AAU surplus and European Union

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 06/10/2011

1. In the context of its pre-2012 climate legislation, can an EU member state unilaterally use Article 3, paragraph 13 of the Kyoto Protocol (Protocol) to choose not to carry forward its AAU surplus?

2. We understand that the 2009 ‘package’ comes into effect for the post-2012 period, however does this have any relevance to the first to second commitment period carry over issue?

1. Background

The Protocol is an international agreement between parties linked to the United Nations Framework Convention on Climate Change (Convention) with the goal of reducing greenhouse gas emissions (GHGs). The parties bound to committing themselves to a reduction of GHGs produced by them under the Protocol (Parties) are stated in Annex I to the Convention.
The Party, the “European Economic Community” (EU), includes a number of other Parties that are also listed separately in Annex I to the Convention. The EU was created by the EEC Treaty, otherwise known as the Treaty of Rome, and shares common targets and goals collectively.
The EU is a fluid organization with the number of member states increasing. At the time the Protocol was ratified by the EU, there were only 15 member states of the EU (EU-15) and they were all separately included as Parties in Annex I to the Convention. The EU-15 included Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.
However, the EU, as of July 2011, now has 27 member states (EU-27) of which not all are Parties to the Protocol. The EU-27 includes Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. Cyprus, Malta, Slovakia and Slovenia are currently not Parties to the Protocol.

2. Kyoto Protocol

2.1 Ability to Meet Commitments Jointly

The core obligation under the Protocol requiring parties to comply with their emissions targets is Article 3(1) of the Protocol. It provides that:

“The Parties included in Annex I shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A do not exceed their assigned amounts, calculated pursuant to their quantified emission limitation and reduction commitments inscribed in Annex B and in accordance with the provisions of this Article, with a view to reducing their overall emissions of such gases by at least 5 per cent below 1990 levels in the commitment period 2008 – 2012”.

Article 3(1) clearly enables parties to elect to jointly meet their emissions reduction commitments. Article 4 of the Protocol sets out what happens under the Protocol when parties agree to jointly meet their commitments under Article 3. Clause 4(1) relevantly provides that:

“Any Parties included in Annex I that have reached an agreement to fulfil their commitments under Article 3 jointly, shall be deemed to have met those commitments provided that their total combined aggregate anthropogenic carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A do not exceed their assigned amounts calculated pursuant to their quantified emission limitation and reduction commitments inscribed in Annex B and in accordance with the provisions of Article 3. The respective emission level allocated to each of the Parties to the agreement shall be set out in that agreement.”

Article 4(1) has the effect that, where parties have agreed to meet their commitments jointly, the parties will be taken to have met their individual commitments if the total emissions of all of these parties is less than the total of their assigned amounts under Article 3(1).

2.2 Joint Agreement of EC

When the Protocol was signed on 29 April 1998, the EU declared that it and its member states would fulfil their respective commitments under Article 3(1) of the Protocol jointly in accordance with Article 4 of the Protocol. The EU as well as each of its member States became parties to the Protocol and were each ascribed emission reduction targets in Annex B.

The EU, by its member states, by a decision adopted on 25 April 2002, agreed to fulfil their commitments under Article 3(1) jointly in accordance with Article 4 of the Protocol (EC Joint Decision). The agreement is set out in a document titled “Agreement between the European Community and its Member States under Article 4 of the Kyoto Protocol” (Joint Agreement). The Joint Agreement attaches the EC Joint Decision. The Joint Agreement has been notified to the Secretariat in accordance with Article 4(2) of the Protocol.

Article 3 of the Joint Agreement provides that the quantified emission limitation and reduction commitments agreed by the EC and its member states for the purpose of determining the respective emission levels allocated for the first commitment period are set out in Annex II of the EC Joint Decision. Annex II states that the quantified emission reduction commitment for:
(a) the EC commitment is 92% in accordance with the Protocol; and
(b) specific percentages for each of the EU’s member states set out in a table as agreed in accordance with Article 4(1) of the Protocol. These percentages are different from those set out for each of the member States in the EC in Annex B of the Protocol. For example, the quantified emission reduction specified for Germany is 79%.

2.3 Article 24(2)

Article 24(2) of the Protocol states that:
“Any regional economic integration organisation which becomes a Party to this Protocol without any of its member States being a Party shall be bound by all the obligations under this Protocol. In the case of such organisations, one or more of whose member States is a Party to this Protocol, the organisation and its member States shall decide on their respective responsibilities for the performance of their obligations under this Protocol. In such cases, the organisation and the member States shall not be entitled to exercise rights under this Protocol concurrently.”

Article 24(3) of the Protocol states that:
“In their instruments of ratification, acceptance, approval or accession, regional economic integration of organisations shall declare the extent of their competence with respect to the matters governed by this Protocol. These organisations shall also inform the Depositary, who shall in turn inform the Parties, of any substantial modification in the extent of their competence.”
The EC has complied with Article 24 in relation to the Joint Agreement. In its notice of ratification to the Secretariat, the EC states that: “The European Community and its Member States will fulfil their respective commitments under article 3, paragraph 1, of the Protocol jointly in accordance with the provisions of article 4.”

The European Community declares that its quantified emission reduction commitment under the Protocol will be fulfilled through action by the Community and its Member States within the respective competence of each and that it has already adopted legal instruments, binding on its Member States, covering matters governed by the Protocol.

The European Community will on a regular basis provide information on relevant Community legal instruments within the framework of the supplementary information incorporated in its national communication submitted under art12 of the Convention for the purpose of demonstrating compliance with its commitments under the Protocol in accordance with article 7 (2) thereof and the guidelines thereunder.”

2.4 Second Commitment Period

The emission reduction levels are only set in Article 3 and Annex B of the Protocol for the first commitment period which is the period 2008 to 2012.
Article 3(9) of the Protocol contemplates commitments beyond 2012 being agreed between the parties. It relevantly provides that:
(9) Commitments for subsequent periods for Parties included in Annex 1 shall be established in amendments to Annex B to this Protocol, which shall be adopted in accordance with the provisions of Article 21, paragraph 7. The Conference of the Parties serving as the meeting of the Parties to this Protocol shall initiate the consideration of commitments at least seven years before the end of the first commitment period referred to in paragraph 1 above
The parties have commenced negotiation over further commitment periods but are yet to formally agree the emission reduction levels for the second commitment period which would cover the period 2013 – 2017.

2.5 Failure to Meet Joint Emissions Reductions

Article 4 of the Protocol sets out rules and procedures which will apply where the parties to the Joint Agreement do not meet their emission reduction obligations in accordance with Article 3 and the Joint Agreement. Article 4 relevantly provides that: “(5) In the event of failure by the Parties to such an agreement to achieve their total combined level of emission reductions, each Party to that agreement shall be responsible for its own level of emissions set out in the agreement.  (6) If Parties acting jointly do so in the framework of, and together with, a regional economic integration organization which is itself a Party to this Protocol, each member State of that regional economic integration organization individually, and together with the regional economic integration organization acting in accordance with Article 24, shall, in the event of failure to achieve the total combined level of emission reductions, be responsible for its level of emissions as notified in accordance with this Article.”

Article 4, paragraphs (6) would apply in circumstances where the EC does not collectively meet the total combined emission reductions of 92% as set out in the Protocol and the Joint Agreement. The effect of the provisions is that if the EC does not meet the combined reduction figure, then each of the parties will be responsible for its level of emissions as notified in the Joint Agreement.

2.6 Carry Forward of Surplus

Article 3(13) of the Protocol deals with the situation where a party’s emissions during a commitment period are less than its assigned amount under Article 3 (ie. the party has an AAU surplus). It relevantly provides that:
(13) If the emissions of a Party included in Annex I in a commitment period are less than its assigned amount under this Article, this difference shall, on request of that Party, be added to the assigned amount for that Party for subsequent commitment periods.
The effect of Article 3(13) is that, where a party’s emissions are less than its assigned amount, the party may, on its request, carry forward the “surplus” emissions and add them to the assigned amount for that party in subsequent commitment periods.
Decision 13/CMP.1 (Article 15) describes the process for carry over of AAUs and other units under Article 13(3) of the Protocol.
At present, the assigned amounts for the second commitment period have not been agreed. It is possible that, even if a party wants to take the benefit of this carry forward provision and add the surplus to its new assigned amount, the parties currently negotiating the levels of assigned amounts for the second commitment period will take this into account in negotiating the new assigned amounts. In other words, it is possible that the other parties to the Protocol will want to negotiate a more stringent assigned amount to take into account the fact that the party may want to carry forward “surplus” assigned amounts from the first commitment period. This negotiating dynamic may temper the benefit of the carry forward provision.
We understand that, at present, it is likely that France, Germany and the United Kingdom will have large amounts of surplus AAUs at the end of the first commitment period .

3. Analysis

3.1 Kyoto Protocol

We have analysed the position under the Protocol. There may be arrangements in place between the member States or under EU law which govern the way in which member States may exercise its rights under the Protocol. We recommend that you seek specialist advice from an EU law expert in relation to such arrangements and EU law.

3.2 Application of Article 3(13) to Joint Agreement

The question arises as to how Article 3(13) applies where parties to the Protocol, such as the EU member States, have agreed to jointly meet their emission reduction commitments under Article 3(1).
Article 3(13) only applies where the party’s emissions are less than its assigned amount (ie. there is a surplus of AAUs).
Both the EU and its member States are parties to the protocol. The EC and each of its member States have emission reduction targets in Annex B from which the assigned amounts are calculated in accordance with Article 3. Article 3(13), on its face, may therefore apply in one of three situations:
(a) the EU and the member State each have an AAU surplus;
(b) the EU has an AAU surplus but a particular member State has an AAU deficit;
(c) the EU has an AAU deficit but a particular member State has an AAU surplus.
The question as to whether the EU member State can unilaterally use Article 3(13) of the Kyoto Protocol to choose not to carry forward its AAU surplus relates only to situation (a) or (c) because in situation (b) the member State has no AAU surplus to carry forward.

3.3 Situation (a) – EC and Member State both have surplus

In situation (a), both the EU and the member State will have an AAU surplus. The EU and member States have agreed to fulfil their commitments under Article 3(1) jointly pursuant to the Joint Agreement under Article 4. The Joint Agreement is silent on the application of Article 3(13) and it is not clear whether the member States agree to jointly or individually exercise their rights under Article 3(13) of the Protocol. The position in this situation is not entirely clear.
On one view, only the EU could determine whether to carry forward to the AAU surplus. The reasons for this view are:

(a) Article 3(13) is a right of a party to request that surplus emissions are carried forward into the next commitment period. Article 24(2) prevents the EU and a member State exercising rights under the Protocol “concurrently”. The ability of a party to the Protocol to request that its assigned amount be added to the assigned amount for subsequent periods is, in our view, a “right” under the Protocol. The EU and its member States are each a party to the Protocol. Article 24(2) may prevent the EU and a member State from concurrently requesting the surplus emissions to be carried forward into the next commitment period. Only one of the EC or the member State is likely to be able to exercise the rights under Article 3(13). Article 24(2) does not resolve which of the EU or the member State could exercise the rights under Article 3(13). It merely says that they both can not exercise rights concurrently.

(b) in practical terms it may be the case that the member State could not unilaterally request carrying forward its surplus AAUs because if the EU made the same request neither would have effect because Article 24(2) prevents concurrent exercise of rights. The exercise of these rights may be regulated by EU law or an EU agreement and we recommend that this be checked; and

(c) it may be that because the EU and its member States have agreed in the Joint Agreement under Article 4 to fulfil their obligations jointly under Article 3(1) and they have in fact met the obligations jointly that the consequences of the joint compliance flows through into the exercise of the consequences under Article 3(13) such that the decision as to whether or not to request the carrying forward of the surplus AAUs, in the context of the Protocol alone, is one for the EU and not the individual member States.

On the other hand, there is an available argument that the member State could unilaterally determine whether to carry forward its AAU surplus. The reasons for this view are:

(a) Article 3(13) is expressed to apply to a party. Each member State is a party to the Protocol. The member States each have assigned amounts which have been “adjusted” under the Joint Agreement in accordance with Article 4 and recorded in the national registries in accordance with the modalities and guidelines;

(b) the Joint Agreement applies to commitments under Article 3(1) and is not expressly to apply to the carry forward rights under Article 3(13).

(c) the exercise of the rights under Article 3(13) may not be a “concurrent” exercise of rights because the EU and its member States are each ascribed an emission reduction level in Annex B (although the EU amount is a combination of the member States amounts) so the exercise of rights may not relate to the same thing. The EU and the member States would be exercising their rights in respect of their separate (but related) levels set out in Annex B;

(d) if second commitment period levels are agreed and an Article 4 agreement is put in place on similar terms to the Joint Agreement, but are not complied with, then Article 4(6) would apply such that each member State is responsible for their own emissions which would suggest that the member State should be able to carry forward its individual AAU surplus under Article 3(13) because if only the EU could decide whether to carry forward the AAU surplus from the first commitment then it could not be used for the member State.

We think the second view is the better view and that a member State with surplus AAUs could unilaterally decide whether to carry forward the surplus AAUs under Article 3(13).
It should be noted that the adoption of new assigned amounts for the second commitment period is proposed to occur by way of amendment to Annex B pursuant to Article 3(9) and Article 21(7). If a member State wanted to unilaterally make, or not make, a request under Article 3(13) then this may prompt broader negotiations over amendments to the Protocol and the second commitment period reduction levels and any further joint agreement between the member States.

3.4 Situation (b) – EU is short and Member State has surplus

Situation (b) may apply if the EU does not meet the joint commitment but one of the member States meets their responsible level set out in the Joint Agreement. It would follow that one or more of the other member States would have failed to meet their responsible level set out in the Joint Agreement.
The analysis for situation (b) is similar to situation (a). However, Article 4(6) would also directly apply in situation (b). Article 4(6) says that if parties acting jointly do so in the framework and together with a regional economic organisation which itself is a party to the Protocol (ie. the EU), each member State individually and the EU is responsible for its own level of emissions set out in the Article 4 agreement (ie the Joint Agreement). In this case, the member States will be individually responsible for their level of emissions.

If the member State has met its level of emissions in the Joint Agreement then it would be responsible for this including, in our view, the surplus AAUs. This would then mean that the member State could unilaterally:
(a) make a request under Article 3(13) to add the surplus emissions to its assigned amount for the subsequent commitment periods; or
(b) elect not to make a request to carry forward the AAUs under Article 3(13).
The way in which the member States are able to exercise these functions under the Protocol may be regulated further by EU law and we recommend that this position be reviewed.

4. EU law

Under EU laws, Member States (MSs) are in the case of concurring competences – as in the present case – obliged to act in accordance with Art 4 para 3 of the Treaty on European Union (TEU): “Member States individually and collectively have the obligation to take all appropriate measures, whether general or particular, to ensure the fulfillment of the obligations resulting from action taken by the institutions of the Community.” The content of that Article also found its way into the “Council Decision concerning the approval to the Kyoto protocol” (Council Decision 2002/358/EC, henceforth ‘Council Decision’). Recital 10 Council Decision explicitly refers to Article 10 cited above and specifies that ‘[i]n deciding to fulfill their commitments jointly in accordance with article 4 of the Kyoto Protocol, the Community and the Member States are jointly responsible, under paragraph 6 of that article and in accordance with article 24(2) of the Protocol, for the fulfillment by the Community of its quantified emission reduction commitment under Article 3(1) of the Protocol.” Consequently, the EU and its MS have the obligation to take all appropriate measures to facilitate the achievement of this commitment and to abstain from any measure that could jeopardize the attainment thereof.

In Commission v Sweden (Case C-247/07 Commission v Sweden 2010), the ECJ ruled that Sweden in its unilateral action (Sweden proposed the addition of PFOS to Annex A to the Stockholm Convention) dissociated itself from a concerted common strategy within the Council which would be contrary to the obligation of unity in international representation arising out of the duty of cooperation in good faith in Article 10 EC. The Court reiterated that where it was apparent that the subject-matter of an agreement or convention fell partly within the competence of the Community and partly within that of its Member States, it was essential to ensure close cooperation between the Member States and the Community institutions, both in the process of negotiation and conclusion and in the fulfillment of the commitments entered into. That obligation to cooperate flowed from the requirement of unity in the international representation of the Community (see Ruling 1/78, 1978, by analogy with the EAEC Treaty; Opinion 2/91 1993; Opinion 1/94, 1994 ; and Case C-25/94 Commission v Council, 1996).

As a result, albeit the EU and its MS are parties to the Kyoto Protocol and the MS, in principle, have the right to take actions in that respect, these actions have to be seen in the light of whether the fulfillment of the EU’s commitments under that protocol are endangered. According to our understanding, there is a risk that the EU would be infected negatively by a MS unilaterally forwarding a surplus. Thus, we share the view that a MS must not request unilaterally to carry forward its surplus. A MS choosing this approach would risk an infringement procedure under Art 258 TFEU. We do not share the second opinion contained in the Analysis under 3.