Commission Decision

of 3 April 2002

on the dual-use exemption which the United Kingdom is planning to implement under the Climate Change Levy and the extended exemption for certain competing processes

(notified under document number C(2002) 1189)

(Only the English text is authentic)

(Text with EEA relevance)

(2002/676/EC, ECSC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community and in particular the first subparagraph of Article 88(2) thereof,

Having regard to the Treaty establishing the European Coal and Steel Community and in particular Article 4(c) thereof and Commission Decision 2496/96/ECSC of 18 December 1996 establishing Community rules for State aid to the steel industry(1) ("the Steel Aid Code"),

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof and Protocol 14 thereto,

Having called on interested parties to submit their comments pursuant to Article 88(2) of the EC Treaty(2) and pursuant to Article 6(5) of the Steel Aid Code(3), respectively, and having regard to their comments, insofar as the dual-use exemption under the climate change levy is concerned,

Whereas:

1. PROCEDURE

(1) By letter dated 14 February 2000, the United Kingdom notified the Commission of the climate change levy ("CCL"). The legal basis for the CCL is the Finance Act 2000, Section 30 and Schedules 6 and 7. By letter dated 5 April 2000, the United Kingdom notified the Commission of the CCL in accordance with the Steel Aid Code.

(2) By letters dated 28 March 2001 (SG(2001) D/287332) and 5 April 2001 (SG(2001) D/287443), the Commission informed the United Kingdom that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty and, respectively, Article 6(5) of the Steel Aid Code in respect of the exemption for dual-use fuels under the CCL.

(3) The Commission decisions to initiate the procedure were published in the Official Journal of the European Communities(4). The Commission called on interested parties to submit their comments.

(4) The Commission received comments from interested parties. In relation to its investigation under Article 88(2) of the EC Treaty, the Commission received observations from the British Cement Association, by letter of 31 July 2001, and from the British Lime Association, by letter of 31 July. Additionally, in relation to its investigation under Article 6(5) of the Steel Aid Code, the Commission received observations from the UK Steel Association, by letter of 27 July 2001; the European Independent Steelworks Association, by letter of 2 August 2001; Corus, by letter of 19 July 2001; and ASW, by letter of 6 August 2001. The Commission forwarded these comments to the United Kingdom by letters of 7 and 21 August 2001.

(5) By letter of 6 August, the United Kingdom submitted a response to the Commission's letters of 28 March and 5 April. By letter dated 21 September, the United Kingdom submitted its comments on the third-party observations.

2. DETAILED DESCRIPTION

2.1. Climate change levy

(6) The CCL package takes forward the British Government's policy on environmental taxation and is a central part of the British Government's climate change programme, which sets out the Government's proposals for meeting the United Kingdom's legally binding target of a 12,5 % reduction in greenhouse gas emissions (Kyoto Protocol) and for moving towards the British Government's domestic goal of a 20 % reduction in carbon dioxide emissions by 2010.

(7) The CCL is designed to cover non-domestic use of energy products for fuel purposes. Fuel purposes include lighting, heating, motive power and power for appliances. Energy products used for fuel purposes are subject to the CCL when used by consumers in industry (including fuel industries), commerce, agriculture, public administration and other services. The tax is levied at the point of sale to the final consumer. Taxable commodities are electricity, gas, coal and other solid fuels and liquefied petroleum gas.

(8) Mineral oils are not within the scope of the tax because they are already subject to excise duty in accordance with Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils(5) ("the Mineral Oils Directive").

(9) The legal basis of the CCL is the Finance Act 2000, Section 30 and Schedules 6 and 7, which received Royal Assent on 28 July 2000.

(10) In its Decisions sent on 28 March and 5 April 2001, the Commission raised no objections to certain exemptions from the CCL, namely: an exemption for electricity, gas and coal used in public transport and rail freight; an exemption for input fuels and electricity generated by good quality combined heat and power plants; an exemption for electricity generated from clean energy sources; and reductions for facilities entering into climate change agreements. In so far as these measures contained elements of State aid, they were notified by the British authorities for a period of 10 years. To the extent that the Commission raised no objections, the CCL came into force on 1 April 2001.

2.2. Non-fuel and dual-use exemption

(11) Under the CCL, energy products falling within the scope of the levy will be exempt from it where they are used for purposes other than as fuel. Thus the CCL does not apply to energy products used entirely as a raw material (the non-fuel exemption). Additionally, where an energy product is used principally for non-fuel purposes, the use of the product is exempt from the CCL (dual-use exemption). A full list of processes that involve the dual use of fuel is contained in the climate change levy (use as fuel) Regulations 2001. The Commission initiated the investigation procedure under Article 88(2) of the EC Treaty and Article 6(5) of the Steel Aid Code in respect of this dual-use exemption.

2.3. Reasons for opening the procedure

(12) In the opening of the procedure, the Commission expressed doubts that the dual-use exemption could be considered as a general measure, as it would favour certain undertakings or the production of certain goods, namely, some metals, batteries and some chemicals. The Commission also considered that, within the steel production sector, the exemption favours one or more undertakings over others, depending upon the production method employed.

(13) The Commission considered that the dual-use exemption would not be justified on the basis of the nature and logic of the tax system, because it would not be consistent with the objective of the CCL to reduce emissions of carbon dioxide. The Commission noted the claim made by the British authorities that the imposition of the CCL solely on energy used for fuel purposes is consistent with the provisions of the Mineral Oils Directive and the proposal for a Council Directive restructuring the Community framework for the taxation of energy products(6) ("the Proposal").

(14) However, the Commission noted that such a definition of the scope of an energy tax, whereby not all uses of energy products are taxed, may be in the logic of a system such as that established in the Mineral Oils Directive and the proposal. However, the Commission considered that the proposed dual-use exemption goes beyond such a definition of the scope of the levy. The reasons for this doubt were as follows.

(a) The United Kingdom exempts fuels entirely from the levy, even if they are only partially used for non-energy purposes as defined above. The Commission doubted, however, that the British authorities cannot establish a mechanism whereby an estimation of fuel/non-fuel uses for certain processes can be made and levy imposed accordingly.

(b) The exemption does not treat comparable situations equally, in so far as some dual-use processes are exempt from the levy, while other processes, which could also be considered as dual-use, are not exempt.

(c) The proposal is not in force and cannot be relied upon as a reference point to establish the logic and general nature of the tax system. However, it may provide some indication. The Commission noted that the exemption does not extend to energy used in all metallurgical processes, as would be required under Article 13(1)(a) of the proposal.

3. COMMENTS FROM INTERESTED PARTIES

(15) The observations received from third parties can be summarised as follows.

(a) The British Cement Association supports the principle of the dual-use exemption, but is concerned that, in practice, comparable situations are not treated equally. In particular, the CCL discriminates against the manufacture of cement. The dual-use exemption creates a distortion in competition between cement and concrete products and those steel products manufactured by use of the blast furnace.

According to the British Cement Association, the dominant chemical reaction of cement is the chemical decomposition of calcium carbonate (CaCO3) to calcium oxide (CaO). Conversion of CaCO3 to CaO is a chemical reaction which typically requires 496 kWh of energy per tonne of CaCO3 with a similar figure for dolomitic limestone. In the cement-making process, most of the energy supplied as fuel is used to drive the chemical reaction for the calcination of lime.

(b) The British Lime Association supports in principle the United Kingdom's dual-use approach but is concerned that, in practice, this does not treat comparable situations equally, and discriminates against lime. It considers that the dual-use exemption threatens to distort competition in the United Kingdom, and that the list of exempt uses should be amended to include lime.

According to the British Lime Association, energy is required in the lime manufacturing process to convert an ore, limestone, to an active chemical, lime. The chemical reaction which defines the manufacture of high calcium lime is: CaCO3 CaO + CO2. The chemical reaction which defines the manufacture of dolomitic lime is: CaCO3 MgCO3 + energy = CaOMgO + 2CO2. In commercial production, the energy required to convert limestone to lime is thermal energy at a temperature in excess of 1000 °C.

(c) The UK Steel Association does not comment on whether the dual-use exemption is a general measure or within the nature and logic of the tax system. It is concerned by the distortion of competition caused by the dual-use exemption and considers that the preferred way to end the distortion would be for the British Government additionally to exempt from the CCL electricity used in the electric arc furnace.

(d) The European Independent Steelworks Association claims that the non-fuel use of coke in the blast furnace is less than 50 % of coke input and that it should not be too difficult to apportion the fuel and non-fuel use. It considers that the electric arc furnace should be exempt as a metallurgical process, in line with the proposal, and that the exemption of coke in the blast furnace without a similar exemption being granted to the electric arc furnace steelmakers is an aid to the British blast furnace steel maker which is contrary to the ECSC State aid rules.

(e) ASW maintains that the dual-use exemption is a State aid which applies only to Corus, which discriminates against the electric arc furnace and which cannot be justified on the basis of the logic and nature of the system. It considers that the non-fuel element of coke in the blast furnace represents at best 47 % of coke input. It underlines that the electric arc furnace is the less environmentally damaging steel production process, as it requires less energy and produces less carbon dioxide. It also considers the dual-use exemption to be incompatible with the proposal, as it does not extend to all metallurgical processes. Finally, it does not consider that the dual-use exemption complies with the Community guidelines on State aid for environmental protection(7) ("the environmental aid guidelines").

(f) Corus considers that the dual-use exemption is not State aid, as it is justified by the nature or general scheme of the system. It considers that it follows the general principles established in the Mineral Oils Directive and the proposal. Its view is that the blast furnace uses coke as a raw material and that only between 0 % and 3 % of the coke charged is used for purposes other than chemical reduction. It considers that, in the electric arc furnace, only the carbon additions (in the form of coke or coal) are used as raw material. It considers that any economic disadvantage suffered by electric arc producers is de minimis. Finally, it is of the view that if the dual-use exemption is to be considered as State aid, it is compatible with the environmental aid guidelines.

4. COMMENTS FROM THE UNITED KINGDOM

4.1. Apportionment

(16) The United Kingdom's position is that the CCL extends to taxable commodities only when used solely for fuel purposes. The view of the British authorities is that where a taxable commodity is used for both a fuel purpose and a non-fuel purpose (as a raw material) the CCL cannot be levied on the part of the taxable commodity used for the fuel purpose (apportionment).

(17) In support of this position, the British authorities highlight the fact that none of the submissions made by interested parties saw apportionment as a solution to the dual-use issue. The British authorities draw the Commission's attention to the wide variety of figures quoted as purporting to define the energy and non energy proportions of coke used in blast furnaces, making it difficult to accurately identify the fuel and non-fuel uses of energy products. The British authorities also maintain that highly variable factors, such as the quality of coke and ore, would have to be accounted for.

(18) The British authorities ask the Commission to note that no other Member State has utilised a method of apportionment to deal with the issue of dual-use fuels. The British authorities contend that this supports their view that apportionment is not scientifically possible or practical.

4.2. Dual-use in the nature and logic of the system

(19) Because the British authorities do not consider apportionment to be possible, they maintain that where the taxable commodity performs a dual use, it is within the logic and nature of the system to grant a full exemption to the commodity, where it is used primarily as a raw material (non-fuel use), but where it also provides, as a by-product, an element of heating. According to the British authorities, an exemption for dual use is in the logic and nature of the system for the same reasons as the exemption for non-fuel uses.

(20) According to the United Kingdom, the exemption for non-fuel uses reflects the widely accepted view that there are manufacturing processes which use particular forms of energy not for heating or lighting, or electronic or motive power, but exclusively as a raw material. The CCL, in line with its objectives and in common with other energy taxation in the United Kingdom, is levied on the use of energy as fuel. Raw material uses of energy do not fall within the intended scope of energy taxation in the United Kingdom - they are exempted from both the CCL and mineral oil excise duties.

(21) The British authorities underline that the exemption for non-fuel uses has been approved by the Commission. This exemption is part of the nature and logic of the system of taxation for two reasons.

(a) The input of the energy as a raw material is determined by the chemistry of the reactions. A given amount of production requires the input of a given amount of energy product. This chemical and physical relationship cannot be altered. This removes the scope for the producer to improve the efficiency of the operation in terms of the amount of energy product required. Imposing the CCL on energy in these circumstances (which would normally increase incentives to use energy more efficiently) would therefore serve no purpose.

In the steel sector, the British authorities accept that there are a number of options associated with the blast furnace's auxiliary processes (those which use energy as fuel and do not benefit from the dual-use exemption), which can improve efficiency. These include such items as blower efficiency, temperature control, pipework insulation and use of heat recovery. However, it is maintained that none of these steps would reduce the amount of raw material coke or oil injectant needed to produce the chemical reduction.

(b) The type of raw material required is severely constrained by the chemistry of the reaction. For example, some reactions require solid carbon-based fuels, others require energy supplied as a raw material in the form of gas. It is not possible for the producer to switch to alternative sources of energy, such as renewably generated electricity, and therefore imposing the CCL on energy in these circumstances (which would normally create an incentive to switch to such other sources) would have no purpose.

(22) The British authorities consider that the non-fuel and dual-use exemptions are entirely within the nature and logic of an energy taxation system and that there is no difference in principle between non-fuel uses of energy and dual-use fuels. The British authorities therefore maintain that there should be no difference in the approach taken to the taxation of non-fuel and dual-uses.

(23) The British authorities maintain that the non-fuel and dual-use exemptions are consistent with all other aspects of the CCL. Other exemptions and discounts within the CCL demonstrate this logic. The package of measures forming the CCL contains exemptions for public transport, some renewable energy and good-quality CHP and temporarily for natural gas in Northern Ireland. It also includes CCL reductions for facilities which enter into energy-saving agreements. The British authorities believe that these aspects of the CCL package are clearly targeted at achieving the same overall objectives and fit equally well within the nature and logic of the CCL.

(24) In relation to the observations received from third parties, the British authorities consider that the majority of the submissions are fully supportive of the principle of the dual-use exemption and that the main area of dispute is whether the correct processes benefit from the exemption. In relation to the particular observations submitted by the British Cement Association and the British Lime Association, the British authorities note that both associations state that chemical transformations are involved in cement and lime manufacturing - making them mineralogical transformation processes, and thus entitled to the dual-use exemption. The British authorities do not dispute the chemical information provided but contend that this is irrelevant to an assessment of eligibility for the dual-use exemption. In cement and lime manufacture, energy is necessary to the reactions purely as a fuel. Energy, in the form of heat, provides the temperature necessary for the calcination of lime or for the calcium carbonate and/or magnesium carbonate feedstocks to react. In both cases, energy is used as fuel rather than as a raw material. The British authorities stress that the dual-use exemption applies to processes where an energy product has a primary purpose as a raw material, but where it also provides heat as a by-product. Because energy is not used as feedstock or raw material in cement or lime production, it would conflict with the nature and logic of the CCL to include cement or lime production in the list of processes eligible for the dual-use exemption.

(25) Whilst maintaining that the dual-use exemption is in the nature and logic of the CCL, which is an environmental tax, the British authorities accept that it could, in certain situations, lead to perverse environmental effects. This is the case where a process is exempted from the levy because of the dual-use provision, while a competing process that is less environmentally damaging is taxed. For this reason, the British authorities are committed to a general removal of such distortions, and have modified their notification accordingly.

(26) The British authorities propose to modify the dual-use exemption to cover situations where a less energy-intensive recycling process is liable to higher CCL payments than a more energy-intensive, competing, primary process which falls within the exemption for non-fuel use or dual use. This new exemption is designed to apply in these very limited circumstances where the nature and logic of the CCL system of energy taxation currently produces a result contrary to the overall environmental aim of the levy. It will apply only:

(a) to recycling processes, where the recycling process is less energy intensive (defined as using less energy to produce an equal quantity of product) than the primary process, but where the recycling process is liable to a higher CCL charge than the primary process (defined as the CCL payable per tonne of product); and

(b) where this situation arises because the primary process is eligible for a non-fuel or dual-use exemption from CCL; and

(c) to those processes or part processes which directly compete - for example in steel manufacturing the new exemption would only apply to the energy used in an electric arc furnace because that is the process which competes with the primary producers' blast furnace, and would not apply to any other part of the steel production process.

(27) The British authorities undertake to publicise the terms of the exemption and invite those businesses who believe they may be eligible to apply, with supporting evidence. All applications would be assessed against the criteria outlined above - with specialist technical input being obtained when required. Valid applications would be approved and the recipients would be entitled to submit a levy-reduction certificate to their energy supplier (or amend certificates already submitted for other benefits).

4.3. Scope of the exemption

(28) The position of the British authorities is that they have accurately identified the processes that meet the criteria for a dual-use exemption and that these are listed in the Climate change levy (use as fuel) Regulations 2001. The British authorities maintain that the uses of energy identified for exemption from the CCL are the result of expert consideration within HM Customs and Excise and supplementary, independent scientific advice from the Energy technology support Unit (ETSU). Where appropriate, the British authorities undertook technical consultations with representatives from the industries concerned.

(29) In relation to the observations received from third parties, the British authorities make the general point that there is a clear difference between fuel for heating, which then allows a chemical reaction to take place, and fuel that is used as a raw material. In the former case, it does not matter how the fuel or heat is generated. In the latter case, the amount and type of energy is determined very precisely by the nature of the chemical reaction.

(30) The British authorities therefore consider that the electric arc furnace and other processes which have been raised by third parties (cement, glass, ceramics and lime) do not fulfil the criteria for a dual-use exemption. The fuel is not used as a raw material; nor is its use determined by immutable scientific equations. Rather, it is used for pure heating purposes.

(31) In relation to the particular observations received from third parties in the steel sector, the British authorities do not agree that the use of coke in the blast furnace should be considered primarily as a fuel use (as suggested by ASW and the European Independent Steelworks Association). The British authorities consider that the technical basis for the claim that less than 50 % of the coke is used in the blast furnace is based on an inaccurate interpretation of figures provided by the International Iron and Steel Institute(8). The British authorities consider that a more accurate interpretation of the figures would be that between 57 % and 90 % of the coke input into the blast furnace is used for non-fuel purposes, but that there will be very significant variations determined by factors such as the quality of the ore and coke(9).

(32) Nor do the British authorities accept that both the blast furnace and electric arc furnace should be exempted from the CCL as metallurgical processes (as suggested by EISA, ASW and the UK Steel Association). The British authorities consider that there is no agreed definition of metallurgical processes for the purposes of Article 13(1) of the proposal and are of the view that the dual-use exemption encompasses all processes, including metallurgical processes, where energy has a primary purpose as a raw material, but where it also provides heat as a by-product.

(33) In relation to the observations received concerning processes that fall within the EC Treaty, the British authorities consider that the processes referred to, which can be considered as mineralogical processes, do not qualify for the dual-use exemption. In cement and lime manufacture, energy is necessary purely as a fuel, to provide the necessary temperatures for the calcination of lime or for the calcium carbonate and/or magnesium carbonate feedstocks to react. Accordingly, it would not be in keeping with the logic and nature of the CCL to include cement or lime production in the list of processes eligible for the dual-use exemption.

(34) The British authorities' evaluation of the exemption for less environmentally damaging direct competitors is that its effects will be limited to secondary metal producers in the ferrous and non-ferrous sectors. The British authorities are not aware of any other products or production processes which would meet the eligibility criteria. For example, they do not consider that other recycling processes such as glass, rubber, plastics, cement, lime or ceramics, would be eligible. This assessment is, however, without prejudice to applications for further processes, which will be considered against the criteria outlined above.

5. ASSESSMENT OF THE MEASURE

(35) The dual-use exemption falls to be assessed under Article 87 of the EC Treaty, Article 4(c) of the ECSC Treaty, the Steel Aid Code, and Article 61(2)(a) of the EEA Agreement and Protocol 14 thereto.

(36) Article 87(1) of the EC Treaty provides that any aid granted by a Member State or through State resources in any form whatsoever, which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market. Point (c) of Article 4 of the ECSC Treaty recognises as incompatible with the common market and prohibits subsidies or aid granted by States in any form whatsoever.

(37) The introduction of environmental taxes on the consumption of electricity, coal and other solid fuel, gas and liquefied petroleum gas are not as such caught by Article 87 of the EC Treaty or Article 4(c) of the ECSC Treaty in so far as they are general measures which do not favour particular firms or sectors of industry. However, exceptions to a general tax, reduced tariffs and refunds from the tax do fall within the scope of Article 87 of the EC Treaty and Article 4(c) of the ECSC Treaty if they are aimed at certain firms or sectors and unless these exemptions are justified by the nature or general scheme of the system (see the principles set out in Commission notice on the application of the State aid rules to measures relating to direct business taxation(10), and in particular point 13 et seq.).

(38) The Commission considers that the dual-use exemption gives benefiting companies an advantage, which is financed through State resources. In assessing whether this exemption is a general measure, as the British authorities claim, or whether it constitutes State aid, the Commission considers it necessary to assess whether the effects would favour certain undertakings or the production of certain goods. The Commission notes that the dual-use exemption benefits only certain undertakings and certain sectors. According to the information provided by the British authorities, the dual-use exemption extends to the use of energy products in certain limited processes, as listed in the Climate change levy (use as fuels) Regulations 2001. The Commission therefore considers the dual-use exemption to be a selective measure.

(39) The Commission notes that it falls to be considered whether the dual-use exemption is justified by the logic and nature of the system of taxation.

(40) The Commission notes that the CCL is levied on energy used for fuel purposes, but is not levied on energy used for non-fuel purposes. The Commission accepts that it is within the logic and nature of an environmental tax system to levy the tax on energy products used for fuel, but to exempt energy products used purely for non-fuel purposes. The Commission has accepted this exemption under the CCL.

(41) The Commission notes that the British authorities have reached their conclusions on the processes that use energy products purely for fuel purposes, on the basis of expert consideration within HM Customs and Excise and, where appropriate, supplementary, independent scientific advice from the Energy technology support unit. The Commission further notes that none of the observations submitted by third parties contend that electricity used in the electric arc furnace, or the energy used for the production of cement or lime, is used as a raw material or reductant. Accordingly, the Commission accepts the position of the British authorities that the energy products used in these processes are used principally for fuel purposes.

(42) In its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty and Article 4(c) of the Steel Aid Code, the Commission expressed doubts about the failure of the British authorities, in relation to processes that use energy partly for fuel and partly for non-fuel purposes, to apportion the CCL accordingly. Indeed, the Commission doubted whether a full exemption for dual-use processes was necessary.

(43) The Commission notes, however, on the basis of the information provided during the investigation procedure, that there appear to be considerable practical difficulties in apportioning the CCL on the fuel part of energy used for dual purposes. The Commission further notes that highly variable factors, such as the quality of the raw materials, must be taken into account in apportioning the fuel/non-fuel use of energy. The Commission notes that none of the parties who submitted observations to the Commission identified apportionment as an alternative to the dual-use exemption. The Commission accepts that apportionment may not be a viable option for the British authorities.

(44) The Commission further notes that the dual-use exemption extends to situations where an energy product is used primarily as a raw material, but provides an element of heat as a by-product. The Commission notes that in such circumstances, the type and amount of the energy product required may be determined by the nature of the chemistry of the reaction. The Commission notes that, where this is the case, the scope for a producer to change the type and amount of the energy product required for the process is very limited.

(45) Moreover, in so far as the proposal for a directive on the taxation of energy products may provide some indication of whether the dual-use exemption is in keeping with the general logic and nature of the system, the Commission notes that Article 13(1)(a) of the proposal provides an exemption for energy products and electricity used principally for the purposes of chemical reduction and in metallurgical and electrolytic processes. The Commission, therefore considers that a dual-use exemption is, in principle, in line with the proposal where an energy product or electricity is used primarily for a non-fuel use.

(46) Taking all these elements into account, the Commission, therefore, considers that, at least where apportionment is not a viable option, it is within the logic and nature of the environmental tax system to provide an exemption for energy products used primarily for non-fuel purposes. The Commission accepts, on the basis of the information gathered during its investigation, that the coke in the blast furnace is used primarily for the purposes of chemical reduction.

(47) The Commission expressed doubts as to the effects of the dual-use exemption. The Commission notes that the application of the dual-use exemption can lead to a distortion of competition and some adverse environmental consequences, in that the less environmentally damaging processes may be treated unfavourably by comparison with directly competing processes that fall within the scope of the dual-use exemption.

(48) The British authorities recognise these consequences of the CCL and have accordingly modified their notification by further undertaking to exempt certain processes when particular criteria are fulfilled.

(49) The Commission notes the United Kingdom's evaluation of the effects of the modification, namely that they will be limited to secondary metal producers in the ferrous and non ferrous metal sectors, as these are the only sectors in which less environmentally damaging recycling production processes compete with primary processes falling within the scope of the dual-use exemption. The Commission notes the United Kingdom's position that the modification will not affect cement or lime production, as neither is a recycling process and neither faces distortion due to the application of the non use or dual-use exemption to a competing primary production process.

(50) It falls to be considered whether the exemption extended to competing processes is justified by the nature and logic of the scheme, or whether it constitutes State aid.

(51) In light of the scope of the CCL, to tax the fuel use of energy, the Commission does not consider that the exemption for processes that would be classified as using energy products purely for fuel purposes are in keeping with the nature and logic of the system.

(52) The Commission, therefore, considers the exemption to constitute State aid. It falls to be considered whether the exemption can be considered compatible with the Treaty. The Commission notes that Article 87(3)(c) of the EC Treaty provides that aid to facilitate the development of certain economic activities may be considered to be compatible with the common market where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(53) The Commission notes that under the modification notified by the British authorities, directly competing primary and recycling production processes will be treated in a like manner for the purposes of taxation under the CCL. The Commission considers that the modification will, therefore, significantly reduce the distortions of competition and mitigate the adverse environmental consequences that would otherwise arise from the operation of the dual-use exemption. In such circumstances, the Commission considers that such an exemption, which limits the negative environmental consequences that would otherwise arise from the dual-use exemption, is acceptable from the point of view of the Community's environmental policy. The Commission does not consider the exemption to adversely affect trading conditions. Indeed, it is designed to ensure the maintenance of equitable trading conditions. The Commission, therefore, finds that the aid can be considered as compatible with the common market for an initial period of 10 years, until the other State aid elements of the CCL fall to be renotified.

(54) Accordingly, in the light of the position of the British authorities and of their undertaking to treat directly competing primary and recycling production processes in a like manner for the purposes of taxation under the CCL, thereby limiting the disadvantage to the less environmentally damaging processes, the Commission's doubts about the environmental consequences and distortion of competition are allayed.

6. CONCLUSION

(55) In view of the foregoing, the Commission considers that the dual-use exemption is within the logic and nature of the CCL. The Commission considers that the exemption for less environmentally damaging processes, namely recycling production processes that compete directly with primary production processes falling within the scope of the non-fuel or dual-use exemption, constitutes a compatible State aid. The Commission, therefore, approves the dual-use exemption and raises no objections to the exemption for competing processes,

HAS ADOPTED THIS DECISION:

Article 1

The dual-use exemption which the United Kingdom is planning to implement under the climate change levy, instituted by Section 30 and Schedules 6 and 7 of the United Kingdom Finance Act 2000, does not constitute aid within the meaning of Article 87(1) of the EC Treaty or point (c) of Article 4 of the ECSC Treaty.

Article 2

The exemption for less environmentally damaging processes, namely recycling production processes that compete directly with primary production processes falling within the scope of the non-fuel or dual-use exemption, constitutes State aid within the meaning of Article 87(1) of the Treaty.

However, the aid meets the conditions for exemption under Article 87(3)(c) of the Treaty and is therefore compatible with the common market.

This approval is given for an initial period of 10 years.

Article 3

This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland.

Done at Brussels, 3 April 2002.

For the Commission

Mario Monti

Member of the Commission

(1) OJ L 338, 28.12.1996, p. 42.

(2) OJ C 185, 30.6.2001, p. 22.

(3) OJ C 191, 7.7.2001, p. 3.

(4) See footnotes 2 and 3.

(5) OJ L 316, 31.10.1992, p. 12.

(6) OJ C 139, 6.5.1997, p. 14.

(7) OJ C 37, 3.2.2001, p. 3.

(8) Energy use in the steel industry, Committee on Technology, Brussels, September 1998, International Iron and Steel Institute, paragraph 3.3.8.3. CJ Cairns et al.

(9) This interpretation of the figures was confirmed to the Commission by the author of the report.

(10) OJ C 384, 10.12.1998, p. 3.