Inclusion of Consumption into the EU ETS: The Legal Basis under European Union Law

AuthorRoland Ismer,Manuel Haussner
Published date01 April 2016
Date01 April 2016
Inclusion of Consumption into the EU ETS: The
Legal Basis under European Union Law
Roland Ismer* and Manuel Haussner
Traditionally discussed measures to prevent carbon
leakage under the European Union (EU) emissions
trading system, such as the free allocation of allow-
ances or border carbon adjustments, either suffer from
significant economic drawbacks or have seen their
political, legal and administrative feasibility ques-
tioned. Recently, a novel approach has been proposed
in the form of the inclusion of consumption into emis-
sions trading schemes. Under this approach, a charge
would be imposed on carbon-intensive products at the
time of their release for consumption within the EU.
After sketching this proposal, this article discusses the
correct legal basis under EU law. It develops the argu-
ment that the inclusion of consumption may be based
on Article 192.1 of the Treaty on the Functioning of the
EU and thus be adopted without unanimity voting in
the Council of the EU.
Under the European Union emissions trading system
(EU ETS),1operators of covered installations have to
acquire and retire emission permits for each tonne of
greenhouse gases emitted during the production
process.2The key idea of the scheme is to reduce emis-
sions in a cost-effective and economically efficient way.3
This requires the cumulative operation of two channels,
namely: (i) upstream production efficiency in the sense
that least-cost emissions reductions are pursued in the
production process;4and (ii) a price signal along the
value chain, which sets incentives for the substitution
for lower-carbon products and for promoting innova-
tion, while allocating mitigation costs to consumers.5
However, there is no single carbon price, but a plethora
of prices, as the EU ETS is geographically limited to the
territory of the EU6and similar schemes, with varying
degrees of stringency, exist only in some other regions.7
This spatial differentiation means that trade-exposed,
energy-intensive industries may be induced to replace
domestic production by imports, or to relocate produc-
tion to foreign countries (also known as carbon
Among the measures proposed to address carbon
leakage,9attention has largely focused on approaches
which can be integrated in the emissions trading
mechanism.10 They can be broadly classified into two
different groups – free allocation of allowances and
border carbon adjustments. Under free allocation,11
emitters from sectors exposed to leakage receive a share
or all of their required allowances for free (or, more
generally, for a consideration below market price).
Imported products remain outside the scope of the
emissions trading scheme. Free allocation, which can
be based on historic data or actual output,12 seeks to
improve the competitive position of domestic products
through a reduction of the financial costs borne by
* Corresponding author.
1Directive 2003/87/EC of 13 October 2003 Establishing a Scheme for
Greenhouse Gas Emission Allowance Trading within the Community
and Amending Council Directive 96/61/EC, [2003] OJ L275/32, as
amended by Directive 2009/29/EC of 23 April 2009 Amending Direc-
tive 2003/87/EC so as to Improve and Extend the Greenhouse Gas
Emission Allowance Trading Scheme of the Community, [2009] OJ
2Ibid., Article 12.3.
3Ibid., Article 1; see also ECJ, Joined Cases C-566/11, C-567/11,
C-580/11, C-620/11 and C-640/11, Iberdrola, SA and Others v.
Administración del Estado, ECLI:EU:C:2013:660, at paragraph 43
(‘Iberdrola, SA’).
4See M. Grubb, J. Hourcade and K. Neuhoff, Planetary Economics
(Routledge, 2014), at Chapter 6 on pricing pollution and at Chapter 7
on cap-and-trade and offsets.
5Iberdrola, SA, n. 3 above, Opinion of Advocate General (AG) Kokott
delivered on 21 March 2013 (‘Opinion of AG Kokott, Iberdrola, SA’),
at paragraph 70; Commission of the European Communities, Green
Paper on Greenhouse Gas Emissions Trading within the European
Union, COM(2000) 87, at paragraph 7.3; R. Ismer, Klimaschutz als
Rechtsproblem (Mohr Siebeck, 2014), at 104.
6As well as Iceland, Liechtenstein and Norway.
7For an overview, see C. Serre et al., Emissions Trading Worldwide:
ICAP Status Report 2015 (ICAP, 2015), at 20ff.
8See S. Dröge et al., Tackling Leakage in a World of Unequal Carbon
Prices (Climate Strategies, 2009); F. Sindico, ‘The EU and Carbon
Leakage: How to Reconcile Border Adjustments with the WTO?’, 17:6
European Energy and Environmental Law Review (2008), 328.
9For an overview on carbon leakage and potential countermeasures,
see S. Dröge et al., n. 8 above.
10 On subsidies as an allocation instrument, which, however, does not
alter the marginal incentives for shifting production to regions with
lower carbon costs, see, e.g., ibid., at 54.
11 See, e.g., P. Quirion, ‘Historic Versus Output-based Allocation of
GHG Tradable Allowances: A Comparison’, 9:6 Climate Policy
(2007), 575; S. Dröge et al., n. 8 above, at 46–54.
12 A comparison of both is given by P. Quirion, n. 11 above.
DOI: 10.1111/reel.12131
© 2015 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
RECIEL 25 (1) 2016. ISSN 2050-0386
Review of European Community & International Environmental Law

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