Methane is a hydrocarbon, so its emissions in the atmospheric air are the subject to environmental taxation – Administrative Cassation Court of the Supreme Court

Judicial Chamber for Cases on Taxes, Fees and Other Obligatory Payments of the Administrative Cassation Court of the Supreme Court gave an assessment on the points of existence/absence of the obligation to pay the environmental tax for emissions of methane into the atmospheric air, and also in respect of application of the methods for measuring amount of these emissions from the total industrial and technological losses.

PJSC "Kryvorizhgaz" appealed to the court against a tax notice-decision of the Major Taxpayers’ Office of the SFS with the obligation for the Appellant to pay environmental tax in respect of emissions into the atmosphere from the stationary sources of pollution for a total of UAH 2 million.

The Appellant, in particular, invoked the fact that methane is a greenhouse gas and does not belong to the category of pollutants, so its emissions are not the subject to taxation.

The Respondent reasoned that the list of pollutants includes, in particular, "hydrocarbons" that comprise "methane" - the main component (96-97.6%) of the natural gas. Moreover, in view of the fact that emissions of methane as pollutant come from equipment and emission reporting in respect of each individual source makes no sense, it is necessary to calculate the environmental tax for the enterprise as a whole.

Having satisfied appeal, the first and appellate courts relied on the fact that methane is a greenhouse gas and does not belong to the category of pollutants, therefore, under efficient laws such emissions are not regulated, as well as indicated that industrial and technological losses of natural gas are the part of emissions into the atmospheric air by stationary sources in the process of the main type of industrial activity, however there are no methods that would measure a definite scope of these expenses in the total scope of natural gas for industrial and technological losses.

When reviewing the dispute under cassation appeal of the Major Taxpayers’ Office of the SFS, the Supreme Court cancelled decisions of the previous courts and referred case for the new consideration to the court of first instance.

The Judicial Chamber noted that the courts erroneously concluded that methane emissions are not the subject to taxation, as far as, paragraph 243.1 of Article 243 of the Tax Code provides the tax rates for the air emissions of pollutants from stationary sources and a list of certain pollutants with "hydrocarbons" and "solids" among them.

The list of pollutants, which are combined in these groups, was approved by the Order of the Ministry of Ecology and Natural Resources of Ukraine of 14 March 2002 No. 104 "On approval of the List of substances included in "solids" and "hydrocarbons" whose emissions are taxable. According to this list, hydrocarbons comprise methane. According to Annex II of the Protocol on Pollutant Release and Transfer Registers of 21 May 2003 (UN; Protocol, International Document), methane (CH 4) is a pollutant.

In view of the above, the Judicial Chamber of the Supreme Court concluded that there is an obligation to pay environmental tax for emissions of natural gas (methane) that belongs to hydrocarbons, as prescribed by the Tax Code of Ukraine.

Moreover, the Judicial Chamber does not see any obstacles to the application of the quantities calculated in accordance with the methods approved by the Order of the Ministry of Fuel and Energy of Ukraine of 30 May 2003 No. 264 "On approval of methods for measuring specific losses and industrial expenses of natural gas during its transportation by the gas distribution networks".

Therefore, the court of first instance in the context of the new trial should examine the evidence provided by the parties in respect of measuring the amount of actual methane emissions that are subject to environmental taxation, in particular, to assess the calculations of the tax agency.

Ruling of the Supreme Court of 25 February 2021 in case No. 160/8128/18 (administrative proceeding No. К/9901/34074/19) – https://reyestr.court.gov.ua/Review/95240809