B. Climate Change and the Use of Market-based Regulatory Instruments

Nowhere is the EU's effort to marry continued economic growth with environmental protection goals more evident than in its championing of market-based regulatory instruments. While this movement has been ongoing since the 1990s,Footnote ⁵ it has gained considerable momentum in recent years, including emphasis in Council conclusionsFootnote ⁶ and the 2007 Commission Green Paper discussing the future of such instruments in the EU regulatory mix.Footnote ⁷

In essence, the aim is to move beyond the limitations of the traditional model of EU command-and-control environmental regulation. Market-based environmental instruments seek to reach the parts of environmental protection that command-and-control cannot, by placing a price on pollution or, put otherwise, by internalizing the environmental cost of pollution (which would otherwise go unpaid) into the market's price mechanism.Footnote ⁸ In this way, market-based environmental instruments give an economic incentive to polluters to minimize their pollution, or at least to reduce it to economically efficient levels. Classic examples of such instruments include taxes, charges and tradable permit schemes. The aim is to reduce pollution in a flexible and cost effective manner, though the approach has raised ethical and distributional concerns that this legitimises pollution for those rich enough to pay for it.Footnote ⁹ Nonetheless, the willingness of EU policy-makers to embrace market-based instruments is understandable. Placing a price on pollution, rather than an absolute upper limit as per much traditional regulation, is more easily reconcilable with the notion that economic growth can continue unabated while still achieving environmental protection goals. For this reason, the use of market-based instruments is central to the EU's Sustainable Development Strategy.Footnote ¹⁰

Most of the examples of the EU's use of market-based instruments to date have been related to achieving its goals in tackling climate change. Quarterly readers will be well aware of the swift rise to prominence of the climate change debate in recent years, and of the continuing efforts of the international community to forge a deal to combat the threat posed by climate change.Footnote ¹¹ After a relatively slow start, the EU has been highly active in this area and has sought to position itself as a global leader in climate change policy.Footnote ¹² Thus, in October 2009 the European Council called upon all parties to the Kyoto Protocol to embrace the objective of limiting climate change to 2°C and to ‘agree to global emission reductions of at least 50 per cent, and aggregate developed country emission reductions of at least 80–95 per cent, as part of such global emission reductions, by 2050 compared to 1990 levels.’Footnote ¹³ The EU's commitment to international climate change action is reflected in the Treaty of Lisbon's amendment of the EU's environmental policy goals to include that of promoting measures at international level to deal with regional or worldwide environmental problems ‘and in particular combating climate change.’Footnote ¹⁴ It is notable that this amendment was the only substantial change made by the 2009 Treaty of Lisbon to the Title on the Environment. Further, the links with the newly-inserted title on Energy, Title XXI, one of the aims of which is to promote energy efficiency and the development of ‘new and renewable forms of energy’, are evident.

Nonetheless, the EU's leadership efforts in the area have not been wholly successful. In particular, its conditional offer to move from a 20 per cent to a 30 per cent reduction in greenhouse gases in the EU by 2020 compared to 1990 levels, ‘provided that other developed countries commit themselves to comparable emission reductions and that developing countries contribute adequately according to their responsibilities and respective capabilities’ has, to date, not been taken up by the other parties to the 2009 Copenhagen Accord.Footnote ¹⁵ In terms of its own performance, the EU has quite a way to go even to get to the lower of these targets, with total greenhouse gas emissions in the EU-27 decreasing by 9.3 per cent between 1990 and 2007.Footnote ¹⁶ In this regard, the impact of the economic recession on industrial activity should, however, help matters.

More successful has been the EU's establishment of an Emissions Trading Scheme (ETS) to help achieve its climate change obligations. As the world's largest emission trading scheme, it represented a veritable regulatory experiment in the use of market-based instruments to achieve environmental goals. This is done by granting permits (allowances) to emit greenhouse gases which are tradable as a commodity on the carbon market. After an initial reluctance to embrace emissions trading (notably in the negotiations running up to signature of the 1997 Kyoto Protocol), the EU performed a swift volte-face, with its landmark 2003 ETS Directive appearing just two years after the Commission's initial legislative proposal—a significant achievement for legislation of this complexity.Footnote ¹⁷ A revised Directive appeared in 2009 as part of the EU's broader climate and energy legislative package,Footnote ¹⁸ which also included a Directive on the promotion of energy from renewable sourcesFootnote ¹⁹ and a Regulation setting EU-wide standards for carbon emissions from passenger cars (an area previously covered by voluntary commitments by vehicle manufacturers).Footnote ²⁰

The 2003 ETS Directive was based on a decentralized cap-and-trade model, whereby Member States were responsible for drawing up a National Allocation Plan (NAP) for each multiannual trading periodFootnote ²¹ setting out—subject to Commission approval—the overall quantity of allowances to be granted within that Member State's jurisdiction, as well as how such allowances would be allocated between polluters (installations) falling within the scope of the scheme.Footnote ²² Though this aspect of the scheme helped its political acceptability at Member State level, it resulted in significant difficulties in the ETS's pilot phase, when over-allocation of allowances led to a collapse of the carbon price through flooding of the market.Footnote ²³ Matters improved in the ETS's second phase thanks largely to the Commission's stricter approach to approval, and in the post-2012 version of the ETS set out in Directive 2009/29 this feature has been fundamentally changed, with an EU-wide cap to be set each year by the Commission. This cap is to decrease year-on-year in a linear manner, thus reducing the overall emissions from polluters covered by the ETS in accordance with the EU's international obligations.Footnote ²⁴ The 2009 ETS Directive also reflects a maturing of the scheme in numerous other respects, including a broadening of the scheme's scope to a wider range of polluters,Footnote ²⁵ a gradual switch from free allocation to auctioning as the primary method of allowance allocation (responding to criticisms that free allocation on the basis of past emissions led to ‘windfall profits’ for historically big carbon polluters),Footnote ²⁶ and an increase in the duration of the validity of allowances (aimed at increasing certainty on the market).Footnote ²⁷

One of the key difficulties for regulators in this area is trying to keep legislation up-to-date with the huge pace of developments in technology, commercial behaviour and climate science, and the 2009 Directive contains a variety of interesting innovations aimed at allowing for such developments to be taken into account going forward. In some cases, this has been provided for in the legislation itself; for instance, the possibility for installations to make use of the novel technology of carbon capture and storage, whereby carbon emissions are sequestered and stored underground, to fulfil their ETS obligations.Footnote ²⁸ In other cases, this has been provided for by way of further scope for action on the part of the Commission. An example is the provision made for action to combat the phenomenon of ‘carbon leakage’ (ie, the relocation of industry to a non-ETS jurisdiction to save costs), where the Commission is empowered to draw up a list of sectors which are exposed to a ‘significant risk’ of carbon leakage and to allocate 100 per cent of these sectors' allowances free of charge.Footnote ²⁹ Though aimed at levelling the playing field on the international market, the obvious scope for inter-sectoral distortions within the internal market means that such power must be sensitively exercised. This point is reflected in the fact that the Commission is obliged to consult the European Council prior to drawing up its list,Footnote ³⁰ and to report to the European Parliament and the Council on the matter.Footnote ³¹

More broadly, it is notable that, under the initial phases of the ETS, the EU courts have been active in striking down Commission decisions to reject certain NAPs, partly on the basis that the scheme of the 2003 Directive left considerable leeway to Member States in drawing up such plans, and that this allocation of powers between the Commission and Member States had not fully been respected. Though two important judgments to this effect (Poland v Commission and Estonia v Commission) are currently under appeal,Footnote ³² it is clear that the 2009 Directive's centralisation of powers will in any event result in a narrower interpretation of the scope of Member States' freedom of action in the ETS field in the future.

While the EU ETS represents the example par excellence of the EU's use of market-based environmental instruments, efforts are also underway to incorporate a market-based approach into other areas of EU environmental policy. Unanimity of voting in the Council on fiscal matters makes significant legislative reform on environmental taxation going beyond the current Energy Taxation Directive, with its many derogations, unlikely.Footnote ³³ However, as many Member States have moved forward with their own environmental taxation and subsidy schemes, the issue of the compatibility of such schemes with EU state aid rules has frequently arisen. In this regard, while generally approving of the overall aim of such schemes, the Commission and European Court of Justice (ECJ) have indicated a move towards a stricter approach in assessing the proportionality of such schemes including, for instance, the extent to which derogations from green taxation schemes can be justified on environmental grounds.Footnote ³⁴

C. A More ‘Traditional’ Approach: the Examples of Nature Conservation, Waste and Chemicals

In contrast, a more traditional, command-and-control style of regulation continues to be evident in many areas of EU environmental policy, and particularly in areas where it is felt that a market-based approach would fail to provide adequate guarantees of environmental protection. Three of the most important such areas in which substantial developments have taken place in recent years include the EU's environmental laws dealing with nature conservation, waste and chemicals. As mentioned above, these areas correspond to three of the EU's four priority areas identified in its Sixth Environmental Action Programme (ie, the nature and biodiversity, natural resources and waste, and environment and health streams). In each of these areas, the EU's approach reflects an ambition to be a global leader in environmental policy.

In the area of nature conservation, the EU's core legislative armoury has essentially been in place since the early 1990s, in the form of the 1992 Habitats Directive, which built upon the 1979 Birds Directive.Footnote ³⁵ The key developments here, therefore, have consisted in interpretations of these Directives by the EU courts, as well as actions to ensure their enforcement taken by the Commission in the ECJ as well as by private parties in national courts. In relation to the former, the ECJ has, in a number of strongly-worded judgments, made clear that it will interpret the Habitats and Birds Directives in the light of their conservation objectives, meaning a strict approach to exceptions allowing Member States to authorize developments in protected areas.Footnote ³⁶ In relation to the latter, the Commission has been increasingly active in pursuing Member States under what is now article 258 TFEU for breach of nature conservation rules—encouraged, in part, by the ECJ's stringent approach—and, in 2008, over one-fifth of open environmental infringement cases related to this area.Footnote ³⁷ Such action is buttressed by the regime established by the 2004 Environmental Liability Directive, which establishes a liability regime requiring preventative or remedial (as the case may be) action to be taken for, inter alia, damage caused to protected species and habitats.Footnote ³⁸ However, the practical impact of this Directive remains unclear, due partly to the limited number of judgments handed down by the EU courts to date on the issue.Footnote ³⁹

Despite this, and as recognized by the Environment Council of March 2010, the levels of biodiversity within the EU continue to diminish, and the EU's target to halt the biodiversity loss of the most important protected habitats and species by 2010 was not met.Footnote ⁴⁰ The Council's response was to set an even more ambitious target, this time to halt ‘the loss of biodiversity and the degradation of ecosystem services in the EU by 2020’, and to restore them in so far as feasible, ‘while stepping up the EU contribution to averting global biodiversity loss.’Footnote ⁴¹ A striking feature of these efforts is the increasing reliance on the economic rationale of protecting biodiversity (ie, avoiding costs from loss of ecosystem services), rather than simply relying on ethical reasons based on the intrinsic value of preserving biodiversity.Footnote ⁴² This shift in emphasis is perhaps unsurprising in the light of the current pressure across the EU on the public funding essential to turn these targets into reality.

In the area of natural resources and waste, the major development in recent years has been the 2008 recasting of the Waste Framework Directive, which has been the cornerstone of the EU's waste policy since its enactment in 1975.Footnote ⁴³ The aims of the 2008 Directive were, in essence, to simplify and clarify the previous legislation, to strengthen the emphasis on waste prevention and recovery, and to introduce an approach where a product's whole life-cycle, rather than just the waste phase, is looked at in EU waste policy.Footnote ⁴⁴ While the product of political compromise following long debate, the 2008 Directive nonetheless includes several important new features, including: setting for the first time generalFootnote ⁴⁵ recycling targets for household, construction and demolition wasteFootnote ⁴⁶ with the aim of moving towards a ‘European recycling society’;Footnote ⁴⁷ integrating the EU's formerly separate regimes for waste oils and hazardous waste into a consolidated framework;Footnote ⁴⁸ and setting out an overarching five-level waste hierarchy to apply as a ‘priority order’ in waste prevention and management law and policy.Footnote ⁴⁹ Despite the stated aim of simplifying EU waste law, the 2008 Directive essentially retains the previous legislation's definition of waste—a matter of vital importance because the Directive's regulatory regime applies only to the handling of ‘waste’ as legally defined.Footnote ⁵⁰ This means that the voluminous and complex case law to which this definition has given rise will, by and large, remain valid. However, some clarity has been given on the issue of when a material considered to be waste ceases to be waste (for instance, through recycling)Footnote ⁵¹ and when a material is to be considered as a by-product from a production process rather than waste.Footnote ⁵² In addition to the substantive recasting of the Directive, the Commission has made clear its intention to step up the enforcement of EU waste legislation on the ground,Footnote ⁵³ and is investigating the possibility of setting up a dedicated waste enforcement agency to support such enforcement, whose tasks could potentially include carrying out on-site inspections of Member States' compliance with EU waste rules.Footnote ⁵⁴ Such a move is, however, likely to be strongly resisted by Member States.Footnote ⁵⁵

Finally, no discussion of recent developments in EU environmental policy could be complete without mention of the EU's controversial landmark chemicals regime, laid down in a 2006 Regulation on the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH).Footnote ⁵⁶ REACH represents a comprehensive overhaul of the previously rather patchy regulatory regime applicable to the production and marketing of chemicals within the EU. The key elements of the regime comprise:

1. (1) a generally applicable registration obligation whereby, in order to produce or market a chemical within the EU, manufacturers or importers must apply for registration, submitting a file including information on the chemical's health, safety and environmental properties;Footnote ⁵⁷

2. (2) a precautionary-based evaluation of registration dossiers, particularly where there are suspicions of a substance's health and/or environmental impact or in the case of proposals for animal testing (where duplication of information is to be avoided);Footnote ⁵⁸

3. (3) an authorization requirement for certain highly dangerous chemicals, such as carcinogens, whereby the Commission is charged with deciding on applications for authorization based on the recommendations of the newly-established European Chemicals Agency (ECHA);Footnote ⁵⁹ and

4. (4) risk reduction measures, also to be adopted by the Commission following an ECHA opinion.Footnote ⁶⁰

Particularly notable is the fact that the registration duty extends not only to substances newly introduced onto the market (the focus of prior reporting obligations), but also to substances already on the market, which may have been in circulation for decades without any data available on them. Further, the key roles attributed to the Commission and ECHA reflect, in a similar manner to the revised ETS Directive discussed above, a centralization of decision-making, and a step away from the mutual recognition approach initially characteristic of health regulation in the internal market.Footnote ⁶¹ More generally, the sheer size of the EU chemicals market, accounting for almost 30 per cent of global chemical shipments in 2008,Footnote ⁶² means that familiarity with the REACH regime is essential for any global player on the chemicals market.

D. Environmental Governance and Enforcement

A further area in which significant developments have occurred in recent years relates to the governance and enforcement of EU environmental law. In relation to environmental governance, the key international document here is, as reported in the last Survey, the 1998 Aarhus Convention, which is based on the three-fold principles of access to information, public participation, and access to justice in environmental matters.Footnote ⁶³ The EU ratified the Convention in 2005.Footnote ⁶⁴ The first two principles—access to information and public participation in environmental decision-making—have proven relatively uncontroversial,Footnote ⁶⁵ and have been implemented (albeit subject to important limitations) by two 2003 DirectivesFootnote ⁶⁶ and, in respect of their application to EU institutions, a 2006 Regulation.Footnote ⁶⁷ The third principle, however, has caused more difficulty, for a number of reasons.

In relation to access to justice in national courts, the 2003 Directives contain provisions relating to access to justice, albeit with a limited scope of application.Footnote ⁶⁸ The prospects of any generally applicable legislation are dim, given Member States' fundamental unwillingness to allow Brussels to interfere in their autonomy to manage their own legal systems.Footnote ⁶⁹ However, within their scope of application, the provisions of the 2003 Directives have to date been broadly interpreted by the ECJ. For instance, the requirement that access to justice must not be ‘prohibitively expensive’ is not, in the ECJ's judgment, compatible with a discretionary power for judges to decline to award costs against an unsuccessful party.Footnote ⁷⁰ In relation to access to justice at EU level, though the 2006 Regulation established a right to request an internal review by an EU institution or body which has adopted an environmental administrative act,Footnote ⁷¹ access to independent judicial review of EU environmental acts in the EU courts remains severely restricted. This is so due to the famously strict locus standi test for challenging EU acts by which, under the ECJ's interpretation of the ‘individual concern’ requirement set out in what is now article 263 TFEU, the applicant is required to show that he is affected by the impugned act in a manner that is peculiar to him and that differentiates him from all others concerned.Footnote ⁷²

The serious difficulties with satisfying such a test in an action aimed at preserving an environmental public good are evident, and have been pointed out to the ECJ, which has refused to change its approach on the basis that national courts offer an alternative avenue for redress in such cases.Footnote ⁷³ On this point, however, the Lisbon Treaty offers some solace, in removing the ‘individual concern’ requirement in the case of a challenge to a ‘regulatory act which is of direct concern [to the applicant] and does not entail implementing measures.’ Nonetheless, the scope of this exception remains uncertain, not least because the term ‘regulatory act’, a hangover from the now-defunct Constitutional Treaty, is not defined in the Lisbon Treaty and will fall to be interpreted by the EU courts.

It is in the area of enforcement of environmental law, however, where some of perhaps the most significant battles have been fought, and advances made. Many, though not all, of these advances are the result of far-reaching judgments by the ECJ in the area. Four important examples suffice. A first is the Court's 2005 judgment in Commission v Council,Footnote ⁷⁴ in which it held that legislation requiring Member States to criminalise certain serious environmental offences should be passed under what was then the first pillar (ie, the Community pillar) rather than, as the Council argued, under the more intergovernmental third pillar (ie, Police and Judicial Cooperation in Criminal Matters). The Court reasoned, inter alia, on the basis of the need to ensure effective achievement of the EU's environmental goals, even if this meant an incursion into Member States' highly sensitive criminal law competence. This led to the 2008 Directive on the Protection of the Environment through Criminal Law which requires criminalization of a range of serious offences, but which—in conformity with the ECJ's case lawFootnote ⁷⁵—does not go so far as to harmonize the sentences which must be imposed for their commission.

A second is the Court's judgment in Commission v Ireland in which, for the first time, the Court found a Member State to have committed a general, systemic and persistent breach of EU environmental law (in that case, the Waste Framework Directive) rather than, as it normally does, simply finding individual discrete breaches.Footnote ⁷⁶ This finding has a number of important implications: the Commission can group together many individual infringements into one case, saving time and effort; the Commission can adduce additional evidence arising after its reasoned opinion in support of an allegation of systemic breach;Footnote ⁷⁷ and the burden of proof shifts to the Member State to challenge the detail of the evidence produced and its consequences where the Commission has adduced ‘sufficient’Footnote ⁷⁸ evidence of a systemic breach. In essence, this finding makes the Commission's job easier in seeking to obtain infringement judgments in areas where there is a long-standing and pervasive practice of disregarding EU environmental rules.

A third important development is the increasing use of the possibility provided for in the Treaty (in what is now article 260 TFEU) to impose fines and/or penalty payments on Member States who have failed to comply with an ECJ infringement judgment. To date, a significant number of article 260 proceedings brought have related to the environment.Footnote ⁷⁹ Here again, the Lisbon Treaty has been innovative, enabling the Commission, under article 260(3) TFEU, to ask for a lump sum or penalty payment to be imposed on a Member State the first time it goes to court (ie, under article 258 TFEU), without having to go to court a second time. While this possibility applies only where a Member State has failed to notify the Commission of measures transposing a Directive, it should speed up the often sluggish transposition process and provides further teeth in the enforcement of EU environmental law. Further, the Lisbon Treaty has removed a step from the article 260 TFEU procedure—namely, the Commission is no longer required to issue a reasoned opinion prior to bringing a Member State to court under this article—which will also increase the pace of this procedure.Footnote ⁸⁰

A final important development in enforcement of EU environmental law is the Commission's demonstration that it is willing, where necessary, to use its powers to apply for interim measures against a Member State. Though such powers are provided for in what are now articles 278 and 279 TFEU, they have rarely been invoked against Member States in the context of article 258 TFEU actions.Footnote ⁸¹ Since 2007, however, the Commission has done just that on a number of occasions. The most high-profile to date was an article 258 TFEU action against Poland for infringement of the Habitats Directive. The case concerned a project to construct a motorway by-pass through a protected area of forestry (the Augustów forest), located in the Rospuda river valley in the north-east of Poland. The Commission applied for interim measures to prevent Poland from commencing or continuing works of reforestation aimed at compensating for damage to the Augustów site, which works were themselves to take place in a site which should, the Commission argued, have been protected.

In acceding to the Commission's request on an ex parte basis, the President of the ECJ ordered that no works should take place on the site pending the outcome of the main proceedings, and set down a date for an inter partes hearing of the interim measures application.Footnote ⁸² By the time of this hearing, however, the Polish Minister for the Environment was willing to give an undertaking to the Court that no work would proceed prior to the conclusion of the main proceedings, meaning that the interim measures procedure could be struck out.Footnote ⁸³ The case is of interest not only as an indication of the Commission's readiness to take draconian measures to preserve important environmental interests, but also because, for a brief period, it raised the spectre that a Member State might ignore an interim judgment of the ECJ, and the question of what the implications of such action might be. In any event, such a stand-off did not occur: Poland backed down, and ultimately altered its plans to the satisfaction of the Commission, resulting in the main proceedings being struck out.Footnote ⁸⁴

E. Conclusion

Developments in EU environmental law in recent years have been characterized by a realization of the limits of traditional environmental regulation, leading to diversification of regulatory techniques and innovations in approaches to governance. This movement has comprised not only the embrace of market-based instruments, but also a commitment to participation and consultation in environmental decision-making, as well as the constitutionalization of the EU's climate change and energy aims. The full effects of such changes will take time to become evident, and in certain areas a positive effect can already been seen (for instance, in the progress towards meeting the EU's climate change obligations). Nonetheless, and despite the proliferation of legislative and policy instruments in the field, in the most recent of the EU's annual Environmental Policy Reviews, only three policy areas out of 26 rated were given a ‘good performance’ rating. Fourteen areas fell into the worst-performing category, indicating poor performance, a worrying trend or that EU targets were unlikely to be met.Footnote ⁸⁵ In essence, this reflects the EU's continuing difficulty in marrying economic and environmental goals and its reluctance, in case of irreconcilable conflict, to prioritize environmental protection. Though such difficulties are in no sense confined to the EU, until these indicators improve, they will sit uneasily with the EU's efforts to stake a claim to global environmental leadership.