“In the 2012 Regulations the Government also took the opportunity to review the system of EU ETS penalties…This includes giving regulators’ power to waive or reduce penalties.”

-UK Government Consultation Response, December 2013

“The Member States have no freedom to choose the penalties applicable in the event of infringement of the obligation to surrender ‘sufficient’ allowances, which are laid down by Directive 2003/87 itself.”

-Opinion of the European Court of Justice, October 2013

Bonfire of ETS regulations

Note: July update to this blog available here

– UK government may be contravening EU Directive 2003/87/EC

– The €100 per tonne of CO2 penalty is not being properly applied

– Changes to the rules could let Chinese and Indian airlines, who refuse to participate in the EU emissions trading scheme, go unchallenged.

It has now been two years since aviation officials in India and China told their airlines to refuse to pay for carbon pollution under the EU Emissions Trading Scheme. These airlines, which fly routes from one European airport to another, are undercutting the majority of businesses, both European and international, which are behaving legally, and paying for their pollution. What have governments in the EU done about this? Officially, the only response has been a few letters. When asked what he thought of this, Indian Civil Aviation Minister Ajit Singh said “That's nice. They are only writing letters.” EU governments do not want to make a fuss, especially when threats of a trade war are tossed around.

However, the EU ‘Stop the Clock’ legislation has a built-in review for April 2014, so there’s renewed focus on the scheme (see Sandbag’s full report,Aviation and the ETS: What happened during Stop the Clock?). Countries in the EU could soon be forced into diplomatic wrangles they desperately want to avoid. In the background, the UK has produced some legislation which may avoid this confrontation, allow Chinese and Indian airlines to continue to flout EU law, and carry on polluting in the EU without paying for it.

Since mid-2012, the UK government has been tinkering with the obscure legislation behind penalties for avoiding participating in the EU Emissions Trading Scheme (Sandbag’s evidence to the 2013 consultation is available here). In complex changes that have almost entirely avoided press coverage or NGO attention, the government has been rebuilding a penalty system so full of holes, a Chinese airliner might just be able to fly right through it. Criminal penalties have been dropped, fines have been made “discretionary”, and many reporting responsibilities have been moved from the polluters onto the Environment Agency, currently creaking under the strain of massive job cuts. The weakening of the rules extends to preventing the Environment Agency from inspecting suspect installations, making it easier for polluters to evade paying for carbon emissions.

The Environment Agency, England's carbon market regulator

The UK Government argument, and EU law

The UK government is attempting to argue that their suggested change in penalty is allowable, on a flexible reading of the Directive. The Directive does allow limited flexibility for penalties decided upon by each Member State; but explicitly not for non-surrender of emissions. A recent decision from the European Court might well unsettle the UK government. In Billerud v Naturvårdsverket (October 2013), a case in which the Swedish company Billerud was attempting to avoid the penalty for failing to surrender allowances, the court explicitly judged that “there is no possibility for the amount [of penalty] to be varied by a national court”, and specifically discounts the UK argument of “proportionality”.

The government has assumed the strict EU-wide €100 per tonne of CO2 penalty applies only to emissions that have been reported, but against which allowances are not surrendered. To date in England, the majority of penalties were for polluters who have been caught after not reporting their emissions, and then not surrendering allowances for them (see the Appendix to Sandbag’s original evidence). This makes sense; if you intend to shoplift, you do not show the shopkeeper your basket before you walk out without paying. Under the government’s changes, in future these polluters would face a €20 per tonne of CO2 fine, with the possibility of that reduced fine being reduced or even waived.

Meanwhile, whilst not yet public, the European Commission are currently questioning whether the UK changes are fully in line with the Directive. Even if the Court of Justice were to allow that the UK had some discretion in administering the penalties, Article 16 of the 2003 Directive states “The penalties provided for must be effective, proportionate and dissuasive.” It is difficult to argue that the complete waiver of any penalty would fulfill this element of the Directive.

The UK Government looks to be on course to weaken the penalties regime of the EU ETS and make it easier for emitters, and in particular airline operators, to evade paying for the cost of climate change pollution. When the legislation makes it on to the statute books, on January 31st 2014, will the EU Commission be moved to act, and uphold their Directive?