State aid — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty, concerning measure C 18/2001 (ex N 123/2000) — Climate change levy (Text with EEA relevance)
Date: 2001-06-30
Institutions: European Commission
Subjects: State aid, United Kingdom, climate change, control of State aid, environmental tax, tax system

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Official Journal of the European Communities

30.6.2001

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty, concerning measure
C 18/2001 (ex N 123/2000) (cid:151) Climate change levy

STATE AID

(2001/C 185/03)

(Text with EEA relevance)

By means of the letter dated 28 March 2001, 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 part of the abovementioned measure.

The Commission decided not to raise any objections to certain other measures, as described in the letter
following this summary.

Interested parties may submit their comments on the aid/measure in respect of which the Commission is
initiating the procedure within one month of the date of publication of this summary and the following
letter, to:

European Commission
Directorate-General for Competition
Directorate G.2
Rue de la Loi/Wetstraat 200
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

The rates of levy in 2001-2002 are expected to be:

1. Description of the measure/aid in respect of which the

Commission is initiating the procedure

The UK authorities intend to introduce from 1 April 2001 the
(cid:145)Climate change levy (CCL)’ on the non-domestic use of energy,
which is broadly the use as heating fuel, lighting, or for motive
power. The climate change levy package takes forward the
government’s policy on environmental
taxation and is a
central part of the government’s climate change programme,
which sets out the government’s proposals for meeting the
UK’s legally binding target of a 12,5 % reduction in greenhouse
gas emissions (Kyoto Protocol) averaged over 2008-2012 and
for moving towards the government’s domestic goal of a 20 %
reduction in carbon dioxide emissions by 2010.(cid:146)

The legal base for the levy is the Finance Act 2000, Section 30
and Schedules 6 and 7.

Mineral oils will not be brought within the scope of the tax
because they are already subject to excise duty in accordance
with Council Directives Nos 92/81 and 92/82/EEC (1).

(1) OJ L 316, 31.10.1992, pp. 12 and 19.

Energy product

Levy rate (pence per
kilowatt hour)

Electricity

Gas

0,43

0,15

Coal and other solid fuels

1,17 p/kg (equivalent to
0,15 p/kWh)

Liquified petroleum gas

0,07

It is proposed that energy products falling within the scope of
the levy will be exempt from it where the person to whom the
product is supplied intends it to be used for other purposes
than as fuel. The notion of (cid:145)fuel(cid:146) is not defined in the Finance
Act 2000. However, according to the United Kingdom auth-
orities it broadly covers use of energy products for motor and
heating purposes. It is proposed that where an energy product
is used for partly fuel and partly non-fuel purposes ((cid:145)mixed
uses(cid:146)) it will be fully exempt from the levy.

The United Kingdom authorities consider this provision as a
general measure, and as part of the logic of the tax system.
According to the United Kingdom,
this (cid:145)dual-use(cid:146) provision
applies to the steel sector, to the production of aluminium,
iron, lead, copper, zinc, batteries and some chemicals.

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2. Assessment of the measure/aid

(a) Existence of aid within the meaning of Article 87(1) of the EC

Treaty

The United Kingdom’s position is that the dual use exemption
is a (cid:145)general measure(cid:146) that does not constitute State aid. They
claim that the CCL is a tax imposed on the use of energy
products used (cid:145)as fuel(cid:146) and that the exemption is in line with
Council Directive 92/81/EEC of 19 October 1992 on the
harmonisation of the structures of excise duties on mineral
oils (2)
((cid:145)the Mineral Oils Directive(cid:146)) as well as the Proposal
the Community
for
((cid:145)the
framework for
proposal(cid:146)),
in so far as only the use of energy products for
motor and heating purposes fall within its scope.

a Council Directive

energy products (3)

restructuring

taxation of

the

According to the United Kingdom authorities, the purpose of
the extension of this exemption to mixed uses is to provide
certainty and clarity for the taxpayer, who is the fuel supplier,
as to whether or not, on the basis of scientific advice, any use
of a commodity by the customer is exempt from the levy. The
United Kingdom authorities do not consider it to be technically
feasible to objectively apportion with sufficient accuracy the
fuel and non-fuel uses of energy products within certain
processes.

the United Kingdom authorities

The Commission considers that the exemption gives the bene-
fiting companies an advantage, which is financed through State
In assessing whether this exemption is a general
resources.
measure,
claim, or
as
whether it constitutes State aid, the Commission considers it
necessary to assess whether the effects would favour certain
certain goods. The
undertakings or
Commission notes
information
to the
provided by the United Kingdom authorities, the exemption
favour the production of certain goods, namely some
will
metals (including aluminium, iron, lead, copper and coke) as
well as batteries and some chemicals. The Commission
therefore has doubts that the exemption can be considered as
a general measure.

the production of
according

that,

However,
beyond such a definition of the scope of the levy.

the proposed exemption for dual use fuels goes

the exemption may not

Firstly,
treat comparable situations
equally, insofar as some dual-use processes are exempt from
the levy, while other processes, which may also fall to be
considered as dual use, are not exempted.

Secondly, the UK exempts fuels entirely from the levy, even if
they are only partially used for non-energy purposes as defined
above.

1. The Commission notes that

the Proposal

for a Council
Directive restructuring the Community framework for the
taxation of energy products is not in force and cannot be
automatically relied upon as a reference point to establish
the logic and general nature of the tax system. However, it
may provide some indication of whether the dual use
provision can be
a general measure,
considered as
although Article 13(1) refers to fuels used (cid:145)principally(cid:146) for
the purposes of chemical reduction. The Commission has
doubts, however, that the exemption is fully consistent with
the proposal, as it does not extend to energy used in all
(cid:145)metallurgical(cid:146) processes, as would be required under Article
13(1)(a) of
that
according to the United Kingdom authorities, a metallurgical
process is a process which results in the production of
metal, for example, from ore. The Commission has doubts
this interpretation is consistent with the notion of
that
metallurgical process
to be
in the proposal.
consistent with the proposal,
it appears that energy used
in all metallurgical processes, namely in any metal
production process, would be exempt from the levy.

the proposal. The Commission notes

In order

2. The Commission further notes the United Kingdom’s claim
that it is not possible to apportion the fuel/non-fuel use
in certain processes with
amounts of energy products
accuracy; and that for reasons of clarity and certainty, a
full exemption from the levy is necessary for mixed uses.
The Commission has doubts, however,
the United
Kingdom authorities
a mechanism
establish
fuel/non-fuel uses for certain
whereby an estimation of
processes can be made and levy imposed accordingly.

cannot

that

The Commission notes that it falls to be assessed whether the
exemption can be justified on the basis of the nature and logic
of the tax system. The Commission notes the claim made by
the United Kingdom authorities that the imposition of the levy
solely on energy used for fuel 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.

The Commission notes that the climate change levy is a tax on
the non-domestic use of energy, which broadly covers use as
heating fuel, lighting or for motive power. The levy will not
apply to fuels used for other than these purposes. Such a
definition of
the scope of an energy tax, whereby not all
uses of fuels are taxed, may be in the logic of a system such
as that established in the Mineral Oils Directive and in the
Proposal for a Council Directive restructuring the Community
framework for the taxation of energy products.

(2) OJ L 316, 31.10.1992, p. 12.
(3) OJ C 139, 6.5.1997, p. 14.

The Commission further notes that, if the energy part in the
dual use were to be fully exempted, the result may be not in
line with the objective of the levy to reduce CO2.

For the reasons given above, the Commission has doubts that
the exemption for energy products used for purposes other
than as fuel can be considered as a general measure and not
as State aid.

(b) Compatibility of the aid

Assuming that the exemption for dual use fuels constitutes
State aid,
the Commission has doubts on its compatibility
with the environmental aid guidelines (OJ C 37, 3.2.2001, p. 3):

1. The provision exempts energy consumption for

some
processes causing considerable CO2 emissions and thus
may run counter to the objective of
the tax to reduce
CO2 emissions.

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2. The exemption is not temporary, and not granted with a
view of enabling companies to adapt to the new tax (point
48 of the environmental aid guidelines).

3. The exemption is not made conditional on the conclusion
of agreements
to achieve the environmental
protection objective, nor is the tax subject to conditions
that have the same effect as agreements (point 51(1)(a) of
the environmental aid guidelines).

in order

4. The UK has not demonstrated that firms eligible for the
exemption must nevertheless pay a significant proportion
of the national tax (point 51(1)(b) of the environmental
aid guidelines).

TEXT OF THE LETTER

(cid:145)The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
on the measures referred to above, it has decided:

(cid:151) not to raise objections on the tax exemptions from the
climate change levy (CCL) for electricity from renewable
sources, for CHP, for public transport and rail freight and
on the tax reductions for companies entering into climate
change agreements,

(cid:151) to initiate the procedure laid down in Article 88(2) of the

EC Treaty on the tax exemption for dual-use fuels.

PROCEDURE

change

(cid:145)climate

By letter dated 14 February 2000, the UK authorities notified
following previous
the
informal
levy(cid:146),
discussions on the subject
in autumn 1999 and on 4
February 2000. The notification was discussed at a meeting
on 8 March 2000 and additional information was subsequently
submitted by letter of 26 April 2000 (registered A/33666, 3
May 2000). A second meeting was held on 4 May 2000,
followed by additional
information sent by letter of 14 July
2000 (registered A/36041, 19 July 2000) and of 8 September
2000 (registered A/31909, 14 September 2000). Further
meetings were held on 20 October 2000 and 9 November
(mainly on the agreements), and additional
information was
submitted by letter of 31 October (registered 6 November,
A/39034), 14 November 2000 (registered on 17 November,
A/39509) and by letter of 23 November
(registered 27
targets were
sector
Preliminary
November, A/39845).
presented by the UK at a meeting on 1 December 2000. The
letter by the Commission of 30 November was answered by
letter of 13 December (A/40698, registered 18 December
2000). At a meeting on 14 December the exemption for
double use fuels was discussed. Additional
information on
targets was
sent on 15 January (registered A/30396, 16
January 2001). At a meeting on 29 January 2001 outstanding
questions on CHP and renewables were discussed. Additional
sent on 1 February
information on dual-use fuels was

(A/30986, registered 2 February 2001). Additional information
was sent on 7 February 2001, confirming several commitments
made orally at meetings, giving additional
information on
double use fuels and modifying the scope of the exemption
for electricity from renewable sources. Information on double
use fuels was also sent on 1 and 9 February 2001 in the
context of the examination of State aid N 197/2000.

Further clarification on the exemption for CHP was provided
by e-mail on 14 February 2000 and confirmation of the facts
was given by letter dated 21 February 2001 (registered on 22
February, A/31532). Detailed information on targets was last
submitted on 5 March 2001. Additional information on CHP
was provided on 7 March 2001.

CHARACTERISTICS OF THE CLIMATE CHANGE LEVY

levy

change

climate

package

The UK authorities intend to introduce from 1 April 2001 the
climate change levy on the non-domestic use of energy, which
is broadly the use as heating fuel, lighting or for motive power.
the
The
forward
takes
government’s policy on environmental
taxation and is a
central part of the government’s climate change programme,
which sets out the government’s proposals for meeting the
UK’s legally binding target of a 12,5 % reduction in greenhouse
gas emissions (Kyoto Protocol) averaged over 2008-2012 and
for moving towards the government’s domestic goal of a 20 %
reduction in carbon dioxide emissions by 2010.

The levy is expected to raise GBP 1 billion in its first full year
(2001/2002).

1. Environmental

impact of the CCL: This new levy is
introduced in order to help meet the UK’s international
greenhouse gas abatement obligations and to progress
towards the domestic goal of reducing CO2 emissions.
instrument is estimated to save
This new environmental
around 5 M tonnes of carbon per year by 2010. Of this
it is estimated that at least 2,5 M tonnes of carbon savings
per year will be achieved through climate change levy
agreements with energy-intensive sectors.

Negotiated
agreements

Levy package

(estimates in MtC for the entire CC package)

Price effect of levy
Renewables exemption
CHP exemption
Energy efficiency measures

Total

2,5

1
0,5
0,5
0,5

5

2. The legal base for the levy is the Finance Act 2000, Section
30 and Schedules 6 and 7, which received Royal Assent on
28 July 2000. The levy is scheduled to come into effect on
1 April 2001. If no Commission approval is given before 1
April 2001, the UK authorities have the option of amending
their proposals in the Finance Bill before this.

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3. Scope of the levy

The levy covers non-domestic use of primary and/or
secondary fuel
for lighting, heating, motive power and
power for appliances by consumers in industry (including
fuel
industries), commerce, agriculture, public adminis-
tration and other services.

The tax will be levied at the point of sale to the final
consumer. In order to avoid double taxation the levy will
not apply where a taxable commodity is used to produce
another taxable commodity.

Mineral oils will not be brought within the scope of the tax
to excise duty in
already subject
because
accordance with Council Directives
92/81/EEC and
92/82/EEC (4).

they are

The levy will apply also to imported commodities when
It will not be applied to commodities
used in the UK.
which are intended to be burnt outside the UK.

4. The rates of the levy

The rates of levy in 2001-2002 are expected to be:

Energy product

Levy rate (pence per kilowatt hour)

Electricity

Gas

0,43

0,15

Coal and other solid fuels

1,17 p/kg
0,15 p/kWh)

(equivalent

to

Liquified petroleum gas

0,07

DESCRIPTION OF THE AID

The UK Government notified several exemptions or reduced
rates from the tax, for a period of 10 years (5). The duration
of 10 years is meant to allow business to plan the necessary
investments in energy savings and to gain legal certainty for
their investment planning and actual decisions.

Subject of the notification in question are:

1. Exemption for electricity, gas and coal used in public

transport and railfreight.

2. Exemption for input fuels and electricity generated by good

quality CHP.

3. Exemption for electricity generated from some energy

sources.

4. Reductions
agreements.

for

facilities

entering into climate

change

The UK Government anounced its intention of entering into
climate change agreements with industry until 2013, that is a

(4) OJ L 316, 31.10.1992, pp. 12 and 19.
(5) The notification does not cover tax exemptions and reductions for
Annex I products and for the ECSC sector, which will be dealt with
as separate notifications (Annex I products: State aid N 9/2001
(intensive pig and poultry rearing) N 10/2001 (food, drinks and
fisheries), N 44/2001 (horticulture), ECSC: State aid N 197/2000).
An exemption for natural gas used in Northern Ireland was
notified separately (State aid N 660/2000) and will also be subject
of a separate decision.

tax benefits of 12 years. However,

the UK
period for
Government seeks approval of
the tax reduction linked to
climate change agreements for an initial period of 10 years.
Also the legal provisions for the other exemptions are by
nature unlimited, but notified for a period of 10 years.

The UK authorities confirmed that although the entitlement to
reductions and exemptions is contained in legislation, they will
review their policy before the end of the 10-year approval and
either renotify or amend the legislation and/or agreements as
necessary so as to respect State aid obligations.

5. Exemption for dual-use fuels

The tax law exempts dual-use fuels from the levy. The UK
authorities consider this exemption to be a general measure
and in the nature of the tax scheme.

The levy exemption for dual-use fuels amounts to around 0,1 %
of the turnover for each sector.

BUDGET OF THE SCHEME

Expenditure on the scheme is not expected to exceed GBP 420
million in the first year 2001/2002 against a net yield of
GBP 1 billion of the levy. The cost and benefit is expected
to fall in subsequent years as the impact of measures taken
to meet the targets in the agreements are taken. The amount
of revenue forgone will depend on future rates of
levy; the
success of the policy in encouraging more environmentally
friendly forms of electricity generation; the scale of reduction
in energy consumption by energy intensive users; and the
development of rail transport.

The total costs for the exemption for public transport will be
GBP 15 million, the exemption for railfreight will cost about
GBP 1 million.

The exemption for CHP will cost GBP 40 million at current
take-up. Part of this benefit will accrue to customers drawing
electricity or heat directly from these plants.

The cost for exemption for renewable sources depends on the
success of the policy in encouraging the development of new
capacity. At current capacity an exemption will cost GBP 15
million.

The cost of
the reduced rate for companies entering into
climate change agreements has been calculated at GBP 350
million in the first full year.

1. Exemption for electricity, gas and coal used in public

transport and railfreight

The UK Government is proposing to exempt energy used in
public transport and rail freight from the CCL. Because diesel
and petrol are not within the scope of the tax (being subject to
this means the main beneficiaries would be
excise duties)
mainline railways,
light railways, London Underground and
rail freight companies using electricity.

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In July 2000, the UK published its integrated transport White
Paper (cid:145)A new deal for transport: better for everyone(cid:146). The plan
aims to transform the UK transport system by helping reduce
road congestion and pollution, providing better and more
reliable public transport and significantly improving transport
in London. Key targets of this plan are:

(cid:151) to increase rail use by 50 %, measured in passenger kilo-

metres, by 2010 from 2000 levels,

(cid:151) to increase rail freight by 80 % by 2010, increasing its share

of the freight market to 10 %,

(cid:151) to double light rail use in England by 2010 from 2000

levels,

(cid:151) to reduce road congestion on the inter-urban network and
in large urban areas in England to below current levels by
2010,

(cid:151) to cut journey times on London Underground services by

increasing capacity and reducing delays.

Without the exemption for 10 years, the costs of the levy could
through the franchise
be passed on to the government
support
an additional
renegotiations. This would create
requirement that would consequently reduce the amount of
support available for the new enhancements envisaged in the
10-year plan. Alternatively, the cost of the levy could be passed
on to the customer in the form of higher fares/charges; this
would also run counter to the objectives of the 10-year plan.

targets

in the plan will

Meeting the
increased
investment in infrastructure and rolling stock which may be
jeopardised if rail operators have to meet the costs of the CCL.
It is estimated that these could add approximately GBP 15
million a year to rail operators’ costs.

require

Securing the exemption from the climate change levy for 10
years will provide the certainty needed by industry to make the
necessary investment to meet the plan targets, and is consistent
with the introduction of
the 10-year plan as a long-term
strategy.

In addition, the exemption of rail freight from the levy would
be consistent with the Commission’s proposal, adopted on 26
July, regarding regulation concerning the granting of aid for the
coordination of transport by rail, road and inland waterways.
This proposes a comprehensive exception for State aid in the
freight sector benefiting users of rail,
inland waterways and
combined transport infrastructure on the grounds (cid:151) in the
interests of sustainable mobility and to overcome existing
distortions between modes (cid:151) that it compensates them for
the unpaid external costs (environmental, congestion, etc.) of
road transport.

Of course, the levy exemption would be just one of many
in the
policies put
in place to help achieve the targets
10-year plan. Other measures include a substantial
increase
in investment, both private and public, with an emphasis on
promoting private and public partnerships. Total private and
public investment in transport over the next 10 years will be

GBP 180 billion. A number of multi-modal studies will be
undertaken, which aim to identify solutions to problems on
key transport corridors by looking at the contribution that
transport might make, moving away from a
all modes of
the Strategic Rail
one-dimensional approach. On railways,
Authority (SRA) will take the targets in the 10-year plan into
account when considering replacement of the current train
operator franchises.

The plan sets out the government’s commitment to monitor
and evaluate progress towards the targets,
including those
mentioned above. The UK will be reporting regularly on the
results, together with other key indicators.

The UK will be monitoring closely how this package of policies
is contributing to the expansion of rail travel as an alternative
to road travel, and its role in promoting more sustainable
transport practices.

2. Exemption for outputs of good quality combined heat

and power plants (CHP)

CHP makes significant fuel and emissions savings over conven-
tional, separate forms of power generation and heat-only
boilers. The generation and supply of electricity from power
stations is generally at an efficiency in the range 25-50 %,
based on the gross calorific value (GCV) of
the fuel and
including transmission and distribution losses. This means
that 50-75 % of the energy content of the fuel is not usefully
employed. This unutilised energy content is rejected as heat
rivers. The
directly to the atmosphere or
generation of electricity and the recovery of heat
in CHP
schemes typically achieve overall efficiencies of 60-80 % and
sometimes more.

into seas or

Unlike conventional methods of electricity generation, some of
the heat cogenerated in a CHP scheme is used typically in
industrial processes or for heating and hot water in buildings.
The heat used in this way displaces heat that would otherwise
have to be supplied by burning additional fuel and so leads
directly to a reduction in emissions. The development of CHP
provides a particularly environmentally-effective approach for
reducing CO2 emissions.

The UK Government has a target of increasing the installed
capacity of CHP from its current level of 4,5 GW to at least
10 GW by 2010. This will
lead to additional reductions in
carbon dioxide emissions of about 4 million tonnes per annum.

However,
development of CHP,
only increase to 7 GW or possibly less by 2010.

in the absence of any incentives to promote the
it is estimated that CHP capacity will

The economic viability of CHP is critically dependent on the
differential between electricity and gas prices. Over the last five
years, electricity prices have fallen by 3 % in real terms, while
gas prices have increased by 30 %. These factors together have
resulted in an extremely adverse effect on CHP economics.
the climate change levy
Without any exemption for CHP,
(CCL) will exacerbate this problem, as it will
increase gas
prices proportionately more than electricity prices.

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these cases. The exemption will address market

It is important to recognise that the cost-effectiveness of CHP is
marginal in many instances. The proposed CHP exemption will
help to tip the balance in favour of investment of CHP in many
of
imper-
the trend in
fections and help to counteract
energy prices over recent years, which has reduced the cost-
effectiveness of many CHP schemes. These issues apply just as
much in the business sector as within any other sector of the
economy.

the effect of

The government has therefore proposed that good quality CHP
should be exempt from the climate change levy. The definition
of good quality CHP (6) is based on threshold criteria, which
must be met or exceeded in order for the whole of the scheme
to qualify as (cid:145)good quality(cid:146).

The CHPQA programme provides for a rigorous assessment of
the energy efficiency and environmental performance of CHP
schemes. It is much more rigorous in this respect than simply
assessing the overall efficiency of a CHP scheme. In particular,
the weighting given to the efficiency of power generation in
the
environmental
assessment procedures
benefits of using CHP rather
than conventional energy
generation technologies. In comparison, a conventional boiler
system with a small amount of electrical power generation
could achieve relatively high (cid:145)headline(cid:146) energy conversion effi-
ciencies, but offers much reduced environmental benefit
compared to good quality CHP.

recognises

the

Threshold criteria are set for quality index and power effi-
ciency.

Power efficiency ((cid:231)power)
input energy
which is converted to electrical or mechanical power (total
annual power output divided by the total annual fuel input).

is the proportion of

The quality index (QI) is a measure of the overall efficiency of a
CHP scheme, taking account of the efficiency of production of
both heat and power. In the definition of the quality index, the
quantity of power produced is weighted relative to the quantity
of heat, given the greater energy and environmental cost
involved in generating power.

The general definition for QI = (X (cid:215) (cid:231)power) + (Y (cid:215) (cid:231)heat) (7)

Quality index (QI) definitions for various sizes and types of
CHP schemes:

Size of scheme

QI definition

£ 1 MWe
> 1 to £ 10 MWe
> 10 to £ 25 MWe
> 25 to £ 50 MWe
> 50 to £ 100 MWe
> 100 to £ 200 MWe
> 200 to £ 500 MWe
> 500 MWe

QI = 230 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 220 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 205 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 190 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 185 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 180 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 170 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat
QI = 160 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat

(6) Established by the UK’s CHP quality assurance programme

(CHPQA).

(7) X is a coefficient related to alternative power supply options.
Similarly Y is a coefficient for heat generation, related to alternative
heat supply options. The values for X and Y vary for different sizes
and types of scheme.

Special cases

QI definition

Fuel cell schemes

engine

Reciprocating
(including
those
cycle applications) £ 25 MWe

schemes
in combined

arrangements

Transitional
for
existing steam turbine and recip-
rocating steam engine schemes to
April 2005

Alternative fuel schemes

QI = 180 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat

QI = 200 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat

QI = 240 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat

Alternative fuel gases

QI = 240 (cid:215) (cid:231)power + 125 (cid:215) (cid:231)heat

Biogas, waste gas or waste heat

QI = 300 (cid:215) (cid:231)power + 140 (cid:215) (cid:231)heat

Biomass or solid or liquid waste

QI = 400 (cid:215) (cid:231)power + 140 (cid:215) (cid:231)heat

Threshold criteria for good quality CHP

For fuel inputs under annual and initial operation:

Normally, a scheme that qualifies as good quality CHP for its
entire energy inputs is one where the power efficiency equals
or exceeds 20 %.

For power outputs under annual operation:

A scheme that qualifies as good quality CHP for its entire
annual energy output is one where the quality index equals
or exceeds 100.

For power outputs under initial operation:

A scheme that qualifies as good quality CHP for its entire
annual energy output is one where the quality index equals
or exceeds 95.

For power generation capacity under annual operation:

The threshold criterion for existing good quality CHP capacity
is that the CHP scheme achieves a QI of at least 100 at its
maximum heat output under normal operating conditions.

For proposed new power generation capacity, threshold criteria
for proposed new good quality CHP scheme capacity, at design,
specification, tendering and approval stages, are:

either QI ‡ 105 and power efficiency ‡ 20 %, both under

annual operation,

or

QI ‡ 110 at max heat and power efficiency ‡ 35 %
under annual operation.

The QI definitions shall be subject to periodic review to ensure
that the values of X and Y remain applicable and appropriate
for each size and type of CHP scheme, that certified good
quality CHP will continue to provide significant environmental
benefits compared with conventional energy supply alternatives
and that the QI definitions provide a challenging threshold for
all CHP schemes and promote continuous improvement of
CHP plant.

C 185/28

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Simplified arrangements will operate for small-scale CHPs (less
than 2 MWe) as regards metering, monitoring and reporting.

The extent of the exemption on fuel input and energy output
depends on the proportion of good quality CHP

A scheme meeting or exceeding the threshold quality index and
power efficiency criteria will qualify as good quality CHP for its
entire capacity, annual energy inputs and annual energy
outputs.

A CHP scheme that does not meet the threshold criteria for
good quality CHP will not be eligible for CCL exemption on its
entire fuel input or power output, but only for a part of it,
corresponding to good quality portion of
the overall CHP
scheme (8).

Regular monitoring

the

standard

It is a requirement of CHPQA that CHP schemes are assessed
against
continued
each year
performance in relation to the good quality CHP threshold
criteria. If there is a change in the level of performance, eligi-
bility for exemption from the climate change levy shall be
adjusted appropriately.

ensure

to

3. Exemption for electricity generated from some energy

sources

The government proposes to exempt from the levy electricity
sold by electricity suppliers which can be matched with

the qualifying fuel
input (CHPQFI)

(8) For such schemes, if the power efficiency is less than the threshold
input must be
power efficiency criterion,
is the portion of
calculated. The qualifying fuel
total fuel input that would achieve the threshold power efficiency,
given actual annual average power output. In this way, the fuel
input to the good quality CHP power output is recognised and
the threshold criterion does not represent a (cid:145)cliff-edge(cid:146).
If the quality index is less than the threshold quality index criterion,
the qualifying power output
(CHPQPO) must be calculated. The
qualifying power output is the portion of total power output that
would achieve the threshold quality index, given actual annual
average heat utilisation. In this way, the good quality CHP power
output is identified and recognised whilst any additional power
output is regarded as conventional power generation.
It is the qualifying fuel input and qualifying power output, as the
fuel input and power output meeting the threshold criteria, that are
used to determine CCL exemption for schemes that do not meet the
threshold criteria for their total fuel inputs and outputs. In this way,
benefits are only ever given to the good quality portion of any
overall CHP scheme.

purchases from an eligible generator. The technologies eligible
for exemption will be: wind energy, hydro power up to
10 MW, tidal power, wave energy, photovoltaics, photocon-
version, geothermal hot dry rock, geothermal aquifers,
the
biodegradable fraction of municipal and industrial wastes,
landfill gas, agriculture and forestry wastes, energy crops and
sewage gas.

Suppliers will be able to exempt sales of electricity from the
levy if
the supplier has contracted with a generator or
generators of eligible electricity from the defined sources to
purchase such electricity; the supplier agrees to independent
audit by the authorities; and the generator(s) agree to the
same conditions.

This exemption is also applicable to imported electricity from
the same energy sources.

4. Reductions for facilities entering into climate change

agreements

government

the need for

also recognises

The
special
consideration to be given to the position of energy intensive
industries given their energy usage, the requirements of the
integrated pollution prevention and control regime and their
exposure
the
government will provide an 80 % discount from the levy
for those sectors that can agree targets for improving their
energy efficiency or reducing carbon emissions ((cid:145)agreements(cid:146)).

competition. Consequently,

to international

Beneficiaries: The government defines an (cid:145)energy intensive(cid:146)
sector as one which operates processes which will be covered
by Annex I of Council Directive 96/61/EC concerning inte-
grated pollution prevention and control (9). This criterion
applies throughout the UK and has been chosen because sites
operating such processes will be subject to a legal requirement
to use energy efficiently (cid:151) other sites are not subject to this
requirement. Small sites which fall below IPPC size thresholds
(with the exception of thresholds relating to combustion plant),
but which would otherwise be covered by the proposed regu-
lations, will also be eligible for the relevant sector agreement.

The UK Government

Duration: The agreements cover a period of 12 years
seeks Commission
(2001-2013).
approval
it
would terminate the agreements with sectors after 10 years if
no
prolongation
Commission
(commitment see above).

for a period of 10 years and confirmed that

decision

allows

their

CHP scheme

(9) These sites and installations will,

in due course, be subject to a
regulatory requirement,
in terms of having to operate in an
energy efficient manner. The activities in question include activities
of energy industries, production and processing of metals, mineral
industry, chemical
industry, waste management and some other
activities.

30.6.2001

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C 185/29

Form of agreements: Two options are envisaged for these
agreements

1. Sector level agreements ((cid:145)umbrella agreements(cid:146)) between the
industrial sector associations (10) and the relevant Secretary
of State under which sector targets would be set. Individual
entities participating in the scheme would additionally agree
individual targets and would enter into separate agreements
with the Secretary of State ((cid:145)participation agreements(cid:146)). The
reduction in levy would be available either if the sector as a
whole met its target or, failing that, if an individual entity
met its target (in which case, only that individual entity
would qualify for a levy reduction).

Most eligible sectors and participants are choosing to use
these forms of agreements.

2. In this option, the sector level agreement is also between the
government and the sector association. But the participant
level agreement is between the sector association and each
participant in respect of their facility or facilities. The UK
Government has to agree the model agreement used by the
sector and will also approve each individual agreement
before they will be permitted to come into effect.

The levy is only payable by those operators carrying out
economic activity in the UK. All of those are equally eligible
to enter climate change agreements, no matter what their
origin. Any business setting up a new establishment in the
UK will be eligible to enter an agreement on equivalent
terms
in existing
agreements. Provided an equivalent target can be agreed
for qualifying activities, DETR will include the establishment
within the relevant sector agreement and the establishment
will become eligible for the 80 % discount.

to those agreed with their

sector

Targets: The targets consist of quantitative energy use and
carbon emissions reductions outcomes, defined in absolute
for
terms or per unit output. Milestone targets are set
two-year periods.

product mix until 2006. A potential extension of this possi-
bility will depend on the successful introduction of a carbon
emission trading scheme. Participants with absolute targets
would not be permitted to use this procedure. The product
mix approach is not available for those participants who
choose a tolerance band approach.

If the beneficiary is unable to meet a milestone target due to a
relevant constraint or requirement, progress made towards
meeting the targets
taken as being satisfactory. These
constraints or requirements are:

is

(cid:151) constraint or requirements imposed by or under town and
country planning, environmental, health and safety or food
hygiene legislation,

(cid:151) certain constraints or

requirements

construction or operation of a CHP plant under
Energy Act 1976 or Electricity Act 1989,

imposed on the
the

(cid:151) unforeseen major disruptions to a dedicated energy supply

of more than 240 consecutive hours.

The scheme foresees the possibility to meet agreed targets by
carbon emission trading among entities committed to a climate
change agreement. Emission trading should later on be possible
also with participants in a wider emission trading scheme
subject
to approval of such a linkage by the Commission.
Details of such a scheme are not yet available. The UK auth-
orities undertake that unless the Commission agrees otherwise,
carbon trading will only be allowed between participants in
climate change agreements, and then only where the selling
party has verified surplus carbon to sell. This restriction is
contained in the climate change agreements.

Targets are reviewed twice,
in 2004 and 2008 in order to
ensure that they continue to represent the potential for cost
effective energy savings taking into account any changes in
technical or market circumstances.

Recuperation: A beneficiary who does not meet a milestone
target will lose the levy reduction for the next two years. If he
then meets the next milestone target, he will be allowed the
levy reduction for the following two years.

The UK Government will make sector targets transparent by
reporting to the UK Parliament, and as appropriate, to the
devolved legislatures.

Tolerance bands allow small overshoots of the milestone target
to be accepted for those participants who otherwise demon-
strated satisfactory performance in view of additional quali-
tative criteria (such as good environmental management). The
tolerance band facility will not be available after the third
milestone.

Over the period envisaged for the agreements participants will
wish to be free to choose whether to respond to market
demand for new products or a different mix of products
from that on which their original energy/CO2 savings targets
were based. This may lead to an increase or decrease of energy
per unit of production. The scheme foresees an adjustment
procedure in order to adapt the targets to a change in the

(10) Or an organisation especially set up by the sector association for

this purpose.

While the mechanism of such a (cid:145)forward penalty(cid:146) is different
from a clawback provision for levy rebates received over the
past years, the UK Government claims that the risk of losing
the levy reduction for the future is a stronger incentive for
beneficiaries
than a proportionate
clawback mechanism would provide (11).

to meet

targets

their

(11) An example for a beneficiary not meeting the target in year 2 and

is back on target thereafter:

Year 2

Year 4

Energy target agreed

Energy use

Levy to be paid:

900

925

Forward penalty

100 (cid:215) 20 % = 20

Proportionate
clawback

100 (cid:215) 20 % = 20

800

800

90 (cid:215) 100 % = 90
Clawback 1/4 of
80 previous
rebate = 20
+ 90 (cid:215) 20 % = 18
= 38

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Official Journal of the European Communities

30.6.2001

For the last milestone target, for which the prospective loss of
levy reduction may not create a sufficient incentive, the UK
authorities undertook that they will introduce a provision to
recover levy reduction granted to participants for the last two
in proportion to the
years of a 10-year State aid approval
extent, if any, to which their last milestone targets were not
met. The UK authorities consider it probable that this provision
will require a change to the legislation, which will be brought
forward at the appropriate time. As yet the framework for
recovery has not been settled, but will be considered in the
prevailing circumstances.

Level of the targets: When negotiating the targets with the
sectors concerned, the principal benchmark used by the UK
authorities to assess whether these targets are demanding is
savings achievable
the UK’s

the potential

study of

for

through the implementation of all energy saving measures
which are cost effective (12).

During the negotiations, several assumptions of the study were
corrected or refined. Agreements are being finalised with most
of the sectors concerned. While all negotiations are not yet
finalised, the UK authorities informed the Commission on the
likely outcome of
the negotiations. The UK informed the
Commission that they do not intend to weaken the targets in
the final phase of the negotiations, but may on the contrary
even enforce them for some sectors. The latest estimates being
reviewed with the sector associations are:

(12) The study has been published as (cid:145)Industrial sector CO2 emissions:
projections and indicators for the UK 1990-2020, April 1999
(EPSC 20616001/Z/1)(cid:146). The assessment of the potential savings,
sector by sector, has assumed unlimited availability of capital and
management time and therefore is an upper potential limit with
known technologies.

First wave climate change levy: Target as agreed and carbon savings as estimated by sector
associations (as of 5 March 2001)

Sector association

Type of target
relative/absolute
carbon/energy

Base year

Target (change from
base year to 2010)

Additional carbon
savings (in 1 000 t
above BAU between
2000 and 2010)

Status of agreements

50

790

150

Agreed

Agreed

Agreed

420 (including
estimate for CHP)

Agreed

430

170

20

44

Agreed

Agreed

Agreed

Agreed

Non-Ferrous Alliance

Relative energy

1990

(cid:150) 22,0 %

Chemical Industries Association

Relative energy

1990

(cid:150) 34,0 %

Aluminium Federation

Relative carbon
equivalent

1990

(cid:150) 32,1 %

Food and Drink Federation (13)

Relative energy

1995

(cid:150) 13,8 %

Paper Federation of Great Britain

Relative energy

1990

(cid:150) 40,0 %

British Cement Association

Relative energy

1990

(cid:150) 25,6 %

British Glass Manufacturers Association

Relative energy

1999

(cid:150) 9,2 %

British Ceramics Confederation

Relative energy

2000

Pottery
(cid:150) 12,4 %

Heavy clay
(cid:150) 10,22 %

Fletton bricks
(cid:150) 8,1 %

Refractories
(cid:150) 10,33 %

Cer. materials
(cid:150) 10,1 %

Foundries: target 2010

Relative energy

2000

(cid:150) 11,0 %

20

Agreed

(13) Partly Annex I products.

30.6.2001

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Official Journal of the European Communities

C 185/31

Second wave climate change levy: Carbon savings estimated by sector associations (as of 5 March
2001)

Status of agreements

Provisionally agreed

Agreed

Agreed

Agreed

Agreed

Agreed

Agreed

Provisionally agreed

Agreed

Agreed

Agreed

23,0

2,0

7,2

6,0

2,0

16,0

5,0

2,0

6,5

7,9

4,5

Finalising data

Sector association

Type of target
relative/absolute
carbon/energy

Base year

Target (change from
base year to 2010)

Carbon savings
(1 000 t)
from target

British Rubber Manufacturers Association

Relative energy

Slag Grinders Association

Relative energy

1999

1999

(cid:150) 10,0 %

(cid:150) 10,0 %

Relative energy

2000

(cid:150) 7,16 %

Gypsum Products Development
Association

British Lime Association

Wallcovering Manufacturing Association of
GB Ltd

Relative energy

Relative energy

Brewers and Licensed Retailers Association

Relative energy

Maltsters Association of Great Britain

Relative energy

National Association of Master Bakers

Relative energy

1998

1999

1999

1999

1999

(cid:150) 7,9 %

(cid:150) 9,0 %

(cid:150) 11,6 %

(cid:150) 7,8 %

Scratch bakeries
(cid:150) 9 %

Bake-off facilities
(cid:150) 4,5 %

Scotch Whisky Association
Gin and Vodka Association

Relative energy

1999

(cid:150) 4,5 %

UK Agricultural Supply Trade Association

Relative energy

UK Renderers Association

Relative energy

British Apparel & Textile Confederation

Relative energy

British Leather Confederation

Relative energy

1999

1999

1999

1999

(cid:150) 7,1 %

(cid:150) 9,0 %

(cid:150) 9,0 %

(cid:150) 9,68 %

0,6

Agreed

Confederation of British Metalforming

Relative energy

2000

(cid:150) 7,0 %

Finalising data

Eurisol

Relative energy

Metal Packaging Manufacturers Association

Relative carbon

1999

1999

(cid:150) 14,9 %

(cid:150) 9,0 %

6,7

2,5

National Microelectronics Institute
(Semiconductors)

Relative energy

2000

(cid:150) 59,0 %

220,0

National Microelectronics Institute (CRTs)

Relative energy

Society of British Aerospace Companies

Absolute energy

Society of Motor Manufacturers and
Traders

Relative energy

Surface Engineering Association

Relative energy

Vehicle Builders and Repairers Association

Relative energy

British Printing Industry Federation

Relative energy

Wood Panel Industries Federation

Relative energy

Boat Builders

Supermarkets

Environmental Service Association
(incineration)

(cid:151)

(cid:151)

2000

2000

1995

1999

2000

2000

1999

(cid:151)

(cid:151)

(cid:150) 21,0 %

(cid:150) 8,5 %

(cid:150) 15,3 %

(cid:150) 12,01 %

(cid:150) 10,0 %

(cid:150) 12,0 %

(cid:150) 7,34 %

(cid:151)

(cid:151)

7,4

0,5

19,2

2,5

Finalising data

4,2

1,9

Late entrant

Late entrant

Agreed

Agreed

Agreed

Agreed

Agreed

Agreed

Agreed

Agreed

Agreed

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Official Journal of the European Communities

30.6.2001

The UK authorities will send final versions of the agreements to
the European Commission.

The UK authorities assume that
the cost of meeting the
milestone targets will be around GBP 2 500 million over the
period 2000-2010. The diversity of investment cycle across the
various industries means that there is no reason to assume that
averaged over the sectors investment will be anything other
than linear over the 10-year period. Therefore, averaged over
the lifetime of the agreements the annual costs of investment
will be GBP 250 million.

the

Companies will not be allowed to receive aid under this
scheme and also other aid for the investments necessary to
fulfil
from
enhanced capital allowances for energy efficient investment, a
measure which does not constitute State aid under Article
87(1) of the EC Treaty (14).

agreements. They can however benefit

The UK authorities undertook to provide the Commission with
progress reports after each two-year review.

5. Exemption for dual-use fuels

It is proposed that energy products falling within the scope of
the levy will be exempt from it where the person to whom the
product is supplied intends it to be used for other purposes
than as fuel. The notion of (cid:145)fuel(cid:146) is not defined in the Finance
Act 2000. However, according to the United Kingdom auth-
orities it broadly covers use of energy products for motor and
heating purposes. It is proposed that where an energy product
is used for partly fuel and partly non-fuel purposes ((cid:145)mixed
uses(cid:146)) it will be fully exempt from the levy.

The United Kingdom authorities consider this provision as a
general measure, and as part of the logic of the tax system.
According to the United Kingdom,
this (cid:145)dual-use(cid:146) provision
applies to the steel sector, to the production of aluminium,
iron, lead, copper, zinc, batteries and some chemicals.

ASSESSMENT

I. EXISTENCE OF AID

1. Exemption for transport

Article 87(1) of the Treaty provides that any aid granted by a
Member State or through State resources in any form what-
soever, 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.

State aid, within the meaning of Article 87(1) of the Treaty also
covers measures that,
in various forms, mitigate the charges
which are normally included in the budget of an undertaking
and which have the same effect as cash grant subsidies.
Consequently, a system under which the public authorities

(14) Notified N 797/2000, Commission decision on 13 February 2001.

grant to certain undertakings a tax exemption that relieves
them of some of their costs and confers on them financial
advantages which
position
constitutes State aid within the meaning of Article 87(1) of
the aid is capable of affecting trade between
the Treaty if
Member States and distorting competition.

competitive

improve

their

the UK Government will offer an
As described above,
exemption from the climate change levy for electricity, coal
and gas used in public transport and railfreight. Since
mineral oils and gases used by road vehicles are not within
the scope of
the benefit deriving from the tax
exemption will accrue to railways and light railways using
electricity,
the London Underground and the
Manchester Metro.

the levy,

such as

The exemption from the levy for rail freight will relieve the
beneficiaries from costs they should normally bear due to the
new tax and hence confers on them a financial advantage,
which improves/safeguards their competitive position vis-(cid:224)-vis
other modes of transport and other operators. It thus distorts
or threatens to distort competition. The advantage involves
State resources as, through the exemption, the State suffers a
loss of
including
tax revenue. Road haulage operations,
cabotage, are completely liberalised within the European
union and the measure
trade between
Member States. Accordingly,
the exemption constitutes aid
within the meaning of Article 87(1) of the Treaty.

therefore affects

Also with regard to public transport, the tax exemption confers
upon the beneficiaries a financial advantage that improves their
competitive situation compared with their main competitors,
e.g. undertakings providing public transport by road. The tax
exemption thus favours certain undertakings and distorts or
threatens
to distorts competition within the meaning of
Article 87(1) of the Treaty.

to provide passenger

Access to the international passenger transport market and the
transport cabotage has been
right
liberalised through Community legislation (15). With regard to
cabotage rights, the legislation has opened up the market to
competition in respect of special
regular services and of
national regular services, which are provided in the course of
an international regular service. The Commission recalls that
urban and suburban transport services are not covered by this
to provide passenger cabotage. However, both the
right
Community’s public procurement
in particular,
legislation in most Member States enhance an
national
EU-wide market access in this respect. The Commission notes
that public transport contracts in many cases takes the form of
a concession contract between an transport operator and a
rules
public authority and that

the detailed procedural

rules and,

(15) Council Regulation (EEC) No 684/92 on common rules for the
international carriage of passengers by coach and bus and
Council Regulation (EC) No 12/98 laying down conditions under
which non-resident carriers may operate national road passenger
transport within a Member State.

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Official Journal of the European Communities

C 185/33

contained in the public procurement directives impose only
limited obligations in relation to works concessions and do
not apply in the case of service concessions (16). However,
although a service concession is not directly covered by the
detailed rules on public procurement and work concessions are
subject to only limited obligations, public entities concluding
such contracts are bound to comply with the fundamental rules
of the Treaty, in particular the principle of non-discrimination
on the ground of nationality (17). In some cases public transport
contracts may amount to public service contracts which are
subject to the detailed procedural requirements of Directive
service
92/50/EEC on the
contracts.
award of public
However, where such contracts are for
the provision of
(cid:145)non-priority(cid:146) services listed in Annex 1B of that Directive,
the public authority is subject to only limited obligations in
relation to the award of such contracts. The Commission
however, notes that a number of Member States, of which
the UK is one, have introduced EU-wide open, transparent
transport
and non-discriminatory procedures
services (18). Furthermore, statistical data show that where the
markets have been accordingly opened, international operators
have stepped in alongside national ones. By early 2000 at least
from the public and private sectors, were
nine companies,
in more than one
acting as public transport operators
Member State (19).

for public

Given the fact that transport undertakings in the passenger
field show an increasing interest in entering domestic public
transport markets, the Commission cannot exclude that the UK
is liable to affect trade
tax exemption for public transport
between Member
the Commission
States. Accordingly,
considers that the exemption for public transport from the
climate change levy constitutes an aid within the meaning of
Article 87(1) of the Treaty.

2. Exemption for CHP

The benefits and beneficiaries of the exemption are assessed by
comparing (1) the treatment of a good quality CHP system,
respectively the qualifying portions of it, with the electricity
production from conventional sources, and (2) by comparing
heat or steam production in good quality CHP with conven-
tional heat or steam production.

(1) Comparison of electricity production good quality CHP

(cid:151) conventional power station

Conventional electricity generator:

Fuel input not
taxed

Conventional power generator

Output taxed if used
on-site or sold to a
known end-user

Output
consumer pays
on electricity

sold to grid,
levy

Good quality CHP:

Fuel input not
taxed

CHP system

Output not
taxed if
used on-site or sold
to a known end-
user

Output
consumer pays
on electricity

sold to grid,
levy

Operators of good quality CHP systems do not pay levy on the
input fuel. This is in line with the general rule of the tax law,
which does not tax the input fuel for electricity production in
order to avoid double taxation.

I. Operators of good quality CHP systems do not pay
levy on the electricity they produce from a good
quality CHP for their own use.

II. Known end-users do not pay levy on electricity they
purchase from a good quality CHP for their own use.

This gives operators of good quality CHP systems an
advantage compared with conventional power generators
who pay a levy on electricity used on site and gives
known end-users an advantage compared with end-users
who buy electricity from the grid for their own use. This
relieves them of charges that are normally borne from their
budgets and gives the recipient firms an advantage over other
firms. 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 or could be
trade between Member States or on which firms from other
Member States might wish to establish themselves. The scheme
thereby distorts or threatens to distort competition and could
affect trade between Member States.

(16) See Commission’s interpretative communication on concessions

under Community law (OJ C 121, 29.4.2000).

(17) European Court of

Justice judgment of 7 December 2000,

C 324/98 (TeleAustria).

The Commission assessed in particular if the exemption (a) is
aid to certain undertakings, or (b) is aid to the production of
certain goods.

(18) Today 11 Member States have introduced legislation or adminis-
trative arrangements that provide for competition in at least part of
the bus, coach or urban rail markets. See the Commission’s
proposal for a regulation on action by Member States concerning
public service requirements and the award of public service
road and inland
contracts
waterway, COM(2000) 7 final.

transport by rail,

in passenger

(19) 2000 data from the International Union of Public Transport (UITP).
1998 data from (cid:145)Major European players in public transport (cid:151)
new developments in the European Union, 1997(cid:146), UITP-EuroTeam,
1998.

I. Operators of good quality CHP systems

(a) Does the exemption constitute aid to certain undertakings?

The exemption is applied in all UK, granting automatic rights if
objective quality criteria are fulfilled. The exemption for good
quality CHP applies to all autogenerator CHP systems,
inde-
pendent of their type or size.

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Official Journal of the European Communities

30.6.2001

CHP is a technology to increase energy efficiency in the context
of a wide variety of economic activities. It is strongly used in
the manufacturing sectors, there in so different subsectors as
refineries, chemical industry, paper and printing; food products,
beverages and tobacco; metal products, machinery, equipment;
mining and agglomeration of solid fuels; extraction of crude oil
and natural gas; coke ovens; extraction and processing of
nuclear
industry; non-ferrous metals;
non-metallic mineral products extraction; textile, clothing and
leather. It is also used in other industrial branches, in transport,
in the service sector and for public supply (district heating).

iron and steel

fuels;

While use in the service sector is by far not as developed as in
manufacturing, CHP is also there increasingly used, e.g. for
hotel (spa) facilities, and in the health sector. The exemption
is even meant to have the effect to spread the use of CHP also
in those sectors, where it is currently not that widely used, but
which would have the potential to use it.

The application of CHP across different economic sectors

Output of CHP potential model from 1999 (cid:151) capacity and
sites

Chemicals

Food

Paper

Textiles

Other industry

Engineering

Warehouses

Retail

Public buildings

Offices

Hotels

District

Health

Education

Capacity

Sites

(MWe)

%

No

%

3 548

1 834

1 349

359

466

24,8 %

12,8 %

9,4 %

2,5 %

3,3 %

4 224

29,6 %

324

355

128

478

119

291

756

54

2,3 %

2,5 %

0,9 %

3,3 %

0,8 %

2,0 %

5,3 %

0,4 %

448

742

107

709

634

1 226

1 150

3 249

526

3,0 %

4,9 %

0,7 %

4,7 %

4,2 %

8,1 %

7,6 %

21,4 %

3,5 %

2 801

18,5 %

659

400

4,3 %

2,6 %

2 468

16,3 %

50

0,3 %

14 285

100 %

15 168

100 %

The following table shows the distribution of CHP systems in the UK in 1999 and the distribution of
applications for good quality CHP certification:

Chemicals
Food
Paper
Textiles
Other industry
Engineering
Warehouses
Retail
Public buildings
Offices
Hotels
District heating
Health
Education

1999 UK CHP statistics

6 March 2001 CHPQA applications

Capacity

Sites

Capacity

Sites

MWe

1,180
392
471
2
1,583
302
(cid:151)
6
68
16
28
68
99
24

%

28 %
9 %
11 %
0 %
37 %
7 %
0 %
0 %
2 %
0 %
1 %
2 %
2 %
1 %

No

52
44
31
3
215
16
0
6
350
40
260
47
204
45

%

4 %
3 %
2 %
0 %
16 %
1 %
0 %
0 %
27 %
3 %
20 %
4 %
16 %
3 %

MWe

1,301
382
537
(cid:151)
916
71
(cid:151)
14
31
66
19
26
64
24

%

38 %
11 %
16 %
0 %
27 %
2 %
0 %
0 %
1 %
2 %
1 %
1 %
2 %
1 %

4,239

100 %

1 313

100 %

3,451

100 %

No

38
35
31
0
68
3
0
1
181
23
144
17
111
17

669

%

6 %
5 %
5 %
0 %
10 %
0 %
0 %
0 %
27 %
3 %
22 %
3 %
17 %
3 %

100 %

electrical

The UK informed the Commission that
the range of CHP
applications is continuing to increase as new technology is
commercialised. The
capacity of CHP schemes
currently available ranges from 15 kWe to over 200 MWe,
sized to meet the energy requirements of a very wide range
of organisations. Schemes over 1 MWe are mainly found on
larger industry sites, large commercial buildings, hospitals and
district heating schemes, etc. These schemes are normally
custom built, tailored to the energy needs of the host(s).

Schemes under 1 MWe are found in smaller industrial sites,
commercial and public buildings, hotels, leisure centres, blocks

of flats and residential homes etc. These schemes are manu-
factured as a package with standard equipment and control
systems
installed within an enclosure. Standard packaged
units are available in the following electrical outputs: 15, 30,
38, 54, 60, 75, 95, 110, 145, 185, 206, 220, 300, 400, 600
and 800 kWe. There are 34 CHP schemes below 1 MWe on
smaller industrial sites, with an average capacity 400 kWe.

There is no minimum size for CHP systems in order to be
eligible as good quality CHP and the development of the use
of small-scale CHP shows that the exemption will also be of
interest for SMEs.

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Thus all companies throughout a wide range of sectors of the
economy are beneficiaries, independent of their size, location
or economic activity. The criteria for defining (cid:145)good quality(cid:146)
CHP are objective and not designed in a way that would
the exemption to specific sectors. The
limit
majority of existing CHP systems already fulfil the standard.
Stations not yet fulfilling the standard can upgrade to fulfil
the criteria at
their
production.

for a considerable portion of

the benefit of

least

(b) Is (cid:145)good quality CHP electricity(cid:146) a specific product?

The product (cid:145)good quality CHP electricity(cid:146) can be produced by
a large number of companies in various sectors. In most of
these sectors, CHP is not used to produce electricity as a core
product of the business, but the technology is used to produce
the different products of the companies more efficiently, by
increasing the energy efficiency of
the production process.
Insofar, in the case of most of the good quality CHP operators,
(cid:145)good quality CHP electricity(cid:146) is not a specific product.

electricity

the production of

This may be different
for a certain type of CHP system
operators, namely power stations, using CHP technology for
producing electricity to feed into the grid (20). For
such
companies,
core
their
business, and the electricity produced is in direct competition
with the same product from conventional electricity producers.
However, electricity from CHP systems is not exempt, if it is
sold via the grid. The exemption includes only good quality
CHP electricity used on site. With respect to this electricity,
CHP power stations are in the same situation as any other
autogenerator in any other sector of
the economy which
produces good quality CHP for use on site.

is

The Commission considers that the same arguments apply as
under point 1 (use of CHP as technology available throughout
the sectors) and that the measure is not selective.

(2) Consumption of a taxable commodity for heat production
(without producing electricity from it first) by a good
quality CHP

Conventional production of heat:

Fuel input taxed

Conventional production of heat or
steam (= boiler)

Heat output not taxed (not a taxable
commodity)

Good quality CHP:

Fuel input not taxed

CHP system

Heat output not taxed (not a taxable
commodity)

Operators of good quality CHP do not pay a levy on input fuels
to produce heat. This favours them in comparison with the
conventional production of heat, where the input
is
taxed. Again, the measure does not favour certain undertakings,
as CHP is a technology available in a wide range of sectors.

fuel

The Commission therefore concludes that the exemption
on CHP does not constitute State aid according to Article
87(1) of the EC Treaty.

Therefore,
quality CHP electricity used on site is not selective.

it can be concluded that the exemption for good

3. Exemption for electricity generated from some energy

sources

II. Known end-users do not pay levy on electricity they
purchase from a good quality CHP for their own use

is not

Known end-users are users, whose main business is not the
production of heat or power. They could produce heat and
power for use on their own site, but outsource this production
(because it
to a separate entity
their core business)
delivering mainly to a group of known end-users (closed
system). Known end-users are not (cid:145)formally(cid:146) producing their
own power, but practically they are in the same situation as
an autogenerator, who produces power for use on site.
It
should also be noted that such (cid:145)closed systems(cid:146) are comparable
to a (cid:145)use on site situation(cid:146) as regards the energy efficiency of
electricity transfer compared with electricity transfer via the
grid.

Firms purchasing electricity generated from some energy
sources as defined in the description are fully exempt from
the levy on the electricity. This relieves them of charges that
are normally borne from their budgets and gives the recipient
firms an advantage over other firms. 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 or could be trade between
Member States or on which firms from other Member States
might wish to establish themselves. The scheme thereby
distorts or threatens to distort competition and could affect
trade between Member States. However, any company in any
sector of the economy is able to purchase electricity from these
sources. Thus,
favour certain
the tax exemption does not
the production of certain goods and is
undertakings or
therefore not selective.

the continuation of

(20) In its decision on a temporary tax exemption for certain combined
cycle power plants in the context of
the
tax reform in Germany (SG(2000) D109283 of
ecological
14.12.2000), the Commission argued that (cid:145)the relevant gas and
steam turbine plants are being used quite predominantly to
generate electricity for feeding into the grid. The technology
(CHPs excluding heat extraction) is not one which can be used
virtually indiscriminately in all sorts of firms in all branches of
industry. Since it can accordingly be assumed that the effects of the
tax exemption will be felt, if not exclusively, then at least quite
predominantly in a certain sector, the measure favours certain
the production of certain goods within the
undertakings or
meaning of Article 87(1)(cid:146).
there were only very few
stations using this type of technology in Germany.

In fact

But it has to be also considered that the exemption will favour
the same time the generators of electricity from these
at
sources feeding the electricity into the grid.
It thus favours
this type of electricity producer compared with producer of
conventional
the
electricity.
exemption is selective.

and CHP

In this

respect,

However, the preliminary objective of the tax is an environ-
mental one, namely the reduction of CO2. The levy is
introduced to penalise the use of energies producing long-cycle
CO2, as these emissions are responsible for climate change.

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A tax aiming at reducing CO2 could have been structured in a
way so that it reflects the carbon content of different fuels.
However, there are good reasons to base the calculation of
the levy rates on the energy content of different fuels: Firstly,
targeting emissions via the energy content of fuels is an appro-
priate way to reduce them as this approach increases the
energy efficiency of fuel use (21). Secondly, given the current
structure of the electricity and distribution industries, it is only
possible to determine the carbon content of electricity as a
fuel switching
broad average. On that basis,
that would be induced by such an approach is likely to be
limited. Thirdly, structuring the levy with regard to the energy
content of different fuels has the advantage of simplicity.

the additional

the sources of energy listed in the notification
None of
contributes negatively to long-cycle CO2 emissions. They
hence are not fuels for which a penalisation in form of the
levy is intended.

However, the exemption is not extended to all energy sources
which do not
contribute negatively to long-cycle CO2
emissions and in particular does not apply to nuclear power
and to hydro power of more than 10 MW. This choice is
justified for the following reasons: While nuclear power does
not contribute to CO2 emissions,
it has a number of other
effects which are not desirable from an environmental point
of view. With regard to large hydro power,
it should be
considered that the CCL scheme is targeting environmentaly
friendly energy sources with significant development potential.
As the potential of large hydro plants has already been largely
developed, it does not fall into the target group of the scheme.
The Commission also notes that its proposal on a directive on
the promotion of electricity from renewable sources also
includes only hydroelectric installations below 10 MW (22).

contributes

The Commission therefore considers that as none of
the
exempted energy sources
to long-cycle CO2
the
emissions, which is fully in line with the objective of
levy, the exemption for electricity from the energy sources
notified by the UK Government is justified by the nature or
general scheme of the tax system. The Commission considers
the exemption therefore does not constitute State aid
that
within the meaning of Article 87(1) of the EC Treaty and
Article 61(1) of the EEA Agreement.

However, even if the exemption would constitute State aid, it
could be declared compatible with Article 87(3) of the EC
Treaty.

4. Tax reduction for companies entering into climate

change agreements

Firms entering into climate change agreements are exempted
for 80 % of the levy. This relieves them of charges that are
normally borne from their budgets and gives the recipient
firms. The advantage is
firms an advantage over other
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 or could be trade between Member
States or on which firms from other Member States might wish
to establish themselves. The scheme thereby distorts or

to distort

competition and could affect

trade
threatens
between Member States. Only companies
fulfilling specifc
criteria can enter into climate change agreements. Thus, the
tax exemption favours certain undertakings or the production
of certain goods and is therefore selective.

It is not a measure which would be in the nature of the tax
law.

The levy reduction for companies entering into climate change
agreements therefore constitutes State aid under Article 87(1)
of the EC Treaty.

5. Exemption for dual-use fuels

The United Kingdom’s position is that the dual-use exemption
is a general measure that does not constitute State aid. They
claim that the CCL is a tax imposed on the use of energy
products used as fuel and that the exemption is in line with
Council Directive 92/81/EEC of 19 October 1992 on the
harmonisation of the structures of excise duties on mineral
oils (23) ((cid:145)the Mineral Oils Directive(cid:146)) as well as the Proposal
the Community
for
restructuring
the taxation of energy products (24)
((cid:145)the
framework for
proposal(cid:146)),
in so far as only the use of energy products for
motor and heating purposes falls within its scope.

a Council Directive

According to the United Kingdom authorities, the purpose of
the extension of this exemption to mixed uses is to provide
certainty and clarity for the taxpayer, who is the fuel supplier,
as to whether or not, on the basis of scientific advice, any use
of a commodity by the customer is exempt from the levy. The
United Kingdom authorities do not consider it to be technically
feasible to objectively apportion with sufficient accuracy the
fuel and non-fuel uses of energy products within certain
processes.

the United Kingdom authorities

The Commission considers that the exemption gives the bene-
fiting companies an advantage, which is financed through State
In assessing whether this exemption is a general
resources.
measure,
claim, or
as
whether it constitutes State aid, the Commission considers it
necessary to assess whether the effects would favour certain
certain goods. The
undertakings or
information
to the
Commission notes
provided by the United Kingdom authorities, the exemption
will
favour the production of certain goods, namely some
metals (including aluminium, iron, lead, copper and coke) as
well as batteries and some chemicals. The Commission
therefore has doubts that the exemption can be considered as
a general measure.

the production of
according

that,

The Commission notes that it falls to be assessed whether the
exemption can be justified on the basis of the nature and logic
of the tax system. The Commission notes the claim made by
the United Kingdom authorities that the imposition of the levy
solely on energy used for fuel is consistent with the provisions
of the Mineral Oils Directive and the Proposal for a Council
the
Directive restructuring the Community framework for
taxation of energy products.

(21) The approach of taxing harmful emissions approximately via the
energy content of fuel is, for example, also used for car emissions.

(22) COM(2000) 279 final.

(23) OJ L 316, 31.10.1992, p. 12.
(24) OJ C 139, 6.5.1997, p. 14.

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The Commission notes that the climate change levy is a tax on
the non-domestic use of energy, which broadly covers use as
heating fuel, lighting or for motive power. The levy will not
apply to fuels used for other than these purposes. Such a
the scope of an energy tax, whereby not all
definition of
uses of fuels are taxed, may be in the logic of a system such
as that established in the Mineral Oils Directive and in the
Proposal for a Council Directive restructuring the Community
framework for the taxation of energy products.

However,
beyond such a definition of the scope of the levy.

the proposed exemption for dual-use fuels goes

the exemption may not
treat comparable situations
Firstly,
in so far as some dual-use processes are exempt
equally,
from the levy, while other processes, which may also fall to
be considered as dual-use, are not exempted.

Secondly, the UK exempts fuels entirely from the levy, even if
they are only partially used for non-energy purposes as defined
above.

1. The Commission notes that

the Proposal

for a Council
Directive restructuring the Community framework for the
taxation of energy products is not in force and cannot be
automatically relied upon as a reference point to establish
the logic and general nature of the tax system. However, it
the dual-use
may provide some indication of whether
a general measure,
considered as
provision can be
although Article 13(1) refers to fuels used principally for
the purposes of chemical reduction. The Commission has
doubts, however, that the exemption is fully consistent with
the proposal, as it does not extend to energy used in all
metallurgical processes, as would be required under Article
13(1)(a) of
that
according to the United Kingdom authorities, a metallurgical
process is a process which results in the production of
metal, for example, from ore. The Commission has doubts
this interpretation is consistent with the notion of
that
metallurgical process
to be
in the proposal.
consistent with the proposal,
it appears that energy used
in all metallurgical processes, namely in any metal
production process, would be exempt from the levy.

the proposal. The Commission notes

In order

2. The Commission further notes the United Kingdom’s claim
that it is not possible to apportion the fuel/non-fuel use
amounts of energy products
in certain processes with
accuracy; and that for reasons of clarity and certainty, a
full exemption from the levy is necessary for mixed uses.
the United
The Commission has doubts, however,
Kingdom authorities
a mechanism
establish
whereby an estimation of
fuel/non-fuel uses for certain
processes can be made and levy imposed accordingly.

cannot

that

The Commission further notes that, if the energy part in the
dual-use were to be fully exempted, the result may be not in
line with the objective of the levy to reduce CO2.

For the reasons given above, the Commission has doubts that
the exemption for energy products used for purposes other
than as fuel can be considered as a general measure and not
as State aid.

II. LEGALITY OF THE AID

By notifiying its intention to introduce the tax scheme, the UK
has complied with its obligation under Article 88(3) of the EC

Treaty to inform the Commission, in sufficient time to enable
the latter to submit its comments, of any plans to grant or alter
aid.

III. COMPATIBILITY OF THE AID

The aid’s compatibility with the common market under Article
87(3)(c) of the EC Treaty has been assessed on the basis of the
Community
environmental
guidelines on State
protection (OJ C 37, 3.2.2001, p. 3).

aid for

1. Exemption for transport

the Treaty, aid may be
According to Article 87(3)(c) of
considered compatible with the common market if the aid
will facilitate the development of certain economic activities
or certain economic areas, where such aid does not adversely
affect trading conditions to an extent contrary to the common
interest.

As described above, the UK has adopted a substantial transport
plan, the aim of which is to improve the UK transport system
by way of
reducing road congestion and pollution and
providing better and more reliable public transport. One key
target of this plan is to increase the use of rail and to create a
sustainable mobility. However,
target,
substantial investments in rail infrastructure and rolling stock
will be necessary. The UK Government has estimated that in
addition to these investments, the cost of the climate change
levy could add approximately GPB 15 million per year to rail
operators’ costs.

the plan’s

to meet

The Commission has for some time pursued a policy of
achieving a sustainable mobility through a balanced intermodal
transport system and a central aim of the Common Transport
Policy is the promotion of a modal shift from road to other
more environmentally friendly modes of transport.

For instance, the Commission communication on the future
development of the common transport policy (25) proposes a
Community framework for sustainable mobility which Member
States, together with the Community, have to implement by
measures ensuring that the development of transport system
lead to a (cid:145)sustainable pattern of development by respecting
environment
in particular, by contributing to the
solution of major environmental problems, such as the limi-
tation of CO2(cid:146). The communication also makes it clear that
state aid does have a role to play, not only in modifying the
cost relationship of modes, but also in rendering certain modes
more competitive (26).

and,

Moreover, a sustainable public transport system is liable to
contribute to economic development and employment as it
helps to clean up the environment by using less energy,
making less noise and producing fewer pollutants.
It also
reduces social exclusion by allowing people without the use
of a car to gain access to jobs, schools, shops, medical facilities,
etc. (27).

(25) Commission Communication COM(92) 494 final, 2 December
1992, (cid:145)The future development of the common transport policy(cid:146).
(26) See Commission Decision of 21 April 1999, Case N 588/98
(Environmental subsidy for the transport of goods by rail)
(OJ
C 166, 12.6.1999, p. 6.

(27) See Commission Communication COM(1998) 431 final of 10 July

1998, (cid:145)Developing the citizen’s network(cid:146).

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Official Journal of the European Communities

30.6.2001

that,

although the

is
levy
The Commission considers,
introduced for long-term environmental reasons,
it could in
the short or medium term jeopardise or hamper the overall
UK transport strategy to promote rail as a mode of transport
and to attain a sustainable and environmentally friendly
transport system, a goal that is shared by the Community as
a whole.

also the

exemption
The Commission accordingly holds
provided for
in Article 3(1)(b) of Regulation (EEC) No
1107/70 to be relevant for the tax exemption in question, in
so far as the UK climate change levy for electricity, gas and coal
used for rail freight and public transport may entail additional
costs connected to the use of railway and light railway infra-
structure as compared with, in particular, road transport.

It is however also true that, in view of the climate change levy,
the beneficiaries of the tax exemption will be relieved of expen-
diture that they normally would have to bear and which hence
gives them a competitive advantage. However, the Commission
also notes that the beneficiaries’ main competitors, operators
providing road transport service, will not be subject to the new
levy. Therefore, the de facto effect of the aid will only be that
the competitive situation between the beneficiaries and their
main competitors will be maintained at the same level as it was
before the levy was introduced.

freight. As described above,

The Commission notes that without the tax exemption, the
beneficiaries are likely to suffer a loss of competitiveness
since their main competitors (cid:151) undertakings providing road
transport services (cid:151) will not be subject to the climate change
levy. It is thus considered that the aid under scrutiny is likely to
facilitate the development of a sustainable public transport and
rail
these
sectors is in line with the policy pursued by the Community
as a whole and is thus in the common interest. Furthermore, as
the de facto result of the aid will only be that the competitive
situation between the beneficiaries and their main competitors
will be maintained at the same level as it was before the levy
was introduced, the Commission finds (cid:151) on balance (cid:151) that
the aid will not affect trading conditions to an extent contrary
to the common interest.

the development of

In view of
concludes
transport and rail
the common market.

that

the foregoing considerations,

the notified tax

the Commission
exemption for public
freight shall be deemed compatible with

2. Exemption for electricity generated from some energy

sources

Even if, contrary to the assumption made above, the exemption
for electricity generated from the sources notified by the UK
Government is not justified by the nature or general scheme of
the levy system, and therefore constitutes State aid,
the
such aid must be deemed
Commission considers
compatible with the common market
in accordance with
Article 87(3)(c) of the EC Treaty.

that

By virtue of point 51(1)(a), second indent, of the environmental
aid guidelines, when,
for environmental reasons, a Member
State introduces a new tax in a sector of activity or on
production in respect of which no Community tax harmon-
isation has been carried out, exemption decisions covering a
10-year period may be justified where a Member State makes a
tax reduction subject to conditions that have the same effect as
to reduction in
agreements
emissions.

relating, among other

things,

In addition, according to Article 73 of the Treaty, aid shall be
it meets the needs of coor-
compatible with the Treaty if
transport. Article 3(1)(b) of Council Regulation
dination of
(EEC) No 1107/70, which implements Article 73 of
the
the entry into force of common
Treaty, allows that, until
infrastructure costs, aid may be
rules on the allocation of
granted to undertakings
expenditure
to bear
that have
relating to the infrastructure used by them, while other under-
takings are not subject to a like burden.

further

Different modes of transport impose different levels of external
costs, which,
in the absence of harmonised rules on infra-
structure charging, are not adequately reflected in the price
that users pay for the use of a particular infrastructure. This
liable to distort competition between
situation is
different
transport modes with a negative environmental
impact. It is, in particular noted that users of rail infrastructure
do not fully benefit from the relatively low external costs they
impose on society as compared with other modes with
relatively higher external costs (28). The Commission considers,
under such circumstances, that users of rail infrastructure are
operating under conditions that need to be coordinated within
the meaning of Article 73 of the Treaty, read in conjunction
with Article 3(1)(b) of Regulation (EEC) No 1107/70 (29).

(28) Commission White Paper COM(1998) 466 final, (cid:145)Fair payment for
infrastructure use: A phased approach to a common transport
infrastructure charging framework in the EU(cid:146).

(29) See Commission Decision . . . N 47/1999.

The climate change levy is a new tax introduced in a sector
which is not yet covered by Community tax harmonisation. As
stated above, the UK authorities have undertaken to renotify or
amend the relevant legislation after an initial period of 10
years. The tax exemption is only granted for electricity
produced from the notified sources which do not contribute
negatively to long-cycle CO2 emissions. Therefore,
in the
present case, the exemption is subject to the condition that
emissions are indeed avoided. The result of this exemption is
thus actually better than what can possibly be achieved under a
CCL agreement. The fact that the levy is charged on electricity
produced from other sources which do not contribute to
in this context,
long-cycle CO2 emissions is not
since the Member State may decide,
justified reasons
linked i.a. to its environmental or energy policy, to reserve
such a benefit to a particular category of energy sources.

relevant
for

For these reasons, the conditions set out in the environmental
aid guidelines are fully met and, if the exemption in favour of
electricity generated from the notified sources constitutes State
aid,
it must be considered compatible with the common
market.

3. Tax reduction for companies entering into climate

change agreements

The climate change levy is a new environmental
tax on
products in respect of which no Community tax harmonisation
has been carried out.

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Although companies will have to make investments in order to
achieve the targets of the agreements, the tax reduction is not
directly linked to and expressed as a percentage of eligible
investment costs. The tax reduction thus constitutes operating
aid.

these tax reduction in order not

The UK introduces
to
endanger the competitiveness of energy-intensive industrial
sectors, for which the full rate of the levy would be a high
increase of their costs and for which the levy is a competitive
disadvantage in particular as there is not tax harmonisation on
energy consumption at the Community level.

Points 47 and 48 of the environmental aid guidelines consider
that when adopting taxes that are to be levied on certain
activities for reasons of environmental protection, Member
States may deem it necessary to make provision for
temporary exemptions for certain firms notably because of
the absence of harmonisation at European level or because of
the temporary risks of a loss of international competitiveness.

If
the tax is to be levied as the result of an autonomous
decision on the part of a Member State, the firms affected
may have some difficulty in adapting rapidly to the new tax
burden. In such circumstances there may be justification for a
temporary exemption enabling certain firms to adapt to the
new situation.

In general, tax measures in question should make a significant
contribution to protecting the environment. Care should be
taken to ensure that the exemptions do not, by their very
nature, undermine the general objective pursued (point 50 of
the environmental aid guidelines).

The climate change levy taxes the energy consumption. By
increasing the costs for energy, it will contribute to a more
efficient use of energy, and thereby to the reduction of CO2
emissions and will thus make an important contribution to
environmental protection. The tax reduction are conditional
on climate change agreements. These agreements establish
emission reduction targets or energy efficiency targets, which
will contribute to the same objective as the tax itself. They thus
do not undermine the general objective of the tax pursued.

In this situation, tax exemptions may be justified for a 10-year
period with no degressivity if the Member State concerned and
the recipient
firms undertake to
achieve environmental protection objectives during the period
for which the exemptions apply.

firms or associations of

Such agreements may relate, among other
to a
reduction in energy consumption or a reduction in emissions
(point 51(1)(a) of the environmental aid guidelines). The tax
firms or
reductions are conditional on the associations of
companies entering into climate change agreements, which
pursue the objectives required by the guidelines.

things,

Point 51(1)(a) of the environmental aid guidelines allows such
agreements to be concluded not only at the level of indivdual
firms, but also at the level of associations of firms. The climate
change agreements are firstly concluded at
the level of
associations, with underlying agreements setting targets for
is
individual

companies. As

long as

sector

target

the

achieved, underperforming companies within the same sector
may also benefit from the levy reduction. However, any free-
rider-benefit is most likely to be limited by sector discipline
exercised internally in the associations. In any case, underper-
forming companies run the risk that the sector target will not
be met, in which case only the underperforming companies of
the sector will have to pay the levy.

The Commission assessed these agreements for the sectors
concerned by this notification as required in point 51(1)(a) of
the guidelines and concludes on the basis of the targets as they
are set out in draft form, that they contribute considerably to
increased energy efficiency and directly or indirectly to CO2
is based on the most
reductions. This positive assessment
recent available information described above and on the
appraisal of the UK authorities that these targets would not
the negotiations. The
be lowered in the final phase of
Commission therefore reminds the UK authorities that
in
case the environmental benefit of the final targets would be
lower than of the envisaged targets, the tax reduction for these
agreements would not be covered by the present Commission
decision.

For some sectors, the UK authorities were not yet in a position
to provide even provisional
information on targets. The
Commission is therefore not in a position to assess the value
of these agreements and cannot express an opinion on them.
These agreements are therefore not covered by this decision.

The loss of levy reduction for the future while the company
has at the same time to catch up on the targets is an efficient
mechanism to keep companies in the agreement and to lead to
the fulfillment of the targets. Together with the recuperation
mechanism proportional to non-achieved targets at the end of
the agreement period is a penalty mechanism which fulfils the
requirements of the environmental aid guidelines.

The scheme allows carbon emission trading among entities
committed to a climate change agreement. This will allow over-
performing entities to sell carbon emission certificates to
underperforming companies in order for them to meet their
targets.

This may be seen as an allocation of a limited number of
transferable emission permits to overperforming companies.
The State thus provides them with an intangible asset, which
can be sold on a market to be created. It can be assumed that
the permits will actually have a value to an extent, as the
underperforming companies would either have to invest them-
selves or would otherwise lose the levy reduction.

Having regard to these circumstances, to the fact the permits
are allocated for free, and in line with points 69 to 71 of the
environmental
Community
protection,
the
that
arrangements constitute aid granted by a Member State or
through State resources in any form whatsoever.

guidelines on State
the Commission

aid for

exclude

cannot

Theoretically, a company able to sell its permits at a certain
price may use
its
competitive position in the UK or in other Member States.

resulting cash-flow to improve

the

C 185/40

EN

Official Journal of the European Communities

30.6.2001

It cannot be excluded that there is a potential distortion of
competition between companies
climate
change agreements and other companies in other Member
States. There may also be a potential effect on trade between
In view of all this, the Commission cannot
Member States.
exclude that the possibility for carbon emission trading may
constitute State aid in the meaning of Article 87(1).

covered under

According to point 71 of the abovementioned guidelines, the
Commission has a large margin of discretion in order to assess
emission trading systems. In the present case, the Commission
considers any aid from this arrangement to be compatible with
Article 87(3)(c) of the EC Treaty for the following reasons:

(cid:151) trading is limited to entities committed to climate change

agreements,

(cid:151) trading is only allowed for verified surplus carbon,

(cid:151) trading allows to achieve the targets in a cost-effective way
and put sectors in a position to offer ambitious targets,

(cid:151) the value of the permits will be limited by the alternatives
open to the companies in the climate change agreements,
thus,
the potential distortion of competition must be
considered to be limited,

(cid:151) companies will have to invest beyond the investments
to obtain
there will be an effective and concrete

needed to fulfil
permits. Thus,
counterpart from the benefiting companies.

their own targets in order

A wider emission trading scheme, in which later on emission
trading should also be possible with CCL companies, is going
to be notified to the Commission soon.

the

terms of

agreements,

In assessing the general
the
Commission did not find any element which, by itself, could
cause participating undertakings or
to
restrict competition through emission trading in a way
contrary to Articles 81 or 82. The UK undertook that it will
keep under review the behaviour of participants in trading
activity and note
competition rules apply to that
behaviour.

sector associations

that

1. The provision exempts energy consumption for

some
processes causing considerable CO2 emissions and thus
may run counter to the objective of
the tax to reduce
CO2 emissions.

2. The exemption is not temporary, and not granted with a
view of enabling companies to adapt to the new tax (point
48 of the environmental aid guidelines).

3. The exemption is not made conditional on the conclusion
of agreements in order to achieve environmental protection
objectives, nor is the tax subject to conditions that have the
same effect as agreements (point 51(1)(a) of the environ-
mental aid guidelines).

4. The UK has not demonstrated that firms eligible for the
exemption must nevertheless pay a significant proportion
of the national tax (point 51(1)(b) of the environmental
aid guidelines).

CONCLUSION

(cid:151) The Commission therefore

levy
change
reduction for
agreements is compatible with the requirements of
the
environmental aid guidelines and Article 87(3)(c) of the
EC Treaty,

covered by climate

companies

concludes

that

the

(cid:151) the Commission concludes that

transport and rail

public
Article 87(3)(c) of the EC Treaty,

freight

the tax exemption for
is compatible with

(cid:151) in the

of

the

light

foregoing

considerations,

the EC Treaty,

the
Commission, acting under the procedure laid down in
Article 88(2) of
the United
Kingdom to submit its comments and to provide all such
information as may help to assess the exemption on
dual-use fuels, within one month of the date of receipt
of this letter. It requests your authorities to forward a copy
of
the aid
this
immediately.

to the potential

recipient of

requests

letter

4. Exemption for dual-use fuels

Assuming that
State aid,
with the environmental aid guidelines:

the exemption for dual-use fuels constitutes
the Commission has doubts on its compatibility

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.(cid:146)