Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on State aid with regard to the tax exemption from the Norwegian CO2 tax on gas and LPG for the use of gas for purposes other than heating of buildings

(2008/C 146/02)

By means of Decision No 597/07/COL of 23 November 2007, reproduced in the authentic language on the pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article 1(2) in Part I of Protocol 3 of the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice (Surveillance and Court Agreement). The Norwegian authorities have been informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the EFTA States, EU Member States and interested parties notice to submit their comments on the measure in question within one month from the publication of this notice to:

The comments will be communicated to the Norwegian authorities. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

PROCEDURE

By letter dated 9 March 2007, the Norwegian authorities notified the Authority of a planned amendment to the CO2 tax on mineral products, pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement. The Norwegian authorities intended to amend the CO2 tax in such a manner as to include taxation on natural gas and liquefied petroleum gas (hereafter LPG), on which no CO2 tax is currently levied.

After correspondence with the Norwegian authorities, the Authority has decided to open a formal investigation procedure with regard to the exemption from the tax for the use of gas for purposes other than the heating of buildings.

ASSESSMENT OF THE MEASURE

In Norway a CO2 tax is currently only levied on mineral oil and petrol. In the budget proposal for 2007, the Norwegian Government proposed to introduce a CO2 tax on gas and LPG, and this proposal was accepted by the Parliament, and further amended by St. prp. nr. 69 (2006-2007).

The new provision introduces an exemption for gas used for all purposes other than heating of houses and commercial buildings, as well as for the greenhouse industry. The objective of the measure is to prevent gas for heating from being preferred to more environmentally favourable alternatives, namely bio-energy.

The Norwegian authorities state that 94 % of the consumption of natural gas concerns purposes other than the heating of buildings. The main consumption of gas in Norway is for industrial uses, of which the manufacturing sector forms a dominant part. The Norwegian authorities claim that in practice only a very limited tax on the heating of buildings is introduced. For technical reasons relating to national law, the CO2 tax on gas and LPG was formally adopted as a general tax.

In the preliminary view of the Authority based on the information submitted by the Norwegian authorities, the Authority cannot exclude the possibility that the exemption from the CO2 tax on gas constitutes aid within the meaning of Article 61(1) of the EEA Agreement.

The Norwegian authorities argue that the limitation of the tax to the purpose of the heating of buildings is a general measure which is open to all undertakings and sectors. However, in the Authority's preliminary view the measure may de facto favour certain undertakings. This is due to the fact that the CO2 tax will be paid on their total gas consumption by those industries which do not engage in production processes, but mainly carry out their work in buildings, i.e. typically the service sector. Undertakings using gas in the production process will not be liable to taxation on the gas used for purposes other than heating buildings. The Authority is of the preliminary opinion that as a starting point all uses of gas are taxed under the Norwegian legislation. The Authority also does not consider that the reference to a particular use rather than referring to certain sectors automatically turns the exemption into a general measure and finds support for its view in cases by the European Court of Justice, where measures which essentially favoured a group of undertakings although formally being open to all operators were considered to be selective. The Authority will, however, also take into account during the formal investigation procedure that the Authority's Guidelines on the application of the State aid rules to direct business taxation stipulate that the fact that a measure benefits certain undertakings more than others does not necessarily speak in favour of a selective advantage. In this regard the Authority takes note of the European Commission's Decision regarding a Danish tax scheme (N 416/99) by which the taxation of household like consumption for undertakings was considered not to be State aid, even if the tax was mainly paid by the services sector.

In the Authority's view the logic of the tax exemption for purposes other than heating is not in line with the objectives of CO2 taxation in Norway. The Authority does not consider the purpose of reducing CO2 emissions, the encouragement of switchover to bio-energy, or taxation of household-related consumption to be adequate reasons for differentiating between sectors.

The Authority has doubts that these measures can be regarded as complying with Article 61(3)(c) of the EEA Agreement, in combination with the requirements laid down in the Chapter on aid for environmental protection of the Authority's State Aid Guidelines. In the present case no tax is paid on gas used for purposes other than the heating of buildings. Such a total tax exemption would only be possible if the aid recipients had concluded environmental agreements with Norway, which is not the case. A partial reduction of the tax would require that a significant part of the tax is paid. The tax exemption therefore cannot be justified under the Environmental Guidelines.

CONCLUSION

In light of the foregoing considerations, the Authority decided to open the formal investigation procedure in accordance with Article 1(2) of the EEA Agreement. Interested parties are invited to submit their comments within one month from publication of this decision in the Official Journal of the European Union.

EFTA SURVEILLANCE AUTHORITY DECISION

No 597/07/COL

of 23 November 2007

to initiate the procedure provided for in Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement with regard to the tax exemption from the Norwegian CO2 tax on gas and LPG for the use of gas for purposes other than heating of buildings

(Norway)

THE EFTA SURVEILLANCE AUTHORITY (1),

Having regard to the Agreement on the European Economic Area (2), in particular to Articles 61 to 63 and Protocol 26 thereof,

Having regard to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice (3), in particular to Article 24 thereof,

Having regard to Article 1(2) of Part I and Articles 4(4) and 6 of Part II of Protocol 3 to the Surveillance and Court Agreement,

Having regard to the Authority's Guidelines (4) on the application and interpretation of Articles 61 and 62 of the EEA Agreement, and in particular the Chapter on Aid for Environmental Protection as well as the Chapter on the Application of the State Aid Rules to Measures relating to Direct Business Taxation,

Whereas:

I. FACTS

1. Procedure

By letter of 9 March 2007 from the Norwegian Ministry of Government Administration and Reform forwarding a letter from the Ministry of Finance dated 8 March 2007, both received and registered by the Authority on 9 March 2007 (Event No 412984), the Norwegian authorities notified a planned amendment to the CO2 tax on mineral products, pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement. The Norwegian authorities intended to amend the CO2 tax in such a manner as to include taxation on natural gas and liquefied petroleum gas (hereafter LPG), on which no CO2 tax is currently levied.

By letter dated 26 April 2007 (Event No 418662), the Authority requested additional information.

By e-mail dated 30 May 2007, the Norwegian Mission to the European Union forwarded a letter dated 25 May 2007 from the Norwegian Ministry of Government Administration and Reform, enclosing a letter from the Ministry of Finance replying to the information request. The letters were received and registered by the Authority on 30 May 2007 (Event No 426435).

A further request for information was sent by the Authority on 11 July 2007 (Event No 425632). The Norwegian authorities replied to that request by letter from the Ministry of Government Administration and Reform dated 25 September 2007, forwarding a letter from the Ministry of Finance dated 24 September 2007. The letters were received and registered by the Authority on 25 September (Event No 443658).

2. Description of the proposed measures

In their notification the Norwegian authorities inform the Authority of a proposed amendment of the CO2 tax on mineral products to include taxation of natural gas and LPG. In the following, the tax will be called ‘the CO2 tax on gas’, which is however to be understood as covering taxation of both natural gas and LPG.

2.1. CO2 taxation in Norway

Currently, CO2 taxes in Norway are only levied on mineral oil and petrol. The Norwegian tax on CO2 is understood by the Norwegian authorities to be a tax on the consumption and emission of CO2 (5), which is levied on the use of the products mentioned in the tax chapter. Both imported and domestic products are subject to the tax.

The CO2 tax is contained in a budgetary chapter concerning the environmental taxes levied on mineral products, with the title ‘Om miljøavgifter på mineralske produkter mv’. Heading A of this chapter deals with the CO2 tax on mineral products CO2 (avgift på mineralske produkter). Section A1 stipulates the levy of the tax on mineral oil and petrol. It reads as follows:

‘Fra 1. januar 2007 skal det i henhold til lov 19 mai 1933 nr. 11 om særavgifter betales CO2-avgift til statskassen på følgende mineralske produkter etter følgende satser: …

a) Mineralolje: kr. 0,47 per liter (…).

b) Bensin: kr 0,80 per liter’,

that is:

‘From 1 January 2007, according to Act of 19 May 1933 No 11 regarding special duties, CO2 tax shall be paid to the Exchequer on the following mineral products at the following rates …

(a) Mineral oil: NOK 0,47 per litre.

(b) Petrol: NOK 0,80 per litre’ (6).

Section A2 contains several exemptions from the tax, depending on the use of the product. Section A2.1 contains general exemptions for various activities, in particular the use of the mineral oil product as a raw material in the production process (Section A2 lit.1.c). Section A2.2 and Section A2.3 contain further exemptions relating to the use of mineral oil and petroleum respectively.

2.2. Introduction of CO2 taxation on gas and LPG

No CO2 tax has so far been levied on gas. In the budget proposal for 2007, the Norwegian Government proposed an amendment to the relevant chapter of the budget, which was accepted by Parliament. The proposal contained in St. prp. nr. 1 (2006-2007), II A and B reads:

‘A. Fra 1 juli 2007 gjøres følgende endringer: § 1 første ledd nye bokstaver c og d skal lyde: c) Naturgass: kr. 0,47 pr. standardkubikkmeter. d) LPG: kr. 0,60 pr. kg. B. §2 første ledd ny nr. 4 skal lyde: 4. Gass til annen bruk en oppvarming mv. i boliger og næringsbygg’.

that is:

‘A. As of 1 July 2007 the following amendments shall apply: In Section 1, first paragraph, new letters c and d shall read: (c) Gas: NOK 0,47 per standard cubic metre. (d) LPG: NOK 0,60 per kilogram. B. Section 2, first paragraph, new number 4 shall read: Gas used for purposes other than heating of houses and commercial buildings’.

By adding the letters (c) and (d) to Section 1, as referred to under A, a CO2 tax on gas is introduced. The new provision referred to under B introduces an exemption for gas used for all purposes other than heating of houses and commercial buildings.

The above exemption was later further amended by St. prp. nr. 69 (2006-2007). By these amendments, the Norwegian authorities intended to exempt the greenhouse industry. They consider this exemption to fall outside the scope of the EEA Agreement. In addition the newly formulated (c) should make the tax duty more precise by not limiting it to gas used for dwellings and commercial buildings, but extending it to cover all buildings.

The amended Section 2.4 now reads as follows:

‘§2 nr. 4 skal lyde:

Det gis fritak, refusjon eller ytes tilskudd for avgift på produkter til følgende anvendelseområder:

4. Gass til c) Annen bruk enn oppvarming av bygg. d) Vektsthusnæringen.’

that is:

‘Section 2 nr. 4 shall read:

The following products are exempted from the tax, entitled to a refund or a grant for the tax in relation to the following fields of application:

4. Gas for (c) any use other than heating of buildings; (d) greenhouse industry.’

In their notification, the Norwegian authorities describe the planned amendment as an ‘amendment of the CO2 tax to include gas used as heating from 1 July 2007’. In the opinion of the Norwegian authorities this amendment does not concern an exemption from a general CO2 tax on gas, but merely the introduction of a very limited tax on the heating of buildings which does not constitute State aid within the meaning of Article 61(1) of the EEA Agreement. The notification is therefore to be understood as a notification for legal certainty only.

The Norwegian authorities state it is only for a technical reason that the CO2 tax on gas is adopted as a general tax; the control possibilities of the Customs and Excise Directorate are increased when working with a general tax. Only if a measure is adopted as a general tax, are all producers of taxable goods obliged to register with the authorities as being liable for the tax and keep accounts of their sales. Had the tax been adopted as a more limited tax on heating, no registration and no keeping of accounts would have been necessary for traders which sell the gas for purposes other than heating.

2.3. The objective of the measure

The objective of the new tax on gas is described in the budget proposal for 2007, which refers to the so-called Soria Moria Statement (7):

‘Domestic use of gas is not subject to CO2 tax. From 2005 gas used in some industries is subject to the climate quota system concerning CO2. Other gas usages are not subject to means which incentivise the reduction of CO2, i.e. gas used in dwellings, industrial houses and mobile sources. In the Soria Moria statement it is announced that the Government will examine the CO2 tax to prevent that gas as heating is preferred to more environmental favourable alternatives’.

2.4. National legal basis for the measure

The CO2 tax on gas was passed by Stortinget (the Parliament). The Government's proposal was put forward in St. prp. nr. 1 (2006-2007) Skatte-, avgifts- og tollvedtak and was adopted by the Parliament 28 November 2006.

As explained above, Parliament's decision was then altered in connection with the Revised National Budget 2007 (8). This amendment concerned an exemption from the tax in favour of the greenhouse growing industry. In addition, the Government proposed to lay down in the Parliament's decision that gas for heating of all buildings are liable to tax, not only gas for residential houses and commercial buildings. The Government's proposal in St. prp. nr. 69 (2006-2007) was adopted by the Parliament on 15 June 2007.

In addition to the general decision by Parliament, there will be an amendment of the Regulation on Excise Duties (Forskrift om endring av Forskrift om særavgifter).

The new Section 3-6-4 of the Regulation, which deals with an exemption from the tax for mineral oil which is exported, will now also explicitly exempt LPG. The exemption now reads that for petrol and LPG the threshold beyond which no tax will be levied is 400 litres or 150 kg. As natural gas is always exported in bulk, natural gas is not mentioned and no minimum threshold is applied here, i.e. it is always tax exempted.

Section 3-6-5 of the Regulation deals with the exemption from the CO2 tax for gas used for purposes other than heating. Section 3-6-5(1) states that gas which is used for other purposes than the heating of buildings, commercial buildings and other dwellings is tax exempted. The exemption does not cover any direct or indirect heating (9).

Gas which is used in units lower than 20 kg is exempted from the tax, see Section 3-6-5(2) of the Regulation.

Section 3-6-5(3) stipulates that registered companies may deliver gas without duty if the gas is to be used for a purpose which is exempted from duty. It is a condition for the exemption of duties that the buyer gives a statement about the use of the gas. If the gas is to be used for both tax liable and tax free purposes, a proportional distribution must be made according to the estimated use. The statement is valid for a period up to one year and must be retained as a record for 10 years. The person issuing the statement is responsible for the information being correct and complete. The tax is to be paid to the Customs and Excise Service (‘Toll- og Avgiftsetaten’). If gas bought tax free is used for a tax liable purpose, the tax has to be paid.

2.5. Beneficiaries of the tax exemption

The Norwegian authorities state that 94 % of the consumption of natural gas concerns purposes other than heating of buildings. The Norwegian authorities explicitly state that only a small percentage of domestic consumption is related to the heating of buildings because the main consumption of natural gas is for industrial purposes, of which the manufacturing sector forms a dominant part.

According to Statistics Norway, approximately 80 % of the net domestic consumption of gas is related to manufacturing, mining and quarrying. The Norwegian authorities present the following consumption tables for 2006:

Norwegian consumption of natural gas and liquefied gas in 2006

Natural gas Mill. Sm3 Liquefied gas 100 t Net domestic consumption 293 188 Manufacturing, mining and quarrying 245 151 Energy intensive industry 187 70 Manufacture of paper and paper products 10 3 Mining, quarrying and other industries 48 77 Transport 13 2 Other sectors 35 (10) 35

Net domestic consumption of natural gas, 2006 Mill. Sm3

Total Total 293 Fishing and agriculture 18 Manufacturing, mining and quarrying 244 (11) Mining and quarrying 7 Manufacture of food products 29 Textile 1 Manufacture of pulp, paper and paper products 10 Manufacture of wood and products of wood 0 Manufacture of chemicals 135 Non metallic mineral products 2 Manufacture of basic metals 52 Other manufacturing industries 9 Construction 0 Services 26 Hotels and restaurants 0 Commodity trade 1 Land transport 3 Sea transport 9 Supporting and auxiliary transport, travel agencies 1 Business like services and property management 1 Public administration 1 Education 1 Health and social works 8 Cultural and personal services 1 Households 4

The Norwegian authorities further state that half of the consumption of gas in the manufacturing sector concerns Statoil's methanol production plant Tjeldbergodden. Another large consumer is Hydro Aluminium for the manufacture of aluminium.

2.6. Budget and duration

The Norwegian authorities have not indicated a duration or a budget for the tax exemption.

II. ASSESSMENT

1. Scope of the Decision

The Decision applies to the exemption from the CO2 tax on gas for uses of gas for purposes other than heating of buildings. In contrast, it does not apply to the similar exemption for the greenhouse growing industry given that this industry concerns goods falling outside the scope of products to which the provisions of the EEA Agreement apply, including those related to State aid (cf. Article 8(3) of the EEA Agreement). With regard to mining, the EEA Agreement applies to trade in coal and steel products, except where the bilateral Free Trade Agreement (12) contains specific provisions which have not been set aside by Protocol 14 to the EEA Agreement. Consequently, this Decision applies to the mining industry, without prejudice to the products which are still governed by the bilateral Free Trade Agreement and to which this decision does not apply (13).

2. The presence of State aid

Article 61(1) of the EEA Agreement reads as follows:

‘Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States 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 Contracting Parties, be incompatible with the functioning of this Agreement’.

2.1. Presence of State resources

The aid measure must be granted by the State or through State resources. The Norwegian authorities plan to introduce a new tax for gas and an exemption from that tax for all purposes other than the heating of buildings. The granting of a tax exemption or reduction involves a loss of tax revenues which is equivalent to consumption of State resources in the form of fiscal (tax) expenditure, see point 3(3) of the Authority's State Aid Guidelines in relation to Business Taxation. In the case at hand, the exemption from the CO2 tax on gas for uses other than heating of buildings leads to a loss of revenue for the State.

2.2. Favouring certain undertakings or the production of certain goods

The aid measure must be selective in that it favours, i.e. confers an advantage on, certain undertakings or the production of certain goods. The Norwegian authorities argue that the limitation of the tax to the heating of buildings is a general measure which is open to all undertakings and sectors. All sectors and undertakings using the gas to heat buildings are liable to the tax for this use, whereas sectors and undertakings which (also) use gas in the production process or for any other purpose than heating of buildings are not liable to taxation on the gas used for those other purposes. A manufacturer who also uses gas for the heating of e.g. administrative buildings would pay — as laid down in the Regulation on Excise Duties — the tax for that use in the same way as any other undertaking, whereas he would not be subject to any taxation for the gas used in the production process.

As underlined by the Norwegian authorities, the Norwegian tax law does not create any explicit distinction between sectors. However, the existence of State aid is to be analysed according to the effects of a measure. The Authority is therefore of the opinion that it must also verify that the exemption in the Norwegian legislation will not have the effect of indirectly favouring certain sectors to the detriment of others. The above statistics (14) demonstrate that the consumption of gas in Norway is mainly for industrial purposes, notably manufacturing and mining, while the transport and the services sector play by comparison a lesser role in the consumption of gas. Hence, the existence of de facto sectoral aid must be investigated. Should this examination lead to the conclusion that the measure indeed concerns only certain undertakings or the production of certain goods, the exemption from the CO2 tax relieves the undertakings benefiting from it of charges which they would normally have to bear from their ordinary budget. The consequence could be that these undertaking receive an advantage within the meaning of Article 61(1) of the EEA Agreement.

The CO2 tax will not be paid on gas used in production processes. Therefore those who do not engage in production processes, but mainly carry out their work in buildings, i.e. typically the service sector, and private households, will pay the tax on the whole of their consumption of gas whereas undertakings using gas in the production process will not be liable to taxation for a substantial part of their gas consumption. In the Authority's preliminary view this may constitute a measure which de facto favours certain undertakings, namely undertakings in the manufacturing sector as well as in the transport sector, to the detriment of the service sector.

The arguments for whether the measure under examination is or is not selective are dealt with below.

2.2.1. Introduction of a limited tax on the heating of buildings instead of a tax exemption from the CO2 tax

Norway considers the notified measure not an exemption from a CO2 tax on gas for certain sectors, but rather the introduction of a limited tax on the use of gas for the heating of buildings, i.e. the tax (on heating of buildings) is a burden for those on whom the tax is levied rather than an exemption and advantage for the many who consume gas in a way which is not subject to the tax. The Norwegian authorities underline that 94 % of the gas used in Norway is used for purposes other than heating, in other words only 6 % of the gas consumed will be taxed. According to the Norwegian authorities, the reality therefore is that natural gas is not subject to a CO2 tax.

The Authority has doubts as to whether it can agree to that argumentation. Firstly, the Norwegian authorities have not provided for a separate Section in the budget which introduced a new tax for the heating of buildings. On the contrary, gas is simply integrated as a new product in Section 1 of the budgetary chapter which contains a general CO2 tax on mineral products. The Norwegian authorities themselves stated in the original notification that the CO2 tax on gas is technically adopted as a general tax on gas.

Secondly, the relief from taxation for uses other than heating is put into the Section of the budgetary chapter which deals with exemptions from the taxation stipulated in Section A1, namely Section A2 of the budgetary chapter. Section A2 starts with the following wording ‘Det gis fritak, refusjon eller ytes tilskudd for avgift på produkter til følgende anvendelsesområder …’, i.e. ‘the following products should be exempted from the tax, receive a refund or a grant for the following fields of application …’. All the products and fields of application contained therein are to be understood as exemptions from the general tax contained in Section 1 of the budgetary chapter. The Authority has until now not been presented with compelling reasons for why the same classification as a tax exemption should not apply to the newly introduced Section A2.4, which deals with exempting certain uses of gas from taxation. The wording used in the newly introduced Section A2.4 is clear in that all uses other than heating of buildings are tax exempted or entitled to a refund or grant.

Lastly, the choice of the Norwegian legislator was a deliberate one. As the Norwegian authorities have argued, the tax was adopted as a general tax on gas in order to give the tax authorities greater control possibilities. According to Section 5-1 of the Regulation on Excise Duties, producers of taxable goods are obliged to register with the Norwegian Customs and Excise Authorities as being liable for the tax and the registered companies are obliged to keep accounts. The Norwegian authorities argue that if the tax had been constructed as a limited tax on the heating of buildings, no registration and no keeping of accounts would be necessary for the traders selling gas for purposes other than heating of buildings and the control possibilities of the Customs and Excise Directorate would be reduced. This argumentation demonstrates that the adoption of a general tax on CO2 rather than a limited tax on the heating of buildings was deliberate.

That being said, the existence of State aid must be analysed according to its effects not the form a measure takes. It therefore seems appropriate to investigate further the claim of the Norwegian authorities.

2.2.2. Exemption for purposes other than heating is a general measure open to all

The Norwegian authorities consider the tax exemption to be a general measure as all undertakings using gas for heating purposes will pay the tax, but all undertakings using gas in the production process or for any other purpose will not be liable to tax on the gas used for those other purposes.

The Authority notes as a starting point that all uses of gas are liable to the CO2 tax, which is a general tax on gas. However, as stated above, the existence of State aid must be analysed according to its effects, not the form a measure takes. Thus, given the explanation of the Norwegian authorities as to the increased control by the Customs and Excise Directorate in cases of general taxation, the Authority finds it appropriate, as noted above, to verify whether the apparent tax exemption is, in fact, a measure which applies generally to all undertakings using gas for the purposes of heating a building.

Nevertheless, even if this were the case, the Authority questions whether a measure which targets the ‘use’ of a product as being tax exempted may automatically be removed from the ambit of the State aid rules, as certain uses of energy will often be linked — as here the use of gas for production purposes — to certain sectors of industry. The Authority has doubts as to whether the fact that the commercial activity of one sector (the manufacturing sector) employs the product in a manner other than the described ‘use’ and is therefore exempted from the tax, whereas the commercial activity of another sector needs the product in question only for uses which are tax liable (due to the fact that the production process of this sector just consists in the use of heated office space) is a legitimate way to set the limits of a general measure.

The case law in this regard is not settled. Contrary to the situation leading to the judgment in Adria-Wien (15), the Norwegian legislation does not make an explicit distinction between types of undertaking or goods. In an older case concerning Italy, the Court of Justice considered that a bigger reduction of certain compulsory sickness insurance contributions for female than for male employees constituted an aid to sectors which employed more female workers (16). Similarly, in Gemo SA, a premium for the disposal of animal carcasses, which was formally applicable to all economic operators but which essentially benefited only a certain group of undertakings, was analysed as State aid (17). Regarding a preferential rate for exports, the Court found the measure to constitute State aid, despite the fact that it was open to all operators wishing to export (18). On the other hand, the Authority notes that in the Commission Decision relating to the British Climate Change Levy, only the exemptions to the general tax on non-domestic use of energy products for fuel purposes were notified. Indeed, ‘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 […] in so far as they are general measures which do not favour particular firms or sectors of industry’ (19).

Moreover, the Authority's Guidelines on the application of the State aid rules to measures relating to direct business taxation stipulate (at point 3.1.) that tax measures which are open to all economic operators are in principle general measures, unless they are de facto reduced in scope. The Guidelines stipulate that measures pursuing general economic policy objectives through a reduction of the tax burden related to certain production costs will constitute general measures, i.e. measures designed to reduce the taxation of labour for all firms have a relatively greater effect on labour intensive industries than on capital intensive industries, without necessarily constituting State aid. The Authority finds it necessary to further investigate whether the Norwegian tax exemption is comparable to these situations.

Finally, the Authority notes the Commission's Decision regarding the Danish electricity reform (20), which was based on the principle that the full tax is paid on household consumption and on comparable consumption by companies. This meant that e.g. liberal professions, which typically have a electricity consumption comparable to that of households, would pay the tax. The levying of the tax was implemented using VAT criteria (companies with a VAT number would get a tax refund, typically the manufacturing sector). Certain companies, while having a VAT number, would still pay the tax, because their consumption was found to be more like that of private households. An annex to the Electricity Tax Act would list these companies. The Commission found this procedure to be in line with the Danish electricity tax logic (21).

The Norwegian authorities have not based themselves on that Danish decision nor reasoned the tax or the tax exemption in that manner. Instead of arguing the parallel with household consumption, the tax exemption is justified, according to the Norwegian authorities, by a desire to stimulate a switch to bio-energy. The Norwegian system does not attempt to create a system which ensures that the consumption of gas other than for industrial purposes is compared with ordinary household consumption and taxed in the same manner.

In this regard it should also be noted that the Danish system was subsequently considered to constitute State aid, as certain VAT registered companies which would receive a tax refund were favoured over certain other companies which likewise had a business-like consumption and therefore should have profited from the tax relief in the same way, i.e. the ‘household consumption’ logic was not followed in all cases (22).

The Authority does not exclude that the Norwegian system by stating that all purposes other than heating should not be tax liable, might be simpler and more coherent than the Danish system. However, the Authority will have to investigate further and the Norwegian authorities need to demonstrate that also the service sector can profit from the tax relief for that part of its commercial activity which does not consist in the heating of buildings. Likewise it would have to be ensured that the manufacturing sector would also include for the payment of the tax those buildings in which the production process takes place (administrative buildings are, according to the Norwegian authorities, in any event covered by the tax).

Based on the information available at this stage, the Authority cannot exclude that the tax exemption is a selective measure which would constitute State aid within the meaning of Article 61(1) of the EEA Agreement.

2.2.3. Nature and scheme of the Norwegian tax system

As the Norwegian authorities are of the opinion that the tax is not materially selective, they do not put forward an explicit argumentation that the tax exemption for purposes other than the heating of buildings is within the nature and scheme of the Norwegian tax system. Nevertheless, according to Section 3.4 of the Authority's Guidelines on business taxation, certain differential measures whose economic rationale makes them necessary to the smooth functioning and effectiveness of the tax system might not constitute State aid. In such cases, the measure would no longer be considered selective (23).

Against this background, the Authority will examine below whether the logic underlying the tax exemption could justify a differentiation between sectors. As the exemption concerns a derogation from the CO2 tax, the Authority will try to establish the objective of this taxation which it considers to be the general system against which the logic of a derogation must be measured. In other words, the Authority will examine whether the logic of the tax exemption for purposes other than heating is in line with the objectives of the CO2 tax itself.

The CO2 tax on mineral products is to be found in a budgetary chapter bearing the heading ‘Environmental taxes’. This seems to suggest that the CO2 tax follows an environmental objective. Such an objective would be to create incentives, via taxation, to reduce CO2 emissions (24).

The Norwegian authorities indeed confirm that intention of the current CO2 tax on mineral oil is to put a price on the environmental damages caused by the use of taxed products and to encourage the use of other more environmental products. Given the fact that, as shown above, the CO2 tax on gas is integrated into the general taxation chapter on mineral products, one would assume that this new taxation follows the same logic, namely to serve an environmental purpose by creating incentives to reduce CO2 emissions. And yet, it is not obvious to the Authority how one can reconcile that environmental logic with a system that excludes certain sectors from taxation despite the fact that also these sectors should be able to reduce CO2 emissions by either curtailing the use of gas or switching to more environmentally friendly products.

The budgetary proposal for the introduction of the CO2 tax on gas as described above (25) demonstrates that certain industries — outside the service sector — indeed have incentives and the possibility to reduce CO2 emissions by being subject to the climate quota system concerning CO2. The climate quota system also covers parts of the manufacturing sector. Given that such a motivation of reducing CO2 emissions for the manufacturing sector is thereby acknowledged, it seems to be hardly compatible with the nature and scheme of the Norwegian tax system to relieve the production of goods from the CO2 taxation of gas. Moreover, in the Authority's opinion, the transport sector also has an incentive and possibility to reduce CO2 emissions.

The Norwegian authorities seem to accept that the manufacturing sector not only has possibilities to reduce CO2 emissions, but that incentives created to that end — e.g. via the emission trading system — can lead to a behavioural change. For Statoil, the largest consumer of gas in the manufacturing sector, the Norwegian authorities have explicitly acknowledged that the company has an incentive to reduce emissions from gas via the emission trading system (26). In addition, and contrary to the proposed CO2 tax on gas, the manufacturing sector is currently subject to the CO2 tax on mineral oil and petrol (27). The only exemption in this regard is when the mineral oil is used as a raw material in the production process, see Section A2d) of the budgetary chapter. Where mineral oil is used for other purposes (e.g. fuel) in the production process, it is subject to the CO2 tax. It is not easy to see the logic behind a taxation system on mineral products which exempts certain sectors from the taxation of one mineral product, namely gas, but not another, namely mineral oil. Both products are covered by the same legal provision establishing a general taxation on mineral products for environmental purposes. The same argument can be made for the transport sector, which in general is submitted to the mineral oil tax with the exception of certain situations like the use of mineral oil in domestic sea freight. Again, there does not seem to be any environmental reason why the transport sector should be subject to the CO2 tax on mineral oil, but not to a CO2 tax on gas.

The Norwegian authorities however argue that the logic behind the CO2 tax on gas is to be distinguished from the CO2 tax on mineral oil and petrol. The latter puts a price on the environmental damage caused by the use of the taxed products and encourages the use of other, more environmentally friendly, products. The tax is broad and general and the exemptions in the budgetary chapter, Section A2, are drafted very narrowly.

The Norwegian authorities argue that the CO2 tax on gas however follows another, more narrow purpose, namely to prevent that gas is preferred to more environmentally favourable alternatives such as bio-energy, which is not taxed. By putting a tax on the use of gas, the intention is to stimulate a switch to bio-energy. Consequently, the exemption is drafted in broad terms (28).

The Authority has doubts as to whether this argumentation justifies a differentiation between sectors. Firstly, it should be noted that the CO2 tax both on mineral oil and on gas is contained in the same budgetary chapter establishing a general CO2 tax. On this basis, it is hard to see why the CO2 tax on gas would follow a completely different logic.

Secondly, and more importantly, it should be noted that a reduction of CO2 emissions can be achieved either by reducing the use of the environmentally damaging product or by turning to more environmentally friendly alternatives. As cited above, with regard to the tax on mineral oil, the use of environmentally friendly alternatives is mentioned. Consequently to argue that the CO2 tax on gas is special and different from the CO2 tax on mineral oil in this respect seems difficult.

Lastly, the Authority is not convinced by the argument put forward by the Norwegian authorities that, in relation to gas for industrial purposes, a switchover possibility does not exist. The Norwegian authorities argue that in the production processes energy is used at high temperatures, whereas bio-energy is best used at low to medium temperatures. However, the Norwegian tax system does not draw a distinction along those lines. At least for the transport sector, the use of bio-energy seems possible as well as for parts of the manufacturing sector.

2.3. Distortion of competition and effect on trade between Contracting Parties

The aid measure must distort competition and affect trade between the Contracting Parties.

The saved tax amounts strengthen the aid recipients' financial position compared with their competitors. As the undertakings are active on a large number of markets in which there is trade within the EEA, the tax exemption must also be considered to affect trade between the Contracting Parties.

2.4. Conclusion

As all the criteria under Article 61(1) of the EEA Agreement seem to be fulfilled, the Authority has come to the preliminary conclusion that the exemption from the CO2 tax for all purposes other than the heating of buildings constitutes State aid within the meaning of Article 61(1) of the EEA Agreement.

3. Procedural requirements

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement, ‘the EFTA Surveillance Authority shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. […]. The State concerned shall not put its proposed measures into effect until the procedure has resulted in a final decision’.

By submitting the notification of the tax exemption from the CO2 taxation on gas by letter dated 9 March 2007 from the Norwegian Ministry of Government Administration and Reform, the Norwegian authorities have complied with the notification requirement. The Norwegian authorities confirmed that the tax and the tax exemptions are not implemented yet. In the interim, i.e. before the Authority's decision, a general tax exemption is in place, i.e. nobody, regardless of sector or use is paying the tax.

The Authority can therefore conclude that the Norwegian authorities have respected their obligations pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement.

4. Compatibility of the aid

Support measures caught by Article 61(1) of the EEA Agreement are generally incompatible with the functioning of the EEA Agreement, unless they qualify for a derogation in Article 61(2) or (3) of the EEA Agreement.

The derogation laid down in Article 61(2) is not applicable to the aid in question, which is not designed to achieve any of the aims listed in this provision.

The aid can also not be justified under Article 61(3)(a) of the EEA Agreement, which provides for regional support. As the aid is not given to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of Norway, Article 61(3)(b) of the EEA Agreement does not apply either.

The aid in question is not linked to any investment. It simply reduces the costs which companies would normally have to bear in the course of pursuing their day-to-day business activities and is consequently to be classified as operating aid. Operating aid is normally not considered suitable to facilitate the development of certain economic activities or of certain regions as provided for in Article 61(3)(c) of the EEA Agreement. However, operating aid can be allowed under the Authority's Environmental Guidelines if certain conditions are fulfilled.

According to Section D.3.2 of the Environmental Guidelines, EFTA States might deem it necessary to make provisions for temporary exemptions from environmental taxes notably because of the absence of harmonisation at European level or because of the temporary risks of a loss of international competitiveness. However, as can be seen from point 42 of the Environmental Guidelines, these exemptions constitute operating aid, which have to fulfil the requirements set out in the Guidelines.

Point 46.1 of the Environmental Guidelines provides that when an EFTA State, for environmental reasons, introduces a new tax in a sector of activity or on products in respect of which no corresponding European Community tax harmonisation exists or the tax exceeds that provided for in Community legislation, exemption decisions covering a ten year period may be justified:

(a) when these exemptions are either conditional on the conclusion of agreements between the EFTA State concerned and the recipient firms whereby the firms undertake to achieve environmental protection objectives; or

(b) when the amount paid by the firms after the tax reduction remains higher than the Community minimum (where a Community tax exists — first indent) or constitutes a significant proportion of the national tax (where the tax does not correspond to a harmonised Community tax — second indent).

The Norwegian CO2 tax exceeds the Community minimum, as the taxation on the Community level is 0 for LPG and EUR 0,15 per gigajoule calorific value for natural gas. Under the Norwegian tax the respective levels are NOK 0,60 (around EUR 0,08) per kilogram for LPG and NOK 0,47 per standard cubic metre (around EUR 0,06). The theoretical energy content in natural gas is 39,9 GJ/1 000 Sm3 (29). The tax rate of NOK 0,47 per Sm3 is equivalent to a tax rate of NOK 11,78 per gigajoule of theoretical energy content (around EUR 1,43).

However, in the present case no tax is paid for purposes other than heating of buildings (i.e. no Community minimum). As can be seen from the above, such a total tax exemption would only be possible if the aid recipients had concluded environmental agreements with Norway, which is not the case. A partial reduction of the tax would require that the Community minimum is paid. The tax exemption therefore cannot be justified under the Environmental Guidelines.

5. Conclusion

Based on the information submitted by the Norwegian authorities, the Authority cannot exclude the possibility that the exemption from the CO2 tax on gas constitutes aid within the meaning of Article 61(1) of the EEA Agreement. Furthermore, the Authority has doubts that these measures can be regarded as complying with Article 61(3)(c) of the EEA Agreement, in combination with the requirements laid down in the Chapter on aid for environmental protection of the Authority's State Aid Guidelines. The Authority thus doubts that the above measures are compatible with the functioning of the EEA Agreement.

Consequently, and in accordance with Article 4(4) of Part II of Protocol 3 to the Surveillance and Court Agreement, the Authority is obliged to open the procedure provided for in Article 1(2) of Part I of Protocol 3 to that Agreement. The decision to open proceedings is without prejudice to the final decision of the Authority, which may conclude that the measures in question do not amount to State aid or are compatible with the functioning of the EEA Agreement.

In light of the foregoing considerations, the Authority, acting under the procedure laid down in Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement, requests the Norwegian authorities to submit their comments within one month of the date of receipt of this Decision.

In light of the foregoing considerations, the Authority requires that, within one month of receipt of this decision, the Norwegian authorities provide all documents, information and data needed for assessment of the compatibility of the exemption from the CO2 tax on gas,

HAS ADOPTED THIS DECISION:

Article 1

The EFTA Surveillance Authority has decided to open the formal investigation procedure provided for in Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement against Norway regarding the tax exemption from the Norwegian CO2 tax on gas for gas and LPG used for purposes other than the heating of buildings.

Article 2

The Norwegian authorities are requested, pursuant to Article 6(1) of Part II of Protocol 3 to the Surveillance and Court Agreement, to submit their comments on the opening of the formal investigation procedure within one month from the notification of this Decision.

Article 3

The Norwegian authorities are required to provide within one month from notification of this Decision, all documents, information and data needed for assessment of the compatibility of the aid measure.

Article 4

The EC Commission shall be informed, in accordance with Protocol 27(d) of the EEA Agreement, by means of a copy of this Decision.

Article 5

Other EFTA States, EC Member States, and interested parties shall be informed by the publishing of this Decision in its authentic language version, accompanied by a meaningful summary in languages other than the authentic language version, in the EEA Section of the Official Journal of the European Union and the EEA Supplement thereto, inviting them to submit comments within one month from the date of publication.

Article 6

This Decision is addressed to the Kingdom of Norway.

Article 7

Only the English version is authentic.