An adviser to Europe’s highest court has said the European Commission’s Cross Sectoral Correction Factor (CSCF) calculations to decide free EUA allocation should be annulled as they had set too high a ceiling for distribution and resulted in too many free units being given out.
The current rules should apply until the Commission comes up with a new allocation method, for which the court should set a time limit of one year, according to the opinion of Advocate General Juliane Kokott, published on the website of the European Court of Justice on Thursday.
“A retroactive reduction would violate the legitimate expectations of a large number of plant operators in maintaining the final allocation,” Kokott said.
The full ruling in the case, brought by big emitters including Borealis, Dow Chemical and Esso against the European Commission, is likely to take several more months but court opinions are generally followed.
Such a verdict would be a slap in the face for the companies, which brought the case claiming they had been given fewer free allowances than they were entitled to.
The CSCF cuts the free allocation of EUAs to industry across the board by 5.73% in 2013 and increasing each year to 17.56% in 2020 under the current Phase 3 trading period. Its application was triggered because national plans exceeded the overall pot for free allocations.
Should the court rule in line with the opinion, it could result in a cut to the future free allocation for all ETS-regulated industry, with the EUAs instead being put up for auction.
This could have a slightly bullish effect to carbon prices as the prospect of lower free allocation may lead industrial companies to be more reluctant to sell their surplus EUAs, squeezing the overall market supply.
EUAs trading on ICE were little changed following the news.
“I think the arguments released with the opinion underpin that this would not affect already allocated allowances (for 2013-15) but would diminish the total number of free allocation some time during phase 3,” said Marcus Ferdinand, an analyst at Thomson Reuters.
“Given that the Attorney General argues that the calculation was done wrongly mainly due to installations newly joining the ETS from phase 3, I would expect the changes to the CSCF being quite small,” he added.
The case could also spur lawmakers to carry out more radical changes of post-2020 free allocation rules than those proposed by the European Commission, which analysts expect will still result in the CSCF being triggered during the next decade.
The UK and several other member states including the Netherlands and the Visegrad+2 group, have called for a more tiered approach to free allocation that could reduce the need for the CSCF by targeting free allowances at sectors that need them most.
By Ben Garside – firstname.lastname@example.org