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The Warsaw Voice » Law » May 28, 2008
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Emissions Trading Scheme: Full of Flaws
May 28, 2008   
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The Polish law on trading in allowances to emit greenhouse gases and other substances was to have implemented EU directives 2003/87/EC and 2001/81/EC. Well, it looks as if a whole host of devils have been working on the details. The law is surprisingly unclear and there are dead letters and major oversights that are going to inflict unnecessary pain on the business sector.

The flaws are deeply rooted in the regulations forming the backbone of the EU's emissions trading scheme and the separate national system in Poland. And although in practice the national system has yet to get up and running, its regulations only serve to intensify the incoherence of the EU's regulatory scheme.

The law imposes various obligations on those involved in emissions trading. However, both the operators of installations and the authorities overseeing the implementation of Directive 2003/87/EC have problems with compliance. Practice has shown a lack of clarity as to: a) who is affected by the various obligations, and b) how enforcement is going to operate. Where clear-cut sanctions exist, they go over the top. One example of this is the duty to report sales contracts within three days of signing-on pain of nullification. Crazy. And this regulation is key to guaranteeing the security of trading in emissions allowances. The basic questions, which require clarification, concern the point of transfer of ownership of rights, the possibility of transferring emissions allowances on the basis of agreements other than sales contracts, the entities that are duty-bound to submit reports, and the possible circumstances in which this duty does not arise. Finally, there is a lack of statutory regulation concerning the form registrations should take. And that's only some of the problems emissions trading players have to come to terms with.

Moreover, the rules imposing severe financial sanctions amounting to the equivalent of 100 euros for the lack of a single emissions allowance corresponding to 1 Mg CO2 fall far short of legislative perfection. The key doubt centers around what exactly sanctions are to be imposed for, since here once again the act is unclear.

On the bright side, there is the potentially advantageous Joint Implementation (JI) and Clean Development Mechanism (CDM) for operators. Unfortunately, the legislature forgot to flesh it out in a meaningful way, and the law actually contains only one short article on this area… which certainly does not support investors in the implementation of these complicated investment processes. The lack of clear binding procedures, which are of unpredictable duration, gives rise to a vast area of uncertainty among the interested parties. They do not know the framework for submitting applications, nor what is going on with projects that are already at an advanced stage in the approval process. This gives rise to difficulties for the whole investment process.

Among many other flaws, it is worth highlighting the lack of rules on the establishment and functioning of a group of installations and the very unclear criteria (given that their statutory basis is also unclear) for sharing out the allowances among new installations. This latter omission could prove particularly important in light of the insufficient reserve of allowances for new operators. Some will get allowances for nothing, while others will face steep prices. To add to these woes, there are numerous gray areas concerning emissions trading as it relates to tax law or the Act on Public Offerings. At the same time, the final version of the national plan for allocating emissions allowances is constantly being changed while the new accounting system has already been up and running from the beginning of this year. Thus it is impossible to clearly determine the overall degree of the burden hanging over 2008.

The surplus emissions allowances available on the market, and consequently their low price, have eased the negative effects of this defective legislation. However, in the 2008-2012 accounting period, the obligations imposed by the EU emissions trading scheme have the potential to become a millstone around the necks of at least certain parts of the economy. A thorough and rapid overhaul of the existing law is essential. As with perhaps too many other things, little action is on the cards. The government seems not to have noticed the elephant in the room. All of which means that the businesses embraced by the emissions trading system are looking to the future with anxiety.

Piotr Czembor associate at SALANS Warsaw Energy & Natural Resources Practice Group
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