Share of proceeds for adaptation

Legal assistance paper

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Date produced: 09/07/2018

How can a Share of Proceeds for adaptation from Article 6.2 of the Paris Agreement be structured to avoid requiring legislation and/or approval by the European/Member State Parliament? 

Summary:

The client wants a percentage of EU ETS transactions to go towards adaptation measures without it being considered a tax. The objective is to avoid the need for European Parliament (EP) approval. The fact that the proposal relates to implementation of the Paris Agreement may provide a basis for its proposal, as Article 30(1) of the revised Phase IV EU ETS directive text states “The provisions of this Directive shall be kept under review in the light of international developments and efforts undertaken to achieve the long-term objectives of the Paris Agreement.”

While I consider that a provision of this kind could be designed so as not to be a tax, I cannot see a way of getting around the need for EP approval.

Each of the 27 Member States have their own detailed rules as to when the national parliament needs to vote on/approve particular types of measures. This is outside of my expertise and so does not form part of this Advice.

Advice:

  1. The starting point is to consider how allowances in the EU ETS are allocated by the Commission to Member States. A proportion are allocated for free by Member States to particular businesses/operators at risk of carbon leakage, while the remainder (the majority) are auctioned by Member States to private parties. These auctions form the primary market. Private parties can buy and sell allowances from each other on the secondary market.
  2. I consider there are three ways in which adaptation measures could be funded through EU ETS transactions:

1)      Before allowances are issued to private parties. A portion of the allowances that would otherwise be issued by the Commission to Member States could instead be designated for this purpose.

2)      When allowances are auctioned. Member States could be required to set aside a proportion of auction revenues for this purpose.

3)      When private parties exchange allowances on the secondary market. A share of the sales price could be taken (presumably by the Commission) to fund these adaptation measures.

  1. Option 3) would clearly be akin to a sales tax. Option 2) would be a form of tax, but one on Member States. Different forms of Option 1) have been used, as demonstrated in the agreed text to Phase IV of the EU ETS Directive:
  • Modernisation Fund:2% of all allowances to be issued are to be set aside to help lower income Member States transition decarbonise.
  • Innovation Fund: around 400 million allowances are to be set aside to fund innovation projects, 325 million from the proportion of free allowances and 75 million from the proportion of auctioned allowances.
  • Solidarity Transfer Mechanism:10% of the allowances to be auctioned by Members States are to be distributed among lower income Member States for the purposes of “solidarity and growth”).
  1. None of the above are seen as taxes. However, the Phase IV agreement – which included all of the measures outlined above – did require European Parliament approval. Even as a one-off measure to support the Adaptation Fund, I cannot see how it could be implemented without EP approval. Article 10 of the ETS Directive (concerning the distribution of allowances) would need to be amended, and EP approval would almost certainly be needed to do so as it would be considered a “legislative act” and therefore subject to the “ordinary legislative procedure” on which the European Parliament has equal voting rights with the Council of the EU.
  2. The EP actually has a reduced role in respect of proposals relating to taxation; instead of the “ordinary legislative procedure”, taxation proposals only provide the EP with a “consultative” role. The Parliament will still vote, however, so as to either approve or reject the proposal; the difference is that the Council of the EU does not have to take into account the outcome of the Parliament’s vote, although it cannot take a decision without having received it. In this sense, it may actually be advantageous to the client’s objective if the proposal did fall under the definition of a “tax”.
  3. One relevant measure – ‘backloading’ wasimplemented via Commission Regulation (EU) 176/2014 and without Parliament approval. This was a measure implemented in response to the oversupply of allowances in Phase III and its function was to delay the auctioning of allowances. However, it can be distinguished with what is being envisaged here for the following reasons:

(i) the backloading proposal did not amend the main ETS Directive; rather, it amended the Auctioning Regulations;

(ii) it did not alter the overall distribution of allowances, it just spread them out differently throughout Phase III (this being the reason it did not alter Article 10 ETS Directive). In contrast, what is being proposed here would alter the distribution of allowances to Member States.

  1. In conclusion, whether the proposal was deemed a tax or not, it appears that the European Parliament will need to vote either as part of the ordinary legislative procedure to adopt the proposal with the Council of the EU, or to approve/reject it as part of the consultation procedure.