GREENHOUSE GAS EMISSION ALLOWANCE TRADING VAT

VAT Treatment of Greenhouse Gas Emission Allowance Trading

Background

The European Union (EU) and its 25 Member States are signatories to the Kyoto Protocol which requires reductions in emissions of greenhouse gases by specific amounts over a period from 2008 to 2012 and beyond. The EU committed to an average reduction of greenhouse gas emissions by 8 per cent below 1990 levels. This 8 per cent reduction was apportioned among the Member States. This apportionment requires Ireland to limit the growth in emissions by the period 2008 to 2012 to 13 per cent above base year emissions. The EU Emissions Trading Directive (Directive 2003/87/EC) is being implemented to assist in achieving these targets. The Directive establishes an ‘allowance trading scheme’ for emissions to promote reductions of greenhouse gases, in particular carbon dioxide.

The Directive has been transposed into Irish law by the European Communities (Greenhouse Gas Emissions Trading) Regulations 2004 (S.I. No. 437 of 2004) under which the Environmental Protection Agency (EPA) has been assigned responsibility for its implementation in this State.

The EPA has been designated the ‘national competent authority’ with responsibility for issuing greenhouse gas emissions permits (referred to further as ‘permits’) and greenhouse gas emissions allowances (referred to further as ‘allowances’) and for overseeing the monitoring, reporting and verification of emissions from participating organisations.

The permits grant authorisation to organisations to emit greenhouse gases. These permits are being issued by the EPA free of charge.

Permit holders are those organisations carrying out activities specified in Schedule I of S.I. No. 437 of 2004. These activities include: power generation; cement and lime production; and, large energy consumption.

The allowances are issued to permit holders. Each allowance covers the emission of one tonne of carbon dioxide. Permit holders are required to monitor and report on their emissions on an annual basis. They are required to surrender allowances equal to their reported emissions each year. If they cannot reduce their emissions to the level of allowances allocated to them during the course of a year, they must buy extra allowances from organisations that have overachieved their targets anywhere in the EU. Failure to buy the extra allowances will result in a fine (“40 per tonne from 2005 to 2007;” 100 per tonne from 2008 to 2012) and an obligation to surrender the excess amount of allowances in the following year.

On the direction of the Government, the allowances will be issued by the EPA in the following manner:

• At least 97 per cent will be issued over the three year period from 2005 to 2007 inclusive, free of charge, to organisations who obtain permits by 31 March 2004 (Issuance will be in three roughly equal tranches, each tranch being issued at the beginning of each of the three years).
• 1-2% will be issued, free of charge, to organisations who obtain permits after 31 March 2004 (but before 31 December 2007).
• The remainder - up to 1% - will be issued by means of an auction to defray the costs of administering the allowance trading scheme (While the details are yet to be decided, it is possible that this will be done by way of a single auction which might take place in late 2005 or early 2006).

VAT treatment

For VAT purposes, the allowances are treated as intangible assets. The transfer of these allowances is regarded as a supply of a service, as defined by Section 5(1) VAT Act, 1972.

On the basis that the EPA is considered to be the State, the position is that the issue by the EPA of both the permits and the allowances will be treated as being outside the scope of VAT. The charging of fines by the EPA will also be treated as being outside the scope of VAT.

Where the allowances are being transferred by a taxable person in this State in the course or furtherance of business to another person within the State, such transfers will be regarded as supplies of services which are subject to VAT in this State at the standard rate (21 per cent).

Where they are being transferred by a taxable person in this State in the course or furtherance of business to a taxable person in another Member State, such transfers will be regarded as supplies of services falling within paragraph (i) of the Fourth Schedule to the VAT Act, 1972. Accordingly, the place of supply of the service is deemed to be the other Member State. This means that Irish VAT is not chargeable on the supply; it is the customer in the other Member State who is liable to pay the VAT, on the reverse charge basis.

Similarly, where such allowances are transferred by a taxable person in another Member State in the course or furtherance of business to a taxable person in this State, the place of supply of the service is deemed to be this State. This means that it is the customer in this State who is liable to pay the VAT, on the reverse charge basis. Accordingly, even persons engaged in ‘VAT-exempt’ activities, such as universities and hospitals, who are not registered for VAT in respect of their normal supplies, are obliged to register and account for VAT in respect of the receipt of these allowances from outside the State.

VAT incurred by taxable persons on the purchase of such allowances in the course or furtherance of business is deductible, in accordance with Section 12 VAT Act, 1972.

Further Information

For further information on the allowance trading scheme, see the EPA’s website at www.epa.ie.