November 29
2021
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19th November 2021
Consumer, Health & Environment Energy & Transport Internal Market

Op-Ed: “Energieversorgungscenter Dresden-Wilschdorf (C-938/19): Establishing the boundaries of a cogeneration installation for the free allocation of emission allowances” by Lucila de Almeida and Viola Cappelli

Introduction

The ultimate objective of the EU greenhouse gas emission allowance trading schemes (Emissions Trading System, ETS) is indisputable and, now more than ever, of recognised importance to combat the climate crisis. ETS uses economic incentives to encourage participants to reduce emissions. Participants are incentivised to emit quantities of greenhouse gases that are lower than the quantity of allowances originally allocated to them in order to sell the surplus to another participant, which has emitted more than its allowance. However, we cannot say that the free allocation of emission allowance calculation is equally clear and indisputable.

In Energieversorgungscenter Dresden-Wilschdorf (C-938/19), the Court of Justice had the chance to clarify for the method of calculation of the number of emission allowances to be allocated free of charge for cogeneration installation plants, which by nature have the purpose of combining the generation of power with the activity of heating and cooling. While the energy activities are subject to ETS, the latter is not.The judgement thus enhances the predictability of the extent to which these ancillary activities are subject to the ETS in cogeneration plants, thereby reducing the risk of jeopardising the virtuous effects of the climate change policies.

Background

EDW is a German company that operates a high-performance industrial gas engine cogeneration plant subject to the ETS at the EU level. The cogeneration plant includes ancillary units of absorption chillers, which convert hot water into cooling and do not emit greenhouse gases. EDW’s cogeneration plant supplies both electricity and cooling only and exclusively to Global Foundries’ semiconductors manufacturing factory, which does not belong to EDW. For the purpose of granting the permit required by the German Federal Emission Control Act (BImSchG), the cogeneration plant and its ancillary units are regarded as forming one and the same installation on account of the noise emissions.

In 2012, EDW applied for the free allocation of emission allowances with the German Emissions Trading Authority (the DEHSt). After an initial adverse decision, the DEHSt granted the requested emission allowances only in part. The DEHSt considered EDW’s ancillary units, the absorption chillers, as part of one installation subject to the ETS. On this basis, the German Authorities recalculated the requested free allocation allowance on the basis of three considerations. First, it deducted from the amounts of heat claimed by EDW the heat imported from the installation not subject to ETS. Second, it refused to recognise any allowance entitlement regarding the flow from the warm water resulting from the energy released by the operation of the chillers. Third, it refused to apply to EDW the rules applicable to the sectors deemed to be exposed to a ‘significant risk of carbon leakage’ for the cooling supplied by the absorption chillers.

In 2017, EDW brought an action against this decision before the Berlin Administrative Court (Verwaltungsgericht Berlin), which referred three questions to the Court of Justice:

  1. The first question concerns the scope of application of Directive 2003/87 establishing a scheme for greenhouse gas emission allowance trading. In particular, it raises the issue of whether Articles 2(1) and 3(e) of the Directive preclude national legislation which includes, within the boundaries of an installation subject to the ETS, ancillary units which do not emit greenhouse gases.
  2. The second question asks whether the corrected eligibility ratio (referred to in the European Commission’s Data Collection Template) for heat imported from facilities not subject to the ETS must be applied to the total amount of heat produced in the installation subject to the ETS, even if the imported heat can be attributed to one of several identifiable and separately recorded heat flows inside the installation.
  3. The third question required to establish whether sub-installations for heat that serve a sector deemed to be exposed to a significant risk of carbon leakage, as the absorption chillers, could be assigned ‘carbon leakage’ status, even though the heat is used to produce cooling and the cooling is consumed by an installation not subject to the ETS, but which belongs to that sector.

Decision and Comments

To answer these questions, the Court of Justice adopted an approach aimed to enhance the rationale behind the European measures in the field of greenhouse emissions trading, namely  Directive 2003/87, Commission Decision 2011/278 on transitional rules, and Commission Decision 2010/2 on sectors exposed to a significant risk of carbon leakage. This approach appears at the very beginning of the judgment, from the consideration of the first question.

To determine the boundaries of an installation for the purposes of the application of the ETS, the Court assessed the meaning of Article 3(e) of Directive 2003/87. According to this provision, ‘installations’ are all the technical units where the activities listed in Annex I, which includes energy activities and any other directly and technically associated activities influencing carried out emissions. Therefore, the Court of Justice concluded that the ancillary units of absorbing chillers can potentially be considered installations covered by the ETS only if certain criteria are met. First, the chillers’ activity must have a technical connection with the activities carried out in the gas cogeneration installation. Such connection must contribute to the overall technical process of the activity covered by Annex I (Granarolo, C‑617/19). Second, the ancillary activity must be capable of having effects on emissions of greenhouse gases listed in Annex II, in accordance with Article 2(1) of the Directive (Trinseo Deutschland, C‑577/16).

In the case at hand, the Court argued that, from the information available to it, one could conclude that the heat production in EDW’s industrial cogeneration plant is carried out to meet its chiller’s needs. Therefore, the ancillary unit affects the cogeneration, proving the connection between the chiller and the energy activity. Moreover, considering the operation of the ancillary unit affects the decision of cogeneration operations, there is no doubt the former influences the emission of the latter. As a result, the two criteria laid down in Articles 2(1) and 3(e) of Directive 2003/87 are met.

To this end, the Court concluded that the fact that the ancillary units of absorbing chillers are considered part of the main installation according to an authorization based on national laws regarding pollution has no relevance. Such an interpretation is borne out by the fact that the term ‘pollution’ according to Directive 96/61 and Directive 2010/75 on pollution prevention and control expresses a broader concept than the term ‘emissions’ contained in Directive 2003/87. In contrast, the Court adopted a strict textual interpretation of Articles 2(1) and 3(e) of Directive 2003/87 to identify the criteria for considering an ancillary unit as part of an installation subjected to ETS.

The Court of Justice took the same approach to answer the second question. It concluded that, in order to calculate the number of emission allowances to be allocated free of charge to a heat benchmark sub-installation, the corrected eligibility ratio should be applied on the basis of a comprehensive approach to the heat flows for that sub-installation, even where the measurable heat imported from an installation not subject to the ETS can be attributed to a particular heat flow. Following the opinion of Advocate General Saugmandsgaard Øe, the Court emphasized the need for an actual assessment of the heat flows, regardless of whether the heat originates from an installation subject to the ETS or not.

The Court of Justice also seemed wary of the importance of ensuring the environmental virtuous impact of  Commission Decision 2011/278. The premise of the Court’s reasoning on this point is that installations in sectors exposed to a significant risk of carbon leakage can benefit from emissions allowances free of charge at 100% of the quantity determined according to Article 10a of Directive 2003/87. Therefore, expanding the boundaries to access this ‘carbon leakage’ status and its advantages could weaken the effectiveness of the ETS and, consequently, be detrimental to the environment in the long term. On this basis, and recalling the wording of the third subparagraph of Article 6(1) of Decision 2011/278, the Court stressed that if the heat is consumed in an installation included in the ETS to produce cooling that is exported to an installation not included in the ETS, the relevant process of the heat benchmark sub-installation for this heat does not serve a sector deemed to be exposed to a significant risk of carbon leakage. Consequently, the installation in which the cooling is exported cannot benefit from the advantages related to ‘carbon leakage’ status.

Conclusion

It is always worth remembering that the ETS aims to create a disincentive to emit greenhouse gases by obliging industries that do not receive enough emissions allowances to buy them on the market. So, Energieversorgungscenter Dresden-Wilschdorf is remarkable for two reasons. First, the judgement offers some clarification about the calculation method applicable for the free allocation of emission allowances. The decision to consider ancillary units subject to the ETS not only when they emit greenhouse gases but also when they influence the total level of emissions of the main installation and the adoption of a comprehensive approach to the heat flows for calculating the corrected eligibility ratio can be understood through this lens. Moreover, although at first sight, the choice to restrict access to the status of ‘carbon leakage sectors’ might threaten the economic initiative in some productive fields, hampering access to some benefits related to the ETS. Second, by clarifying the criteria to access the allocation of emissions allowances, the judgment supports an interpretation that grants an expansive application of the ETS to cogeneration installations, while simoustaneously avoiding jeopardizing the virtuous effect of the ETS on the environment.

 

Lucila de Almeida is Assistant Professor of Energy and Environmental Law at Wageningen University & Research, and Part-time Assistant Professor at European University Institute, RSCAS, Florence School of Regulation.

Viola Cappelli is PhD candidate in Law at Sant’Anna School of Advanced Studies in Pisa.

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