State aid - United Kingdom

Aid C 12/03 (ex 778/02) - Climate Change Levy Exemption for Coal Mine Methane

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2003/C 69/05)

(Text with EEA relevance)

By means of the letter dated 5 February 2003 reproduced in the authentic language on the pages following this summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty concerning the abovementioned measure.

Interested parties may submit their comments within one month of the date of publication of this summary and the following letter, to: European Commission Directorate-General for Competition

Directorate G

B - 1049 Brussels Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

1. Description

On 5 December 2002 the United Kingdom notified the exemption from Climate Change Levy (CCL) charged to suppliers of electricity produced from Coal Mine Methane (CMM) from abandoned coal-mines.

CMM is a potent greenhouse gas, currently venting into the atmosphere. At present, there are four CMM extraction sites being utilised for electricity generation with a total generating capacity of 35 MW.

The aim of the scheme is to incentivise the industry to develop further installations at about 40 further sites of abandoned coalmines, with around 175 MW added capacity. Because of the uncertainty over the exact level of the environmental benefit from the scheme, the Government intends to hold a review of the exemption in 2004/2005. The scheme however is notified for a duration of ten years.

The aid operates by giving a tax exemption equal to a flat rate of GBP 4,30 per MWh of electricity generation from CMM. As the estimated 40 plants incentivised by the exemption will not be all uneconomical up to point of the full support level, the measure will involve some dead-weight loss.

The scheme will directly benefit the generators/suppliers of electricity derived from CMM, but the tax exemption is likely to be shared with the company which extracts the gas. There are three companies who currently extract CMM to sell to electricity generators in the United Kingdom. There are also three electricity producers working with them.

2. Assessment

2.1. The Member State's position

The United Kingdom Government argues that in the same way as the Commission decided that the tax exemption for electricity from renewable sources did not constitute State aid(1), also the current measure is in the logic and nature of the tax scheme. If however the exemption does constitute State aid, it could be approved under section F "Policies, Measures and Instruments for Reducing Greenhouse Gases", points 68 to 71 of the environmental aid guidelines.

2.2. The Commission's preliminary assessment

2.2.1. The existence of State aid

The measure will give an advantage to electricity generators using CMM as input, and is therefore selective. The advantage is granted through state resources as the State suffers a loss of tax revenues. The recipients exercise an economic activity on markets on which there is trade between Member States. The scheme thereby distorts or threatens to distort competition and could affect trade between Member States.

The Commission has doubts that the selective advantage which the measure grants, is justified by the logic and nature of the tax system itself. The tax is due because of the harmful effect of the use of energy on Climate Change. It is therefore in the nature of the tax to exempt the use of energy which production has no harmful effect. This is the case e.g. for electricity from renewable sources, as these sources do not contribute to long-cycle CO2. Electricity production from CMM has, like electricity production from other fossil sources, harmful effects and is therefore not of the same nature as electricity from renewable sources. In fact, electricity production from CMM is not different in terms of CO2 emissions than electricity production from natural gas. However, it is true that the use of CMM for electricity production avoids CMM released in the atmosphere as the unused CMM is leaking. The Commission is of the preliminary opinion that this does not alter the nature of the support in terms of existence of state aid.

2.2.2. Compatibility of the aid with State aid rules

The aid does not seem to be compatible with the Community guidelines on State aid for environmental protection (thereafter the guidelines)(2).

The measure envisages a new, full exemption from an existing environmental tax for a duration of 10 years. For such an exemption point 51.2 of the guidelines requires that the derogation for the firms concerned must have become necessary as a result of a significant change in economic conditions that placed the firms in a particularly difficult competitive situation. This does not seem to be fulfilled.

CMM and electricity production from CMM are not renewable energy sources within the meaning of the guidelines and Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market(3). In any case, the Commission thinks that the provisions of section E.3.3 of the guidelines are not respected.

Point 51.3 of the guidelines allows that Member States may also encourage the development of processes for producing electric power from conventional energy sources such as gas that have an energy efficiency very much higher than the energy efficiency obtained with conventional production processes. In such cases a total exemption may be approved for a period of five years. The Commission doubts that this provision is applicable in the present case. In any case, the notified duration of ten years exceeds the duration of five years permitted.

The provisions related to waste management and energy saving (points 42 to 46 of the guidelines) do also not seem to be fulfilled. The aid is not degressive, it is not strictly limited to compensating for extra production costs by comparison with the market prices of the relevant product or service, and the aid is not limited to five years. It is also questionable if the measure could be considered as aiming at managing waste or saving energy.

Section F of the guidelines "Policies, Measures and Instruments for reducing Greenhouse Gases" is applicable to State aid under common and coordinated policies and measures, including economic instruments, and also by means of the instruments established by the Kyoto Protocol itself, namely international emissions trading, joint implementation and the clean development mechanism. The Commission doubts that this section is applicable in the present case.

Equally, Council Regulation (EC) No 1407/2002 of 23 July 2002 on State aid to the coal industry(4) does not seem applicable either.

However, the Commission recognises the environmental benefit for climate protection that can result from the measure, even if support for such a measure has not been envisaged by the environmental aid guidelines. The Commission at the current stage though has doubts that the design of the measure may lead to overcompensation.

For all these reasons, the Commission at the current stage has doubts that the measure is compatible with Article 87 of the EC Treaty.

The quantity of electricity which could be produced from CMM in the United Kingdom is not negligible. The Commission considers the potential for electricity generation from CMM not only in the United Kingdom but also in other Member States. The Commission also considers that Member States are currently discussing the possibility for a facultative exemption from energy taxation of electricity produced from CMM in the context of the draft directive for the taxation of energy products(5). For these reasons, the Commission wants to give third parties the possibility to comment on the measure.

TEXT OF THE LETTER

"The Commission wishes to inform the United Kingdom that, having examined the information supplied by your authorities on the measure referred to above, it has decided to initiate the procedure laid down in Article 88(2) of the EC Treaty.

1. Description of the measure

By letter of 5 December 2002, registered by the Secretariat General on the same day (SG(2002) A/11958), the United Kingdom notified the exemption from Climate Change Levy (CCL) charged to suppliers of electricity produced from Coal Mine Methane (CMM) from abandoned coal-mines.

The basic legislation for the CCL is contained in Schedule 6 to the Finance Act 2000. Section 126 of the Finance Act 2002 amends Schedule 6 to the Finance Act 2002 by inserting a new subparagraph (4A) after subparagraph (4) of paragraph 19 of Schedule 6 of the Finance Act 2000(6). It will exempt from CCL supplies of electricity generated from CMM from a day to be appointed by Treasury Order. The relevant secondary legislation (Regulations 46 to 51 of the CCL (General) Regulations 2001 - SI 2001/838) will include CMM within their scope.

CMM is a potent greenhouse gas, currently venting into the atmosphere. At present, there are four CMM extraction sites being utilised for electricity generation with a total generating capacity of 35 MW.

The aim of the scheme is to incentivise the industry to develop further installations at about 40 further sites of abandoned coal-mines, with around 175 MW added capacity. Because of the uncertainty over the exact level of the environmental benefit from the scheme, the Government intends to hold a review of the exemption in 2004/05. The scheme however is notified for a duration of ten years.

The minimum value of the exemption in its first year of operation will be around GBP 1 million. If the uptake of electricity generation plants fuelled by CMM occurs as planned, revenue foregone rises to GBP 6,3 million per annum.

The aid operates by giving a tax exemption equal to a flat rate of GBP 4,30 per MWh of electricity generation from CMM. As the estimated 40 plants incentivised by the exemption will not be all uneconomical up to point of the full support level, the measure will involve some dead-weight loss.

The scheme will directly benefit the generators/suppliers of electricity derived from CMM, but the tax exemption is likely to be shared with the company which extracts the gas. There are three companies who currently extract CMM to sell to electricity generators in the United Kingdom. These are Alkane Energy, StrataGas and Octagon Energy. The electricity generators working with them are Clarke Energy, Scottish and Southern Energy and Warwick Energy.

2. Assessment

2.1. The Member State's position

The United Kingdom Government argues that in the same way as the Commission decided that the tax exemption for electricity from renewable sources did not constitute State aid(7), also the current measure is in the logic and nature of the tax scheme. This for the following reason: There are two main ways to reduce greenhouse gas emissions relating to a given level of non-domestic energy consumption. The first is to promote the use of technologies that do not contribute negatively to long-cycle greenhouse gas emissions, and this is the logic behind the exemption for certain renewable energy sources. The second is to promote the use of technologies which decrease the greenhouse gas emissions from given levels of production from other sources. Allowing CMM to escape into the atmosphere rather than harness and make use of it has a significant detrimental effect. By exempting CMM derived electricity from the CCL, significant greenhouse gas savings will be made. The environmental benefit in terms of carbon equivalent emissions avoided per kWh is as much as nine times greater than the carbon avoided from renewable sources when they are compared to what is currently considered to be the marginal fossil fuel energy source (Combined Cycle Gas Turbine). If however the exemption does constitute State aid, it could be approved under section F 'Policies, Measures and Instruments for Reducing Greenhouse Gases', points 68-71 of the Community Guidelines on State aid for environmental protection(8).

2.2. The Commission's preliminary assessment

2.2.1. The existence of State aid

The CCL on electricity is charged to suppliers of electricity. The measure exempts from the levy electricity from CMM. It is assumed that most if not the whole tax exemption is passed on to the electricity generators using CMM as input by the suppliers through higher purchase prices(9). These generators, which represent a specific category of undertakings are therefore granted an advantage. The advantage is granted through state resources as the State suffers a loss of tax revenues. The recipients exercise an economic activity on markets on which there is trade between Member States. The scheme thereby distorts or threatens to distort competition and could affect trade between Member States.

The Commission does not think at this stage that the selective advantage which the measure grants, is justified by the logic and nature of the tax system itself. The United Kingdom argues that an exemption for technologies which decrease the greenhouse gas emissions from given levels of production from other sources is in the nature of a climate change tax system.

The Commission considers the following. The tax is due because of the harmful effect of the use of energy on climate change. It is therefore in the nature of the tax to exempt the use of energy which production has no harmful effect. This is the case e.g. for electricity from renewable sources, as these sources do not contribute to long-cycle CO2. Electricity production from CMM has, like electricity production from other fossil sources, harmful effects and is therefore of a different nature than electricity from renewable sources. In fact, electricity production from CMM is not different in terms of CO2 emissions than electricity production from natural gas. It would therefore be in the nature and logic of the tax system to tax electricity produced from CCM. However, it is true that the use of CMM for electricity production avoids CMM released in the atmosphere as the unused CMM is leaking. The Commission is therefore of the preliminary opinion that this does not alter the nature of the support in terms of State aid. The Commission considers that the overall effect on greenhouse gasemissions should be taken into account when assessing the compatibility of the measure with State aid rules.

In conclusion, the Commission thinks at this stage that the tax exemption involves State aid to electricity generators using CMM (see also footnote 4). Such an aid which is not linked to investment is operating aid.

2.2.2. Compatibility of the aid with State aid rules

The Commission at this stage has doubts that the aid is compatible with the Community guidelines on State aid for environmental protection (thereafter the guidelines).

2.2.2.1. The measure envisages a full exemption from an existing environmental tax for a duration of 10 years. Point 51.2 of the guidelines allows tax exemptions from an existing environmental tax for 10 years if the following two conditions are fulfilled at the same time:

- the tax in question must have an appreciable positive impact in terms of environmental protection and

- the derogations for the firms concerned must have been decided on when the tax was adopted or must have become necessary as a result of a significant change in economic conditions that placed the firms in a particularly difficult competitive situation.

The exemption in question is newly introduced and the United Kingdom has not demonstrated a significant change in economic conditions in the abovementioned sense. Therefore the Commission has doubts that the measure complies with point 51.2 of the guidelines.

2.2.2.2. CMM and electricity production from CMM are not renewable energy sources within the meaning of the environmental guidelines and Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market(10). In any case, the United Kingdom has not invoked compatibility with the relevant provisions in section E.3.3 of the guidelines related to renewable energy sources and the Commission has doubts that these provisions are respected.

2.2.2.3. Under point 51.3 of the guidelines Member States may also encourage the development of processes for producing electric power from conventional energy sources such as gas that have an energy efficiency very much higher than the energy efficiency obtained with conventional production processes. In such cases, given the importance of such techniques for environmental protection and provided that the primary energy used reduces significantly the negative effects in terms of environmental protection, a total exemption may be approved for a period of five years where aid is non-degressive. The Commission doubts that this provision is applicable in the present case as it is primarily targeted at supporting particularly efficient generating techniques rather than the use of certain input fuels. In any case, the notified duration of 10 years exceeds the duration of five years permitted under point 51.3 of the guidelines. The conditions of point 51.1 which could allow a ten year duration under point 51.3 do not seem either to be met.

2.2.2.4. The provisions related to waste management and energy saving (points 42 to 46 of the guidelines) do also not seem to be fulfilled. The aid is not degressive, it is not strictly limited to compensating for extra production costs by comparison with the market prices of the relevant product or service, and the aid is not limited to five years. Furthermore it is questionable if the measure could be considered as aiming at managing waste or saving energy.

2.2.2.5. The United Kingdom invoked the application of Section F of the guidelines 'Policies, Measures and Instruments for reducing Greenhouse Gases'. This section is applicable to State aid potentially involved in common and coordinated policies and measures, including economic instruments, and also by means of the instruments established by the Kyoto Protocol itself, namely international emissions trading, joint implementation and the clean development mechanism. The Commission doubts that this section is applicable in the present case.

Equally, Council Regulation (EC) No 1407/2002 of 23 July 2002 on State aid to the coal industry(11) does not seem applicable.

Finally, no other legal text based on Article 87(2) or (3) appears to be relevant.

However, climate protection is a Community objective. The Commission recognises the environmental benefit for climate protection that can result from the measure, even if support for such a measure has not been envisaged by the environmental aid guidelines. The Commission at the current stage though has doubts that the design of the measure may lead to overcompensation.

For all these reasons, the Commission at the current stage has doubts that the measure is compatible with Article 87 of the EC Treaty.

The quantity of electricity which could be produced from CMM in the United Kingdom is not negligible. The Commission considers the potential for electricity generation from CMM not only in the United Kingdom but also in other Member States. The Commission also considers that Member States are currently discussing the possibility for a facultative exemption from energy taxation of electricity produced from CMM in the context of the draft directive for the taxation of energy products(12). For these reasons, the Commission wants to give third parties the possibility to comment on the measure.

In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 88(2) of the EC Treaty, requests the United Kingdom to submit its comments and to provide all such information as may help to assess the aid/measure, within one month of the date of receipt of this letter. In particular information should be provided as may help to assess if the aid may be compatible directly with Article 87(3)(c) of the EC Treaty.

The Commission wishes to remind the United Kingdom that Article 88(3) of the EC Treaty has suspensory effect, and would draw your attention to Article 14 of Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient."

(1) Commission decision on State aid C 18/01 (ex N 123/2000), published in OJ C 185, 30.6.2001, p. 22.

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

(3) OJ L 283, 27.10.2001, p. 33.

(4) OJ L 205, 2.8.2002, p. 1.

(5) Fisc 311 Rev 1 ADD of 9.12.2002.

(6) The new subparagraph (4) provides for CMM to be regarded as a renewable source in the context of the CCL, in order to allow electricity derived from it to benefit from the same exemption as renewable sources. However, the United Kingdom authorities explained that this drafting serves administrative simplicity and clarity and should not be taken to imply that the Government in fact considers CMM to be a renewable source of energy.

(7) Commission decision on State aid C 18/01 (ex N 123/2000), published in OJ C 185, 30.6.2001, p. 22.

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

(9) It cannot be excluded that suppliers do not pass on the entire benefit of the exemption and keep a small part of it through their price negotiations with electricity generators using CMM. This is nevertheless supposed to be minimal. In all previous cases concerning exemptions or reductions from eco-taxes on electricity charged to suppliers, the Commission has considered that the real beneficiaries of the aid are the producers of electricity.

(10) OJ L 283, 27.10.2001, p. 33.

(11) OJ L 205 of 2.8.2002, p. 1.

(12) Fisc 311 Rev 1 ADD of 9.12.2002.