A Legal View on Ex Post Interventions in an Emissions Trading Scheme

Abstract

Up till now, the question whether the government can or should intervene in an emissions trading scheme has hardly been discussed in legal literature. This paper explores some legal aspects regarding so called ex post interventions (retroactive adjustments) within emissions trading schemes, in particular the European greenhouse gas emissions trading scheme. It discusses the need for such ex post interventions, with a focus on the withdrawal of allocated allowances. It states that the issue of ex post adjustments should be considered in view of the allocation method chosen, like auctioning or the free distribution of tradable rights. The present European greenhouse gas allowance trading scheme serves as an interesting case regarding ex post interventions. This scheme is predominantly based on a free allocation of the allowances by the member states. Within this scheme, the issue of ex post adjustments has even led to a striking and important ruling of the Court of First Instance (ruling from 7 November 2007, T-374/04). The Court conducted in its ruling an elaborated analysis of the nature and effects of the ex post adjustment mechanisms as initially proposed by Germany in its first National Allocation Plan, and ruled that the Commission could not uphold its reluctant position on downwards ex post adjustments. The case shows that ex post adjustments within the current emissions trading framework can be used to correct some perverse effects of the cap and trade approach based on historical production data. Although the outcome of this ruling did not have important effects on the current trading period, we conclude that the analysis of the Court should be taken into consideration by the legislative institutions when amending the present emissions trading directive. This case illustrates that the possibility of allowing ex post adjustments in an emissions trading system should not be overlooked. As such, there is not yet available a systematic analysis of the possible (greenhouse gas) emissions trading models and the different forms of governmental interventions within such schemes. The design of such competences, and the conditions and limits to interventions within emissions trading schemes thus needs further exploration from an economic and legal perspective, not only within greenhouse gas emissions trading schemes, but regarding any emissions trading scheme to be considered.