Aermec UK Limited v The Environment Agency

Aermec’s grounds of appeal, and the arguments made in support, can be summarised as follows:

These grounds accord with those available to Aermec under Paragraph 4(2) of Schedule 5 to the 2015 regulations:

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.

A comprehensive chronology has been provided on behalf of Aermec. Mr Lawrence spoke to its accuracy at the hearing and Mr. Collins was able to ask questions. I find Mr. Lawrence’s evidence to have been honest and reliable, being consistent with the contemporaneous documentation and Mr. Collins making no submission to the contrary. I was also assisted by Mr Collins as to other aspects of the dealings between the parties and the chronology of the introduction of the GB F-gas system, and referred to the various guidance documents provided in the bundle and available online. I can therefore find the following facts on the balance of probabilities, and without having to resort to any burden of proof.

Aermec first appreciated in mid-2020 that it would need to “apply for quota” in relation to F-gases. It was a member of a trade association and had received communications alerting it to forthcoming changes. Mr Lawrence also stated, and I accept, that various companies seeking to sell quota to Aermec wrote to the company. On 3 December 2020 it registered with the GB F-gas scheme and on 22 December 2021 applied for new entrant quota. The deadline to, as the published guidance put it at the time, “apply for GB quota” closed on 15 January 2021. On both 31 December 2020 and 14 January 2021 the guidance was significantly updated with clearer explanations as to the applicable requirements. At the deadline however, Aermec thought that it had made the necessary application. Notwithstanding that its application came only a month before what it understood to be the deadline, it had already been submitted when the guidance was updated. There was no reason for Aermec to reconsider it.

On 3 February 2021 the Environment Agency’s F-gas team wrote to Aermec informing it that some imported air conditioning parts were being held by customs while further checks were carried out. The e-mail required the following action:

The next day, Aermec provided what it considered to be the requested information and, without any further correspondence from the Environment Agency, the imported goods were released. Mr Collins did raise that the certificate of conformity refers to quota authorisations in a way that ought to have revealed the problem, but against the wider evidence I nonetheless find that this was an understandable oversight when faced with a large amount of legalistic text.

On 5 February 2021, pursuant to its application, Aermec was allocated 2,436 tCO2e of new entrant quota for 2021. Later that year, having made the necessary application and having queried a couple of points that arose, it was allocated 2,228 tCO2e of new entrant quota for 2022. On 2 November 2021, additional 2021 quota was granted taking Aermec’s quota to 2,490 tCO2e.

I recognise Mr Collins’ observation that the correspondence does disclose occasional delay by Aermec in dealing with its obligations during the rest year 2021. This is nonetheless minor and I am prepared to accept that it arose from a misunderstanding as to who was responsible for the relevant filings. It does not, in my assessment, materially alter the approach that should be taken to this appeal.

On 7 February 2022, Aermec sent its completed return for 2021. This is the return which shows the imports made in the relevant year so that compliance can be checked by the Environment Agency. Following some further correspondence, the Environment Agency wrote on 2 March 2022 to state that Aermec had failed to hold sufficient “quota/authorisations” for the amount of F-gases placed on the market.

Mr Lawrence was very surprised to receive this email, as he entirely believed that Aermec had complied with its obligations. It held the required amount of quota at the required time. He queried the situation, and the Environment Agency responded on 3 March 2022 to state

This was the point, I find, when Mr Lawrence first appreciated that Aermec had mistakenly bought quota instead of quota authorisations. Attempting to address that mistake, on 22 March 2022 Aermec purchased 11,200 tCO2e delegations of quota authorisations at a price of £4.50 per tCO2e for a total price of £50,400. This did not address the mistake, as it was too late for those quota authorisations to be used for the previous year. The authorisations went unused.

On 13 October 2022 the Environment Agency served a notice of intent to issue a civil penalty. Aermec provided representations pointing out the lack of clear guidance, that it had immediately tried to take action, and had tried to resolve customs issues correctly and in good faith. It had also bought the correct amount of quota, albeit that quota was not what was needed, which had not been used.

Finally, Aermec has argued that no published guidance was available at the relevant time explaining that quota authorisations were required for pre-charged equipment rather than quota. It points to the guidance “Import, export or manufacture equipment pre-charged with F Gas”, first published by the Environment Agency on 2 August 2022. I agree that this guidance was only published on 2 August 2022. In the email of 3 March 2022, the Environment Agency points to its published guidance “Transfer and authorise F-gas quota to another business” but the introduction to that guidance is clearly aimed at quota holders who wish to transfer quota or grant authorisations to others, and there is no indication anywhere that it might provide any assistance to importers of pre-charged equipment.

The guidance available at the deadline of 15 January 2021 was “Applying for quota to produce or import F gas”. When Aermec submitted its application and tried to comply with the legislation, the guidance (Footnote: ²) said nothing about importing pre-charged equipment. It was only on 14 January 2021, the day before the deadline Aermec understood applied to it, that the guidance was amended to include the following:

Environment Agency written submissions for this appeal also refer to the guidance ‘Selling F gas or equipment’. Again, the version in place in late December 2019 makes no mention whatsoever of the need to obtain quota allocations (Footnote: ³). Nor does it now, the current version stating that it:

It is therefore intended for businesses that buy pre-charged equipment in Great Britain, not those who import it. During the hearing it was suggested to Mr Collins that the Environment Agency had not provided any guidance or instructions to businesses such as Aermec on how to meet their obligations, in time for them to realistically do so. He was unable to point to any document refuting this.

I do not need to address every argument raised by Aermec above. I turn first to the ESP. In the penalty notice, the Environment Agency guided itself by explicit reference to its provisions. 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:

Aermec argues that the Environment Agency failed to give any consideration to E2.2 by considering whether giving advice and guidance would be sufficient to rectify the breach, and whether punishment was necessary. I agree. There is no reference anywhere in the notice of intent or the penalty notice to any consideration this issue. As set out above, when the penalty notice was issued it was apparent to the Environment Agency that:

These are all relevant matters to E2.2 that were not considered. Insofar as the Environment Agency considered when issuing the penalty notice that Aermec had benefited financially from its non-compliance, this was misconceived. The way in which it has calculated financial gain to determine the penalty amount is the subject of great controversy between the parties, and indeed causes me some concern, but even on the Environment Agency’s approach it is intended to avoid any risk that the penalty amount is less than any financial gain from non-compliance. In this case it ignores that quota (distinct from authorisations) had been bought at market value at the relevant time that would have broadly approximated to the price that would have been charged for authorisations. Certainly, once the price of the extra unused authorisations that were subsequently purchased are taken into account there is no realistic possibility that Aermec will materially gain from its mistake in the absence of a penalty. Even on the correspondence available at the time the penalty was issued, it is plain that Aermec was trying to understand the scheme and to comply. It has now done so without any significant issues since the discovery of its quota vs quota allocations mistake.

I accept the points made by Mr Collins in response to the above, being that compliance with published legislation is still the responsibility of Aermec even in the absence of guidance to business on how to do so, and that the public interest in compliance goes beyond the precise number of tCO2e accounted for and also includes maintaining the integrity of scheme through its correct operation, compliance by businesses, and accurate reporting year on year. Yet the questions posed by E2.2 are whether advice and guidance will be sufficient to rectify the breach, and whether punishment or future deterrence are necessary. The Environment Agency having failed to ask itself those questions, I address them myself.

On the first question, Aermec has complied with its obligations since the time when it actually understood them. There is no indication that the ‘advice and guidance’ contained in just the two sentences of the email of 2 March 2022 set out above has not been enough. Future compliance by Aermec itself does not require a penalty to be imposed.

Second, I accept that there might often be times when punishment might still be appropriate in these circumstances. Imposition of a penalty may deter other businesses from failing to comply, or to address a gain from non-compliance. If a business had not taken reasonable steps to try to comply, stood to benefit financially if no penalty were imposed, or if F-gases were placed on the market without any corresponding unused quota of a different type or from a different year to mitigate environment damage, then the great importance of reducing climate change gas emissions and maintaining the integrity of the F-gas scheme might still justify a penalty even where the business is entirely rehabilitated. These factors are not present here. The circumstances of this case clearly permit the discretion at paragraph E2.2 to be exercised. No cogent explanation has been provided by the Environment Agency at any point as to why it should not. Wider deterrence is not in issue, as my reasons include that the GB scheme was in its infancy, and the guidance to businesses unclear and unhelpful. I exercise the discretion under E2.2, for the reasons I have given. I am entirely satisfied that it would be unreasonable to impose a penalty, and that the corresponding statutory ground at Paragraph 4(2)(a)(iv) of Schedule 5 has therefore been made out.

The above conclusion should not be misunderstood as finding that inadvertent errors, or ignorance of legal responsibilities, will commonly amount to justification for imposing no penalty. On the contrary, this will usually be very rare. In environmental regulation, given the importance of combating climate change businesses do have a positive responsibility to understand their obligations and strictly comply with them. Rather, I have reached a fact specific conclusion applying a section of the Environment Agency's own ESP that was not considered in the penalty notice, and the plain language of which justifies issuing no penalty in the present circumstances. There is no need to address the other grounds put forward by Aermec.