Finding common ground: INEOS FPS LTD v Scottish Environment Protection Agency

A recent decision of the Scottish Land Court highlights the court system’s overall aim in ensuring balance, proportionality and fairness in relationships between regulators and duty holders.

The UK Emissions Trading Scheme

INEOS appealed the Scottish Environment Agency’s (SEPA) decision to impose civil penalties totalling £68,960, following an admitted breach by the former of the Greenhouse Gas Emissions Trading Scheme Order 2020. The 2020 Order introduced a UK Emissions Trading Scheme (“ETS”) which requires operators to measure and report their carbon emissions over the relevant yearly period, and to surrender allowances in proportion to the emissions from their installations. Participants are typically given some of these allowances but must trade or purchase others through auctions.

Initial SEPA penalties

In 2017, INEOS had taken over a site that created propane gas emissions during the operation of product driers. INEOS calculated its mission volumes using a design value for the product drier, and in 2023, it discovered that the void space in the drier was significantly larger than it had thought. INEOS had relied upon a void space value of 5% based on manufacturer figures provided by the previous owner upon takeover. However, upon contacting the drier manufacturer during a separate engineering project, it came to light that the correct figures resulted in a void space value of 37%.

As a result, SEPA imposed civil penalties totalling £68,960, discounted by half from £137,920, which INEOS then appealed. In their submissions, SEPA contended that the penalties were lawfully imposed, reasonably calculated and appropriately reduced given the circumstances. The error had persisted for 6 years and had resulted in an underreporting of almost 7,000 tonnes of CO2 equivalent, a significant figure. Reliance on manufacturer data, even if in good faith, did not absolve the appellant of its responsibility as a duty holder.

SEPA sought to strike a balance in its enforcement, weighing INEOS’s transparency and voluntary surrender of its allowances upon discovering the error, with the importance of accurate reporting of emissions being fundamental to the effective operation of the UK ETS. SEPA followed procedure properly, issuing a Notice of Intent and inviting representations. It calculated the penalties in accordance with the statutory formula and its own internal guidance. The reductions applied were the maximum available under its methodology, and it also waived entirely a £20,000 penalty for breaching enforcement conditions.

INEOS’ appeal

INEOS appealed on the basis that whilst the 2020 Order gave SEPA power to impose a penalty, it did not create a mandatory obligation. It submitted that this was recognised by SEPA’s own guidance, which emphasised that penalties should be fair, proportionate and appropriate in the circumstances. Moreover, SEPA was not prevented from waiving the penalty entirely, where circumstances justified. It argued that the breach was unintentional, non-systemic, promptly remedied, and that it had voluntarily calculated and surrendered the allowances prior to any enforcement action being taken. SEPA, INEOS argued, failed to exercise its discretion in a fair, proportionate or reasonable manner, failing to consider mitigating circumstances. It risked, in effect, creating a de facto strict liability regime, which the legislation did not provide for.

The court’s decision

In its decision, the Scottish Land Court struck down the middle. It recognised that SEPA had provided the maximum possible discount allowed under its own methodology, but felt that, nonetheless, insufficient weight was given to the mitigating conduct on the part of INEOS. On the other hand, the court recognised that the imposition of a penalty, in principle, was appropriate having regard to SEPA’s duty to ensure that operators met their reporting obligations. It also noted that the breach in question persisted for six years.

The court ruled that whilst the imposition of a penalty was lawful and correct, the penalty itself was disproportionate to the breach. Applying what it described as the “judicial blunt axe”, it increased the discount from 50% to 80% resulting in a reduction in the total penalty from £68,960 to £27,584. It was, however, keen to stress that the decision should not be taken to set a precedent and was contingent on the circumstances of this case.

How we can help

Anderson Strathern advises regulators, companies and individuals alike. The regulators we advise are approachable, collaborative, and are keen to work with duty holders to ensure that fair and proportionate outcomes are reached, having regard to all relevant factors whilst balancing the public interest. The outcome detailed above perhaps highlights the potential benefit in early dialogue between duty holders and regulators. The court ruled that SEPA were correct in applying a penalty, but at the same time, saw fit to reduce the extent of that penalty in recognising the positive actions on behalf of INEOS when the admitted breach was discovered; a “score draw”, effectively. Whilst not appropriate in every case, prompt discussion often avoids lengthy and costly proceedings where, on many occasions, a compromise can be found. At Anderson Strathern, we recognise and are keen to explore the potential advantages in early discussions for both regulators and duty holders.

To discuss any of the issues raised in this case, or for any health and safety or regulatory queries, please contact Calum Sweeney (calum.sweeney@andersonstrathern.co.uk) or Julia McDonald (julia.mcdonald@andersonstrathern.co.uk).