Select Committee on European Union Thirty-Third Report

CHAPTER 6: Compliance and Enforcement

The issue

141.  EU environmental legislation that places costly obligations on companies must be enforced effectively by Member States if environmental results are to be delivered and distortions of competition avoided. Poor compliance would, in the case of the EU ETS, jeopardise the entire scheme. Compliance is also a critical consideration at the international level.

BOX 8

Monitoring and verifying emissions

Greenhouse gas emissions are calculated in different ways according to the type of installation and the product concerned. By way of example, CO₂ emissions from fuel (such as coal) are calculated by multiplying the energy consumption of the fuel in terms of kilowatt hours by an emission factor for each fuel. The emission factors[63] have been independently established by the Intergovernmental Panel on Climate Change and they reflect the emission intensity of the fuel relative to its use.

These calculations for each installation are then verified by a competent, independent, accredited verification body. Should the verifier decide that an installation's report is unsatisfactory, the operator may not make any further allowance transfers until the irregularities have been dealt with. Member States may also apply penalties in accordance with the Directive.

Content of the proposal

142.  The Commission states in its impact assessment that "monitoring, reporting and verification (MRV) … are indispensable for the environmental integrity of the EU ETS"[64]. Under the scheme at present, monitoring and reporting of emissions is implemented on the basis of Monitoring and Reporting Guidelines (MRG) issued by the Commission[65]. However, Member States have applied the MRG differently, employing varying penalties, inspection methodologies and definitions of key terms such as "installation". The Commission consequently concludes that there is no level playing field across the EU for monitoring and reporting.

143.  The Commission proposes to replace the Monitoring and Reporting Guidelines with EU-wide Regulations on monitoring and reporting and (separately) on verification and accreditation in order to promote greater harmonisation across the EU. It is also proposed that the 2008-12 emissions penalty of €100 per tonne of excess emissions should increase in line with the European Index of Consumer Prices.

144.  An important aspect of monitoring the implementation of the ETS and assisting its effective functioning is the maintenance of allowance registries. Under the proposal, the current system of national registries will be replaced from 1 January 2013 by a Community registry, which should simplify the current system and ensure that the EU ETS can link to other emissions trading systems around the world.

Witnesses' Views

145.  The Environment Agency, the body responsible for enforcing the ETS in the UK, asserted that "the backbone of a robust carbon market is monitoring, reporting, verification (MRV), compliance and enforcement" (Memorandum, para. 3.3.2). It expressed the view that the current Monitoring and Reporting Guidelines (MRG) Commission Decision[66] should be maintained and amended to introduce verification standards rather than including current MRG provisions, which provide little in the way of verification standards, in a new Regulation, as proposed by the Commission.

146.  The UK Government shared the Environment Agency's scepticism about the need for a Regulation on monitoring and reporting standards to replace the existing MRG Decision. Phil Woolas MP, Minister of State, argued that the current legal arrangements "provide sufficient direction for Member States to work within the boundaries of the MRG" and that it would be easier to update the MRG in the future under the existing arrangements (Correspondence with the Minister).

147.  However, the Government did not concur with the Environment Agency on the desirability of incorporating verification standards into the MRG. DEFRA favoured a Regulation that would harmonise verification rules, because "having a harmonised system across Europe will be easier to enforce [compared to Phases 1 and 2]" (Q 126). Officials indicated that independent verifiers would have to come and audit emissions and, once the EU had harmonised rules, it would be possible to "rely to a significant extent on competitors telling tales on each other if they are not happy with the level of checking up by the national regulator in different countries" (Q 202).

148.  The Environment Agency emphasised that the system must be underpinned by confidence that one tonne of CO₂ meant the same in each Member State (Memorandum, para. 1.2). For that purpose, it argued, it is necessary to develop EU-wide electronic tools to manage the MRV process (Memorandum, para. 3.3.3). 4cmr emphasised that the Commission "should continue working with Member States to ensure that all relevant installations are covered and comply" (Memorandum, para.3)

149.  DEFRA recognised that the Commission could take action against Member States that were not fulfilling their responsibilities in this regard. Officials acknowledged that "everyone who is involved in policing the system knows that it only takes a few cases to devalue the whole system, and then the carbon price would collapse" (Q 202).

BOX 9

Commission infringement procedures against Member States

The documented cases in which the Commission has begun infringement procedures[67] against Member States over violations of EU climate change legislation, include[68]:

• warning letters to five Member States for failure to link their national allowance registries to the EU-wide system;
• warning letters to five Member States for failure to submit information on their greenhouse gas emissions and the policies taken to reduce them;
• warning letters to four Member States for failure to prepare for international emissions trading under the Kyoto Protocol.

150.  The European Commission emphasised the importance of compliance, warning that "it must be cheaper to comply than not to comply or the ETS will not work, and we have the €100 per tonne penalty applicable to ensure companies comply" (Q 393). The Environment Agency took the view that civil penalties must remain effective as a deterrent against non-compliance, and it therefore supported the proposal that civil penalties be index-linked. 4cmr agreed but went one step further by suggesting that penalties should be linked to the carbon price, in order to avoid situations "where the carbon price exceeds the penalty" and it is therefore cheaper to pay the penalty rather than comply (Memorandum, para.3).

151.  Commenting on international compliance and enforcement, the European Commission pointed out that it was more difficult to enforce commitments under international law than it was within domestic legal systems or within EC law. A Commission official explained, by way of example, that when parties to the Kyoto Protocol met in Marrakech in 2001 to finalise the procedures needed to make the Protocol operational, agreement was only secured by dropping the EU's demand for a strong compliance system. He added that Canada had openly stated that it would not necessarily comply with its Kyoto target during this period and that little action could be taken against Canada in that regard save for threatening to inflict a more stringent target on it in the next commitment period (Q 393).

Conclusions and Recommendations

152.  The practical application and enforcement of the EU ETS is critical to its success. It is clear to us that, without effective enforcement, the integrity of the scheme would be severely prejudiced. We therefore welcome the European Commission's proposal that monitoring, reporting and verification rules should be harmonised across the European Union with the aim of guaranteeing a level playing field. The Commission has been vigilant in monitoring Member States' compliance with climate change legislation thus far and we urge it to continue to pursue this approach in future, taking all necessary action against Member States that are not fulfilling their responsibilities. We are not persuaded by the argument that the performance of national regulators will be kept in check by competitors in different Member States informing on each other.

153.  We note with serious concern that the enforcement mechanisms of the Kyoto Protocol have been shown to be weak and consider that these deficiencies must be addressed in any successor agreement if international efforts to address climate change are to produce the desired result. The Commission and Member States must therefore place high priority on this issue during negotiations on a new international climate change agreement.

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63   http://www.defra.gov.uk/environment/climatechange/trading/eu/pdf/2007euets-cef-gcv-gasupdate.xls Back

64   SEC(2007)52, 23.01.2008, p. 62 Back

65   Commission Decision 2007/589/EC of 18 July 2007 establishing guidelines for the monitoring and reporting of greenhouse gas emissions Back

66   Reference Back

67   If the Commission considers that there has been an infringement of EC law, it can send a first written warning, followed by a second written warning (the "Reasoned Opinion") and, finally, if the Member States is still in breach of EC law the Commission may choose to bring the case before the European Court of Justice.  Back

68   See Commission Press Relase IP/06/469, 06.04.2006 Back