Poland files lawsuit over ETS stability reserve

OREANDA-NEWS. January 11, 2016. Poland has filed a lawsuit at the European Court of Justice (ECJ) calling for an annulment of the decision to implement a market stability reserve (MSR) for the EU emissions trading scheme (ETS).

The complaint was filed to the ECJ on the 4 of January, the country's permanent representation to the EU told Argus today.

The Polish government said last week that it would challenge the decision on the basis that the reserve's introduction in 2019 will disrupt phase 3 (2013-20) of the EU ETS, thereby undermining investor certainty. Warsaw also argued that the MSR effectively violates the principle of proportionality by increasing the EU's emissions reduction goals beyond its international obligations.

But Poland's legal challenge is unlikely to succeed, according to non-governmental organisation (NGO) Sandbag.

Poland unsuccessfully sued the European Commission in 2011 over its "benchmarking" decision on the grounds that different EU ETS elements were either too ambitious or breached the proportionality principle.

As the current lawsuit is based on similar grounds, Sandbag does not expect Poland's action to cause any "significant trouble beyond diverting everybody's attention to the wrong file — the already closed one," Sandbag's EU member states climate policy campaigner, Aleksandra Mirowicz, said.

The MSR will not affect the EU's emissions budget or targets or undermine investor confidence, according to Mirowicz.

The MSR will remove EU ETS allowances from auction when the surplus is above 833mn and return them again when the surplus is below 400mn. As such, it will protect against "unexpected demand-side shocks by adjusting supply in a provisional and predictable manner within the carbon budgets that have already been established", Mirowicz said.

"From a market participant's perspective, a more predictable supply should lead to a more predictable price, decreasing the risk premiums on investment," she added.

If the MSR was introduced in 2021 as initially proposed, it would create a "rollercoaster effect" whereby the surplus would initially go down and then grow aggressively at the end of phase 3 of the EU ETS before the MSR had a chance to tame it. "That is not a friendly investing environment," Mirowicz said.

The back-loading measure was a "stopgap action" that bought policy makers a window of time to agree a more sustainable solution. In contrast, the MSR is a structural measure, introduced to avoid the need to use emergency changes as introduced under back-loading, whereby 900mn EU ETS allowances was removed from auction in 2014-16, to then be reintroduced in 2019-20.

Poland's lawsuit over the MSR introduces a high degree of uncertainty in the marketplace and is not a helpful way forward after the UN Paris climate agreement, nor is it in keeping with its spirit, according to Centre for European Policy Studies' carbon market forum head Andrei Marcu.

"In terms of interfering in the phase 3 framework, the EU ETS is a regulatory market created by decree and, as such, nothing is sacrosanct," Marcu said. "Markets are subject to interventions all the time."

Whereas the back-loading measure was an ad-hoc interference, the MSR was put in place to provide predictability to these kinds of interventions, Marcu said. "The EU ETS did not respond to market forces and economic cycles in the same way that a normal market does. So the MSR was introduced to provide the scheme with supply flexibility," he added.

"Poland may be able to challenge the MSR on a technicality, but I cannot see any of the issues raised as being convincing," Marcu said.

The case should not take longer than two years given that, during 2010-14, general cases took 14-25 months to be completed, according to Sandbag.

Polish president Andrzej Duda will visit Brussels on 18 January to discuss energy policy, among other issues, with European Council president Donald Tusk.