On March 10, 2016, ExxonMobil filed a challenge against Germany in the Verwaltungsgericht Berlin (Administrative Court, Berlin, Germany), concerning an application to the German Emissions Trading Authority (DEHSt) for the allocation of greenhouse gas emission allowances (“ghg allowances”) free of charge to a Exxon-owned natural gas processing installation in Germany which, among other activities, engages in sulphur recovery that by the combustion of fuels generates electricity and heat and releases carbon dioxide (CO2) into the atmosphere. The Administrative Court referred the case to the European Union’s Court of Justice for a preliminary ruling interpreting the laws which establish a greenhouse gas emission allowance trading system with the European Union to determine whether this facility was entitled to ghg allowances free of charge.
On June 20, 2019, the Court of Justice ruled that part of Exxon’s natural gas processing plant in Germany should be classified as an electricity generator. The Court of Justice interpreted Article 3(u) and Article 10a of, and Annex I to, Directive 2003/87/EC of the European Parliament and of the Council (which established a scheme for greenhouse gas emission allowance trading within the EU) and as amended by Directive 2009/29/EC (“Directive 2003/87”). It additionally interpreted Article 3(c) and (h) of Commission Decision 2011/278/EU concerning rules for the temporary free allocation of emission allowances pursuant to Article 10a of Directive 2003/87. The court concluded that Article 3(u) of Directive 2003/87/EC must be interpreted to mean that an installation, such as that at issue in the proceedings, (which produces electricity through the “combustion of fuels in installations with a total rated thermal input exceeding 20 [megawatts (MW)]”), must be understood as an ‘electricity generator’ when even a small portion of that electricity is continuously fed into the public electricity network (unless the product of the installation meets an exempted category in the annex). The installation in question could not be exempted even if its purpose was to produce electricity for the natural gas processing facility. The Court of Justice further determined that Article 3(c) of Commission Decision 2011/278/EU must be interpreted to mean that an installation such as that at issue in the main proceedings is not entitled to be allocated free emission allowances for the heat produced “where that heat is used for purposes other than the production of electricity, since such an installation does not fulfill the conditions laid down in Article 10a(4) and (8) of the directive.” The activities of natural gas desulphurisation and sulphur recovery did not meet the criteria of those articles.
An analyst reviewing the decision noted that if it is followed by EU governments, it could result in thousands of facilities no longer qualifying for free allocation of ghg emission permits and drive up the cost of carbon in the market.