Risk of regulatory fines in emissions trading: German Emissions Trading Authority’s sanctioning practice fails in court

The attempt by the German Emissions Trading Authority at the Federal Environment Agency (Deutsche Emissionshandelsstelle im Umweltbundesamt – DEHSt) (hereinafter simply referred to as the “German Emissions Trading Authority”) to establish special personal obligations to act on the part of management board members and managing directors in connection with carbon reporting under the German Greenhouse Gas Emissions Trading Act (Treibhausgas-Emissionshandelsgesetz – TEHG) has finally failed. In the first court case on the regulatory offence of negligent incorrect emissions reporting pursuant to Section 32(1) no. 1, (2) German Greenhouse Gas Emissions Trading Act, the first-instance acquittal of the industrial company concerned has now been confirmed by the Higher Regional Court of Naumburg. The appeal on points of law filed by the public prosecutor’s office against the judgement of the Local Court of Dessau-Rosslau of 7 November 2019 and substantiated by the German Emissions Trading Authority in the background was dismissed as unfounded by order of 29 January 2021 (Higher Regional Court of Naumburg, 1 Ws 41/20).

The Higher Regional Court made its decision in line with the Local Court's assessment of the facts of the case and the defence arguments put forward by Luther partner Dr Stefan Altenschmidt, who acted as defence counsel in said case. In order for incorrect emissions reporting to be punished as a regulatory offence, it must be proven that a managing director of the company concerned or another executive himself/herself communicated the incorrect quantity of emissions, ordered or tolerated the incorrect communication, or could have prevented the incorrect communication. The objective mistake of an employee alone does not suffice to constitute such an offence.

According to the Higher Regional Court, the same is true for the accusation of a breach of supervisory duties pursuant to Section 130 German Act on Regulatory Offences (Gesetz über Ordnungswidrigkeiten – OWiG): the mere circumstance that an objective reporting mistake has been made does not constitute such a breach of duty. In a company, only those supervisory measures need to be taken which, from an objective perspective, are necessary and reasonable to prevent operations-related violations. The legislator does not expect that all staff members are comprehensively monitored on a permanent basis: it only requires measures that make operations-related violations highly unlikely, rather than prescribing that every member of staff be supervised at all times. The managing director of a company subject to emissions trading is not obliged to sit next to the responsible employee, so to speak, and constantly monitor all of his/her actions.

The ruling of the Higher Regional Court limits the risks for executives and companies with regard to emissions reporting, which is prone to errors. Contrary to the view hitherto taken by the German Emissions Trading Authority, they are allowed to delegate the company-related emissions reporting duties to employees below the management level and thereby relieve themselves. At the same time, however, management board members and managing directors continue to be responsible: they must carefully select, instruct and monitor the employees responsible for carbon reporting.

Caution and diligence in emissions reporting are, therefore, still required in order to avoid accusations of inadequate operational organisation and monitoring in the event of a reporting mistake. In practical terms, however, it should be difficult for the German Emissions Trading Authority to prove such mistakes without a legal error where duties have been delegated to employees below management level. Compared to reporting under the German Greenhouse Gas Emissions Trading Act within the EU emissions trading system (ETS), however, emissions reporting within the new German fuel emissions trading system under the German Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz – BEHG) is likely to involve the greater risk of regulatory fines. This is because in the latter case, at least as regards the years 2021 and 2022, no liability-reducing verification by an independent body is required.