Poland and the European Commission have finally reached agreement on Poland’s national allocation plan (“NAP”) after nearly two years of litigation, by which the amount of CO2 emission allowances allocated to Polish industry under the EU Emissions Trading System (ETS) for the period 2008-2012 are set. The EC had taken Poland to task for being overly generous in the number of allowances given to industry, as well as the manner Poland had set aside reserve allowances for CO2 emitters not yet in existence. On April 19, 2010, however, the EC dropped its opposition to Polands’ NAP following the submission of a revised plan by the Polish government just 10 days earlier.

What’s required?

Pursuant to Art. 9 of Directive 2003/87/EC, each member state “shall develop a national plan stating the total quantity of allowances that it intends to allocate” among emitters of greenhouse gases. Industries subject to these allowances include energy producers, coke ovens, steel mills, glass furnaces, ceramic manufacturers, pulp and paper mills, and generally all combustion installations exceeding 20 MW. At the EU level, the overall goal is to reduce the amount of CO2 emissions by 20 percent of 1990 levels by 2020, calculated against CO2 emissions from 2005.

The Polish government, citing the fact that 94 percent of Poland’s electricity is produced by burning coal, argued that Poland would only be able to achieve a 15 percent reduction in the level of CO2 emissions from 1990 levels by 2020. In line with this goal, Poland’s NAP allocated up to 208.5 metric tons in CO2 allowances to Polish industry on an annual basis. Within this figure Poland had also set aside allowances for companies not yet in existence, in effect creating more allowances than actual CO2 emissions levels in 2005.

On this final point the EU Commission had objected, but following the submission of an amended NAP by Poland, the EU Commission relented. The 15 percent reduction target, as well as the number of CO2 allowances, remains unchanged. Beyond 2020 the number of annual CO2 allowances is to be gradually reduced.

Was Poland right?

Directive 2003/87/EC does not specify the number of allowance points that a member state may issue to a particular industry or greenhouse gas emitter. The closest the Directive comes to defining a number is as follows: “the total quantity of allowances to be allocated shall not be more than is likely to be needed for the strict application of the criteria of this Annex,” referring to the criteria each member state must follow in calculating allowance points.

In other words, the amount of allowance points is not clearly defined, and as such Poland was free to decide for itself the number of allowances.

Carrot and stick

Exactly how is the ETS supposed to work? For the sake of clarity, let’s assume that two different companies, X and Y, are each granted 1,000 allowance points in year one of the program, meaning that each may emit up to 1,000 metric tons of CO2 into the environment without incurring any expense.

At the end of the year Company X emits a total of 900 tons of carbon dioxide, in effect pocketing 100 allowance points. Company Y, in contrast, emits 1,100 tons, creating a deficit of 100 allowance points. In order to avoid a fine of 100 euro per ton, Company Y will need to cover its deficit of 100 allowance points by purchasing the 100 allowance points saved by Company X.

The transfer of ownership of allowance points will be recorded in a central electronic registry system at the EU level, which will be connected to individual registries in each member state.

This summer Germany, France and the UK called for raising the CO2 emission reduction target from the current 20 percent to 30 percent by 2020. Time will tell if other EU member states follow their lead.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki, A. Chelchowski & Partners. fogo@pl.millercanfield.com

This is an accompanying piece to the main article