Unsuccessful constitutional complaint against the reduction in emission allowances allocated free of charge

Press Release No. 24/2018 of 18 April 2018

Order of 5 March 2018
1 BvR 2864/13

It does not violate Art. 2(1) of the Basic Law (Grundgesetz – GG) in conjunction with the constitu-tional law governing public finances (Finanzverfassung), or the right to equality that greenhouse gas emission allowances issued to operators of electricity-generating installations under the EU Emissions Trading System are no longer allocated free of charge in their entirety, and that the allocation guarantee set out in previous legislation is discontinued. For these reasons, the Third Chamber of the First Senate, in an order published today, did not admit for decision a constitutional complaint lodged by a plant operator against the reduction of allowances allocated to the relevant power plant free of charge.

Facts of the case:

The EU Emissions Trading System serves as an instrument of climate change mitigation. The scheme operates by putting a cap on the total amount of greenhouse gases that may be emitted by certain installations, and by issuing tradeable emission allowances. It aims to achieve a reduction in greenhouse gas emissions by gradually decreasing the permissible emission volume and by granting companies the option to trade unused allowances, thus creating an incentive for them to reduce emissions. In Germany, the national targets for carbon dioxide emission levels and the rules for the allocation of emission allowances were laid down in the 2007 Allocation Act (Zuteilungsgesetz 2007 – ZuG 2007) for the period 2005-2007 and in the 2012 Allocation Act (Zuteilungsgesetz 2012 – ZuG 2012) for the period 2008-2012. The 2012 Allocation Act limits the total quantity of allow-ances to be allocated for the period 2008-2012 to 453.07 million per year (cap). It calls for the pro-portionate reduction of emission allowances in the event that the total quantity of allowances allo-cated exceeds a specified amount. An allocation guarantee had been included in the 2007 Allocation Act, exempting, inter alia, new facilities that had been added to existing installations during the years 2003 and 2004 from the envisaged proportionate reduction. The duration of exemption under the allocation guarantee was initially set to be 12 years from the date the additional facilities became operational. Under the 2012 Allocation Act, the allocation guarantee was repealed.

Pursuant to the EU Emissions Trading Directive, Member States should allocate at least 90% of allowances free of charge for the period 2008-2012, which is the relevant period in the present pro-ceedings. Whereas all emission allowances for the allocation period 2005-2007 had been allocated free of charge under the 2007 Allocation Act, the 2012 Allocation Act requires, for the first time, that a specified share of allowances be sold to operators instead. In order to secure the quantity of allowances to be made available for sale, the amount of allowances designated to the electricity-generating sector free of charge was reduced.
The complainant operates a lignite-fired power plant that went into operation during the years 1963 to 1974; in 2003, a further generating unit was added to the plant. Pursuant to the 2012 Allocation Act, the German Emissions Trading Authority (Deutsche Emissionshandelsstelle) reduced the amount of allowances allocated free of charge to the complainant for the operation of its power plant in the allocation period 2008-2012, because the total quantity of allowances exceeded the limit of § 4(3) ZuG 2012 and because it wanted to generate allowances to be sold to operators. The al-lowances allocated to the complainant free of charge accounted for only half the amount necessary for operating the entire power plant during the relevant allocation period. The complainant unsuc-cessfully sought legal recourse before the regular courts. By means of its constitutional complaint, the complainant challenges the proportionate reduction in emission allowances allocated free of charge for the allocation period 2008-2012 and the repeal of the allocation guarantee provided un-der the 2007 Allocation Act.

Key considerations of the Chamber:

1. In part, the constitutional complaint is inadmissible, as it does not meet the substantiation requirements under the Federal Constitutional Court Act (Bundesverfassungsgerichtsgesetz – BVerfGG). As regards the indirect challenges to § 4(3) ZuG 2012, governing a reduction of allocation quantities in the event the total quantity exceeds the cap, and to § 7 ZuG 2012, governing the allocation of emission allowances, the complaint does not specify why it regards these provisions as unconstitutional. As regards the right to one’s lawful judge, which is equivalent to a fundamental right, the complainant also fails to substantiate the alleged violation on the grounds that the regular courts had, in an untenable manner, disregarded the duty to submit a request for a preliminary ruling to the Court of Justice of the European Union.

2. The complainant’s fundamental rights are not violated. The allocation decision is not contrary to fundamental rights, neither regarding the reduction in the quantity of free allowances for the purposes of facilitating the sale of emission allowances nor regarding the fact that the allocation guarantee was not applied.

a) As for the reduction in allowances allocated free of charge to facilitate the sale of emission allowances, the applicable standard of review derives from the Basic Law’s fundamental rights, rather than European Union law. The Federal Administrative Court (Bundesverwaltungsgericht) held that while the EU Emissions Trading Directive imposes binding requirements on the Member States regarding the establishment of an emissions trading scheme, it gives them latitude for domestic regulation with regard to the reduction in emission allowances allocated free of charge for the period 2008-2012; this assessment does not raise objections under constitutional law.

aa) The reduction in allowances allocated free of charge to facilitate the sale of emission allowances does not violate the complainant’s rights under Art. 2(1) GG in conjunction with the constitutional law governing public finances. The federal legislature’s decision to generate revenues from the sale of emission allowances serves the establishment of the EU Emissions Trading System. Such revenues do not fall within the constitutional framework on public finances governing fiscal monopolies and taxes. In particular, the revenues from the sale of emission allowances do not qualify as taxes given that they are not unrequited payments; rather, the revenues are collected as consideration for the purchase of emission allowances. The Federation had legislative competence for establishing the emissions trading scheme at the domestic level. The constitutional requirement that the federal budget provide a complete account of public finances is satisfied.

bb) The provisions governing the sale of allowances set out in § 19 ZuG 2012 and the provisions governing reductions in allowances allocated free of charge set out in § 20 ZuG 2012 are furthermore compatible with Art. 3(1) GG, including with the principle of equal imposition of burdens in tax and fiscal law. The requirement that tax and levy payers be equally burdened by fiscal law is only satisfied if non-tax charges, i.e. financial charges imposed on the individual on top of the tax burden, can be based on a specific justification that goes beyond the purpose of revenue raising.

(1) Generating revenues from sales is generally compatible with the right to equality. The sale of emission allowances envisaged under § 19 ZuG 2012 is closely connected to the reduction in allowances allocated free of charge under § 20 ZuG 2012; as a result, its effect is equivalent to that of a levy. The objective legitimation for the generating of proceeds at issue in the current proceedings follows from its nature as a levy designed to set off benefits derived from the use of a natural resource whose use is governed by public law.

If an operator of an installation covered by the emissions trading scheme can purchase additional emission allowances from the state, the operator may release carbon dioxide emissions – thus using the air – on top of the free allowances. This constitutes a special advantage vis-à-vis all those operators of installations covered by the emissions trading scheme that cannot purchase additional emission allowances, and thus may not emit a surplus amount of carbon dioxide. It is true that the emission of carbon dioxide outside the Emissions Trading System does not require emission allowances; this has no bearing, however, on the special advantage deriving from the purchase of allowances within the Emissions Trading System.

Clean air is a scarce natural resource. The legislature’s consideration that carbon dioxide levels in the atmosphere must be kept within a certain limit to avoid harmful effects on the climate is readily comprehensible. The scarce resource is not the air itself, but its quality in terms of pollution levels.

The emissions trading scheme subjects the use of air by installations with high carbon dioxide emission levels to a resource management regime governed by public law. Whereas the use of air in the manner at issue had previously been free of charge and not subject to restrictions other than the natural limits of the resource, the emissions trading scheme puts an end to unregulated access and imposes quantitative limitations controlling the use of air as a resource and regulating its distribution. This resource management regime produces a shortage in the available environmental resources through state intervention.

(2) The reduction in allowances allocated free of charge under § 20 ZuG 2012, for the purposes of facilitating the sale of emission allowances, does not violate Art. 3(1) GG.

The reduction in emission allowances allocated free of charge increases the burden on electricity-generating installations in the energy sector, especially when compared to installations in the industrial sector. The measure is justified by objective reasons, as it sets off specific benefits granted to the burdened parties. The reduction mechanism compensates the benefits of electricity generators from the free allocation of emission allowances beyond the permission to use air to operate their installations. The legislature assumes that in the German energy sector, companies are to a much greater extent able to incorporate the market value of free allowances into energy prices than in other sectors; this allows electricity generators to use the emission allowances that they received free of charge to generate windfall profits. The different treatment in terms of allocation between sectors that can incorporate the market value of free allowances into their pricing on the one hand, and those sectors that are unable to do so on the other, is justified by sufficiently weighty objective reasons.

b) § 2 third sentence ZuG 2012, pursuant to which the allocation guarantee for capacity expansions of existing installations carried out in the years 2003 and 2004 shall no longer apply, is also not objectionable under constitutional law. Even if repealing the allocation guarantee were qualified as an interference with Art. 14(1) GG, such interference would, in any case, be justified.

There is no need to decide whether the repeal of the allocation guarantee must satisfy the requirements of real retroactivity (echte Rückwirkung). Even if there were real retroactive effects, the repeal of the guarantee would not be objectionable. There were not at any time circumstances that could have given rise to the legitimate expectation on the part of operators concerned that the allocation guarantee would continue to apply.

The expectation of plant operators that the existing legal framework will continue to apply does not require protection under constitutional law against objectively justified retroactive amendments of the applicable law, in particular if the amendment causes little to no detriment. The principle of the rule of law does not protect against each and every disappointment. Rather, it must be shown that the relevant statutory provision reasonably induced or influenced decisions and arrangements, reflecting the expectation that the existing legal framework will continue to apply, that would result in disadvantages in the event the legal situation changed.

The allocation guarantee was adopted in view of investments that had already been made and completed before the 2007 Allocation Act entered into force. With the allocation guarantee, the legislature intended to honour past efforts of lowering emission levels; however, it was not meant to be an incentive for future investments. Even if one were to assume, as suggested by the complainant, that the allocation guarantee was likely to result in considerable investments, the expectation of its continued applicability cannot be considered legitimate. It has neither been demonstrated, nor is it otherwise ascertainable, that the repeal of the allocation guarantee would inappropriately disadvantage the installation operators concerned. The challenged judgment of the Federal Administrative Court states, in a manner that does not raise objections under constitutional law, that the fundamental change of the rules of allocation for existing power plants was due to considerations of efficiency and took account of the potential of the respective installation to reduce emission levels.