EU Court Overturns Some Emission Caps

By ALESSANDRO TORELLO
BRUSSELS -- A European court overturned a European Commission decision to impose stricter limits on carbon emissions from Poland and Estonia from 2008 to 2012, sending the price of carbon credits lower.
Under the European Union's market for allowances to emit carbon dioxide -- called the Emissions Trading System -- EU governments must set national limits on the amount of CO2 industries can emit in the five years from 2008 to 2012. These caps must then be approved by the commission, the EU's executive branch.
The commission said in 2007 that the emission levels set by Poland and Estonia were too high, and sought to reduce them by 26.7% and 47.8%, respectively. However, the Court of First Instance said Wednesday that "by imposing ... a ceiling on emission allowances to be allocated, the commission exceeded its powers."
Barbara Helfferich, the commission's spokeswoman on environmental issues, said "We are extremely disappointed by the judgment. We are studying it carefully, with a view to a possible appeal of the decision," adding that it was still too early to assess what impact the ruling will have on the Emissions Trading System.
Analysts and carbon-market participants, meanwhile, expressed concerns about the potential implications of the ruling.
"This is a landslide judgment which fundamentally alters the way the supply side of the [Emissions Trading System] is administered," said Emmanuel Fages, an analyst at Société Générale. "It opens large uncertainty."
For the trading period of 2008 to 2012, the commission has approved the emissions levels of only four national plans -- those from Denmark, France, Slovenia and the U.K. -- and has sought reductions from the other 23 EU governments.
"It could very well be that in the near future, similar decisions will follow," said Wim Vandenberghe, an energy and environment lawyer at DLA Piper in Brussels. Six other countries -- Bulgaria, Romania, Hungary, the Czech Republic, Lithuania and Latvia -- have appealed cuts to emissions levels demanded by the commission.
Carbon-market participants said they were worried that extra allowances will enter the market, putting downward pressure on prices. On the European Climate Exchange, Europe's main platform for trading carbon credits, December carbon futures closed down 2.6% after having dropped as much as 4.7% earlier in the day.
"The market seems to expect an additional issuing of these allowances," said Nele Glienke, an analyst at UniCredit Markets & Investment Banking in Munich.
The Emissions Trading System is the EU's main instrument for reducing greenhouse-gas emissions and thus contributing to the fight against climate change. The bloc wants to lead negotiations on a new climate pact to replace the 1997 Kyoto accord when world leaders meet in December in Copenhagen.
The trading system, launched in 2005 and covering about 11,500 installations, ranging from power plants to steel and paper makers, is set to be expanded in 2013. Companies that stay below the limits can sell carbon permits to participants that have overshot their quotas. In theory, the stricter these limits are, the higher the price of carbon credits.
The commission now has two months to appeal Wednesday's ruling at a higher court.—Frank Huetten contributed to this article.
Write to Alessandro Torello at alessandro.torello@dowjones.com