Greenhouse gas emission allowance trading

77 Pages·2005·1.32 MB·English

Aarhus University, Business and Social Science September 2013
Greenhouse gas emission allowance trading
How Danish legislation and companies are influenced
by the EU ETS and EU state aid rules
Master Thesis, MSc EU Business and Law
Author: Maiken Høgh Rasmussen
Supervsior: Ellen Margrethe Basse, Professor, dr. Jur.
Department of Law
CONTENT
PREFACE ............................................................................................................................... 1
ABSTRACT ............................................................................................................................ 2
LIST OF ABBREVIATIONS................................................................................................ 3
1. INTRODUCTION .............................................................................................................. 4
1.1 Background ............................................................................................................................... 4
1.1.1 Decreasing sovereignty? ............................................................................................................ 4
1.2 Problem statement ..................................................................................................................... 6
1.3 Structure and delimitation ........................................................................................................ 6
1.4 Methodology .............................................................................................................................. 8
1.4.1 The European legal system ........................................................................................................ 8
1.4.2 Legal dogmatic studies ............................................................................................................ 10
1.4.2.1 Majoritarian vs. constitutional democracy ........................................................................ 10
1.4.3 Interviews................................................................................................................................. 11
1.4.3.1 Reflections after the interviews ......................................................................................... 12
1.5 Source of law ........................................................................................................................... 13
1.6 Concepts .................................................................................................................................. 14
2. HARMONISATION: THE SINGLE MARKET AND THE ENVIRONMENT ........ 16
2.1 The single market: Article 114 TFEU ..................................................................................... 16
2.1.1 Level of harmonisation ............................................................................................................ 16
2.1.2 Harmonisation requirements .................................................................................................... 18
2.2 The environment ..................................................................................................................... 19
2.2.1 Article 191-193 TFEU ............................................................................................................. 20
2.2.1.1 Level of harmonisation ..................................................................................................... 22
2.2.2 Article 194 TFEU .................................................................................................................... 22
2.3 Sub-conclusion ......................................................................................................................... 23
3. EU EMISSIONS TRADING SYSTEM (EU ETS) ........................................................ 24
3.1 The background of the EU ETS .............................................................................................. 24
3.2 The third trading period: Directive 2009/29/EC ..................................................................... 25
3.2.1 An EU single cap ..................................................................................................................... 26
3.2.1.1 The impact on Danish legislation ...................................................................................... 27
3.2.2 Auctioning ............................................................................................................................... 29
3.2.2.1 The impact on Danish legislation ...................................................................................... 31
3.2.3 Harmonised allocation rules on free allocation ........................................................................ 33
3.2.3.1 Carbon Leakage ................................................................................................................ 34
3.2.3.2 The impact on Danish legislation ...................................................................................... 35
3.3. State aid .................................................................................................................................. 36
3.3.1 The 2008-Guidelines ................................................................................................................ 39
3.3.1.1 Aid for renewable energy sources ..................................................................................... 41
3.3.2 The impact on Danish ability to reduce emissions ................................................................... 43
3.3.2.1 Guaranteed prices.............................................................................................................. 44
3.3.2.2 Additional prices ............................................................................................................... 44
3.3.3 The 2012-Guidelines ................................................................................................................ 45
3.4 Sub-conclusion ......................................................................................................................... 46
4. THE CARBON MARKET AND THE SECTOR EXPERIENCE .............................. 48
4.1 The challenges and impact of the EU ETS .............................................................................. 48
4.1.1 The emergency solution: Back-loading ................................................................................... 51
4.1.1.1 The consequences of the back-loading process ................................................................. 53
4.1.1.2 The consequences of a low/high price level...................................................................... 54
4.1.2 The structural long-term solution ............................................................................................. 57
4.2 Sub-conclusion ......................................................................................................................... 59
5. CONCLUSION ................................................................................................................. 61
6. BIBLIOGRAPHY ............................................................................................................ 64
Preface
This thesis is written as a response to an invitation from the Danish Energy Association (DE)
who has launched a project with the purpose to determine the extent of the EU’s influence on
the Member States’ legislative work and to analyse the European energy and climate policy’s
direct and indirect impact on the Danish legislation.

I would like to thank Troels Ranis (DI) and Ulrich Bang (DE) for taking the time to do the
interviews which were crucial for me to be able to present the whole picture in the report.

Also a thank you to my supervisor, Ellen Margrethe Basse, Professor at Aarhus University.

Number of characters, excl. spaces

+
5 figures of 800 characters = 4.000
2 textboxes = 1.058
IN TOTAL: 129.015, excl. tables and front page
1
Abstract
The influence of the EU law on Danish legislation is a widely debated issue in Denmark.
Several studies on the subject have been done but with as many different results.

This report has the purpose of analysing the influence of the amending Directive on the EU
Emission Trading System on the Danish legislation; meaning going from the second trading
period into the third. The main purpose of the EU Emission Trading System is to give
incentives to invest in green technologies and alternative as to emit less greenhouse gasses in
the atmosphere.
The subjects for analysis will be the EU single cap replacing the National Allocation Plans;
the auctioning replacing the free allocation as default allocation method; and the rules for
allocation of the allowances still being allocated for free.

State aid is another way of giving incentives to investments in at green changeover, and
therefore the influence of the EU prohibition of State aid and the Guidelines on
environmental protection which modifies the prohibition, will also be subject for analysis.
The specific actions analysed in the section of State aid is guaranteed- and additional prices
as support to the operation of windmills as wind energy is one of the main renewable energy
sources in Denmark.

To build a profound basis for the analysis above, the harmonisation levels and requirement
on the single market (Article 114 TFEU) and the environment (Article 192 TFEU) in the
Treaty of Lisbon will be analysed first.

The analysis of the influence on the Danish legislation will be followed up by an analysis of
how the situation on the current carbon market is experienced by the Danish companies and
how they evaluate short- and long term measures for the development of the EU ETS. The
short term measure is in this report defined as the back-loading plan which is currently
pending in the EU decision making process. The long term measures are defined as structural
measures which are presented as suggestions by the European Commission.

2
List of abbreviations

CDM Clean Development Mechanism
CJ (European) Court of Justice
EC European Community
ECCP European Climate Change Programme
EESC European Economic and Social Committee
EP European Parliament
EU European Union
EUA EU Allowance
EU ETS European Union Emission Trading Scheme
DE Danish Energy Association
JI Joint Implementation
NAP National Allocation Plan
NATO North Atlantic Treaty Organisation
SEA Single European Act
SME Small and medium sized enterprise
TEC Treaty establishing the European Community (The Treaty of Rome)
TEU Treaty of the European Union: Two versions (1) the Treaty of
Maastricht (2) the consolidated version (First part of the Treaty of
Lisbon)
TFEU Treaty on the Functioning of the European Union – consolidated
version (Second part of the Treaty of Lisbon)
UN United Nations
UNFCCC United Nations Framework Convention on Climate Change

3
1. Introduction
1.1 Background
It is well known that the European Union (EU) has a high degree of influence on the national
law of its Member States – but to what extent and what are the consequences of it? This
issue has continuing importance as EU Member States experience more harmonisation in the
EU in general. These thoughts are the basis for the report and the problem statement
presented below.
The subject has been touched in general in Power and Democracy in Denmark from 2003.
This publication was a result of a study which the Danish Parliament in 1997 decided to
launch1. The overall result is explained below, but ten years have passed since then and the
EU has developed a lot in this period.
1.1.1 Decreasing sovereignty?
Denmark is a member of various international organisations, EU, UN and NATO just to
mention a few. Out of these, the EU-membership has the greatest impact on Danish decision
making as Denmark has ceded sovereignty to the EU. This means that decisions in narrowly
defined areas are made by the EU and not by the Danish Parliament, Folketinget.
This section outlines the competence of the EU, including its limitations. Furthermore, it will
shortly present results of other studies of the EU influence on Danish legislation.

The areas of competence are outlined in Article 2-6 TFEU2. Article 3 TFEU sets out in
which areas the EU has exclusive competence. An example is on the establishment of
competitive rules necessary for the functioning of the internal market3. In other areas the
Member States and the EU share the competence for decision making. These areas are set
out in Article 4 TFEU. Article 4(2)(e) concludes a shared competence in environment and
Article 4(2)(i) on energy.
There are three types of limitations to the scope and depth of the EU cooperation: The first
one is the principle of conferral, also called the principle of legality, which limits the EU
cooperation to those areas that are stated in the treaty4. The second limitation is the
subsidiarity principle, which says that decisions must be made as close to the affected

1 Togeby, L. et al. (2003) p. 2
2 Treaty on the Functioning of the European Union
3 Article 3(1)(b) TFEU
4 Article 5(2) TEU
4
citizens as possible5. The third principle of the EU competence is the principle of
proportionality, which says that the content and form of the EU action shall not exceed what
is necessary to achieve the objectives of the treaty6.

In the report Power and democracy in Denmark the authors express the EU influence on the
Danish Parliament legislation by examining how often law texts refer directly to compliance
with EU regulation. In 1981/82 only 3% of Danish laws referred to direct compliance with
EU Directives. In 2000/01 this percentage had increased to 12%. In 1981/82 14% of the laws
contained some form of adaptation to EU regulation and in 2000/01 this percentage had
increased to 37%. The conclusion of the report was that although many of the laws had
limited scope, the autonomy of the Danish Parliament had been significantly reduced7.
Since this report was published, various research scientists, think tanks and also the Danish
Ministry of Justice have tried to calculate the influence by the EU; however, they do neither
agree on the calculation method nor the result. In 2011 the Ministry made a statement that
11,25 % of the Danish legislation derive directly or indirectly from EU law8. However, it
does not include EU Regulations which are directly applicable in the Member States.
Furthermore, it does not distinguish between significance of the single role: A major
legislation on for example the Common Agriculture Policy has the same weight as a minor
technical standard9.
The Danish liberal think tank CEPOS disagree with the Ministry’s low percentage.
According to their research 25,8% of legislation passed in Denmark in 2010 had its basis in
EU law10. If Regulations are also included, CEPOS estimate the direct and indirect influence
to be 50-60% 11.
Thus, it is important to carefully compare the researches but despite the disagreements and
the different calculation methods both the Ministry of Justice and CEPOS state that the
biggest influence is on subjects under the Ministry of the Environment and the Ministry of
Climate and Energy12 13. Furthermore, CEPOS does also conclude the trend of influence to
be increasing14.

5 Article 5(3) TEU
6 Article 5(4) TEU
7 Togeby, L. et al. (2003) p. 30
8 See Appendix 1, table 1
9 EU Information Centre, Folketinget (2011)
10 CEPOS (2011) p. 3
11 CEPOS (2011) p. 1
12 Now Ministry of Climate, Energy and Building
13 See Appendix 1, table 1 and figure 1
14 See Appendix 1, figure 2
5
1.2 Problem statement
The purpose of this report is to analyse the impact-change of the European Union Emission
Trading System (EU ETS) going from second to third trading period. The analysis is spilt
into a legal part and a business part. Before starting the analysis the report will also have the
purpose to present a profound basis for the analysis above with a focus on the Treaty of
Lisbon. The Treaty constitutes legal basis for the legal acts used in the report and also sets a
frame for competition in the single market which will be relevant in regard to State aid but
also in the business impact analysis.

Thus, the report will search to answer the following questions:
1. The Treaty of Lisbon
a. What is the idea of the single market, what are the harmonisation
requirements according to the Treaty and which Articles are legal basis for
minimum harmonization and maximum harmonization on the area of
environment and the single market?
2. The legal influence
a. How does the latest amendment15 of Directive 2003/87/EC affect the Danish
legislation and the regulatory work?
b. How do the EU prohibition of State aid and the EU modification to the
prohibition of State aid as laid down in the 2008-Guidelines on
environmental protection influence the Danish ability to reduce greenhouse
gas on emission?
3. The company experience and the development of the EUA16 market
a. How does the latest development on the emission trading market, regarding
surplus of allowances, low prices and back-loading, affect the companies
and the competitive situation?
b. How does the sector evaluate the possible solutions for saving/developing
the EU ETS?
1.3 Structure and delimitation
Structure
To maintain a good overview, the structure of the report will follow the problem statement.
Chapter 1 contains the introduction to the subject and the methodology, which the report will
be based on. Chapter 2 will be the foundation for answering the first part of the problem

15 Directive 2009/29/EC
16 European Union Allowance, see explanation later
6
statement. It will give an introduction to the thoughts about the single market and its
harmonisation requirement in the Treaty of Lisbon17. Chapter 3 will focus on the legal part of
the influence of the EU ETS whereas chapter 4 will have a business focus, including
qualitative interviews with sector representatives. Chapter 3 will also contain the State aid
element, which together with chapter 4 will be a part of the competitiveness analysis. Lastly,
chapter 5 will sum up in a conclusion and give a full answer to the problem statement.

The delimitation
To be able to analyse some elements in depth, other elements most be left out of account
with reference to, inter alia, the physical limitations of a master thesis.
The EU ETS has its legal basis in the environmental chapter of the Treaty of Lisbon and
therefore the analysis of the single market and Article 114 TFEU has to be seen primarily in
the perspective of chapter 4 analysing impacts on the competitive situation distinguishing
between EU and non-EU countries/companies. This situation – but also the carbon leakage
situation in chapter 3 – appears because we have the single market. Also the State aid rules
are developed to the single market. However, Articles 114 TFEU is a very broad provision,
which covers many areas. The Article will be analysed to the extent evaluated to be
necessary to this report, and thereby some parts will be left out.

Concerning the EU ETS, the transport sector will be excluded. The aviation sector became a
part of the EU ETS recently but as it uses special allowances it will not be a part of the
analysis. Furthermore, the amendment Directive is very comprehensive and therefore the
whole Directive cannot be subject for analysis. It has been chosen to focus on the main
changes, which will be outlined in section 3.2.

Many areas; Directives etc. would make sense to bring into this report, for example the
Directive on Energy Taxes as it interacts with the State aid prohibition and modifying
Guidelines, and furthermore it supports the polluter pays principle18. However, a significant
part of the report has been prioritised to the analysis of the impact of the companies and the
current unstable situation on the carbon market as to cover the “business-part” of the line of
study; EU Business and Law, together with the fact that law first becomes relevant when it
comes in “contact” with parts covered by the single law.

17 The Treaty of Lisbon constitutes of two treaties: The Treaty of the European Union (TEU) and the Treaty on
the Functioning of the European Union (TFEU)
18 Basse, Ellen Margrethe (2011), p. 107
7