The European Commission has released Guidelines clarifying the conditions necessary for transitional free allocation of CO2 emission allowances under the EU Emissions Trading Scheme (EU ETS). The Guidelines concern Central and Eastern Europe’s power sector after 2012. The aim is to avoid undue distortion of competition and minimize the negative impacts on the incentives to reduce emissions.

Environmental law organization ClientEarth welcomes the publication of the Guidelines surrounding article 10c - the article that explains which power facilities qualify for free allowances under the EU ETS. ClientEarth says that correct implementation is essential now if the main objective of the EU ETS (to reduce greenhouse gas emissions) is to be met.

In order to qualify for free allocations “the investment process” has to be “physically initiated”. These Guidelines consider this to mean when construction works have physically started on site and were visible before 31 December 2008; or, worryingly, when a contract for the construction of a power plant was signed before 31 December 2008. However, for state controlled power plants, tenders are required before the signature of the contract.

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Notes to Editors:

Summary of the legal requirements for eligibility as an installation for which the investment process was physically initiated under article 10c of the EU ETS Directive and Polish law:

All elements provided by article 10c – an installation for electricity production, investment process, physically initiated, before 31 December 2008 – must be carefully examined and fulfilled in relation to each investment. 

“Investment phase” should be understood as the stage of a project when the construction takes place and comes after the planning phase where preparatory and technical studies are developed and licences and authorisations obtained.

The provisions of the Polish Building Law are appropriate to determine and define investment process relating to any investment in Poland.

“Physically initiated” requires that tangible and concrete steps have been taken in the investment process such as actual construction and building works of the power installation.

A building permit is always required for any investment and thus the investment can be physically initiated only after the building permit becomes final and binding.

Only investments which obtained a final and binding building permit before 31 December 2008 could be considered eligible for transitional free allocations in the meaning of provisions of article 10c of EU ETS Directive.
 
Physical or preparatory works on a site before 31 December 2008 are only relevant to physical initiation of the investment process if they relate to an installation for electricity production (for which an EIA is required) and if they were authorized by and carried out on the basis of a building permit for construction of such an installation.

Member States must notify to the Commission measures under Article 10c as they should be considered state aid within the meaning of Article 107(1)TFEU. Following notification under Article 108 TFEU, Member States cannot put the proposed measures into effect until the Commission takes final decision on granting authorisation.

In summary, qualification under Article 10c requires a proposed installation to provide evidence of both the paperwork which legally authorised construction of a power station, and the physical works carried out on the site initiating the investment before 31 December 2008. 
In accordance with EU law on derogations and the emissions reduction purpose of the EU ETS Directive, a strict interpretation of Article 10c must be applied. Article 10c also requires that the negative effect on incentives to reduce emissions and undue distortions of competition must be avoided.