The first penalty under the rules governing the EU Greenhouse Gas Emission Trading Scheme (EU ETS) has recently been imposed The case highlights the importance of compliance, explain Jacqueline Mailly

The EU ETS Scheme, as introduced by Directive 2003/87/EC, leaves member states with the responsibility for its implementation, by the enactment of appropriate national laws. Under Article 4, member states are responsible for ensuring that no installation undertakes activities resulting in emissions unless the operator holds an appropriate permit. Companies must therefore apply for a carbon dioxide emissions licence before they can join the national register and buy and sell their carbon credits.

Vidrios Benignim is a small Spanish company employing 123 people, which manufactures Valencian glass and falls under one of the sectors covered by the scheme. The company had failed to apply for the permit by the 1 January 2005 deadline, despite having allegedly received notification.

As a result, the Valencian government ordered the company to cease its activity until further notice and is threatening a EUR100,000 fine.

As well as highlighting the importance of compliance for all businesses, the case reveals the complex relationship of responsibilities under the new scheme.

The scheme

The EU ETS Scheme commenced operation in January 2005 as the largest multi-country, multi-sector greenhouse gas emission trading scheme in the world. It covers more than 12,000 installations, representing close to half of Europe's emissions of CO2. The scheme aims to reduce emissions of greenhouse gases in a cost-effective manner, while allowing the EU to meet its obligations under the UN Framework Convention on Climate Change and the Kyoto Protocol. By allocating tradeable permits, operators who are likely to exceed their emission quotas are able to buy allowances from operators who have excess allowances for sale. By capping the total CO2 emissions from the energy and industrial sectors, the intention is to prevent any rise in CO2 emissions and to generate the scarcity necessary for a fully functioning market to develop. It is hoped that this system will not only provide an efficient system to control CO2 emissions, but will protect the competitiveness of the EU economy, without imposing higher than necessary costs on EU businesses.

Member states

Member states were responsible for implementing the Directive and drawing up National Allocation Plans (NAPs) which involved setting targets and allocating allowances (each worth 1 tonne of CO2) to installations, in line with the domestic implementation of each country's Kyoto commitment.

Each installation covered by the scheme must hold a greenhouse gas emissions permit, licensing it to emit CO2. Member states are also responsible for ensuring that each installation possesses the correct permit. The permit is accompanied by the emission allowances. It is member states' responsibility to allocate allowances to installations by 28 February each year and to ensure that by 30 April each year, the operator of each installation surrenders a number of allowances equal to the total emissions from that installation during the preceding calendar year.


From January 1, 2005, companies have been responsible for keeping track of their emissions. Installations will have to surrender allowances for the first time by 30 April 2006.

Companies therefore have three duties - to ensure that:

- they have the correct permits

- the correct data relating to their emissions is submitted on time

- they are in possession of a sufficient number of allowances to surrender year by year.

As well as facing sanctions for failing to possess the correct permit as highlighted by the Spanish case, companies not returning enough allowances to cover the emission quota allocated to them will also have to pay fines and be forced to make up the deficit in subsequent periods. The amount of the fines, and the threat of having their business closed, are intended to provide a strong incentive for companies to comply with the new rules.

As regulation in this field grows, the threat of prosecution, the closure of installations and large fines all represent a deliberate and direct attempt to encourage companies to comply with the law. However, it is also becoming increasingly necessary for companies to ensure compliance with the appropriate regulatory regime for other reasons.

A recent report by the Carbon Trust highlights 'Regulatory Risk' in the form of the EU ETS Scheme as one of the five key areas of risk associated with climate change. It is of particular importance to high-emitting sectors such as manufacturing, power, and oil and gas. The report says that investors are becoming increasingly conscious of the risk of non-compliance. As they do, those companies who find themselves charged under national law could also find that investors prefer to invest in companies with a clean record of regulatory compliance.

- Jacqueline Mailly, Tel: + 32 2 505 09 19, e-mail:, Guglielmo Adinolfi, Tel: + 32 2 505 09 51, e-mail:, and Thierry Chaumeil, Tel: + 33 1 55732360, e-mail:, are attorneys, Hogan & Hartson LLP.