EU wrangling on carbon emissions moves into courts

Poland, Hungary, the Czech Republic, Slovakia and Estonia have all started legal action against pollution quotas imposed by the European Commission. The arguments they use are similar to those made by China and other emerging markets: that the strict limits will hurt their economic growth. On Tuesday, Latvia became the latest to challenge regulators at a European-level court, highlighting the growing tension in the European Union over the sacrifices needed to tackle climate change.

Even as European governments signed up to lead the world in lowering greenhouse gases, they have in many cases also faced push-back from companies and politicians. Such arguments have already bubbled to the surface in wealthier countries like Britain and Germany, where there also are worries about the competitiveness of industries like steel and electricity. “The reality behind all of this is the pain that governments face in having to go back to their factories and tell them to emit less,” said Cándido García Molyneux, a special counsel with the law firm Covington & Burling in Brussels. “It’s particularly tough when the factory turns around and says a similar facility in the country next door does not have to do the same thing.” Latvia’s decision to join its East European neighbors in mounting legal challenges comes ahead of a broader political argument, due this autumn, over which countries should carry the greatest burden of EU efforts to combat climate change. So far Poland and Hungary have taken the lead in arguing that the new, ex-Communist, member states from the East have special considerations. They are seeking latitude to pollute more to catch up with their Western counterparts. On Tuesday, Prime Minister Aigars Kalvitis of Latvia said his country needed to produce more carbon emissions partly because a Communist-era nuclear power plant, Ignalina, which supplies some of the Baltic nation’s electricity, is due to be phased out - at EU insistence.

The European Commission condemned the move by the Latvians but expressed confidence that its policies would not be undermined by the growing tide of court cases. “We are confident that our decisions that have been challenged will stand up in court,” said Barbara Helfferich, a spokeswoman for the commission. She insisted that the commission had “applied the rules fairly” and not “discriminated in any way.” The need for “catch-up” economic growth in the East has been a key argument in court challenges to the EU’s fledgling carbon-capping system. Jaroslav Zajícek, head of the internal market unit at the Czech representation in Brussels, said that in Prague, “the basic idea is that the emissions are simply not enough in terms of the overall amount of economic growth that is expected and the future development.” In Latvia’s case, the government had asked for an allowance to emit 6.25 million tons of CO2 each year from 2008 to 2012, but the commission allocated the Latvians about half that amount, or 3.43 million tons.

Sebestyén Gorka, executive director of the Institute for Transitional Democracy and International Security in Budapest, said that the need for the West to share more of the burden of CO2 emissions was “a logical argument to make if you are within the political elite and are trying to strengthen your position in the decision-making.” But critics of the moves to challenge the allocations say they have been fueled at least in part by ideology, as politicians in some countries question the concept of man-made climate change and strike a “Euroskeptical” stance. The Czech president, Vaclav Klaus, whose ODS party leads the coalition government, has denounced environmental “hysteria.” In an article posted on his Web site, he wrote that “Communism was replaced by the threat of ambitious environmentalism” as “the biggest threat to freedom, democracy, the market economy and prosperity at the beginning of the 21st century.” Poland’s rightist government also has also made a point of fighting hard for national interests within the EU, including in the environmental arena.

The European system is meant to foster a sufficiently high price for carbon allowances to give incentives to factories and governments to be more efficient and use cleaner generation. But volatility in the price of carbon allowances already has been a heavily criticized aspect of the first phase of the system, which comes to an end this year. Governments vastly overestimated the amount of credits required by emitters, and when the over-allocation became public last spring, the price of carbon allowances plummeted. Legal setbacks to the system at the court could mean a re-run of that scenario during the second phase of the system, due to start next year and run until 2012, lawyers warned.

Some countries might be allowed to revert to their original proposals to emit more carbon dioxide than the commission allowed. That could vastly reduce demand for carbon dioxide allowances and again send the price of carbon allowances tumbling. Losses in court by the commission “could throw the entire market out of balance,” said Frank Schoneveld, a partner at law firm McDermott Will & Emery in Brussels. “Suddenly there could be anywhere between 5% and 20% more CO2 emissions allowed depending on the country.” He added, however, that judges could seek to make their rulings narrow enough to avoid destabilizing carbon markets. So far there are few precedents for how judges might rule.

Germany and Britain and three companies - Drax Power of Britain, EnBW of Germany and US Steel Kosice of Slovakia - have challenged the commission at the Court of First Instance, which is based in Luxembourg, for the first period. The commission lost the case brought by the British government in November 2005. That ruling was largely procedural, however. Judges found the commission had failed to account fairly for amendments proposed by London, revising CO2 emissions upwards. The German government case is still pending a decision. The cases brought by EnBW and Drax were dismissed because judges decided that Germany and Britain, and not the companies, were entitled to plead before the court. A decision in the case involving US Steel Kosice is pending. For the second period, Hungary, Poland, Slovakia, Czech Republic and Estonia have brought cases since the start this year at the same court. Thirteen companies, at least half of them cement companies based in Poland, also have brought cases, according to a court spokesman. A final decision in all the country cases still could be about two years away.

The highest court, the European Court of Justice, also is examining a case referred by French judicial authorities concerning the steel company Arcelor, now part of Arcelor Mittal. In that case, the company is questioning whether the EU law unfairly places burdens on the steel sector but not on sectors like aluminum and plastics. “There are a quite a few new cases in the pipeline as these companies are keen to challenge the commission on the CO2 quotas,” said Georgina Crowhurst, a solicitor that specializes in environmental law with the law firm Clyde & Co. in London. “They see the restrictive quotas as a serious threat to profitability.” Molyneux, the lawyer at Covington & Burling, said the wave of carbon dioxide cases would probably force the commission to pay more attention to ensuring that the rules were applied the same way across all European countries. In addition, said Molyneux, the commission probably would be forced to take steps to allow countries and factories to obtain allowances more easily from carbon-cutting projects based overseas, like from projects preventing deforestation, if it aimed to continue being so strict on emissions controls. (iht.com)