EU emissions trading scheme in turmoil after Poland wins right to raise carbon cap

The price of carbon in the EU emissions trading scheme (ETS) slipped more than 2.5 per cent to €13.35 (£12.21) yesterday, after a European court overturned European Commission caps on the amount of carbon Poland and Estonia are permitted to emit between 2008 and 2012.

The controversial decision opens the way for the court to make similar rulings on other countries' emission caps and, according to experts, could have devastating consequences for the high-profile cap-and-trade scheme.

Under the ETS, governments must set national limits on the amount of carbon they can emit for the period from 2008 to 2012, which the commission approves. To date, the Commission has only approved the limits proposed by Denmark, France, Slovenia and the UK, and is in the process of seeking more demanding caps from the 23 other EU countries.

However, the European Court of First Instance has now ruled that in the case of Poland and Estonia, the Commission does not have the authority to call for tighter emission limits.

"By imposing… a ceiling on emission allowances to be allocated, the commission exceeded its powers," the court ruled.

Barabar Helfferich, the commission spokeswoman on environmental issues, told the Wall Street Journal that it was "extremely disappointed" by the ruling. "We are studying it carefully, with a view to a possible appeal," she added.

The move could mean an influx of extra allowances to the market, increasing downward pressure on prices that have already fallen significantly in the past 18 months as a result of the economic downturn.

Stig Schjølset at analyst Point Carbon said the decision has led to a great deal of uncertainty on the markets. "A week ago, traders thought they knew what the total caps for phase 2 [2008-2012] of the ETS would be and now they are not so sure," he said.

Six other countries – Bulgaria, Romania, Hungary, Czech Republic, Lithuania and Latvia – have appealed cuts to their carbon caps demanded by the commission and Schjølset said that the court's decision would almost set a precedent for these countries to win their appeals.

"The judgment is devastating for the commission," he said. "I expect it to serve more or less as a blueprint for the other countries."

Anna Pearson, ETS campaigner for environmental charity Sandbag, said that because Poland and Estonia would now be forced to use more up to date emissions information in calculating their caps, the market is not likely to be flooded with allowances.

""In fact, they could end up with tighter caps," she said. "This is more of a political move by those countries who are trying to undermine the Commission's authority as a regulator for the scheme."