“Double charging” for carbon emissions through EU ETS and national emissions trading and how to avoid it

Hogan Lovells
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Hogan Lovells

With the introduction of the German national fuel emissions trading system at the beginning of the year, the procurement costs for several energy sources have increased in many energy intensive industries in Germany. Companies that operate installations within the scope of the European emissions trading system (“EU ETS”) should immediately begin to prepare the appropriate countermeasures in order to avoid the resulting “double charging” for their emissions.

With the introduction of the German national fuel emissions trading system at the beginning of the year, the procurement costs for several energy sources have increased in many energy intensive industries in Germany. Companies that operate installations within the scope of the European emissions trading system (“EU ETS”) should immediately begin to prepare the appropriate countermeasures in order to avoid the resulting “double charging” for their emissions.

The majority of installations that fall under the scope of the EU ETS, and as such are required to purchase certificates in the amount equivalent to their carbon dioxide emissions (i.e. in particular large power plants and industrial complexes), use fossil fuels as their main energy source.

The purchase of these fuels is a main cost factor for these installations. Due to the introduction of the German Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz or BEHG), this factor saw a significant increase at the beginning of the year (see our previous blog post regarding the related topic of carbon leakage). The BEHG mandates that the suppliers of fossil fuels declare to the competent authorities the amount of fuel they delivered to their customers in the previous year, and that they purchase and redeem an equivalent amount of emissions certificates. The affected suppliers usually simply add the costs for these certificates to their fuel prices, and hence pass the additional costs on to their customers.

As a consequence, the risk of a double burden for installations falling under the scope of the EU ETS becomes imminent, as they will generally be charged twice for their carbon dioxide emissions: first in relation to the emissions certificates purchased under the BEHG related to the supply of fossil fuels (so-called upstream emissions trading), and second in relation to the certificates required under the EU ETS for the emissions produced in the installations (so-called downstream emissions trading). In light of this risk, the German legislator has implemented various regulations to avoid such double burden.

The central norm in this regard is Sec. 7(5) BEHG in connection with the Emissions Notifications Ordinance 2022 (Emissionsberichterstattungsverordnung or EBeV 2022). The goal of these norms is to avoid the anticipated price increases in the first place by exempting fuel suppliers from the obligation to purchase certificates under the BEHG regarding the amount of fuel delivered for consumption in EU ETS installations. This mechanism shall allow suppliers to maintain their previous prices unburdened by the cost of BEHG emissions certificates.

However, it is important to note that this exemption does not apply automatically. In order to benefit from the exemption, the affected companies must proactively coordinate and collaborate. In particular, both the fuel supplier and the company operating the EU ETS installation must each individually issue an identical declaration to the competent authority that the cost for the BEHG certificates were not part of the price for the fuel delivered by the supplier to the customer. It is therefore necessary that the affected companies and the fuel suppliers are mindful of this requirement during the negotiations of their contracts, in order to be able to make this declaration truthfully.

In addition, the operator of the EU ETS installation must provide proof that the installation is in fact covered by the EU ETS (pursuant to Sec. 11(2) in connection with Annex 3 EBeV 2022).

If the necessary declarations are successfully made, the supplier of the amount of fuels in question is exempt from the requirement to purchase and redeem the according amount of emissions certificates under the BEHG.

The precise metrics for the calculation of the potentially exempt amounts of fuel are set forth in detail in the EBeV 2022. Next to the amount of fuel delivered for consumption in EU ETS installations in the relevant calendar year, they take into account the share of biomass used in the installations, as well as certain values specific to the fuel used in the installations, such as a conversion factor, the calorific value and the emissions factor. Additional rules exist in particular with regards to fuels that were supplied to EU ETS installations, but not used during the same calendar year. In this case, the amounts in question must (verifiably) be used in the following year in order to qualify for the exemption.

Apart from Sec. 7(5) BEHG, Sec. 11(2) BEHG contains an additional mechanism to remedy any potential double burden. According to this norm, the German federal government is entitled to issue a supplementary ordinance containing retroactive compensation mechanisms for companies operating EU ETS installations which have already used fuels with increased prices due to the cost of BEHG certificates (this can happen, for example, if the parties neglected to adapt their contractual relations in the aforementioned way). However, it is still unclear if and when the German Federal Government will introduce such ordinance. In addition, the ordinance will also require the consent of the EU Commission regarding European state aid regulations.

Under these circumstances, affected companies should avoid relying on this future, retroactive mechanism, and organize their contracts in a way that avoids “double taxation” in a legally reliable way already today.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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