2002/676/EC,ECSC: Commission Decision of 3 April 2002 on the dual-use exemption which the United Kingdom is planning to implement under the Climate Change Levy and the extended exemption for certain competing processes (Text with EEA relevance) (notified under document number C(2002) 1189)
Date: 2002-04-03
Institutions: European Commission
Subjects: State aid, United Kingdom, climate change, energy-generating product, environmental protection, environmental tax, tax exemption, waste recycling

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 3 April 2002

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

(notified under document number C(2002) 1189)

(Only the English text is authentic)

(Text with EEA relevance)

(2002/676/EC, ECSC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(2)

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

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

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

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

Whereas:

1. PROCEDURE

(1)

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

(1) OJ L 338, 28.12.1996, p. 42.
(2) OJ C 185, 30.6.2001, p. 22.
(3) OJ C 191, 7.7.2001, p. 3.

(3)

(4)

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

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

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

(4) See footnotes 2 and 3.

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(5)

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

2.2. Non-fuel and dual-use exemption

2. DETAILED DESCRIPTION

2.1. Climate change levy

(6)

(7)

(8)

(9)

(10)

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

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

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

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

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

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

2.3. Reasons for opening the procedure

(12)

(13)

the procedure,

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

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

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

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

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

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

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

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

3. COMMENTS FROM INTERESTED PARTIES

(15)

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

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

is

cement

reaction of

chemical
decomposition of

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

(b) The British Lime Association supports in principle
is
the United Kingdom’s dual-use approach but
concerned that,
treat
in practice,
comparable situations equally, and discriminates
against lime. It considers that the dual-use exemption
to distort competition in the United
threatens

this does not

Kingdom, and that the list of exempt uses should be
amended to include lime.

According to the British Lime Association, energy is
required in the lime manufacturing process
to
convert an ore,
limestone, to an active chemical,
lime. The chemical reaction which defines the manu-
facture of high calcium lime is: CaCO3 CaO + CO2.
The chemical reaction which defines the manufacture
of dolomitic lime is: CaCO3 MgCO3 + energy =
CaOMgO + 2CO2.
In commercial production, the
limestone to lime is
energy required to convert
thermal energy at a temperature in excess of 1 000
°C.

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

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

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

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

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

4. COMMENTS FROM THE UNITED KINGDOM

4.1. Apportionment

(16)

(17)

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

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

(18)

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

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

(19)

Because the British authorities do not consider appor-
tionment to be possible, they maintain that where the

taxable commodity performs a dual use, it is within the
logic and nature of the system to grant a full exemption
to the commodity, where it is used primarily as a raw
material (non-fuel use), but where it also provides, as a
by-product, an element of heating. According to the
British authorities, an exemption for dual use is in the
logic and nature of the system for the same reasons as
the exemption for non-fuel uses.

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

(21)

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

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

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

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(b) The type of

required is

raw material

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

feedstocks to react. In both cases, energy is used as fuel
rather than as a raw material. The British authorities
stress that the dual-use exemption applies to processes
where an energy product has a primary purpose as a
raw material, but where it also provides heat as a by-
product. Because energy is not used as feedstock or raw
material in cement or lime production, it would conflict
with the nature and logic of the CCL to include cement
or lime production in the list of processes eligible for the
dual-use exemption.

(22)

(23)

(24)

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

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

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

(26)

energy-intensive,

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

In relation to the observations received from third
parties, the British authorities consider that the majority
of the submissions are fully supportive of the principle
of the dual-use exemption and that the main area of
dispute is whether the correct processes benefit from the
exemption.
In relation to the particular observations
submitted by the British Cement Association and the
British Lime Association, the British authorities note that
both associations state that chemical transformations are
involved in cement and lime manufacturing — making
them mineralogical transformation processes, and thus
entitled to the dual-use exemption. The British authori-
ties do not dispute the chemical information provided
but contend that this is irrelevant to an assessment of
eligibility for the dual-use exemption. In cement and lime
manufacture, energy is necessary to the reactions purely
as a fuel. Energy,
in the form of heat, provides the
temperature necessary for the calcination of lime or for
the calcium carbonate and/or magnesium carbonate

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

(b) where this

situation arises because the primary
process is eligible for a non-fuel or dual-use exemp-
tion from CCL; and

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

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(27)

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

4.3. Scope of the exemption

(28)

(29)

(30)

(31)

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

representatives

from the

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

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

In relation to the particular observations received from
third parties in the steel sector, the British authorities do
not agree that the use of coke in the blast furnace should
be considered primarily as a fuel use (as suggested by
ASW and the European Independent Steelworks Associa-
tion). The British authorities consider that the technical
basis for the claim that less than 50 % of the coke is used
in the blast furnace is based on an inaccurate interpreta-
tion of figures provided by the International Iron and

Steel Institute (8). The British authorities consider that a
more accurate interpretation of the figures would be that
between 57 % and 90 % of the coke input into the blast
furnace is used for non-fuel purposes, but that there will
be very significant variations determined by factors such
as the quality of the ore and coke (9).

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

(33)

(34)

fall within the EC Treaty,

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

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

5. ASSESSMENT OF THE MEASURE

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

(35)

(9) This interpretation of the figures was confirmed to the Commission

by the author of the report.

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

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

(37)

(38)

environmental

introduction of

favour particular

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

the system (see the principles set out

sectors of

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

(39)

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

(40)

The Commission notes that the CCL is levied on energy
used for fuel purposes, but is not levied on energy used
for non-fuel purposes. The Commission accepts that it is
within the logic and nature of an environmental tax
system to levy the tax on energy products used for fuel,

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

(41)

(42)

(43)

(44)

but to exempt energy products used purely for non-fuel
purposes. The Commission has accepted this exemption
under the CCL.

supplementary,

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

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

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

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

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

(46)

(47)

(48)

(49)

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

energy products used primarily

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

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

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

(52)

(53)

energy products purely for fuel purposes are in keeping
with the nature and logic of the system.

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

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

equitable

trading

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

6. CONCLUSION

(50)

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

(51)

In light of the scope of the CCL, to tax the fuel use of
the
energy,
exemption for processes that would be classified as using

the Commission does not consider that

(55)

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

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L 229/23

HAS ADOPTED THIS DECISION:

Article 1

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

Article 2

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

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

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

Article 3

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

Done at Brussels, 3 April 2002.

For the Commission

Mario MONTI

Member of the Commission