Original language


United Kingdom
Date of text
Type of court
National - higher court
Court name
High Court
Seat of court
Reference number
[2012] EWHC 1201
Air pollution, Contract, Damages, Evidence, Sustainable Development Goals, Property, Land Use, Permits, Taxation, Cooperation
Free tags
Environment gen.
Legal questions
Air & atmosphere
Smith, A.
All EU operators that own an installation which emits a certain level of CO2 must participate in the EU Emissions Trading System (EU ETS). Those subject to the system must surrender allowances corresponding to the cap placed on their emissions. Certified Emissions Reductions (or “CERs”) are a type of carbon credit issued by the Clean Development Mechanism (CDM) Executive Board. Under the EU ETS such CERs can be “surrendered”, meaning they are exchanged for AAUs and paid out at a level of one emissions allowance for every tonne of carbon dioxide emitted. Whilst Article 11(a) of the EU ETS Directive prohibits CERs from being used more than once for compliance with EU ETS obligations, the EU ETS and the Kyoto Protocol are essentially separate trading systems. Although the practice of swapping CERs surrendered to meet EU ETS obligations for AAUs and reselling them on the international market was legal under the current regime, surrendered CERs were not supposed to be resubmitted into the EU ETS. In December 2009 and January 2010, the European Commission, as regulator of the EU ETS, introduced restrictions that prevented previously surrendered CERS from being used for compliance purposes. In 2010 the Hungarian Government sold 800,000 CERs, which had previously been surrendered to it by Hungarian companies to comply with their obligations under the EU ETS, to a trading company based in Hong Kong for €9 per CER. The sale was made on the understanding that the CERs would be sold for use in Japan (and not within Europe, and were therefore not effected by the EC restrictions). Prior to the sale the Hungarian Government had swapped the surrendered CERs for AAUs. These ‘surrendered’ CERs were bought by Total Global Steel (“TGS”) and sold on to Deutsche Bank AG (“DB”) in March 2010. A dispute arose between TGS and DB once DB discovered that these CERs had been preciously surrendered. DB claimed that TGS were in breach of their contractual requirement to supply CERs that could be used under the EU ETS for compliance purposes. TGS argued that their only obligation was to supply CERs that met the legal requirements of the EU ETS for such use, and it was irrelevant that the European Union had introduced measures that prevented or hampered this use. The Court found the determinative factor to be that the contract referred to an “EU Credit”, defined as a CER or ERU “that may be used for determining compliance with emissions limitation commitments pursuant to and in accordance with the Scheme”. The contract therefore specified that the instruments should be able to be used for determining such compliance. The key issue was whether or not there was only required to be a legal entitlement to exchange the CERs for allowances, or whether they could in practice have been so exchanged. The judge stated that the requirement in the definition of EU Credit “must be given an interpretation that makes business sense and would accord with the reasonable expectations of those buying and selling such instruments on the spot market”. He found that they should, therefore, have been able to be so exchanged in practice. He stated that CERs were a species of intangible property and that the measure of DB’s damages was that codified in the Sale of Goods Act 1979, being the difference in value between the value of the CERs when delivered to DB, and the value they would have had if they had not been previously surrendered. Claims by TGS that DB had failed to mitigate its losses by not selling the CERs were dismissed by the judge, who found there was no available market for them or, if buyers could be found, the price would have been so low that it would have created damaging publicity for DB. This made it very difficult for the Court to assess the value of the CERs. However after detailed evidence by experts it concluded that the CERs could be valued by reference to AAUs, though they would be worth around half their value. Accordingly DB’s damages were assessed at almost £4.2 million.