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Published online by Cambridge University Press: 03 October 2012
The European Union Emissions Trading System (EU ETS) is the largest mandatory programme of its kind. The entitlements in emissions allowances (emissions entitlements) combine public and private law characteristics: allowances are tradable, commercially valuable regulatory instruments. This dual nature reveals a new interdependency between public and private law mechanisms in the context of climate change policy. This article argues that achieving the requisite level of emissions reductions is contingent on the viability of the emissions market, and that both are dependent on the definition of emissions entitlements. This view is supported by a case study which identifies the practical and serious consequences of the absence of a legal concept of emissions entitlements. The United States (US) Acid Rain Program offers useful lessons on the treatment of emissions entitlements. They can be further defined by analogy with similar rights regimes. Their nature is highly relevant to the emissions market, particularly to the commercial contracts that constitute it.
1 Directive 2003/87/EC establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community and Amending Directive 96/61/EC [2003] OJ L275/32 (EU ETS Directive).
2 E. Doyle, J. Hill & I. Jack, Growth in Commodity Investment: Risks and Challenges for Commodity Market Participants, FSA Markets Infrastructure Department, Mar. 2007, at pp. 30–1, available at: http://www.fsa.gov.uk/pubs/other/commodity_invest.pdf.
3 Art. 1, EU ETS Directive, n. 1 above.
4 E.g., C. Kettner, D. Kletzan-Slamanig, A. Köppl, T. Schinko & A. Türk, Price Volatility in Carbon Markets: Why It Matters and How It Can be Managed, WIFO Working Papers, 409/2011, at pp. 6–7, available at: http://angela.koeppl.wifo.ac.at/fileadmin/files/price_volatility_01.pdf.
5 Recital 20, EU ETS Directive, n. 1 above.
6 Kettner et al., n. 4 above, at p. 7; Grubb, M. & Neuhoff, K., ‘Allocation and Competitiveness in the EU Emissions Trading Scheme: Policy Overview’ (2006) 6(1) Climate Policy, pp. 7–30Google Scholar, at 13–4.
7 Kettner et al., ibid.
8 Convery, F., ‘Origins and Development of the EU ETS’ (2009) 43(3) Environmental and Resource Economics, pp. 391–412Google Scholar, at 392–3.
9 E.g., Ellerman, D. & Buchner, B., ‘The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results’ (2007) 1(1) Review of Environmental Economics and Policy, pp. 66–87Google Scholar, at 69–70; Pohlmann, M., ‘The European Union Emissions Trading Scheme’, in Freestone, D. & Streck, C. (eds.), Legal Aspects of Carbon Trading, Kyoto, Copenhagen, and Beyond (Oxford University Press, 2009), pp. 336–49CrossRefGoogle Scholar, at 353.
10 European Commission, Climate Action, ‘Questions and Answers on the Revised EU Emissions Trading System’ (EU ETS FAQ), answers to questions 3 and 4, available at: http://ec.europa.eu/clima/policies/ets/faq_en.htm. Kyoto Protocol, Kyoto (Japan), 11 Dec. 1997, in force 16 Feb. 2005, available at: http://unfccc.int/kyoto_protocol/items/2830.php.
11 M. Cames, F. Matthes & S. Healy, ‘Functioning of the ETS and the Flexible Mechanisms’, European Parliament, Directorate General for Internal Policies, Policy Department A: Economic and Scientific Policy, Environment, Public Health and Food Safety, Mar. 2011, at pp. 8–9, available at: http://www.europarl.europa.eu/meetdocs/2009_2014/documents/envi/dv/201/201104/20110419_envi_functioning_of_ets_en.pdf.
12 European Commission Communication, ‘Analysis of Options to Move Beyond 20% Greenhouse Gas Emission Reductions and Assessing the Risk of Carbon Leakage’, COM(2010)265 final, at pp. 3–4, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0265:FIN:EN:PDF.
13 See Part 3 below.
14 See Part 6 below.
15 EU ETS FAQ, n. 10 above, answer to question 1.
16 New York, NY (US), 9 May 1992, in force 21 Mar. 1994, available at: http://unfccc.int.
17 Kyoto Protocol, n. 10 above.
18 Recital 5, EU ETS Directive, n. 1 above; Dornau, R., ‘The Emissions Trading Scheme of the European Union’, in Freestone, D. & Streck, C. (eds.), Legal Aspects of Implementing the Kyoto Protocol Mechanisms (Oxford University Press, 2005), pp. 417–30CrossRefGoogle Scholar, at 417.
19 See Australian Government, Department of Climate Change and Energy Efficiency website at: http://climatechange.gov.au/government/clean-energy-future/legislation.aspx.
20 See California Environmental Protection Agency, Air Resources Board website at: http://arb.ca.gov/cc/capandtrade/capandtrade.htm.
21 Clean Energy Act 2011 (Commonwealth) (Cth) s. 103.
22 California Code of Regulations (Cal. Code Regs.), Title 17, § 95820(c).
23 E.g., Driesen, D., ‘Is Emissions Trading an Economic Incentive Program? Replacing the Command and Control/Economic Incentive Dichotomy’ (1998) 55 Washington and Lee Law Review, pp. 289–350Google Scholar; Tietenberg, T., ‘The Evolution of Emissions Trading’, in Siegfried, J. (ed.), Better Living Through Economics (Harvard University Press, 2010), at pp. 42–58Google Scholar; P. Heindl & A. Löschel, Designing Emissions Trading in Practice – General Considerations and Experiences from the EU Emissions Trading Scheme (EU ETS), ZEW Discussion Paper No. 12-009, 2012, available at: http://www.econstor.eu/bitstream/10419/56009/1/68858070X.pdf.
24 Heindl & Löschel, ibid.; Dietz, T., Ostrom, E. & Stern, P., ‘The Struggle to Govern the Commons’ (2003) 302(5652) Science, pp. 1907–12Google Scholar; Goulder, L. & Parry, I., ‘Instrument Choice in Environmental Policy’ (2008) 2 Review of Environmental Economics and Policy, pp. 152–74.Google Scholar
25 Hansjürgens, B. (ed.), Emissions Trading for Climate Policy: US and European Perspectives (Cambridge University Press, 2005), at pp. 5–7.Google Scholar
26 E.g., Financial Markets Law Committee (FMLC), ‘Emission Allowances: Creating Legal Certainty’, Issue 116, Oct. 2009, available at: http://www.fmlc.org/papers/Issue116Oct09.pdf.
27 E.g., Wilder, M., ‘Nature of An Allowance’, in Watchman, P. (ed.), Climate Change: A Guide to Carbon Law and Practice (Globe Business Publishing, 2008), pp. 93–109Google Scholar, at 101–2; M. Wemaere, C. Streck & T. Chagas, ‘Legal Ownership and Nature of Kyoto Units and EU Allowances’, in Freestone & Streck, n. 9 above, pp. 35–58, at 50–2.
28 E.g., Hahn, R. & Axtell, R., ‘Re-evaluating the Relationship between Transferable Property Rights and Command-and-Control Regulation’ (2007) 8(2) Journal of Regulatory Economics, pp. 125–48.Google Scholar
29 Convery, n. 8 above, at 397 and 407.
30 See Part 4 below.
31 Recital 5, EU ETS Directive, n. 1 above.
32 Ibid., Art. 1.
33 Ibid., Recital 20.
34 European Commission, Climate Action, ‘Emissions Trading System (EU ETS)’, available at: http://ec.europa.eu/clima/policies/ets/index_en.htm.
35 Keohane, N., ‘Cap and Trade, Rehabilitated: Using Tradable Permits to Control U.S. Greenhouse Gases’ (2009) 3(1) Review of Environmental Economics and Policy, pp. 42–62Google Scholar, at 45–6.
36 Tietenberg, n. 23 above, at pp. 46–7.
37 Ibid., at pp. 47–8.
38 Arts. 12(1) and 19(2), EU ETS Directive, n. 1 above.
39 Ibid., Recital 20.
40 In microeconomic theory, exclusivity, enforceability and transferability of rights are the key prerequisites for a market to function effectively: see, e.g., Field, B. & Field, M., Environmental Economics: An Introduction (McGraw-Hill Irwin, 2009), at p. 203.Google Scholar
41 § 403(f), 1990 Clean Air Act Amendments, 42 U.S.C. § 7651b(f).
42 Cal. Code Regs., n. 22 above.
43 Cole, D., ‘Clearing the Air: Four Propositions about Property Rights and Environmental Protection’ (1999) 10 Duke Environmental Law & Policy Forum, pp. 103–30Google Scholar, at 113.
44 Cole, D., Pollution and Property: Comparing Ownership Institutions for Environmental Protection (Cambridge University Press, 2002), at p. 55Google Scholar; Dennis, J., ‘Smoke for Sale: Paradoxes and Problems of the Emissions Trading Program of the Clean Air Act Amendments of 1990’ (1993) 40 UCLA Law Review, pp. 1101–44Google Scholar, at 1137; Rosenberg, A., ‘Emissions Credit Futures Contracts on the Chicago Board of Trade: Regional and Rational Challenges to the Right to Pollute’ (1994) 13 Virginia Environmental Law Journal, pp. 501–36Google Scholar, at 508.
45 Commission Regulation (EU) No. 1193/2011 establishing a Union Registry for the Trading Period Commencing on 1 January 2013, and Subsequent Trading Periods, of the European Union Emissions Trading Scheme pursuant to Directive 2003/87/EC and Decision 280/2004/EC and Amending Commission Regulations (EC) No. 2216/2004 and (EU) No. 920/2010 [2011] OJ L315/1.
46 Ibid., Recital 12 and Art. 37(4).
47 European Commission, Climate Action, ‘General Questions and Answers on Registries’, answer to question 6, available at: http://ec.europa.eu/clima/policies/ets/registries/faq_en.htm.
48 A suggested analytical method for determining the characteristics of emissions entitlements is put forward in Part 5 below, using the UK as an example.
49 E.g., Webb, T., ‘Corus Agrees to Sell Teesside Plant to SSI of Thailand’, The Guardian, 27 Aug. 2010Google Scholar, available at: http://www.guardian.co.uk/business/2010/aug/27/ssi-corus-teesside-sale.
50 E.g., Szabo, M., ‘Closed UK Steel Plant to Get EU Carbon Permits: Government’, Reuters, 14 Dec. 2009Google Scholar, available at: http://uk.reuters.com/article/2009/12/14/btscenes-us-britain-steel-emissions-idUKTRE5BA2JJ20091214.
51 Art. 7, EU ETS Directive, n. 1 above.
52 The recent judgment of the High Court of England and Wales in Armstrong DLW GmbH v. Winnington Networks Ltd [2012] EWHC 10 suggests that in UK law an allowance is capable of forming the subject-matter of a trust: see [52]–[59].
53 Department for Business, Innovation and Skills, Government Response to the North East Regional Committee’s Second Report of Session 2009–10 into Teesside Cast Products (BIS, Government Response), Cm 7868, 7 Apr. 2010, at p. 7, available at: http://www.official-documents.gov.uk/document/cm78/7868/7868.asp.
54 Art. 7, EU ETS Directive, n. 1 above.
55 Art. 1(8), Directive 2009/29/EC amending Directive 2003/87/EC so as to Improve and Extend the Greenhouse Gas Emission Allowance Trading Scheme of the Community [2009] OJ L140/63.
56 Commission Decision of 27 April 2011 Determining Transitional Union-Wide Rules for Harmonised Free Allocation of Emission Allowances pursuant to Article 10a of Directive 2003/87/EC [2011] OJ L130/1.
57 Ibid., Arts. 21 and 23.
58 Ibid., Art. 22.
59 Ibid., Arts. 21(3), 22(3) and 23(2)–(4).
60 Field & Field, n. 40 above.
61 Recital 20, EU ETS Directive, n. 1 above.
62 Parliament Committee on Climate Change, ‘Meeting Carbon Budgets: The Need for a Step Change’, Oct. 2009, at p. 17, available at: http://downloads.theccc.org.uk/docs/21667%20CCC%20Report%20Intro.pdf.
63 European Commission, Climate Action, ‘The EU Climate and Energy Package’, available at: http://ec.europa.eu/clima/policies/package/index_en.htm.
64 European Commission, ‘Analysis of Options Beyond 20% GHG Emission Reductions: Member State Results’, SWD(2012)5 final, at pp. 5–6, available at: http://ec.europa.eu/clima/policies/package/docs/swd_2012_5_en.pdf.
65 B. Leguet, N. Fujiwara & A. Georgiev, ‘The EU Emissions Trading Scheme as a Driver for Future Carbon Markets’, Centre for European Policy Studies, 2012, at pp. viii–ix and 27–8, available at: http://www.ceps.eu/book/eu-emissions-trading-scheme-driver-future-carbon-markets.
66 Directive 2009/29/EC, n. 55 above.
67 Ibid., Recital 8.
68 European Commission, ‘A Roadmap for Moving to a Competitive Low Carbon Economy in 2050’, COM(2011)112 final, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0112:FIN:EN:PDF.
69 Ibid., at pp. 6–7.
70 Convery, n. 8 above, at pp. 397 and 407.
71 42 U.S.C. § 7651.
72 U.S. Environmental Protection Agency, Clean Air Markets, ‘SO2 Reductions and Allowance Trading under the Acid Rain Program’, available at: http://www.epa.gov/airmarkets/progsregs/arp/s02.html.
73 1990 Clean Air Act Amendments, n. 71 above, § 7651a(3).
74 Ibid., § 7651b(b).
75 E.g., Chestnut, L. & Mills, D., ‘A Fresh Look at the Benefits and Costs of the US Acid Rain Program’ (2005) 77 Journal of Environmental Management, pp. 252–66Google Scholar, at 253–5; G. Chan, R. Stavins, R. Stowe & R. Sweeney, ‘The SO2 Allowance Trading System and the Clean Air Act Amendments of 1990: Reflections on Twenty Years of Policy Innovation’, Harvard Kennedy School, RPP-2012-01, Jan. 2012, available at: http://www.hks.harvard.edu/m-rcbg/rpp/Working%20papers/RPP_2012_01.pdf.
76 1990 Clean Air Act Amendments, n. 71 above, § 7651b(f).
77 Gehring, M. & Streck, C., ‘Emissions Trading: Lessons from SOx and NOx Emissions Allowance and Credit Systems, Legal Nature, Title, Transfer, and Taxation of Emission Allowances and Credits’ (2005) 35 Environmental Law Reporter, pp. 10219–35Google Scholar, at 10221–2.
78 Cole, n. 43 above.
79 US Constitution, Amendment V: Private property is not to be taken ‘without just compensation’. This can include regulatory takings: Pennsylvania Coal Co. v. Mahon, 260 US 393 (1922).
80 1990 Clean Air Act Amendments, n. 71 above, § 7651b(b).
81 98 F. 3d 799 (4th Cir. 1996).
82 Ibid.
83 1990 Clean Air Act Amendments, n. 71 above, § 7651g(i)(1).
84 Gehring & Streck, n. 77 above, at p. 10222.
85 194 F. Supp. 2d 147 (NDNY 2002).
86 Ibid.
87 1990 Clean Air Act Amendments, n. 71 above, § 7651b(b).
88 Cole, n. 43 above, at pp. 113–4; Cole, n. 44 above, at p. 53–4.
89 Gehring & Streck, n. 77 above, at p. 10224.
90 Cole, n. 43 above, at pp. 113–4; Cole, n. 44 above, at p. 53–4.
91 Cole, n. 44 above, at p. 55; Dennis, n. 44 above, at p. 1137; Rosenberg, n. 44 above, at p. 508.
92 E.g., INEOS Manufacturing Scotland Ltd v. Grangemouth CHP Ltd and Another [2011] EWHC 163, which concerned a dispute based on a commercial contract for allowances.
93 Nn. 54–59 above.
94 BIS, Government Response, n. 53 above.
95 Art. 14(3), Grundgesetz für die Bundesrepublik Deutschland (German Federal Basic Law/Constitution); Deutsch, U., ‘Expropriation Without Compensation – the European Court of Human Rights Sanctions German Legislation Expropriating the Heirs of “New Farmers”’ (2005) 6(10) German Law Journal, pp. 1367–80Google Scholar, at 1370–1.
96 German Federal Basic Law/Constitution, ibid., Art. 14(1); Deutsch, ibid.
97 US Constitution, Amendment V, n. 79 above; Pennsylvania Coal Co., n. 79 above.
98 This article refers to the UK legal system in respect of intellectual property rights and spectrum licences as an example of how the proposed analytical approach can be used to determine the characteristics of emissions entitlements.
99 See Part 6 below.
100 Regulation (EC) No. 1234/2007 establishing a Common Organisation of Agricultural Markets and on Specific Provisions for Certain Agricultural Products [2007] OJ L299/1 (Single CMO Regulation).
101 Copyright, Designs and Patents Act 1988 (CDPA), s. 1(1); Patents Act 1977, s. 30(1); Trade Mark Act 1994, ss. 2(1), 22 and 27.
102 Cardwell, M., ‘Milk and Livestock Quotas as Property’ (2000) 4(2) Edinburgh Law Review, pp. 168–90Google Scholar, in particular at 189–90.
103 Data Broadcasting International Ltd and Simpleactive Ltd v. Office of Communications (OFCOM) [2010] EWHC 1243, in particular at [68], [88] and [91]–[94].
104 Walter v. Lane [1900] AC 539, at 545; Designers Guild v. Williams [2001] Fleet Street Reports (FSR) 11, at para. 2.
105 Arsenal [2003] European Trade Marks Reports (ETMR) 19, at paras. 46–7; L’Oreal v. Bellure [2007] ETMR 1, at para. 99.
106 Asahi Kasei Kogyo [1991] Reports of Patent, Design and Trade Mark Cases (RPC) 485, at 523.
107 CDPA 1988, s. 45.
108 Patents Act 1977, ss. 60(5) and 64(1).
109 Art. 1, EU ETS Directive, n. 1 above.
110 In 2010 the value of the market in EU ETS allowances was $119.8 bn: see, e.g., World Bank, State and Trends of the Carbon Market 2011 (World Bank, 2011), at p. 9.Google Scholar
111 Cardwell, M., Milk Quotas: European Community and United Kingdom Law (Clarendon Press, 1996), at pp. 92–3.Google Scholar
112 Decision 243/2012/EU establishing a Multiannual Radio Spectrum Policy Programme [2012] OJ L81/7, Recital 14; Arts. 3(f) and 4(2): Member States must work to allow spectrum trading in their respective jurisdictions. Spectrum management falls within the responsibility of Member States, and must be carried out in line with EU legislation; European Commission, Information Society, ‘Managing and Monitoring the Radio Spectrum in the EU’, available at: http://ec.europa.eu/information_society/policy/ecomm/radio_spectrum/eu_policy/manage/index_en.htm. In the UK, e.g., spectrum licences are tradable if so designated by the Office of Communications (OFCOM): Wireless Telegraphy Act 2006, s. 30.
113 Irish Supreme Court, Maher v. Minister for Agriculture, Food and Rural Development [2001] IESC 32, at paras. 237 and 239.
114 The UK spectrum rights regime is set out principally in the Wireless Telegraphy Act 2006, s. 125(1) and Sch. 9.
115 E.g., European Commission, ‘The EU Single Market’, available at: http://ec.europa.eu/internal_market/index_en.htm.
116 Arts. 12(1) and 19(2), EU ETS Directive, n. 1 above.
117 Information regarding licence details is set out in the Wireless Telegraphy Act Register: Wireless Telegraphy Act 2006, s. 31.
118 E.g. Member States may retain part of a quota which has been transferred and add it to their national quota reserve: Regulation (EC) No. 1234/2007, n. 100 above, Art. 76.
119 See Part 2 above.
120 Data Broadcasting, n. 103 above.
121 Ibid.
122 A. Bell & G. Parchomovsky, ‘A Theory of Property’ (2005) 90 Cornell Law Review, pp. 531–615, at 581–2.
123 Art. 16, EU ETS Directive, n. 1 above.
124 Cole, n. 43 above.
125 Mace, M., ‘The Legal Nature of Emission Reductions and EU Allowances: Issues Addressed in an International Workshop’ (2005) 2(2) Journal for European Environmental and Planning Law, pp. 123–34Google Scholar, at 129–34; A. Cook, ‘Accounting for Emissions: From Costless Activity to Market Operations’, in Freestone & Streck, n. 9 above, pp. 59–76.
126 FMLC, n. 26 above, pp. 5 and 8.
127 Ibid.
128 Drummond, S., ‘Trading Instruments and Risk Management’, in de Jong, C. & Walet, K. (eds.), A Guide to Emissions Trading: Risk Management and Business Implications (Risk Books, 2004), pp. 157–77Google Scholar; Mace, n. 125 above, at pp. 124–5.
129 Cole, n. 43 above.
130 Mace, n. 125 above, at pp. 126–7.
131 Ibid., at pp. 127–8.
132 Ibid., at pp. 128–9; Voigt, C., ‘WTO Law and International Emissions Trading: Is There Potential for Conflict?’ (2008) 2(1) Carbon and Climate Law Review, pp. 54–66.Google Scholar Cf. L. Rubini and I. Jegou, ‘Who'll Stop the Rain? Allocating Emissions Allowances for Free: Environmental Policy, Economics, and WTO Subsidy Law’ (2012) 1(2) Transnational Environmental Law, pp. 325–54.