AGCO Limited v Environment Agency

AGCO Limited appeals against a civil penalty notice in the sum of £95,025, served on it by the Environment Agency on 17 February 2023.

EU Regulation 517/2014 aims to control emissions of fluorinated greenhouse gases (“F-gases”), including hydrofluorocarbons (“HFCs”), by (among other measures) imposing a stepped reduction of the total that can be placed on the market in the European Union. F-gases are a major contributor to climate change and, weight for weight, some have a global warming effect many thousands of times higher than carbon dioxide. Following the United Kingdom’s departure from the European Union, the EU Regulation was retained in domestic law. It is now the GB F-gas Regulation, and regulates F-gases placed on the market in Great Britain. There is furthermore a separate GB F-gas registry and quota system. This has had consequences for British businesses engaged in the sale of F-gases and goods containing them. Previously, a business in the UK buying F-gases from another EU member state (termed a ‘downstream operator’) would have faced no obligations under the EU Regulation. Now, they are treated as importers and must comply with the GB Regulation’s requirements accordingly.

As to how different products are treated, from 1 January 2015, the EU Regulation prohibited the bulk importation or production of HFCs by an organisation unless it held sufficient quota. From 1 January 2017, pursuant to Article 14(1), organisations were prohibited from placing refrigeration, air conditioning and heat pump equipment pre-charged with HFCs on the market unless a sufficient number of quota authorisations had been obtained. It is important to emphasise the difference between quota and quota authorisations. Quota cannot be used directly for pre-charged equipment; the importer must instead obtain sufficient quota authorisations from a quota holder. These features are preserved in the GB Regulation.

If the prohibition at Article 14(1) is breached, Regulation 31A of the Fluorinated Greenhouse Gases Regulations 2015 provides that an enforcing authority (here, the Environment Agency) may impose a civil penalty, and Paragraph 1(4) of Schedule 4 sets the maximum civil penalty at £200,000. It is that provision under which the present penalty notice was served.

The service of the penalty notice followed a Notice of Intent sent on 6 October 2022, in response to which AGCO admitted placing equipment charged with F-gases on the market in GB without the necessary quota authorisations and made representations as to why a penalty should not be imposed.

In deciding to issue the penalty notice, the Environment Agency applied its Enforcement and Sanctions Policy (Footnote: ¹) (“ESP”). The introduction to the ESP is as follows:

At Section 2 the ESP sets out an outcome focused approach to enforcement, and at Section 3 that the Environment Agency will follow the regulators’ code (save where necessary), act proportionately, have regard to economic growth, be consistent, transparent and accountable, and target its regulatory effort in a number of specified ways. At Section 4, it records that enforcement activity will aim to:

Annex 2 to the ESP provides a specific civil penalties framework for climate change schemes. As it explains:

For F-gases, Section E also provides as follows:

The penalty notice makes no reference to E2.2, nor does it provide any reasons why the Environment Agency decided not to exercise its discretion to impose no penalty.

The ESP requires the penalty amount to be determined in a similar way to a sentencing guideline in the criminal courts, setting a penalty range and a starting point. The starting point is a multiplier of the maximum statutory penalty as follows:

After setting the starting point, the next table is used to calculate the penalty range:

In this penalty notice, the Environment Agency decided as follows:

The following reasoning was provided in support:

The penalty notice next purports to consider the relevant aggravating and mitigating factors. It nonetheless only mentions one: financial gain by AGCO by avoiding the cost of obtaining the required authorisations in 2021. This calculation was performed by applying the maximum known cost paid for a quote authorisation in that year, being £25, and multiplying it by the number of required authorisations. This equals the amount of the penalty, £95,025. It was considered appropriate to take the maximum figure to ensure that AGCO did not make any financial gain.

The 2015 regulations provide a right of appeal at Schedule 5, on the following grounds at paragraph 4(2):

The narrative grounds submitted in support of AGCO’s appeal can be fairly summarised as follows:

I pause to note that in its response to the Notice of Intent AGCO had pointed out that in 2022 it had paid £8 per authorisation, rather than the £25 used by the Environment Agency.

Both parties consented to the appeal being decided without a hearing. I have been provided with a bundle containing the notice and grounds of appeal, the Environment Agency’s rule 23 Response, AGCO’s Rule 24 Reply, and further written submissions from the Environment Agency. AGCO has written to the Tribunal taking exception to that final document being taken into account, as no permission had been given for further written submissions. I need not formally exclude the Environment Agency’s further written submissions as, for reasons that will become clear, doing so would not materially alter the decision I have reached.

There is no authority on how the Tribunal should approach these particular regulations. In contrast with the statutory scheme discussed in R. (Begum) v Special Immigration Appeals Commission & Anor [2021] UKSC 7 at [67]-[68], I consider that Paragraph 4 of the regulations does permit the Tribunal to decide how a discretion conferred upon the Environment Agency ought to have been exercised, subject to the important qualification that the particular ground has made out. This legislative intent is clear from the grounds’ expansive wording, particularly the use of the word “wrong” and the phrase “for any other reason”. Furthermore, Paragraph 1 clearly confers a power to exercise the discretion at Schedule 1 for itself:

The qualification above should be reiterated. The Tribunal must find that one or more of the grounds is made out. In making that decision, appropriate weight must be afforded to the view taken by the Environment Agency: the regulator entrusted by Parliament to administer the scheme and maintain its integrity and effectiveness through enforcement action, and having expertise and experience in doing so; see Hesham Ali v Secretary of State for the Home Department [2016] UKSC 60 at [45].

Finally on the Tribunal’s legal approach, I do not consider the word ‘unreasonable’ at Paragraph 4(2)(a)(iv) to denote unreasonableness in the classic public law sense described in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. This is inconsistent with the powers given to the Tribunal at Paragraph (5), and I instead treat the word as having its everyday meaning of unfair, unsound or excessive.

AGCO make no argument that the Environment Agency should not have imposed any penalty at all, nor is evidence provided of facts that might justify engaging the discretion at E2.2 of the ESP. The actual issue between the parties is narrow, being whether it was unlawful or unreasonable for the Environment Agency to adopt the figure of £25 per authorisation in an attempt to ensure that the penalty was sufficient to rule out any possibility of financial gain.

The Environment Agency has explained that in order to determine the appropriate deemed cost of a 2021 authorisation, it:

A table is provided with the results, showing those figures for all 21 respondents. In its Reply, AGCO Complaints that it is unclear whether the figures are for Bulk Transfers, Authorisations or Authorisation Delegations. I disagree; the wording above the table makes it clear that the prices are for authorisations. £25 is the highest figure in the table. It is the maximum price paid by Respondent 2, who is also the only respondent not to provide the median and mean price paid. In further justification of its methodology, the Environment Agency argues as follows:

There is, I consider, merit in AGCO’s core criticism that the £25 figure is “an outlier”. It is more than the maximum figure given by all other organisations. The next four highest figures are £19, £15.38, £14.30 and £12. Below this, however, the figures are all much lower. This can be illustrated by (according to my calculations) the mean maximum figure being £9, with a standard deviation of £5.83.

I agree with the Environment Agency on the importance of ensuring that there is no financial gain from non-compliance. This is recognised in the principles underlying the ESP, already set out above. I also consider that the Environment Agency is entitled to use a reasonable and workable method for achieving that objective, even if in some cases that may result in a greater penalty than would be imposed if there were more data on what the organisation would have likely paid. There is no burden on the Environment Agency to provide definitive proof of an exact figure, such as expert valuation evidence or detailed market analysis. It is entitled to adopt a reasonable methodology.

The ESP sets out a detailed process for calculating a penalty range and starting point that takes account of a number of factors. Choosing the figure of £25, according to a methodology not found in the ESP, leads to a penalty figure that is over 50% more than the starting point. The proportionality of that penalty therefore depends on there being at least a reasonable degree of likelihood (according to the standard identified in the above paragraph) that the deemed maximum allocation cost could be that high. For the reasons argued by AGCO, and set out above, I find it very unlikely indeed that AGCO would have spent that much on allocations had it complied. The mean maximum figure is £9, slightly above what was actually paid by AGCO the following year. The Environment Agency rejects the 2022 price out of hand on the basis that markets may fluctuate. That is a relevant factor, but it is irrational to completely ignore that it is so similar to the mean maximum and the mean price paid in 2021. Furthermore, by its own admission the Environment Agency is working with a very limited dataset, but the lack of information as to why one respondent paid so much more than most is not then taken into account when deciding to place reliance on the figure.

I agree with the Environment Agency that if a figure of £8 is used then there is a real risk that AGCO might gain from its non-compliance. A handful of respondents did pay more than that. Its error, however, was to ignore the output of the ESP. It is the ESP that suggests a starting point, which should be increased or decreased by reference to considerations that include avoiding financial gain, as follows:

It does not provide for the starting point to be simply replaced with an alternative basis for calculation not found anywhere in the ESP. The ESP provides no methodology by which financial gain must be calculated nor any hard-edged principle that any financial gain must be ruled out at the maximum cost paid by anyone. Here, the identified starting point was £60,000. The question the Environment Agency ought to have asked itself is the one posed by the ESP: whether that figure ought to be increased to address financial gain. It can be seen, dividing £60,000 by the 3,801 missing authorisations, that the figure will be sufficient to meet financial gain so long as AGCO would not have paid more than £15.79 per authorisation. A simple glance at the table shows it to be very unlikely that it would; £15.79 would have been the third highest payment that year, above the mean maximum and its standard deviation, and much more than AGCO paid the following year. On any reasonable view, the starting point ought not to have been increased to recognise financial gain. Certainly, to do so in this way was unreasonable and disproportionate.

Being satisfied that the statutory ground at paragraph 4(2)(a)(iv) is made out, I turn to paragraph 1(5). The £60,000 starting point was reached by a process that is unchallenged by AGCO. No other mitigating or aggravating factors are put forward by either party as applicable, nor is it the function of the Tribunal to identify them for itself. In those circumstances I substitute a penalty notice of £60,000.