State aid — United Kingdom — Aid C 12/03 (ex 778/02) — Climate Change Levy Exemption for Coal Mine Methane — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2003-03-22
Institutions: European Commission
Subjects: State aid, United Kingdom, climate change, control of State aid, electrical energy, environmental tax, exchange of information, hydrocarbon, tax exemption

22.3.2003

EN

Official Journal of the European Union

C 69/9

STATE AID — UNITED KINGDOM

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

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

(2003/C 69/05)

(Text with EEA relevance)

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

Interested parties may submit their comments within one month of the date of publication of this
summary and the following letter, to:

European Commission
Directorate-General for Competition
Directorate G
B-1049 Brussels
Fax (32-2) 296 12 42

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

SUMMARY

1. Description

are three companies who currently extract CMM to sell to
electricity generators in the United Kingdom. There are also
three electricity producers working with them.

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

2. Assessment

2.1. The Member State's position

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

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

level of

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

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

2.2. The Commission's preliminary assessment

2.2.1. The existence of State aid

input,

therefore

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

competition and could affect

to distort

The scheme will directly benefit the generators/suppliers of
electricity derived from CMM, but the tax exemption is likely
to be shared with the company which extracts the gas. There

(1) Commission decision on State aid C 18/01 (ex N 123/2000),

published in OJ C 185, 30.6.2001, p. 22.

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the tax to exempt

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

electricity production from other

is true that

like

2.2.2. Compatibility of the aid with State aid rules

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

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

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

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

The provisions related to waste management and energy saving
(points 42 to 46 of the guidelines) do also not seem to be
fulfilled. The aid is not degressive, it is not strictly limited to
compensating for extra production costs by comparison with

the market prices of the relevant product or service, and the
aid is not limited to five years. It is also questionable if the
measure could be considered as aiming at managing waste or
saving energy.

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

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

the Commission recognises

for climate protection that can result

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

guidelines.

the

the

aid

by

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

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

TEXT OF THE LETTER

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

1. Description of the measure

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

(2) OJ C 37, 3.2.2001, p. 3.
(3) OJ L 283, 27.10.2001, p. 33.

(4) OJ L 205, 2.8.2002, p. 1.
(5) Fisc 311 Rev 1 ADD of 9.12.2002.

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

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

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

level of

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

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

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

2. Assessment

2.1. The Member State's position

The United Kingdom Government argues that in the same way
as the Commission decided that the tax exemption for elec-
tricity from renewable sources did not constitute State aid (7),
also the current measure is in the logic and nature of the tax
scheme. This for the following reason: There are two main
ways to reduce greenhouse gas emissions relating to a given
level of non-domestic energy consumption. The first
is to
promote the use of technologies that do not contribute nega-

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

(7) Commission decision on State aid C 18/01 (ex N 123/2000),

published in OJ C 185, 30.6.2001, p. 22.

tively to long-cycle greenhouse gas emissions, and this is the
logic behind the exemption for certain renewable energy
sources. The second is to promote the use of technologies
which decrease the greenhouse gas emissions from given
levels of production from other sources. Allowing CMM to
escape into the atmosphere rather than harness and make
use of it has a significant detrimental effect. By exempting
CMM derived electricity from the CCL, significant greenhouse
gas savings will be made. The environmental benefit in terms
of carbon equivalent emissions avoided per kWh is as much as
nine times greater than the carbon avoided from renewable
sources when they are
is currently
compared to what
fossil
considered to be the marginal
fuel energy source
(Combined Cycle Gas Turbine).
If however the exemption
does constitute State aid, it could be approved under section
F ‘Policies, Measures and Instruments for Reducing Greenhouse
Gases’, points 68-71 of the Community Guidelines on State aid
for environmental protection (8).

2.2. The Commission's preliminary assessment

2.2.1. The existence of State aid

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

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

technologies which decrease

The Commission considers the following. The tax is due
because of the harmful effect of the use of energy on climate
change. It is therefore in the nature of the tax to exempt the
use of energy which production has no harmful effect. This is
the case e.g. for electricity from renewable sources, as these
sources do not contribute to long-cycle CO2. Electricity
production from CMM has,
like electricity production from
other fossil sources, harmful effects and is therefore of a
In
different nature than electricity from renewable sources.
fact, electricity production from CMM is not different
in
terms of CO2 emissions than electricity production from
natural gas. It would therefore be in the nature and logic of
the tax system to tax electricity produced from CCM. However,
it is true that the use of CMM for electricity production avoids

(8) OJ C 37, 3.2.2001, p. 3.
(9) It cannot be excluded that suppliers do not pass on the entire
benefit of the exemption and keep a small part of
through
their price negotiations with electricity generators using CMM.
This is nevertheless supposed to be minimal. In all previous cases
concerning exemptions or reductions from eco-taxes on electricity
charged to suppliers, the Commission has considered that the real
beneficiaries of the aid are the producers of electricity.

it

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therefore of

CMM released in the atmosphere as the unused CMM is
leaking. The Commission is
the preliminary
opinion that this does not alter the nature of the support in
terms of State aid. The Commission considers that the overall
should be taken into
effect on greenhouse gasemissions
account when assessing the compatibility of
the measure
with State aid rules.

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

2.2.2. Compatibility of the aid with State aid rules

The Commission at
the aid is
compatible with the Community guidelines on State aid for
environmental protection (thereafter the guidelines).

this stage has doubts that

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

allows

— the tax in question must have an appreciable
environmental
in terms

impact

of

positive
protection and

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

in a particularly

firms

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

2.2.2.2. CMM and electricity production from CMM are not
renewable energy sources within the meaning of the
environmental guidelines and Directive 2001/77/EC of
the European Parliament and of the Council of 27
September 2001 on the promotion of electricity
in the
produced from renewable energy sources
the
internal
United Kingdom has not invoked compatibility with
the
the
guidelines related to renewable energy sources and
the Commission has doubts that these provisions are
respected.

electricity market (10).

in section E.3.3 of

relevant provisions

In any case,

used

energy

reduces

significantly

years where

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

non-degressive.

aid

is

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

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

clean

that

the

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

Finally, no other legal
appears to be relevant.

text based on Article 87(2) or (3)

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

2.2.2.3. Under point 51.3 of the guidelines Member States
may also encourage the development of processes
from conventional
for producing electric power

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

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

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

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requests

the United Kingdom to submit

its
EC Treaty,
comments and to provide all such information as may help
to assess the aid/measure, within one month of the date of
receipt of
information should be
In particular
provided as may help to assess if the aid may be compatible
directly with Article 87(3)(c) of the EC Treaty.

this letter.

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.’

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

In the light of the foregoing considerations, the Commission,
acting under the procedure laid down in Article 88(2) of the

(12) Fisc 311 Rev 1 ADD of 9.12.2002.