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

• Author: Roland Ismer,Manuel Haussner
• Published date: 01 April 2016
• Date: 01 April 2016
• DOI: http://doi.org/10.1111/reel.12131

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.

INTRODUCTION

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

leakage).8

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.

Email: roland.ismer@fau.de

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

L140/63.

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.

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RECIEL 25 (1) 2016. ISSN 2050-0386

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