Structuring share of proceeds for adaptation mechanism under EU ETS

Legal assistance paper

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Date produced: 07/11/2018

Can a share of proceeds for adaptation from transactions under Article 6.2, Paris Agreement, based on net flows over a certain period of time (rather than individual EU ETS trades) be achieved by relying on article 30.1 of the revised Phase IV EU ETS Directive without the need to obtain the approval of the European Parliament ?

1.              INTRODUCTION

The purpose of this note is to set our advice on the following question in the context of article 6.2 of the Paris Agreement:

Would Article 30(1) of the revised Phase IV EU ETS Directive provide a sufficient legal basis for the EU to agree to such a scenario (focused on net flows over time) as it directly relates to “international developments and efforts undertaken to achieve the long-term objectives of the Paris Agreement” without prior approval/legislation by the European Parliament (which would be required because it is a form of tax).

2.              SUMMARY

Article 6.2 of the Paris Agreement provides that “parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting (…) “.

In the context of the European Union emissions trading system (“EU ETS”) and the possibility that a “share of proceeds” for adaptation from transactions under article 6.2 may be considered to be a tax on EU ETS trades, we understand that this question has arisen from a previous advice to the effect that it would not be possible to avoid the need for European Parliament approval for a percentage of specific EU ETS trades to go towards adaptation measures. We understand that the specific issue has arisen as a result of the likelihood (under the draft implementation rules that are currently being negotiated) that these so-called “internationally transferred mitigation outcomes” (“ITMOs”) will differ from Kyoto Protocol units and allowances traded under the EU ETS, and instead refer to net flows between countries over a specified period of time, rather than specific trades of certain volumes of units and allowances.

The question is therefore whether article 30.1 of the revised EU ETS Directive (which provides that “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”) could provide a sufficient legal basis for this mechanism.

This question is one of European Union law, specifically the process for amending European Union legislation (or implementing new legislation) and whether a share of proceeds based on net flows over a certain period of time (rather than individual EU ETS trades) could be achieved by relying on article 30.1 without the need to obtain the approval of the European Parliament.

We think that the answer to that question is no, and that the “ordinary legislative procedure” would be required unless the share of proceeds mechanism constitutes a tax under European Law.

3.              ANALYSIS

European Union legislative procedures

Under European Union law, there are two principal ways of creating or amending legislation:

  • the ordinary legislative procedure; and
  •  the special legislative procedures.

The ordinary legislative procedure is the standard decision-making procedure used in the European Union and involves both the European Council and the European Parliament as equal co-decision makers. The revised EU ETS Directive has been passed into law based on the ordinary legislative procedure.

The special legislative procedures are only used when the European Union treaties expressly state that one of these procedures is to be used for a particular policy area or subject. There are various special legislative procedures, but they do not require the approval of the European Parliament.

In addition, there are specified procedures for making secondary legislation to guide implementation and harmonisation. Secondary legislation is made by the European Commission, without the European Parliament or the European Council, through delegated acts and implementing acts (often as “Commission Regulations”). The European Commission can only make secondary legislation where it is expressly authorised to do so by the text of a Directive or Regulation.

Application to ITMOs

Based on this analysis, it follows that a share of proceeds based on ITMOs i.e., net flows over a certain period of time (rather than individual EU ETS trades) could be achieved without the approval of the European Parliament only if:

  •  it would qualify for one of the special legislative procedures; or
  • it would be possible for the European Commission to make secondary legislation.

Special legislative procedure

This subject matter is not expressly stated to be one of the particular policy areas or subjects in the European Union treaties.

As a result, it does not qualify for any of the special legislative procedures, unless the share of proceeds for net flows over a specified period of time were considered to be a tax within the meaning of European Union (the analysis of which is outside the scope of this note), in which case the European Parliament will only have a consultative role under the relevant special legislative procedure (but would still be required to vote before the European Council can decide to adopt it following a unanimous decision).

Secondary legislation

The revised EU ETS Directive also does not expressly provide the European Commission with the authority to make an implementing act or delegated act to implement any international developments in relation to the Paris Agreement. We note the wording in article 30.1, and as the question suggests, we agree that a share of proceeds directly relates to “international developments and efforts undertaken to achieve the long-term objective of the Paris Agreement.

It is important to recognise that it is limited to being “kept under review in the light of international developments”. Article 30.1 does not expressly authorise the European Commission to make secondary legislation. The fact that it uses this language, rather than saying words to the effect that “the European Commission is authorised to consider and implement appropriate amendments in the light of international developments” strongly supports the view that the amendments to the revised EU ETS Directive would need to be made through the ordinary legislative procedure.

It is true that there are Commission Regulations that have been made under earlier iterations of the revised EU ETS Directive. These typically related to technical aspects including verification and determination of international credit entitlements. However, it is also true that the Commission was expressly authorised under the relevant Directives to make such Commission Regulations in relation to international transfers under the Kyoto Protocol.