-up calculation of allowances exceeds the applicable cap. The Court noted that it had recently invalidated the correction factor, and the EU was in the midst of revising it.

The claimants also argued that the benchmark for the hot metal industry was improper for a number of reasons. Product benchmarks are reference values that determine how many free allowances each installation in a particular industry will receive. Under Directive 2003/87, a product benchmark must be established based on the performance of the 10% most efficient installations in the sector. In implementing this rule, the European Commission overestimated the performances of installations producing hot metal. The Court held that the resulting benchmark did not exceed the Commission's discretion, explaining that the Commission had verified that its starting point sufficiently reflected the most efficient techniques available, and used appropriate reference documents where data could not be verified or did not comply with the benchmarking methodology.

The claimants further challenged the treatment of waste gases produced by the hot metal sector. Under Decision 2011/278, the product benchmarks must take account of the efficient energy recovery of waste gases and emissions related to their use. Under Article 15(3) of that Decision, where waste gases are exported from the production process outside the system boundaries of the relevant product benchmark and used to produce heat, related emissions should be taken into account for purposes of allocating allowances. However, when such waste gases are used to produce electricity, additional allowances should not be allocated, in accordance with the principle that no free allowances should be allocated for electricity generation. The Court upheld Article 15(3) as valid insofar as it excludes the taking into account of emissions from electricity generators for the purposes of determining the maximum annual amount of allowances.

The Court further determined that Decision 2011/278 permits a Member State to decline to allocate allowances to an operator for the consumption, in a heat benchmark sub-installation, of heat produced in a fuel benchmark sub-installation, based on the principle that emissions cannot be double-counted. Similarly, the Court concluded, a Member State may decline to count emissions related to that exported heat when collecting data under the EU ETS, and may refuse to allocate free allowances for emissions related to the production of measurable heat by burning waste gases generated by a hot metal benchmark installation. However, the Court held that the rule against double counting does not prohibit the allocation of free allowances on the basis of the heat benchmark for the combustion of waste gases, created during hot metal production, to supply heat to a district heating network. The Court reasoned that the Environmental Protection Agency had applied the heat benchmark in determining the amount of free allowances to be allocated, and considered emissions beyond the value set by the fuel benchmark to be taken into account under the hot metal benchmark.

The Court remanded the case to the Swedish court for a final ruling consistent with its opinion.

At Issue: Claimants challenged Swedish government's 2013 allocation of free allowances under the EU Emissions Trading Scheme.