On 14 November 2024, Advocate General Kokott delivered her Opinion in Case C-621/23 P, LKAB v Commission, which concerns the Swedish company’s efforts to overturn a judgment of the General Court (Case T-244/21).
She has advised the Court to dismiss the appeal taken by the Swedish state-owned mining company should have its appeal against the General Court’s judgment on free greenhouse gas emissions allowances dismissed.
Background and facts
The case revolves around the EU’s Emissions Trading System, established by Directive 2003/87, which aims to reduce greenhouse gas emissions through a cap-and-trade system. Under this system, emission allowances are primarily auctioned, but certain installations receive free allowances based on benchmarks that reflect the performance of the most efficient installations. The benchmarks are defined in Commission Delegated Regulation 2019/331.
LKAB as they are known (formally Luossavaara-Kiirunavaara AB) is state-owned company (public undertaking) in Sweden. It mines iron ore, and is in a dominant position in the EU internal market, providing approximately 80% of Europe’s iron ore for commercial purposes.
The legal proceedings in which it is engaged before the EU courts concerns the allocation of emission allowances for the production of iron ore pellets by the company.
LKAB argues that it should receive free emission allowances based on the benchmark for sintered iron ore, which would result in a higher allocation compared to the current method based on actual greenhouse gas emissions produced by the installation. According to the company, the production of iron ore pellets generates significantly fewer greenhouse gases than the production of sintered ore, and LKAB contends that using the sinter benchmark would incentivise the use of pellets, thereby reducing overall emissions.
The Commission had rejected LKAB’s proposal on substance, leading to the legal challenge. LKAB claim that the Commission’s Decision violated principles of equal treatment and non-discrimination, and failed to consider the European Union’s international commitments under the Paris Agreement.
Judgment of the General Court
The General Court on 26 July 2023 in Case T‑244/21, LKAB v Commission, noted that the ETS primarily relies on auctioning allowances, with free allocations being an exception. It examined the wording of the benchmark for sintered ore, which defines the products and processes covered. The benchmark specifically refered to sintered ore produced in sinter plants, not iron ore pellets. The General Court thus found that the terminology used in the benchmark clearly distinguishes between sinter and pellets, and that the Commission was justified in excluding pellets from this benchmark.
In reaching its conclusion, the General Court noted that while Directive 2003/87 aims to incentivise the reduction of greenhouse gas emissions, this objective must nonetheless be achieved to the extent feasible.” . Accordingly, the Commission must balance various factors, including technological efficiency and the recycling of materials, which may justify different treatment for sinter and pellets.
Consequently, the General Court found differences between the two products, including their raw material inputs, production processes, and emission intensities, concluding that these differences justified the Commission’s decision to treat them separately. The claim that equal treatment was not respected was thus dismissed.
As for the applicant’s claims about not reaching goals set under the Paris Agreement, the General Court found that the EU commitments under the Paris Agreement do not require the inclusion of iron ore pellets under the sinter benchmark. According to the General Court, the ETS is part of a broader strategy to reduce emissions, and the exclusion of pellets from the sinter benchmark does not violate these international commitments.
On appeal to the Court of Justice, the Opinion of Advocate General Kokott
LKAB’s pleas, appealing the judgment of the General Court to the Court of Justice can be summarised as: a claim that the General Court made an erroneous interpretation of the ETS Directive; a claim that the General Court wrongly replaced the Commission’s assessment with its own; a claim that the General Court distorted the evidence; that the General Court incorrectly found that the Commission had carefully and impartially examined all relevant aspects; and a claim that the General Court erred in finding that the Commission had fulfilled its obligation to provide reasons.
The Opinion of Advocate General Kokott dealt with all the pleas.
She noted that Article 10a of Directive 2003/87 empowers the Commission to adopt delegated acts to supplement the directive with Union-wide rules for the allocation of allowances. In this context, the Advocate General examined the regulatory discretion available to the Commission in defining benchmarks and the legal principles guiding this process. She opined that the Commission must balance various factors, including the need to reduce emissions, promote energy efficiency, and ensure fair competition within the internal market.
For the argument presented by LKAB on the substitutability of pellets for sinter in the production of basic iron, Advocate General Kokott acknowledged that while pellets and sinter are intermediate products used in the same stage of iron production, they are produced from different ores and processed differently. She further stated that the production of sinter is an integral part of steel production, allowing for the processing of certain forms of coke and iron-bearing residues, which is not as feasible with pellet production.
The Opinion also addresses the potential impact of a common benchmark for both sinter and pellets. For her, if such a benchmark were based on the emissions associated with pellet production, it would result in significantly fewer allowances being allocated compared to the current sinter benchmark. For her, this could create an imbalance between installations producing sinter and those producing pellets, potentially disadvantaging sinter producers and affecting the overall competitiveness of the sector.
Furthermore, the Advocate General emphasised the importance of preventing carbon leakage, which refers to the risk of industries relocating production to countries with less stringent emission regulations. The free allocation of emission allowances aims to mitigate this risk by ensuring that European industries remain competitive while reducing their greenhouse gas emissions. A common benchmark that does not adequately reflect the differences between sinter and pellet production could undermine this objective.
In conclusion therefore, the Advocate General advised the Court to dismiss appeal brought by LKAB.
Read the Opinion of the Advocate General
The Opinion of Advocate General Kokott in Case C-621/23 P, LKAB v Commission, delivered on 14 November 2024, can be read here.