greenhouse gas emission allowance trading
TRANSCRIPT
Greenhouse gas emission allowance trading
How Danish legislation and companies are influenced by the EU ETS and EU state aid rules
Master Thesis, MSc EU Business and LawAuthor: Maiken Høgh Rasmussen Supervsior: Ellen Margrethe Basse, Professor, dr. Jur.Department of Law
September 2013Aarhus University, Business and Social Science
CONTENT
PREFACE ............................................................................................................................... 1
ABSTRACT ............................................................................................................................ 2
LIST OF ABBREVIATIONS................................................................................................ 3
1. INTRODUCTION .............................................................................................................. 4
1.1 Background ............................................................................................................................... 4
1.1.1 Decreasing sovereignty? ............................................................................................................ 4
1.2 Problem statement ..................................................................................................................... 6
1.3 Structure and delimitation ........................................................................................................ 6
1.4 Methodology .............................................................................................................................. 8
1.4.1 The European legal system ........................................................................................................ 8
1.4.2 Legal dogmatic studies ............................................................................................................ 10
1.4.2.1 Majoritarian vs. constitutional democracy ........................................................................ 10
1.4.3 Interviews................................................................................................................................. 11
1.4.3.1 Reflections after the interviews ......................................................................................... 12
1.5 Source of law ........................................................................................................................... 13
1.6 Concepts .................................................................................................................................. 14
2. HARMONISATION: THE SINGLE MARKET AND THE ENVIRONMENT ........ 16
2.1 The single market: Article 114 TFEU ..................................................................................... 16
2.1.1 Level of harmonisation ............................................................................................................ 16
2.1.2 Harmonisation requirements .................................................................................................... 18
2.2 The environment ..................................................................................................................... 19
2.2.1 Article 191-193 TFEU ............................................................................................................. 20
2.2.1.1 Level of harmonisation ..................................................................................................... 22
2.2.2 Article 194 TFEU .................................................................................................................... 22
2.3 Sub-conclusion ......................................................................................................................... 23
3. EU EMISSIONS TRADING SYSTEM (EU ETS) ........................................................ 24
3.1 The background of the EU ETS .............................................................................................. 24
3.2 The third trading period: Directive 2009/29/EC ..................................................................... 25
3.2.1 An EU single cap ..................................................................................................................... 26
3.2.1.1 The impact on Danish legislation ...................................................................................... 27
3.2.2 Auctioning ............................................................................................................................... 29
3.2.2.1 The impact on Danish legislation ...................................................................................... 31
3.2.3 Harmonised allocation rules on free allocation ........................................................................ 33
3.2.3.1 Carbon Leakage ................................................................................................................ 34
3.2.3.2 The impact on Danish legislation ...................................................................................... 35
3.3. State aid .................................................................................................................................. 36
3.3.1 The 2008-Guidelines ................................................................................................................ 39
3.3.1.1 Aid for renewable energy sources ..................................................................................... 41
3.3.2 The impact on Danish ability to reduce emissions ................................................................... 43
3.3.2.1 Guaranteed prices.............................................................................................................. 44
3.3.2.2 Additional prices ............................................................................................................... 44
3.3.3 The 2012-Guidelines ................................................................................................................ 45
3.4 Sub-conclusion ......................................................................................................................... 46
4. THE CARBON MARKET AND THE SECTOR EXPERIENCE .............................. 48
4.1 The challenges and impact of the EU ETS .............................................................................. 48
4.1.1 The emergency solution: Back-loading ................................................................................... 51
4.1.1.1 The consequences of the back-loading process ................................................................. 53
4.1.1.2 The consequences of a low/high price level...................................................................... 54
4.1.2 The structural long-term solution ............................................................................................. 57
4.2 Sub-conclusion ......................................................................................................................... 59
5. CONCLUSION ................................................................................................................. 61
6. BIBLIOGRAPHY ............................................................................................................ 64
1
Preface
This thesis is written as a response to an invitation from the Danish Energy Association (DE)
who has launched a project with the purpose to determine the extent of the EU’s influence on
the Member States’ legislative work and to analyse the European energy and climate policy’s
direct and indirect impact on the Danish legislation.
I would like to thank Troels Ranis (DI) and Ulrich Bang (DE) for taking the time to do the
interviews which were crucial for me to be able to present the whole picture in the report.
Also a thank you to my supervisor, Ellen Margrethe Basse, Professor at Aarhus University.
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Abstract
The influence of the EU law on Danish legislation is a widely debated issue in Denmark.
Several studies on the subject have been done but with as many different results.
This report has the purpose of analysing the influence of the amending Directive on the EU
Emission Trading System on the Danish legislation; meaning going from the second trading
period into the third. The main purpose of the EU Emission Trading System is to give
incentives to invest in green technologies and alternative as to emit less greenhouse gasses in
the atmosphere.
The subjects for analysis will be the EU single cap replacing the National Allocation Plans;
the auctioning replacing the free allocation as default allocation method; and the rules for
allocation of the allowances still being allocated for free.
State aid is another way of giving incentives to investments in at green changeover, and
therefore the influence of the EU prohibition of State aid and the Guidelines on
environmental protection which modifies the prohibition, will also be subject for analysis.
The specific actions analysed in the section of State aid is guaranteed- and additional prices
as support to the operation of windmills as wind energy is one of the main renewable energy
sources in Denmark.
To build a profound basis for the analysis above, the harmonisation levels and requirement
on the single market (Article 114 TFEU) and the environment (Article 192 TFEU) in the
Treaty of Lisbon will be analysed first.
The analysis of the influence on the Danish legislation will be followed up by an analysis of
how the situation on the current carbon market is experienced by the Danish companies and
how they evaluate short- and long term measures for the development of the EU ETS. The
short term measure is in this report defined as the back-loading plan which is currently
pending in the EU decision making process. The long term measures are defined as structural
measures which are presented as suggestions by the European Commission.
3
List of abbreviations
CDM Clean Development Mechanism
CJ (European) Court of Justice
EC European Community
ECCP European Climate Change Programme
EESC European Economic and Social Committee
EP European Parliament
EU European Union
EUA EU Allowance
EU ETS European Union Emission Trading Scheme
DE Danish Energy Association
JI Joint Implementation
NAP National Allocation Plan
NATO North Atlantic Treaty Organisation
SEA Single European Act
SME Small and medium sized enterprise
TEC Treaty establishing the European Community (The Treaty of Rome)
TEU Treaty of the European Union: Two versions (1) the Treaty of
Maastricht (2) the consolidated version (First part of the Treaty of
Lisbon)
TFEU Treaty on the Functioning of the European Union – consolidated
version (Second part of the Treaty of Lisbon)
UN United Nations
UNFCCC United Nations Framework Convention on Climate Change
4
1. Introduction
1.1 Background
It is well known that the European Union (EU) has a high degree of influence on the national
law of its Member States – but to what extent and what are the consequences of it? This
issue has continuing importance as EU Member States experience more harmonisation in the
EU in general. These thoughts are the basis for the report and the problem statement
presented below.
The subject has been touched in general in Power and Democracy in Denmark from 2003.
This publication was a result of a study which the Danish Parliament in 1997 decided to
launch1. The overall result is explained below, but ten years have passed since then and the
EU has developed a lot in this period.
1.1.1 Decreasing sovereignty?
Denmark is a member of various international organisations, EU, UN and NATO just to
mention a few. Out of these, the EU-membership has the greatest impact on Danish decision
making as Denmark has ceded sovereignty to the EU. This means that decisions in narrowly
defined areas are made by the EU and not by the Danish Parliament, Folketinget.
This section outlines the competence of the EU, including its limitations. Furthermore, it will
shortly present results of other studies of the EU influence on Danish legislation.
The areas of competence are outlined in Article 2-6 TFEU2. Article 3 TFEU sets out in
which areas the EU has exclusive competence. An example is on the establishment of
competitive rules necessary for the functioning of the internal market3. In other areas the
Member States and the EU share the competence for decision making. These areas are set
out in Article 4 TFEU. Article 4(2)(e) concludes a shared competence in environment and
Article 4(2)(i) on energy.
There are three types of limitations to the scope and depth of the EU cooperation: The first
one is the principle of conferral, also called the principle of legality, which limits the EU
cooperation to those areas that are stated in the treaty4. The second limitation is the
subsidiarity principle, which says that decisions must be made as close to the affected
1 Togeby, L. et al. (2003) p. 2
2 Treaty on the Functioning of the European Union
3 Article 3(1)(b) TFEU
4 Article 5(2) TEU
5
citizens as possible5. The third principle of the EU competence is the principle of
proportionality, which says that the content and form of the EU action shall not exceed what
is necessary to achieve the objectives of the treaty6.
In the report Power and democracy in Denmark the authors express the EU influence on the
Danish Parliament legislation by examining how often law texts refer directly to compliance
with EU regulation. In 1981/82 only 3% of Danish laws referred to direct compliance with
EU Directives. In 2000/01 this percentage had increased to 12%. In 1981/82 14% of the laws
contained some form of adaptation to EU regulation and in 2000/01 this percentage had
increased to 37%. The conclusion of the report was that although many of the laws had
limited scope, the autonomy of the Danish Parliament had been significantly reduced7.
Since this report was published, various research scientists, think tanks and also the Danish
Ministry of Justice have tried to calculate the influence by the EU; however, they do neither
agree on the calculation method nor the result. In 2011 the Ministry made a statement that
11,25 % of the Danish legislation derive directly or indirectly from EU law8. However, it
does not include EU Regulations which are directly applicable in the Member States.
Furthermore, it does not distinguish between significance of the single role: A major
legislation on for example the Common Agriculture Policy has the same weight as a minor
technical standard9.
The Danish liberal think tank CEPOS disagree with the Ministry’s low percentage.
According to their research 25,8% of legislation passed in Denmark in 2010 had its basis in
EU law10
. If Regulations are also included, CEPOS estimate the direct and indirect influence
to be 50-60% 11
.
Thus, it is important to carefully compare the researches but despite the disagreements and
the different calculation methods both the Ministry of Justice and CEPOS state that the
biggest influence is on subjects under the Ministry of the Environment and the Ministry of
Climate and Energy12
13
. Furthermore, CEPOS does also conclude the trend of influence to
be increasing14
.
5 Article 5(3) TEU
6 Article 5(4) TEU
7 Togeby, L. et al. (2003) p. 30
8 See Appendix 1, table 1
9 EU Information Centre, Folketinget (2011)
10 CEPOS (2011) p. 3
11 CEPOS (2011) p. 1
12 Now Ministry of Climate, Energy and Building
13 See Appendix 1, table 1 and figure 1
14 See Appendix 1, figure 2
6
1.2 Problem statement
The purpose of this report is to analyse the impact-change of the European Union Emission
Trading System (EU ETS) going from second to third trading period. The analysis is spilt
into a legal part and a business part. Before starting the analysis the report will also have the
purpose to present a profound basis for the analysis above with a focus on the Treaty of
Lisbon. The Treaty constitutes legal basis for the legal acts used in the report and also sets a
frame for competition in the single market which will be relevant in regard to State aid but
also in the business impact analysis.
Thus, the report will search to answer the following questions:
1. The Treaty of Lisbon
a. What is the idea of the single market, what are the harmonisation
requirements according to the Treaty and which Articles are legal basis for
minimum harmonization and maximum harmonization on the area of
environment and the single market?
2. The legal influence
a. How does the latest amendment15
of Directive 2003/87/EC affect the Danish
legislation and the regulatory work?
b. How do the EU prohibition of State aid and the EU modification to the
prohibition of State aid as laid down in the 2008-Guidelines on
environmental protection influence the Danish ability to reduce greenhouse
gas on emission?
3. The company experience and the development of the EUA16
market
a. How does the latest development on the emission trading market, regarding
surplus of allowances, low prices and back-loading, affect the companies
and the competitive situation?
b. How does the sector evaluate the possible solutions for saving/developing
the EU ETS?
1.3 Structure and delimitation
Structure
To maintain a good overview, the structure of the report will follow the problem statement.
Chapter 1 contains the introduction to the subject and the methodology, which the report will
be based on. Chapter 2 will be the foundation for answering the first part of the problem
15
Directive 2009/29/EC 16
European Union Allowance, see explanation later
7
statement. It will give an introduction to the thoughts about the single market and its
harmonisation requirement in the Treaty of Lisbon17
. Chapter 3 will focus on the legal part of
the influence of the EU ETS whereas chapter 4 will have a business focus, including
qualitative interviews with sector representatives. Chapter 3 will also contain the State aid
element, which together with chapter 4 will be a part of the competitiveness analysis. Lastly,
chapter 5 will sum up in a conclusion and give a full answer to the problem statement.
The delimitation
To be able to analyse some elements in depth, other elements most be left out of account
with reference to, inter alia, the physical limitations of a master thesis.
The EU ETS has its legal basis in the environmental chapter of the Treaty of Lisbon and
therefore the analysis of the single market and Article 114 TFEU has to be seen primarily in
the perspective of chapter 4 analysing impacts on the competitive situation distinguishing
between EU and non-EU countries/companies. This situation – but also the carbon leakage
situation in chapter 3 – appears because we have the single market. Also the State aid rules
are developed to the single market. However, Articles 114 TFEU is a very broad provision,
which covers many areas. The Article will be analysed to the extent evaluated to be
necessary to this report, and thereby some parts will be left out.
Concerning the EU ETS, the transport sector will be excluded. The aviation sector became a
part of the EU ETS recently but as it uses special allowances it will not be a part of the
analysis. Furthermore, the amendment Directive is very comprehensive and therefore the
whole Directive cannot be subject for analysis. It has been chosen to focus on the main
changes, which will be outlined in section 3.2.
Many areas; Directives etc. would make sense to bring into this report, for example the
Directive on Energy Taxes as it interacts with the State aid prohibition and modifying
Guidelines, and furthermore it supports the polluter pays principle18
. However, a significant
part of the report has been prioritised to the analysis of the impact of the companies and the
current unstable situation on the carbon market as to cover the “business-part” of the line of
study; EU Business and Law, together with the fact that law first becomes relevant when it
comes in “contact” with parts covered by the single law.
17
The Treaty of Lisbon constitutes of two treaties: The Treaty of the European Union (TEU) and the Treaty on
the Functioning of the European Union (TFEU) 18
Basse, Ellen Margrethe (2011), p. 107
8
1.4 Methodology
To understand law and how it is formed and used the legal dogmatic method is brought into
play. However, looking at both Danish and EU law we have to make a distinction between
Danish legal dogmatic method and European dogmatic method. The reason for this is that
Denmark – and the rest of Scandinavia – has another democratic tradition than the rest of
Europe. In addition to this, we also have a different tradition in our courts compared to the
constitutional courts, which are traditional in Middle-, South- and Eastern Europe but also in
the European Court of Justice (CJ).
Before entering the section of the legal methods a discussion about the multi-layered legal
system in the EU and how it may be incorporated, will be made.
After the presentation of the legal methodology, the qualitative research methodology chosen
to achieve the interviews for answering the third part of the problem statement, will be
described.
1.4.1 The European legal system
As the EU law has gained more influence on the legislation of the Member States it is,
according to Ruth Nielsen and Christina D. Tvarnø (2011), necessary that it is reflected in
the legal theory. An aspect enhanced in the legal theoretic discussion is particularly that the
EU law is not directly connected with a state and there is a lack of the opportunity to force
the Member States19
. It is widely discussed how many legal systems the EU consists of.
There are three models which are mostly used to describe the legal system(s) in EU: The
2820
+1 model, the 28 model and the one-big system-model21
.
- The 28+1 model: The EU law is understood as one single system, which exists
separate and as an addition to the national legal systems.
- The 28 model: The EU law is understood as an aspect of the national legal systems
- The one big system-model: The EU law is understood as one big system where the
national systems are subsystems.
A graphic overview of the three models is presented below.
19
Nielsen, R. and Tvarnø, C. (2011) p. 472 20
In the literature the models are explained with 27 Member States but as Croatia joined the EU on 1 July 2013,
the number of 28 Member States is used. 21
Nielsen, R. and Tvarnø, C. (2011) p. 472
9
Figure 1: Three ways of describing the legal system(s) in the EU
Source: Composed on basis of text above
In the literature of Ruth Nielsen and Christina D. Tvarnø (2011) none of the suggested
systems are evaluated as wrong or useless, but there are different arguments for the different
models, but because of the principles of EU law of direct effect22
and supremacy23
the EU
has got an increased legal extent and thereby the EU law cannot just be seen as an aspect of
national law anymore (The 28 model). It is not explicit given which of the two remaining
legal systems the CJ sees as the ‘right’ one as it is not stated anywhere. According to Ruth
Nielsen, Professor at Copenhagen Business School, the European law should be seen as one
big multi-layered interactive system comprising both sources of EU law and national law24
.
National courts are required to collaborate on making the combined national and EU law
system effective by treating national elements of law that are incompatible with EU elements
of law as inapplicable25
.
This section has put a focus on the system of the EU and that it can be seen in different ways
without any of them being wrong, however, the multi-layered system will be the system in
mind in this report.
22
Case C-26/62 van Gend en Loos. The concept of direct effect will not be explained further as it is directed to
the citizens of the Member States and thereby not interesting to the problem statement 23
Case C-6/64 Costa v ENEL The concept supremacy will be outlined in section 1.6 24
Neergaard, U. and Nielsen R. (2012), pp.91-92 25
Neergaard, U. and Nielsen R. (2012), p. 93
10
1.4.2 Legal dogmatic studies
Having made the point that EU should be seen as one big multi-layered legal system, it is
obvious that a comparison between EU and national law cannot be made as they are not at an
equal level. The main issue in the problem statement is to analyse the influence of one law
on another and therefore what Ruth Nielsen calls dogmatic studies of law can be used as the
question here relates to what is valid law and how and why different elements of valid law
interact. The method will then be that a statement will be regarded true if it can be traced
back to an authoritative source26
.
When looking at Danish law alone no issues arise as we use our own legal traditions, but
when we bring in EU law the situation will change because of the different legal traditions.
In the following, it will be explained how and why the legal traditions differ.
1.4.2.1 Majoritarian vs. constitutional democracy
The difference in legal traditions must be located in different democratic perceptions. In
Denmark the perception of democracy is a majoritarian democracy, which means that the
parliamentarian supremacy dominates: We do not have a tradition or practice for the
legislative power to be under surveillance of the courts. In the legal positivism the law and
moral is separated. The perception is that the court must interpret the law objectively. The
argument for this has often been related to the courts’ lack of democratic legitimacy27
. Based
on this, more historians argue(d) that Denmark do not really have a real separation of power
as Montesquieu defined it - In Denmark it is actually only seen once that the court has
overridden a law that a majority of Folketinget was behind28
29
.
It is often seen that Danish politicians and Danish citizens are reacting very strongly when a
decision is made by the CJ, which seems to affect Denmark negatively or goes against our
own legislation30
. According to Marlene Wind, Professor at Copenhagen University, this
reaction has something to do with the different perceptions of democracy31
. Most of Europe,
Scandinavia excluded, has a tradition of constitutional democracy, which has roots back to
the dark history of Europe. Dictatorship and oppresses have developed a mistrust to the
legislative power in big parts of Europe. In a constitutional democracy the courts control the
legislative power to secure that parliamentarians do not “cross the line”, which is seen as a
26
Neergaard, U. and Nielsen, R.(2012), p. 96 27
Wind, M. et al. (2012), p. 221 28
The Tvind case 29
Wind, M. (2009), p. 8 30
Examples: The Metock-case from 2008 and the SU-case from 2013 31
Wind, M. (2009), p. 8
11
‘real’ separation of power as the legislature, executive and judiciary power are seen as
equal32
.
As most of Europe recognize the constitutional tradition it has influenced the EU where the
style of interpretation is more dynamic, judicial activism. This does not mean that the court
judge from their own fantasy, but it is an acknowledgement of the development of the
society when the interpretation of law is made33
.
The assertion of Marlene Wind will not the tested or analysed further and will therefore be
taken as the ‘gospel truth’. The reaction created on basis of the democracy types will be
compared with the company experience in Chapter 5.
1.4.3 Interviews
The qualitative research methodology used will be phenomenology34
as this is the subjective
experience of others: The research of the world seen through the eyes of other persons by
discovering how they interpret their experiences35
. This methodology matches the purpose of
searching for a qualitative evaluation of the impact of the companies.
With this research approach it can be managed to uncover the participants’ experience of the
phenomenon of the law on the area of the environment and energy, and what the
representatives might have in common.
In general there are three types of phenomenology; transcendental phenomenology,
hermeneutic phenomenology and phenomenpgraphy. In this report, the hermeneutic
phenomenology will be used. It was developed by the German philosopher Martin Heidegger
(1889-1876) as he did not agree with the stance of Husserl. Heidegger argued that a person’s
background influenced the way they saw the world, hence it was important to take this
background influence into account36
. As the goal is to investigate the opinion of the sector,
interviews with representatives from two organisations will be made: The Danish Energy
Association (Ulrich Bang, Director of International and EU affairs) and the Confederation of
Danish Industry (Troels Ranis, Director of Energy- and Climate politics). The two
representatives are likely to be influenced by the organisations they represent and will
therefore probably not only give their personal opinion. With this in mind the hermeneutic
phenomenology make sense to use.
32
Wind, M. (2009) p. 9 33
Wind, M. et al (2012) p. 223 34
Phenomenology was founded by the German philosopher Edmund Husserl (1859-1938) 35
Research Methodology (2013) 36
Savin-Baden M. and Major, C. H (2013) p. 218
12
One of the main concepts within the hermeneutic approach is the hermeneutic circle. In the
circle you always switch between the parts and the whole. Firstly, this means that experience
and understanding presuppose each other, and secondly, that more experience create better
understanding37
.
An advantage of using phenomenology is that it can look at processes over time, which can
help understand the development of the conditions that the energy sector and covered
companies work under, how they ended up as they are today and what the expected and
wanted changes for the future are. A disadvantage is that the gathering and interpretation of
data take a relatively long time compared to the number of respondents38
, however, it is
acceptable in the scale of this report.
The method for collecting data is semi-structured interviews. The interviews will be semi-
structured as the author/interviewer does not want to limit the interviews to a fixed set of
questions equal to structured interviews. The flexibility of the semi-structured interviews
allows new questions to be brought up during the interview as a result of what the
respondent says. Interviews made in the phenomenological approach are usually done with
an unstructured approach with an unforced flow of questions39
, however, making it semi-
structured the interviewer has a higher degree of control, which can be used to ensure usable
answers. To ensure the best outcome of the interviews, an interview guide will be prepared
in advance40
and with reference to the hermeneutic circle the questions will be adjusted
between the two interviews.
1.4.3.1 Reflections after the interviews
The planed interview procedure was followed during the first interview; however, the author
had to change it on urgent matters the morning before the second interview. The procedure
was changed to a relatively high extent as the Confederation of Danish Industries (DI) would
not participate in a recorded interview when the questions were about a current running case
in both EU and Denmark.
Suddenly being in the position as the questioner, the person who reflects upon answers to be
able to ask follow-up questions, and the person who takes notes, the risk for missing
important points during the interview increased dramatically compared to the expected
37
Thurén, T. (2007), p. 70. More about the hermeneutic work see Appendix 9 38
Research Methodology (2013) 39
Savin-Baden M. and Major, C. H (2013), p. 221 40
Appendix 2
13
process of transcription. Even though the author had to make some changes according to the
method set up beforehand it was decided to go through with it. Having taken the increased
risk into consideration the author has evaluated the position of DI to be valuable for the
analysis and therefore the conditions were agreed on.
Based on the interview DI agreed on some quotes, which is presented in Appendix 4.
1.5 Source of law
The material which will be used to make the dogmatic study of law is the legal sources
present in EU and Denmark:
- Danish law
o Law on CO2 emission allowances (Lov om CO2-kvoter)41
- EU law
o Primary legislation
Treaties: A treaty is a binding agreement between EU member
countries. It sets out EU objectives, rules for EU institutions, how
decisions are made and the relationship between the EU and its
member countries42
.
o Secondary legislation
Directives: A Directive shall be binding, as to the result to be
achieved, upon each Member State to which it is addressed, but
shall leave to the national authorities the choice of form and
methods43
Regulations: A regulation shall have general application. It shall be
binding in its entirety and directly applicable in all Member States44
Decisions: A decision shall be binding in its entirety to those
addressed in it45
o Case law by the CJ
o Soft law
Guidelines: Not legally binding.
A point of criticism of soft law is that it result in soft
compliance: Implementation must rest solely on the
goodwill of those agreeing to an affected by it46
.
41
L 1095 (existing) and L 1222 (historically) 42
European Union Web 1, 28 May 2013 43
Article 288 TFEU 44
Article 288 TFEU 45
Article 288 TFEU
14
To supplement the above stated Commission communications and information presented by
the Commission and the European Parliament (EP) will be used.
For answering the third question about the change in the market and the sector experience -
which will not be based on law - position papers, interviews etc. will be used as well.
1.6 Concepts
Supremacy
The concept of supremacy is important to outline as it shows how great importance the EU
law has to national law in general.
Supremacy of EU law means that EU law can override national law, but not the other way
around. This is never stated directly in the treaty, but the CJ made a judgement in 1964:
In the case 6/64 Costa v ENEL an individual was claiming before his local court that the law
nationalising production and distribution of electricity was incompatible with the EC Treaty.
The local court referred the question to the ECJ47
for a preliminary ruling48
. In the judgement
the ECJ said: ‘It is impossible for the states to set up a subsequent unilateral measure
against a legal order which they have accepted on a reciprocal basis’. The Court found the
supremacy of EC law confirmed by the wording of Art. 288 TFEU under which regulations
have ‘binding’ force and are ‘directly applicable in all Member States’.
Minimum harmonisation
Harmonisation at a minimum level is when a Directive imposes the Member States to
implement some minimum standards. This gives the Member States the opportunity to
implement stricter rules than those dictated by the Directive49
. Minimum harmonisation will
be explained from legal sources in chapter 2.
Maximum harmonisation
Harmonisation at a maximum level means that the Member States are obliged to apply the
provisions of the Directive and they are not allowed to implement stricter rules50
. Maximum
harmonisation will be explained from legal sources in chapter 2.
46
Cini, Mihelle (2001), p. 194 47
Now CJ 48
Article 267 TFEU 49
EESC (2007) 50
EESC (2007)
15
Total harmonization
Not to be confused with maximum harmonization. Total harmonisation occurs when a
regulation is adopted. Regulations are used as legislatives acts where there is a need for
uniformity51
European Union Allowance (EUA)
‘An “allowance” means an allowance to emit one tonne of CO2 equivalent during a specific
period, which shall be valid only for the purposes of meeting the requirements of Directive
2003/87/EC and shall be transferable in accordance with the provisions in the Directive’52
In connection hereto, it is important to make clear that the use of the term “CO2” in this
report means “CO2 and equivalent gasses”53
.
ETS covered sectors/industries
The sectors and industries covered by the ETS are listed in Annex I of the Directive. More
sectors were added when entering the third trading period but generally speaking the energy
sector and heavy-emitter industries are covered.
The technical details about when companies and covered will not be elaborated on but
Energistyrelsen, the Danish competent authority, has made an overview which is presented
below54
:
- Energy producing plants with at least 20 MW, including industry- and offshore
plants
- Refineries and coke plants
- Metal industry over an certain size
- Concrete-, glass- and ceramic companies over a certain size
- Paper- and pasteboard companies over a certain size
In Denmark around 70% of the emissions from the energy sectors (excl. transport) are
covered. The 30% not covered is primarily emissions from individual use of coal and gas in
business and household together with small district heating plant55
.
Altogether, 380 Danish companies are covered by the EU ETS56
and these will be the ones
referred to when talking about “companies” during the report.
51
Article 288 TFEU 52
Directive 2003/87/EC, Article 3(a) 53
Directive 2003/87/EC, Annex II 54
Energistyrelsen (2013) 55
Climate plan (2013), P. 21 56
Energistyrelsen (2013)
16
2. Harmonisation: The single market and the environment
This chapter of the report will answer the first part of the problem statement. The focus will
be on the instruments that have been used to develop the common policies on area of
environment. As a start the development of the single market will be explained and thereafter
how the functioning is secured by the Treaty of Lisbon. The chapter will serve as a general
foundation for chapter 3 and 4 as Article 114 TFEU constitutes a basis for harmonisation on
the single market, whereas Article 191-193 TFEU more specifically on the environment and
Article 194 TFEU on the area of energy.
2.1 The single market: Article 114 TFEU
The first attempt to develop the European Community (EC) in direction towards a single
market was done in 1957 by the Treaty of Rome. In the Treaty it was stated that a common
market with a no-tariffs policy between the Member States together with a common external
tariff should be established57
. In 1986, a big revision of the Treaty of Rome was adopted:
The Single European Act (SEA), which set the objective to establish a single market by
December 31, 1992. This single market should ‘comprise an area without internal frontiers
in which the free movement of goods, persons, services and capital was ensured (...)’58
, and
thereby the integration of the national markets of the Member States into a single European
market was started. This meant, and still means, that the internal market has ambitions that
go beyond interstate trade: It aims to merge the markets of the Member States into a larger
market, something which entails a greater degree of uniformity of structure and conditions59
.
During the past 20 years the single market has continued its development by including more
and more areas and sectors. Today the umbrella provision of the single market is stated in the
Treaty of Lisbon, Article 26 TFEU.
2.1.1 Level of harmonisation
Article 26 TFEU sets up goals for the internal market and one way of achieving them is by
the development of union-wide rules on matters which may affect interstate trade,
harmonisation. When the EU institutions plan to regulate the single market they may use
Article 114 TFEU as legal basis. Unless otherwise is provided in the Treaties, the provisions
in Article 114 TFEU shall apply for the achievement of the objectives set out in Article 26
57
Article 3(a)+(b) TEC 58
Single European Act; Article 8(a) 59
Chalmers, D. et al. (2010) p. 676
17
about the established and development of the single market60
. For an optimal function of the
single market, a market without anti-competition has to be secured61
.
Article 114 TFEU does not expressly specify the degree of harmonisation. However, the CJ
has stated that harmonisation with a legal basis in Article 114 TFEU is maximum
harmonisation. This fact was stated in C-52/00 Commission v France. In the judgement, the
CJ stated that the authority of minimum harmonisation in Article 153(5) TEC (now 169(4)
TFEU) is only valid for legal actions covered in Article 153(3)(b) TEC (now 169(2)(b)
TFEU); ‘measures supporting, supplementing and monitoring the policy pursued by the
Member States’ and not actions covered in 153(3)(a) TEC (now 169(2)(a) TFEU), which are
measures adopted pursuant to Article 95 TEC (now 114 TFEU)62
. Furthermore, the fact that
Article 114 TFEU has a derogation mechanism in paragraph 114(4)-(5) can indicate that
Article 114(1) harmonise at maximum level.
To understand why these exceptions were added to the Article, the Treaty of Amsterdam,
which changed the procedure for decision making in 199763
, is brought into play. Before the
revision the decision making in Article 95 TEC was made by unanimity in the Council of the
European Union. By the revision the text was changed to: ‘The European Parliament and the
Council shall, acting in accordance with the ordinary legislative procedure64
(…)’. This
change resulted in the fact that one Member State could not stop a legislation anymore that it
did not find good enough and therefore paragraph 3 was added to accommodate the Member
States who want as strict roles as possible: ‘The Commission, in its proposals envisaged in
paragraph 1 concerning health, safety, environmental protection and consumer protection,
will take as a base a high level of protection, taking account in particular of any new
development based on scientific facts. Within their respective powers, the European
Parliament and the Council will also seek to achieve this objective’65
.
Furthermore, the Member States were concerned that harmonisations with lower standards
than already applicable in the Member States could be agreed upon in the EU. Therefore,
Article 114(4)-(9) TFEU were also added in the Treaty of Amsterdam. These paragraphs
have a function of exceptions so the single Member State has the possibility to make
stricter/sustain rules than the harmonisation says.
60
Article 114(1) TFEU 61
Case C-300/89, Premise 14 62
Case C-52/00, Premise 15 63
Implementation deadline: 1 May 1999 64
Ordinary legislative procedure, see Article 294 TFEU 65
Article 114(3) TFEU
18
Article 114(4)-(5) TFEU is in Denmark called the ‘environment guarantee’. Article 114(4)
gives the Member State the possibility to sustain stricter rules than determined by the
harmonisation, but it has to be justified in ‘protection of the working environment, protection
of the environment’ or in at least one of the conditions in Articles 36 TFEU: ‘Public
morality, public policy or public security; the protection of health and life of humans,
animals or plants; the protection of national treasures possessing artistic, historic or
archaeological value; or the protection of industrial and commercial property’66
. Moreover,
‘such prohibitions or restrictions shall not, however, constitute a means of arbitrary
discrimination or a disguised restriction on trade between Member States’. Article 114(5)
gives the Member States the possibility to introduce stricter rules to protect the environment
as long as it is based on scientific research. If a Member State wishes to act in accordance
with Article 114(4) or (5), it has to notify the European Commission67
who has to approve
the act68
.
2.1.2 Harmonisation requirements
The interpretation of Article 114 TFEU has been tried before the CJ several times, and by the
judgements we can conclude an important thing: Article 114 TFEU does not give EU a
general competence to regulate the single market: The leading case in relation to
interpretation of Article 114 TFEU continues to be C-376/98 Germany v Parliament and
Council, also known as Tobacco Advertising I. The Tobacco Advertising Directive aimed to
harmonize and regulate advertising and sponsorship of tobacco products69
in the press70
,
including advertising on posters, ashtrays and parasols in cafes (C-376/98; premise 99). It
had its legal basis in Article 114 TFEU. Germany wanted the Directive to be annulled, which
the CJ agreed upon as they stated that the Directive exceeded what the legal basis allowed71
.
Overall, the CJ stated that a legislative act must promote the internal market to have legal
basis in Article 100A TEC (later Article 95 TEC, and now Article 114 TFEU)72
, but from the
case the CJ also provided a framework of legal principles, which continues to define the
scope of Article 114 TFEU73
:
66
Article 36 TFEU 67
The European Commission will from now on be referred to as ‘the Commission’ 68
Article 114(5)-(6) 69
Directive 98/43/EC headline 70
Television was excepted as it was addressed in an earlier Directive 71
C-376/98; Premise 118 72
C-376/98, Premise 23+24 73
In the Tobacco Advertising I case the framework was provided but spread out through the premises. In the case
C‐58/08, Vodafone, O2 et al v. Secretary of State the framework was made in premises connected
19
1. Measures based in Article 114 TFEU must contribute to removing obstacles to
interstate trade, or to removing distortions of competition74
.
2. While there is no de minimis75
for obstacles to movement, harmonization to remove
distortion is only possible when those distortions are ‘appreciable’76
.
3. It is acceptable to harmonise to prevent obstacles arising, rather than removing
already existing problems, but those future problems must be likely77
.
4. Provided that a measure does in fact contribute to free movement or undistorted
competition, it is not rendered invalid because it also contributes to public health78
.
2.2 The environment
In 2007 the EU leaders committed the Union to become an energy-efficient and low-carbon
economy. These goals, together with many others, became the “EU 2020 Strategy”. It
consists of five targets whereas one of them is ‘Climate change and energy sustainability’.
Under this headline are the following targets79
:
- Greenhouse gas emissions reduced by 20% compared to 1990 – even 30% if other
major developed and developing economies decide to take their fair share of a global
emission reduction effort
- Raising the share of EU energy consumption produced from renewable resources to
20%
- A 20% improvement in the EU’s energy efficiency.
In 2009 these targets were enacted in the EU Climate and energy package which specifically
has the aim to ensure that the EU meets these climate and energy targets for 2020.
The climate and energy package comprises pieces of complementary legislation which
intended to deliver the three targets80
I. Reform of the EU Emission Trading System
II. National targets for non-EU ETS emissions
III. National renewable energy targets
IV. Carbon capture and storage
This report is limited to the first measure, which will be fully outlined in chapter 3.
74
C-376/98, Premise 84 and C-58/08, Premise 32 75
De minimis means a lower limit under which it is considered insignificant 76
C-376/98, Premise 106 and C-58/08, Premise 32 77
C-376/98, Premise 86 and C-58/08, Premise 33 78
C-376/98, Premise 88 and C-58/08, Premise 34 79
European Commission 4 (2013) 80
European Commission 5 (2013)
20
2.2.1 Article 191-193 TFEU
The chapter in the Treaty of Lisbon containing Article 191-193 TFEU outlines objectives
and harmonisation rules on the area of environment which covers the EU ETS.
In the Treaty of the European Union it is stated that the Union shall work for a sustainable
development of Europe based on ‘(…) a high level of protection and improvement of the
quality of the environment’81
. Based on that, Article 191(1) TFEU is developed.
Article 191 TFEU establishes the common environment policy objectives: ‘Preserving,
protecting and improving the quality of the environment; protecting human health; prudent
and rational utilisation of natural resources and; promoting measures at international level
to deal with regional or worldwide environmental problems, and in particular combating
climate change’82
. The last part, in particular combating climate change, was added in the
Treaty of Lisbon.
Furthermore, Article 191 TFEU states on which principles and conditions are taken into
account when the European environmental policies are developed. The four principles are (1)
the precautionary principles; (2) the principles on that preventive action should be taken; (3)
the principle saying that environmental damage should as a priority be rectified at source;
and (4) the principle of that the polluter should pay83
. Especially principle (4) was used in the
development and improvement of the Emission Trading System as the emitter now has to
buy allowances to pollute. The four principles are directed towards the EU institutions as it
refers to the development of the policy. Therefore, the principles have to be used in
environmental acts before the Member States are committed by them.
As the EU motto is “United in diversity”84
the EU shall also aim at a high level of protection
taking this diversity of the Union into account85
.In preparing the policies on the
environment, the EU shall take account of ‘available scientific and technical data;
environmental conditions in the various regions of the Union; the potential benefits and
costs of action or lack of action; the economic and social development of the Union as a
whole and the balanced development of its regions’86
.
81
Article 3(3) TEU 82
Article 191(1) TFEU 83
Article 191(2) TFEU 84
European Union Web 2 (2013) 85
Article 191(2) TFEU 86
Article 191(3) TFEU
21
When the EU agrees to harmonize with an environmental aim it has to be done with a legal
basis in Article 192 TFEU. The Article is not legal basis for legal acts, which have the
purpose to develop the single market although they might have environmental elements: For
example the Directives on electricity87
and natural gas88
has not legal basis in the chapter of
environment, but the Directive on greenhouse gas emission allowances89
has.
When a legislative act is prepared the right legal basis must be chosen, however, the history
of case law shows that it can be difficult. The CJ has had cases about the delimitation
between Article 114 and 192 TFEU. Before the Treaty of Amsterdam the distinction
between the two Articles was very important as the two Articles did not have the same
decision-making procedure90
. If a legal act had its primary legal effect in relation to
environmental protection, the legal basis must be Article 192 TFEU. On the other hand, the
legal basis must be 114 TFEU if the primary legal effect was in relation to the single market.
The CJ stated out the conditions for single and double legal basis in the case C-155/07
Commission v Council. If a measure has two or more aims, it has to be examined whether
one of the aims is incidental or whether one is the main aim. If there is one main aim, 'the
measure must be founded on a single legal basis, namely that required by the main or
predominant aim’91
. If a measure has two or more aims that cannot be separated without one
being incidental, 'such a measure will have to be founded, exceptionally, on the various
corresponding legal bases’92
, also called double legal basis. However, such a double legal
basis is not possible where the procedures laid down are incompatible with each other93
.
Incompatibility can originate from a hierarchy from the Treaty, either based on specialty94
,
the intention of the legislator95
, or an explicitly preferred legal basis96
. In addition,
incompatibility can originate from practical impossibility, such as two different voting-
thresholds97
.
87
Directive 2009/72/EC 88
Directive 2009/73/EC 89
Directive 2003/87/EC (+ revised) 90
Article 192(2) TFEU requires unanimously made decisions and contradict therefore still with 114. 91
C-155/07, Premise 35 92
C-155/07, Premise 36 93
C-155/07, Premise 37 94
On the basis of Lex specialis derogate lex generali 95
C-155/07, Premise 47 96
E.g. when a provision reads 'without prejudges to Article x' 97
E.g. Qualified Majority Voting versus unanimity
22
2.2.1.1 Level of harmonisation
Article 193 TFEU measures the level of harmonisation when a legal action is taken pursuant
to Article 192 TFEU. Article 193 TFEU saying that the protective measures adopted
pursuant to Article 192 shall not prevent any Member State from maintaining or introducing
more stringent protective measures constitutes the Article for minimum harmonisation on
the area of environment. The Article, however, also states that such measure must be
compatible with the treaties and that shall be notified to the European Commission98
.
2.2.2 Article 194 TFEU
Article 194 TFEU is not directly relevant to this report as the Directive to be analysed in
chapter 3 primarily has an environmental propose. However, it should be mentioned that it
might be relevant for the future developments with relevance for the environment as on the
basis of this Article, the Treaty of Lisbon also gives the EU a better opportunity to develop
policies that are supporting a transition to sustainable energy99
.
Article 194 TFEU is a new Article after the Treaty of Lisbon and it establishes an EU
competence on energy. Before the effective date of the Treaty of Lisbon the EU had no
established competence on energy. However, the EU has used its competence on other areas
applying Article 47(2), 55 and 95 TEC as legal basis, for example seen in Directive
2009/72/EC on the internal market for electricity. Now Article 194 TFEU serves as the legal
basis allowing the EU to complete the single energy market. The Article itself has its legal
basis in Article 114 TFEU as it starts: ‘In the context of the establishment and functioning of
the internal market (...)’.
The addition of Article 194 TFEU is a step towards the common energy policy. The aim of
the Articles is stated as follows: ‘(...)Union policy on energy shall aim, in a spirit of
solidarity between Member States, to: (a) ensure the functioning of the energy market; (b)
ensure security of energy supply in the Union; (c) promote energy efficiency and energy
saving and the development of new and renewable forms of energy; and (d) promote the
interconnection of energy networks’100
Article 194 TFEU is not clear in relation to the level of harmonisation. To find the level of
harmonisation the reader has to study the wording of every single legal act with legal basis in
the Article.
98
Article 193 TFEU 99
Article 194(1)(c) 100
Article 194(1) TFEU
23
2.3 Sub-conclusion
The idea of the single market
This single market comprises an area without internal frontiers in which the free movement
of goods, persons, services and capital is ensured. The aims are to merge the markets of the
Member States into a larger market. More and more sectors are included in the single market
thought and now the single energy market is closer than ever to be fully included.
The harmonisation requirements according to the treaty
Article 114 TFEU shall apply for the achievement of the objectives of the single market;
however, the Article does not give the EU a general competence to regulate. A framework
developed by case law defines the scope of Article 114 TFEU.
Legislation with a primary environmental aim shall have a legal basis in Article 192 TFEU.
Double legal basis is an opportunity if a proposed legislation has two equal aims. Inserted by
the Treaty of Lisbon, Article 194 TFEU is the newest harmonisation tool. It covers the area
of energy.
The overall requirements established by the principle of conferral, the subsidiarity principle
and the principle of proportionality will also have to be met.
Legal basis for minimum harmonization and maximum harmonization
With a background in case law, it is settled that harmonisation according to Article 114
constitutes maximum harmonisation, unless one of the exceptions can be used. The
environmental guarantee gives the Member State the possibility to sustain or introduce
stricter rules than determined by the harmonisation.
Article 193 TFEU states that harmonisation done in accordance with Article 192 TFEU shall
be at a minimum level, as it shall not prevent Member States from maintaining or
introducing more stringent measures.
24
3. EU Emissions Trading System (EU ETS)
This chapter will answer the second part of the problem statement concerning the effect of
the latest amendment of EU ETS on the Danish legislation and further the effect of EU State
aid rules.
The structure of the chapter is divided into two parts as follows: The first part is partly
descriptive, starting with the initial EU ETS Directive and its background and further with an
analytical view on the main changes which were made by the latest amendment and the
impact of it. The second part will focus on the EU State aid rules.
3.1 The background of the EU ETS
The EU ETS was established in 2003 by Directive 2003/87/EC. It was established ‘in order
to promote reductions of greenhouse gas emissions in a cost-effective and economically
efficient manner’101
. The EU ETS is a cornerstone in the EU’s effort to reduce emissions in
order to slow down climate changes. In the conclusions of the Green Paper on greenhouse
gas emissions trading within the EU, the Council recognised on 8 March 2001, the particular
importance of the European Climate Change Programme (ECCP), and underlined the urgent
need for concrete action at Community level102
. The first ECCP was established in 2000 to
help identify the most environmentally effective and most cost-effective policies and
measures that could be taken at European level to cut greenhouse gas emissions. With the
ECCP, EU wanted to ensure that it could meet its target for reducing emissions under the
Kyoto Protocol103
. The Protocol required the countries that were EU members before 2004 to
cut their combined emissions of greenhouse gases to 8% below the 1990 level by 2012104
.
The EU Member States joining the Union after 2004 were assigned to other rules105
,
however, the EU and all its Member States agreed106
to fulfil their commitments to reduce
greenhouse gas emissions under the Kyoto Protocol jointly which has resulted in the
establishment of the EU ETS107
. The opportunity for making such a joint action was given by
the Kyoto Protocol’s Article 4(6).
By putting a price on CO2 and thereby giving a financial value to each tonne of emissions
saved, the EU ETS has placed climate changes on the agenda of company boards across
101
Directive 2003/87/EC, Article 1 102
Directive 2003/87/EC, Preamble 1 103
European Commission 2 (2013) 104
Kyoto Protocol (1998), Article 3(1) and Annex B 105
These rules will not be elaborated on as it is not evaluated relevant in the context of the purpose of this report. 106
The agreement was made by Decision 2002/358/EC 107
Directive 2003/87/EC, Preamble 5
25
Europe. Every company would like to minimize costs and furthermore, a sufficiently high
CO2-emission price promotes investment in clean, low-carbon technologies108
.
The Directive required the government of each Member State to make a ‘National Allocation
Plan’ (NAP) to set a cap on the amount of greenhouse gases to be emitted annually by the
various installations covered by the scheme. The scheme applied to the categories of
activities listed in Annex I of the Directive, and to six gases listed in Annex II109
.
The NAP was sent to the Commission, who may accept or reject the plan within three
month110
.
The launch of the trading system happened by January 1, 2005111
. The first period ending in
2007 was a pilot phase ensuring time for adaptation and development of infrastructure.
Second trading period was 2008-2012 which coincide with the first commitment period of
the Kyoto Protocol112
. The EU ETS is now in its third trading period, 2013-2020 – covered
by the amendment Directive referred to in the problem statement113
.
During the first trading periods other amendments than the one in focus of the report has
been made. To understand the amending process of the EU ETS Directive it may be relevant
to get a short overview. As the earlier amendment is not a part of the problem statement, they
are just presented in Appendix 10
3.2 The third trading period: Directive 2009/29/EC114
The third period, starting 1 January 2013 will end in 2020, and it is covered by the
amendment Directive, Directive 2009/29/EC. This amendment has made the third trading
period significantly different from the first two periods as the rules are far more harmonised
than before. The EU ETS was improved in many ways so to simplify and to keep the focus
on the main changes115
it has been chosen to look at the following:
I. Going from national caps to an EU single cap116
.
II. Going from free allocation to auctioning as the default method for allocating
allowances117
.
108
European Commission 1 (2013), p. 2 109
Directive 2003/87/EC, Article 2(1) 110
Directive 2003/87/EC, Article 9(3) 111
Directive 2003/87/EC, Article 4 112
Kyoto Protocol (1998), Article 3(7) 113
See section 3.2 114
Will be referred to as ’Directive 2003/87/EC revised’ 115
European Commission Press Release (2012) 116
Directive 2003/87/EC revised, Article 9
26
III. Switching to harmonised allocation rules for those allowances still given away for
free118
.
3.2.1 An EU single cap
By entering the third trading period the NAP was taken over by the EU single cap,
‘Community-wide quantity of allowances’119
, which means that the EU sets out the total
amount of allowances instead of just the sum of all the NAPs.
The continuing decreasing cap will in 2020 have reduced greenhouse gas emissions by 21%
compared to 2005120
. To reach that goal, the total number of allowances in the EU of
2.039.152.882121
is decreasing linear every year until 2020 by 1,74% of the average total
quantity allowances issued annually on 2008-2012122
.
When the third trading period was entered all covered emitters needed a new greenhouse gas
emission permit which has to be renewed every five year123
. The permit shall contain five
things listed in Article 6(2)(a)-(e) of the revised ETS Directive. Enhanced in this section it
the monitoring plan124
as this paragraph was added by the new Directive. The monitoring
plan must fulfil the requirements set up in Article 14 of the same Directive and be approved
by the competent authority in the Member State. In Denmark the competent authority is
Energistyrelsen.
On 21 June 2012 the Commission approved a Regulation125
on monitoring and reporting on
greenhouse gas emissions pursuant to Directive 2003/87/EC. There will not be elaborated on
how the monitoring plans should exactly be shaped as it is not evaluated important to answer
the problem statement.
117
Directive 2003/87/EC revised, Article 10 118
Directive 2003/87/EC revised, Article 10(a) 119
Directive 2003/87/EC revised, Article 9 120
Directive 2003/87/EC revised; Preamble 14 121
European Commission 3 (2013) 122
Directive 2003/87/EC revised, Article 9 123
Directive 2003/87/EC revised, Article 6(2)(a) 124
Directive 2003/87/EC revised, Article 6(2)(c) 125
Regulation 601/2012/EU
27
3.2.1.1 The impact on Danish legislation
Overall, the amendment of the EU ETS resulted in a new Danish main law of CO2-
emissions: Law on CO2-allowances126
. The different elements presented in section 3.2 have
had various influences on the Danish legislation and therefore the areas are separated below.
In the first and second trading period Denmark determined its own rules on allocation of
allowances. The rules for the second period will be stated in chapter 4 in the previous Law
on CO2-allowances127
. The allocation128
was mainly based on the average historical CO2-
emission129
- also called Grandfathering130
. The rules were elaborated in the NAP for
Denmark for the second trading period131
. For this period, Denmark decided to allocate 24.5
million allowances per year which were significantly lower than the average on 33.5 million
allocated in the first period per year132
. Denmark was approved for all the proposed
allowances in the second trading period but this has from far been the case for all Member
States. Some Member States, see table 1, proposed a much larger cap than they ended up
being allowed.
Table 1: Examples of Member States and allowed cap in relation to the proposed
Member State Cap allowed 2008-2012
(in relation to proposed)
Denmark 100%
Slovakia 78%
Romania 79,3%
Lithuania 53%
Bulgaria 62,6%
Poland 73,3%
Estonia 52,2%
Source: EU Press Release (2007)
126
“Lov om CO2-kvoter”, Law 2012-11-28 no. 1095 127
Law 2010-10-15 no. 1222 128
For installations started before 1 April 2004 129
Law 2010-10-15 no. 1222, §16 130
Basse, Ellen Margrethe et.al (2008), p. 695 131
Law 2010-10-15 no. 1222, §38(1) 132
National Allocation Plan for Denmark in the period 2008-2012 (2007), p. 49
28
Some Members States were not satisfied with the Commission’s decisions to decrease their
cap brought the case before the court. One of the countries was Poland (supported by
Hungary, Lithuania and Slovakia) who put forward the statement that such action of the
Commission (supported by UK and North Ireland) was against Article 9(1) of the Directive.
The Directive ‘determines clearly and explicitly, in Article 9(1) and (3) and in Article 11(2),
the allocation of powers between the Member States and the Commission for the drawing-
up, review and implementation of NAPs’133
. Only the Member State has according to Article
9(1) and 11(2) of the Directive the power, ‘at initial stage, to draw up an NAP stating the
total quantity of allowances which they propose to allocate for the period’134
. The court
further stated that ‘the Commission is empowered only to verify the conformity of the
measures taken by the Member States with the criteria set out in Annex III and the provisions
of Article 10 of the Directive’135
.
On the basis of the above stated, the court of first instance took the party of Poland. The
Commission was not allowed to decrease the national caps on the basis of – for them –
wrong data.
A Commission argument during the case was a fear of the market reaction on that the fact
that too many allowances were supplied on the basis of inferior data136
and when the court
pronounced the verdict the market reacted immediately by sending the EUA price down with
4%, however, this reaction was considered moderate but the market excepted a fast
clarification137
This clarification came by giving the EU the competence to allocate allowances after 2013.
Having made the single cap and thereby harmonised the system, Danish companies have
been secured a fairer competitive situation as Member States cannot favour their own
industries anymore and thereby the decision-makers in Denmark do not have to have the
problem of some Member States to allocate too many allowances in mind.
After the evaluation of the pilot period the potential of the system was clear but to exploit the
emission trading advantages and to avoid anti-competition on the single market ‘a more
harmonised emission trading system is’ imperative138
. The Directive as a whole has its legal
basis in Article 192 TFEU and is therefore basis of minimum harmonisation. However, the
Articles in the Directive may be formulated as to limit this minimum harmonisation. This is 133
Case T-183/07, Premise 84 134
Case T-183/07, Premise 85 135
Case T-183/07, Premise 89 136
Bassen, Ellen Margrethe (2009), p. 531 137
Bassen, Ellen Margrethe (2009), p. 532 138
Directive 2003/87/EC revised, Preamble 8
29
the case with the Regulation on monitoring and reporting, and thereby the harmonisation on
this specific area changes from minimum harmonisation to total harmonisation139
. Before the
revision of the EU ETS the monitoring and reporting rules were laid down in a decision140
.
The changes have resulted in less freedom for Denmark to decide on how it will reach its
reduction commitments and in what pace.
3.2.2 Auctioning
In the first trading period at least 95% of the allowances141
should be allocated free of
charge. In the second trading period this percentage should decrease to 90 %142
. The picture
of almost all allowances allocated free of charge by the NAPs has changed by the
improvement of the EU ETS. The goal is now to phase out free allocations, ending in
2027143
.
From 2013 all allowances which are not given free of charge is auctioned by the Member
States144
. To secure the function of the infrastructure before the start of the third trading
period, the auctions started in 2011145
. The method of auctioning was chosen as it was
evaluated to be simple, effective and capable of eliminating anti-competitiveness146
.
The total amount of allowances allocated is divided with 88% allocated on the basis of either
the share of verified emissions under the Community Scheme for 2005 or the average of the
first trading period. The higher of the two are relied upon147
. 10% is allocated to some
Member States to support solidarity and growth within the Union148
. The remaining 2% is
distributed as a Kyoto bonus to Member States who in 2005 had reduced its emissions with
at least 20% compared to level of the base year applicable to it under the Kyoto Protocol149
.
139
Directive 2003/87/EC revised, Article 14(1) 140
Directive 2003/87/EC, Article 14(1) 141
‘One allowance’ means an allowance to emit one tonne of CO2, valid for a specific trading period (Directive
2003/87/EC, Article 3(a)) 142
Directive 2003/87/EC, Article 10 143
Directive 2003/87/EC revised, Article 10a(11) 144
Directive 2003/87/EC revised, Article 10(1) 145
Directive 2003/87/EC revised, Preamble 22 146
Directive 2003/87/EC revised, Preamble 15 147
Directive 2003/87/EC revised, Article 10(2)(a) 148
Directive 2003/87/EC revised, Article 10(2)(b) 149
Directive 2003/87/EC revised, Article 10(2)(c)
30
Denmark will only get allowances from the first group150
as we are not fulfil requirements
for the other two.
By shifting from free allowances to auctioning as the primary allocation method, the EU
fulfils its own principle from Article 192(2) saying that the emitter should pay.
In order to make the timing and administration open, transparent, harmonised and non-
discriminatory, the Commission adopted Regulation (EU) 1031/2010151
; the Auctioning
Regulation. Article 10(4) of the EU ETS also states that auctions shall be designed to ensure
that both large companies and SMEs have full, fair and equal access to the allowances152
;
that they have access to the same information153
; that participation in auctions shall be cost-
efficient and avoid undue administrative costs154
; and finally, that small emitters get access
to allowances155
. Each Member State shall report to the Commission how the proper
implementation is carried out156
.
Auctions are carried out on different platforms. The central EU-platform is EEX which is
appointed by Denmark and 23 other Member States157
. UK has appointed its own platform
(ICE) and the same has Poland (PRAVDA), however, when acting on the single market all
buyers can buy on every platform and not only the platform appointed by the country you are
settled in. The Auction Regulation describes a common platform as the most open, efficient,
transparent and non-discriminating approach158
and such a platform is chosen according to
Article 26(1)-(2), however to avoid potential risk for lower competition on the CO2-market
the Regulation opens an opportunity for Member States to appoint their auction platforms159
and this is done according to Article 30(1).
The Member States are allocated the allowances and therefore the revenue from the
auctioning is assigned to them, but the Commission must be orientated about the spending of
150
Directive 2003/87/EC revised, Annex IIa and IIb 151
Directive 2003/87/EC revised, Article 10(4) - The Auctioning Regulation has character of an “Implemen-
tation Regulation” and is not a legal act. The competence allowing the Commission to adapt this Regulation is
given by the Directive. 152
Directive 2003/87/EC revised, Article 10(4)(a) 153
Directive 2003/87/EC revised, Article 10(4)(b) 154
Directive 2003/87/EC revised, Article 10(4)(c) 155
Directive 2003/87/EC revised, Article 10(4)(d) 156
Directive 2003/87/EC revised, Article 10(4) 157
EEX Web (2013) 158
Regulation 1031/2010/EC, Preamble 7 159
Regulation 1031/2010/EC, Preamble 8
31
the revenue. The Member States shall use at least 50% of the revenue160
to for example
reduction of greenhouse gas emissions161
; develop renewable energies and technologies162
or
to encourage to a shift to low-emission and public forms of transport163
164
.
3.2.2.1 The impact on Danish legislation
Because auctioning of allowances is a new allocation method, it has influenced the Danish
legislation. However, not much is left to the Member States to decide as the Commission has
adopted a Regulation ‘on the timing, administration and other aspects of auctioning of
greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European
Parliament and of the Council establishing a scheme for greenhouse gas emission
allowances trading within the Community’165
.
The auctioning-element is present in Danish legislation in Law on CO2-emissions allowances
§18 but on the same reason as above the paragraph is very short and does only say that the
Minister of Climate, Energy and Building shall auction the allowances allocated to Denmark
which are not distributed for free which is a repetition from the Directive. Hereby it can be
concluded that the auctioning is totally harmonised on the basis on the Regulation, which
also has been the intention as the Directive says ‘that the revised Community scheme operate
with the highest possible degree of economic efficiency and on the basis of fully harmonised
conditions of allocation within the Community’166
. Only on the spending of the revenue from
the auction is pursuant to minimum harmonisation as the Directive has legal basis in Article
192 TFEU. Denmark has to spend at least 50% of the revenue on one or more of the listed
examples but it can spend more if it wants.
In the first two trading periods competitiveness was an issue for Danish legislators. In the
first period Denmark auctioned the 5 % of the allowances as it was allowed to167
. In the
second period the Member States were allowed to auction 10% of the allowances, but
Denmark did not set any allowances aside for auctioning. The reason was a fear of losing
competitiveness168
. This could be the result some of the covered companies had to pay for its
emissions and their competitors in other EU countries could make emissions for free. The
160
Directive 2003/87/EC revised, Article 10(3) 161
Directive 2003/87/EC revised, Article 10(3)(a) 162
Directive 2003/87/EC revised, Article 10(3)(b) 163
Directive 2003/87/EC revised, Article 10(3)(f) 164
All the things which the 50% may be used for are listed in Article 10(2)(a-i) 165
Directive 2003/87/EC revised, Article 10(4) and Regulation (EU) 1031/2010 166
Directive 2003/87/EC revised, Preamble 15 167
Law 2004-06-09 no. 493, § 15(2) 168
National Allocation Plan for Denmark in the period 2008-2012 (2007), p. 56
32
harmonised rules on auctioning secured equal rules for everybody and thereby the Danish
legislators would not have to make this balance after 2013. The competitiveness problem has
now shifted to the relation to third countries but this is taken care of at EU level, for example
on rules on carbon leakage169
.
3.2.2.1.1 The Danish Climate Plan and the consequence of the auctioning price
On 14 August 2013 the Danish Minister of Climate, Energy and Building presented a new
climate plan on behalf of the Government. By 2020 the goal is to reduce greenhouse gas
emissions by 40% (based on 1990 level). This means that Denmark has to reduce with
further 6% as the already established and planed actions will reach a 34% reduction. The
Government evaluates it to be necessary to reduce with further 6% to have a chance to reach
the EU goal of an 80-95% reduction in 2050170
.
Continuing on the current path, Denmark will emit 4 million tonne too much in 2020 to
reach the 40% reduction, according to the calculations dome by the Ministry171
.
The auctioning price on the EUAs in the ETS172
has an impact on how much action Denmark
has to take to reach the 40% and thereby on how much new legislation to be passed in the
Danish Parliament. If the EUA price is high, Denmark will emit lesser on the basis of the
already taken actions: For example the emitters will invest in green technologies of
“themselves” but the Danish State will also get a higher profit on the sold allowances which
it can use to reduction actions, for example in sectors not covered by the ETS or at
household level. Will the price continue to be low, Denmark will emit more under the
current actions, and get less money in the State treasury. In the spring 2013 the Ministry of
Finance made a calculation of what the lower price will cost Denmark from 2013-2020, see
table 2. The costs are the difference between the new estimate – which is lower – and the
calculation behind the National Budget 2013.
Table 2: Danish State Treasury loses because of a lower EUA price (2013-2020)
Source: Altinget (2013)
169
See section 3.2.3.1 170
Climate Plan (2013), P. 10 171
Climate Plan (2013), P. 10 172
The price history and the general problems in the EU ETS will be presented in chapter 4
2013 2014 2015 2016 2017 2018 2019 2020 Sum
Lower income compared with
National Budget 2013 (bil. DKK)0,5 0,7 0,8 1,0 1,1 1,2 1,3 1,4 8,0
33
Thus, the conditions of the Danish climate plan depend on the EUA price. The Ministry
made the illustration below.
Figure 2: Deficit in 2020 to 40% by different conditions according to EUA price
Source: Climate plan (2013), p. 27
The price that the Ministry is counting on in its calculations is 72 DKK in 2020 and then
Denmark has a deficit on 4 million tonne CO2 to the 40% reduction goal. If the price is
around 144 DKK in 2020 Denmark will only have a deficit on 2,8 million tonne instead of 4
million. This will make the action plan cheaper. The reverse situation can also become
relevant if the trust in the ETS fades. If the price is zero in 2020, the Danish deficit is
calculated to be 4,2 million tonne and thereby the plan become more expensive173
.
Also the economic growth/development in Europe will have an impact on the climate plan
but it is not in the scope of this report.
3.2.3 Harmonised allocation rules on free allocation
Even though auctioning now is the default methods for distribution, 80% of the allowances
will be allocated for free in 2013, which is going to be reduced to 30% in 2020174
, however,
with subject to Article 10b about carbon leakage. The revised EU ETS sets up rules for the
allocation of free allowances. The harmonised rules are laid down in the Commission
Decision 2011/278/EU ‘determining transitional Union-wide rules for harmonised free
allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC’.
173
Climate plan (2013), p. 27 174
Directive 2003/87/EC revised, Article 10a(11)
1
2
3
4
5
Low price Central High price
Mill
ion
to
nn
e C
O2
EUA price
34
The distribution is done on a basis of a product benchmark175
. The product benchmark is a
benchmark of performance based on a value reflecting the average greenhouse gas emission
performance of the 10% best performing installations producing that product in 2007-
2008176
.
The installations that meet the benchmarks and thereby are among the most efficient, will
receive more of the allowances they need for free. Thus, also said that installations that do
not meet the benchmark get fewer allowances that they need – the rest have be bought
through the auctioning. These numbers of free allowances are calculated by multiplying the
benchmarks a factor to ensure the decreasing number of free allowances towards 2020. In
2013 the factor is 0,8 (80 %) and in 2020, the factor will be 0,3 (30%). The factors in the
years in between are continuing decreasing towards 2020.
By giving more free allowances to the best performing installations the harmonised rules of
benchmarking is securing incentives to reduce emissions as the aim is177
.
In general, there are no free allowances for electricity production unless it is in connection to
modernisation of the production178
or if the electricity production is made from waste
gases179
.
3.2.3.1 Carbon Leakage
‘Carbon Leakage’ is a term used to describe a special competitiveness situation where costs
related to climate policies can make businesses180
transfer their production to non-EU
countries181
which do not have as strict rules on emissions as the EU182
. Such movement
could lead to an increase in their total emission as the company will probably emit more in
the new country than it did in the home country. This is not desirable as climate changes
obviously have no boundaries: It is a global issue!
To prevent this situation, the EU has made special rules for those sectors and sub-sectors
deemed to be exposed to significant risk of carbon leakage. Thus, Article 10a(12) has a
175
Product benchmark is the main benchmark, but in situations where it is not technically possible to make such
a product benchmark three fallback methods is used; heat benchmark, fuel benchmark and process emissions
(Decision 2011/278/EU, Preamble 12 and Article 6). These methods will not be discussed further in this report. 176
Directive 2003/87/EC revised, Article 10a(2) 177
Decision 2011/278/EU, Preamble 1 178
Directive 2003/87/EC revised, Article 10c 179
Directive 2003/87/EC revised, Article 10a(1) 180
The rules does only apply to industries, not the sector of energy 181
When talking about the EU ETS, Norway, Iceland and Lichtenstein are covered and thereby they do not fall
under non-EU countries here. 182
Directive 2003/87/EC revised, Article 10a(6)
35
function of exception for Article 10(1) and 10a(1): The rules of auctioning and the factors on
benchmarking does not apply.
The reason for adoption of these rules in the revised ETS is that by allocation free of charge
in the second trading period, the extra economic burden on companies was minimal, this
became significantly bigger by shifting to auctioning.
Sectors and sub-sectors are evaluated by the Commission and the European Council and
those subject to significant carbon leakage are presented on a list valid for five years183
. The
current list184
is valid until the end of 2014 but it is allowed to be amended on the way185
. To
get on the list, a sector or a sub-sector must fulfil Article 10a(15)+(16) in the EU ETS
Directive. Either the increase of production cost (in proportion of the Gross Value Added)
must be increased by at least 5% because of the implementation of the new EU ETS
Directive186
and the trade intensity with non-EU countries is above 10%187
, or the additional
costs is at least 30%188
or the trade intensity is above 30%189
.
The carbon leakage rules do not mean that sectors and sub-sectors subject to carbon leakage
are exempted from the EU ETS. As seen earlier the free allocation is multiplied with factor
0,8 in 2013 decreasing to 0,3 in 2020. The free allocation for the sectors on the list will
however be multiplied by factor 1 (100%). This means that the installations that meet the
benchmark get all the allowances they need190
.
By adding this exception in the revised ETS the EU is also sending a signal that
environmental actions should not be taken at any price. Competitiveness and thereby
European jobs are also valuated: The principle of “the polluter pays” is left out of account.
This assessment is a result of the European strategy for a sustainable, competitive and secure
energy policy.
3.2.3.2 The impact on Danish legislation
In the second trading period the Member States decided how to allocate the allowances
themselves. In Denmark, the allocation was based in the average historical CO2.emissions
and the electricity and heat production in the years 1998-2004191
. First of all, the Danish
Government cannot give allowances to electricity production anymore - unless it is subject to
183
Directive 2003/87/EC revised, Article 10(13) 184
Commission Decison 2010/2/EU 185
Directive 2003/87/EC revised, Article 10(13) 186
Directive 2003/87/EC revised, Article 10a(15)(a) 187
Directive 2003/87/EC revised, Article 10a(15)(b) 188
Directive 2003/87/EC revised, Article 10a(16)(a) 189
Directive 2003/87/EC revised, Article 10a(15)(b) 190
Directive 2003/87/EC revised, Article 10a(12) 191
Law 2010-10-15 no. 1222, §16(1)+(2)
36
modernisation - as it was changed in the Directive. Secondly, a lot of new activities for
which the EU ETS applies were added in Annex 1.
The implementation of the revised EU ETS Directive has had the result that the chapter on
allocation of allowances in the Danish legislation192
has been significantly reduced and does
now only refer to the benchmark method.
The influence has the result that Danish emitters now are in direct competition with their
competitors (producing the same product) all over Europa as the benchmark is based on the
end product instead of geography, which were the case before the revision. The new
situation of competition does not mean that Danish emitters loose competitiveness to their
EU competitors as the rules are the same for everyone. The competitiveness issue has been
shifted towards competitors in non-EU countries as the same rules do not apply to them. The
EU has tried to neutralise this situation with the factor 1 multiplication for the emitters
subject to carbon leakage. This means that the Danish legislators shall not think of methods
to solve this problem.
3.3. State aid
EU’s general rules on competition are laid down in the Treaty of Lisbon Articles 101-109
TFEU. In these Articles three general prohibitions are formulated:
- Prohibition of agreements limiting competition (Article 101 TFEU)
- Prohibition of abuse of dominant position (Article 102 TFEU)
- Prohibition of State aid (Articles 107-109 TFEU)
This report will according to the problem statement only analyse the prohibition of State aid
and the modified rules in relation environmental protection193
.
State aid is covered by the Treaty of Lisbon Articles 107-109 TFEU but Article 107(1)
constitute the basis of the overall EU prohibition of State aid. The reason for the prohibition
of State aid is based on the priority of the functioning of the single market. The provision
sets up some requirements to conditions which all have to be fulfilled before the prohibition
of State aid can be applied.
1. There must be an aid.
2. The aid must be granted by a Member State or through Member State resources.
3. The aid must favour certain undertakings or production of certain goods
(selectivity).
192
Law 2012-11-28 no. 1095, Chapter 4 193
Community Guidelines (2008)
37
4. The aid must affect trade between Member States by distorting competition within
the single market (cross-border effect).
Are the first two conditions fulfilled an aid can be characterised as a State aid. Are the last
two conditions also fulfilled the State aid is characterised as incompatible with the single
market194
.
Regarding condition no. 1, it is the effect of the aid which is important and not the form or
intention. Thus, not only economic aid is covered by the prohibition, but all types of
(direct/indirect) contribution and modifications may fall under the provision195
.
Regarding condition no. 2, the two things are not alternatives although it may seem like in
the wording. The CJ states in the PreussenElektra case that both criteria must be fulfilled196
.
Article 107(2) works as exemption to 107(1) and sets out types of State aid which shall be
compatible with the single market. These types will however not be outlined further as they
are not relevant in relation to environmental protection.
Article 107(3) lists types of State aid which may be compatible with the single market. The
Commission has the exclusive competence to evaluate every situation. The most relevant
Article is 107(3)(c) – saying that ‘aid to facilitate the development of certain economic
activities or certain economic area, where such aid dies not adversely affect trading
conditions to an extent contrary to the common interests’ may be considered to be
compatible with the single market – as this is the legal basis for the Guidelines on State aid
for Environmental Protection197
.
Also Article 107(3)(e) – saying that ‘other categories of aid as may be specified by decision
of the Council on proposal from the Commission may be considered compatible with the
single market’ – is also relevant in relation to environmental protection. The competence for
the Council to add new categories is given by Article 109. Article 109 gives the Council the
competence to make appropriate regulations for the application of Articles 107 and 108. On
this basis the Council has adopted Regulation no. 994/98/EC which gives the Commission
powers to adopt Block Exemption Regulations in relation to certain identified forms of
horizontal State aid198
. These certain identified forms are outlined in Article 1(a) where
194
Iversen, Bent; et al (2011), p. 24 195
Basse, Ellen Margrethe (2008), p. 148 196
Case C-379/98, Premise 58 197
Community Guidelines (2008), Premise 71 198
Iversen, Bent; et al (2011), p. 4
38
“environmental protection” is listed199
. The Regulation was just amended by Regulation no.
733/2013/EU but this has not affected the relevant area environmental protection as it was
already part of the Regulation.
On the basis of the Regulation above the General Block Exemption Regulation200
was
adopted by the Commission. The General Block Exemption ‘is declaring certain categories
of aid compatible with the common market in application of Articles 87 and 88 of the Treaty’
(now Articles 107 and 108). The Regulation consolidated five previous Block Exemption
Regulations in one Regulation, including State aid for environmental protection201
. Aid for
environmental protection is outlined in section 4 of the General Block Exemption
Regulation.
The Guidelines on environmental protection shall be seen in interaction with the General
Block Exemption Regulation202
. The Guidelines applies to all measures notified to the
Commission if 1) the measure is not covered the General Block Exemption, or if 2) the
measure is covered by the notification obligation for individual support in the General Block
Exemption203
.
Article 108 TFEU establishes the legal basis for the Commission to make on-going
investigations and control within State aid. The Council has adopted the Procedural
Regulation204
which establishes further conditions of the application of Article 108205
. Article
108(1) is directed toward existing State aid rules whereas Article 108(3) is directed towards
new/planned/changed State aid rules. If a Member State wishes to introduce a new rule or to
modify an existing rule it has to notify the Commission. An initial investigation starts, and
the Member State shall not put the proposed measure into effect until the procedures has
resulted in a final decision. This is called the stand-still obligation206
. If the Commission
does not react in two months after the completion of the notification, the Member State can
consider the measure as approved and it can put it into effect207
. Does the Commission on the
other hand have the opinion that the measure is a breach of Article 107 TFEU, the Article
199
Regulation 994/98/EC, Article 1(a)(iii) 200
Commission Regulation 800/2008/EC 201
Iversen, Bent; et al (2011), p. 4 202
Basse, Ellen Margrethe (2011), p. 103 203
Guidelines (2008), Point 14 204
Regulation 659/1999 amended by Regulation 734/2013/EU 205
Basse, Ellen Margrethe (2008), p. 147 206
Regulation 659/1999/EC, Article 3 207
Regulation 659/1999/EC, Article 4(6)
39
108(2) established procedure begins208
. The procedure ends with a decision according to
Article 7(2)-(5) of the Procedural Regulation.
The Commission Regulation 1998/2006/EC however establishes an exemption to Article
108(3) – The de minimis. If a measure fulfils the conditions in Article 107(1) the Member
State shall not inform the Commission if it fulfils the conditions laid down in Article 2(2)-(5)
of this Regulation. The total State aid granted to any undertaking shall not exceed EUR
200.000 over a period of three fiscal years209
. Paragraphs (3)-(5) of the Article 2 are about
the calculation methods which will not be elaborated on.
The State aid is the rather positive way to influence the companies to make a green
changeover. The polluter pays principle can be seen like negative incentives because the
company has to pay to reduce the pollution. State aid establishes positive incentives as the
polluter receives aid to change its behaviour and reduce pollution.
State aid is however still considered as just the next best solution and the polluter pays
principle as the main rule210
.
3.3.1 The 2008-Guidelines
The 2008-Guidelines replaced Guidelines from 2001. The purpose of these Guidelines is to
contribute to carry out the action plan on energy 2007-2009211
.
208
Regulation 659/1999/EC, Article 4(4) 209
Regulation 1998/2006/EC, Article 2(2) 210
Community Guidelines (2008), Point 24 211
Community Guidelines (2008), Point 4
Action plan on energy 2007-2009
The spring 2007 European Council called on Member States and EU institutions to
pursue actions to develop a sustainable integrated European climate and energy policy.
The energy policy for Europe would pursue the following three objectives, fully
respecting Member States’ choice of energy mix and sovereignty over primary energy
sources and underpinned by a spirit of solidarity amongst Member States:
Increasing security of supply,
Ensuring the competitiveness of European economies and the availability of
affordable energy,
Promoting environmental sustainability and combating climate change.
Source: Community Guidelines (2008), Point 1
40
The primary objective of State aid control for environmental protection is to ensure that State
aid measures will result in a higher level of environmental protection then without the aid,
and to ensure the positive effect of aid overweight its negative effects of distortions of
competition - still with a focus on the polluter pays principle212
.
In determine whether an aid measure can be deemed compatible with the single market, the
Commission balances the positive and negative effects of the certain measure.
For being a positive effect the measure has to reach an objective on common interest.
Negative effects are such things as distortion of trade and competition.A ‘balancing test’ has
been formalized and is structured as follows213
:
1) Is the aid measure aimed at a well-defined objective of common interest?
- In the context of these Guidelines, the relevant common interest objective is the
protection of the environment.
2) Is the aid well designed to deliver the objective of common interest? (Does the
proposed aid address the market failure or other objectives?)
- Is State aid an appropriate policy instrument?
- Is there an incentive effect, namely does the aid change the behaviour of
undertakings?
- Is the aid measure proportional, namely could the same change in behaviour be
obtained with less aid?
3) Are the distortions of competition and effect on trade limited, so that the overall
balance is positive?
The Guidelines contain two forms of standards214
:
- A standard evaluation of actions which increase the level of environmental
protection over the level set by EU law.
- Investments in new installations producing renewable energy and where the aid is
calculated on the basis of saved external costs.
The Guidelines constitute framework conditions for when State aid for environmental
protection is considered as being compatible with the Article 107(3)(c) and thereby the
single market215
. The twelve State aid measures covered216
:
212
Community Guidelines (2008), Point 6 213
Community Guidelines (2008), Point 16 214
Basse, Ellen Margrethe (2008), p. 154 + Community Guidelines (2008), Point 13
41
1. Aid for undertakings which go beyond Community standards or which increase the
level of environmental protection in the absence of Community standards
2. Aid for the acquisition of new transport vehicles which go beyond Community
standards or which increase the level of environmental protection in the absence of
Community standards
3. Aid for early adaptation to future Community standards
4. Aid for environmental studies
5. Aid for energy saving
6. Aid for renewable energy sources
7. Aid for cogeneration and aid for district heating
8. Aid for waste management
9. Aid for the remediation of contaminated sites
10. Aid for the relocation of undertakings
11. Aid involved in tradable permit schemes
12. Aid in the form of reductions of or exemptions from environmental taxes
This report does not have the proportions to cover all these twelve measure. Therefore, the
focus of the analysis will be measure no. 6: Aid for renewable energy sources. It has been
chosen as renewable energy is a crucial measure to reduce greenhouse gas emissions217
.
3.3.1.1 Aid for renewable energy sources
The definition on ‘renewable energy sources’ ‘is renewable non-fossil energy sources: wind,
solar, geothermal, wave, tidal, hydropower installations, biomass, landfill gas, sewage
treatment plant gas and biogases’218
.
As already outlined in section 2.2 the goal of the EU is to raise the share of EU energy
consumption produced from renewable energy resources to 20% in 2020. Denmark has
committed itself to a goal of 30%219
State aid can be justified if the costs of producing energy from renewable resources are
higher than producing from less environmentally friendly sources, and if there is no
Community standards on the share of energy from renewable sources for individual
215
Community Guidelines (2008), Point 42 216
Community Guidelines (2008), Section 1.5.1-12 217
Community Guidelines (2008), Point 48 218
Community Guidelines (2008), Point 70(5) 219
Energipolitisk Redegørelse (2012), p. 7
42
undertakings220
. Thereby said, that without the State aid on this measure the energy sector
would not be able to supply the energy for a competitive price on the market.
State aid for renewable energy sources is compatible with the single market if it fulfils the
conditions in Points 102-111 in the Guidelines221
. The State aid is divided into investment
aid and operating aid. Regarding investment aid the aid shall not cover more than 60% for
large companies, 70% for medium-size companies and 80% for small companies222
.
Common for all aid covered by the Guidelines is that it must the proportional: ‘Aid is
considered to be proportional only if the same result could not be achieved with less aid’223
.
More specific for renewable energy, ‘eligible investment costs must be limited to the extra
investment costs borne by the beneficiary compared with a conventional power plant or with
a conventional heating system with the same capacity in terms of the effective production of
energy’224
.
Regarding operating aid, the Member States can give operating aid in three different ways225
:
Option 1: Member States may grant operating aid to compensate for the difference
between the cost of producing energy from renewable sources and the market price
of the form of energy concerned. Included in the costs of production is depreciation
of extra investments for environmental protection226
.
o Any investment aid granted to the undertaking in respect of the new plant
must be deducted from production costs when determining the amount of
operating aid227
.
o When notifying the Commission, Member States must state the precise
support mechanisms and in particular the calculation methods228
Option 2: Member States may grant aid for renewable energy sources by using
market mechanisms such as green certificates or tenders. This will give the producer
guaranteed demand for their resources229
.
o The Member States must be able to show that the aid is essential to ensure
the viability of the renewable energy sources concerned; that it does not in
220
Community Guidelines (2008), Point 48 221
Community Guidelines (2008), Point 101 222
Community Guidelines (2008), Point 103 223
Community Guidelines (2008), Point 30 224
Community Guidelines (2008), Point 105 225
Community Guidelines (2008), Point 108 226
Community Guidelines (2008), Point 109(a) 227
Community Guidelines (2008), Point 109(b) 228
Community Guidelines (2008), Point 109(b) 229
Community Guidelines (2008), Point 110(a)
43
the aggregate result in overcompensation and that it does not dissuade
renewable energy producer from becoming more competitive230
.
Option 3231
:
o In the case of aid which is gradually reduced: The aid intensity must not
exceed 100 % of the extra costs in the first year but must have fallen in a
linear fashion to zero by the end of the fifth year.
o In the case of aid which does not decrease gradually: The aid intensity must
not exceed 50 % of the extra costs.
3.3.2 The impact on Danish ability to reduce emissions
The instruments used to facilitate renewable energy in Denmark are mainly based on
national special arrangements, for example additional charges and guaranteed price levels.
Both of these arrangements are considered as State aid as to the Treaty of Lisbon232
. Not
considered State aid is, if the consumers are required to pay a higher price (PSO-tariff) as it
is just allocating the financial burden for the extra costs renewable energy entail233
.
Therefore, the PSO-tariff will not be a part of this analysis.
The General Block Exemption and the Guidelines set up a frame for State aid measures to be
compatible with the single market, but the more specific actions are set up by the national
parliaments. In Denmark this is done by Energy Policy Agreements. The current agreement
is covering the period 2012-2020 and the agreement before that covered the period 2008-
2011. The agreement for 2012-2020 was signed by the Government (Socialdemokraterne,
Redikale Venstre and Socialistisk Folkeparti), Enhedslisten, De Konservative, Venstre and
Dansk Folkepart, so to say a very broad agreement across the parliament.
By this agreement Denmark expect to reach the goal of a 30% share of renewable energy in
2020 with extra 5%234
. In 2011 the share was 19,7%235
.
Two types Danish State aid for renewable energy covered by the Guidelines236
are chosen:
Guaranteed prices and additional prices which both are operating aid. To strengthen the
focus further, the types of State aids will be analysed in relation to windmills. The reason for
230
Community Guidelines (2008), Point 110(b) 231
Community Guidelines (2008), Point 111 + 100 232
Basse, Ellen Margrethe (2011), p. 27 233
Case C-379/98, Premise 56-60 234
Energipolitisk Redegørelse (2012), p. 7 235
Ministry of Climate, Energy and Building (2013) 236
Guidelines (2008), Point 109(a)
44
the choice of windmills is the fact that wind energy is one of the main renewable energy
sources in Denmark237
.
The Danish calculation rules of State aid for windmills are set out in Law no. 1074 of 8
November 2011 of law on facilitating renewable energy and the Law no. 576 of 18 July 2012
on amending the law on facilitating renewable energy238
.
3.3.2.1 Guaranteed prices
In the case of guaranteed prices, the market price does not have any effect of the amount
received for the electricity produced as the guaranteed price is fixed. The aid given by the
State is determined as followed:
State aid = Guaranteed price - Market price
This mean that the State aid varying. The market price it set by §51 in the RE-law.
Table 3 shows some examples of guaranteed prices. The aid is matching option 2 above.
Table 3: Examples of guaranteed prices
Source: Law no. 1074 of 8 November 2011 of law on facilitating renewable energy
The reason for giving State aid as guaranteed prices in case of tendering may be that
investors in these kinds of projects are only interested in bidding if they can calculate the
potential revenue of the investment. This would not be possible if the State aid was given as
addition prices as it would be varying along with the market price.
3.3.2.2 Additional prices
This form of State aid matches option 1 above and is depending on which Energy Policy
Agreement being valid for the period of grid connection. This overview of examples is
presented in table 4 below.
Unlike the case of guaranteed prices, the received amount for the produced electricity in case
of additional prices can vary and the State aid is fixed.
Received price = Market price + State aid ≤ Max received price
237
Ministry of Climate, Energy and Building (2013) 238
In the following the Danish law on facilitating renewable energy is referred to as ”the RE-law”
Location Covered by § in RE-law Guaranteed price Market price, § Limit of aid
Offshore, tender
- Horns Rev 2 §37, stk. 2, no. 1 51,8 øre/kWh §51, stk. 2, no. 1 10 TWh, 20 years
- Rødsand 2 §37, stk. 2, no. 2 62,9 øre/kWh §51, stk. 2, no. 1 10 TWh, 20 years
- Anholt §37, stk. 2, no. 3 105,1 øre/kWh §51, stk. 2, no. 1 20 TWh, 20 years
45
In some situation the law dictate a maximum price which may be received by the producer
Table 4: Examples of additional prices
Source: Act no. 1074 of 8 November 2011 of law on facilitating renewable energy and the
Law no. 576 of 18 July 2012 on amending the law on facilitating renewable energy
The purpose of giving State aid to renewable energy is to support a green changeover but if it
really helps when the supported companies are covered by the EU ETS is not clear.
Once a year the chairmanship of the (Environmental) Economic Council publishes an
“environmental advisors report”. In the 2012 report it was concluded that the increased
support to renewable energy inside the EUA-sector should be avoided as the free allowances
can be taken advantage of by other EU-countries. At the release of the report on 28 February
2012 chairman of the Economic Council, Hans Jørgen Whitta-Jacobsen, said: “The focus on
more renewable energy in electricity production is not thought through. It does not account
for the European ETS, which means that CO2 emission from energy production is fixed at
European level. More Danish wind energy does not reduce the amount of CO2 in the
atmosphere and helps therefore not to the climate problem”239
.
The amount of the CO2 in the atmosphere will not be reduced on basis of State aid to
companies covered by the EU ETS as they just sell the allowances they do not need, and
therefore the reduction made by a Danish company will just be emitted equivalent by the
buying company in another place in Europe. Looking at the corporate economic perspective
the State aid rules affects in a positive direction as the company can earn money on the
allowances not needed but in an environmental perspective the State aid is not making any
difference and thereby the money given out by the Danish State is just fostering more
renewable energy.
3.3.3 The 2012-Guidelines
In 2012 the Commission adopted Guidelines ‘on certain State aid measures in the context of
the greenhouse gas emission allowance trading scheme post-2012’. These Guidelines is
239
Ingeniøren (2012)
Location Covered by § in RE-law Grid connection Additional price Limit of aid Time limit/"fuldlasttimer"
Onshore §35a (amendment law) 01/01/14 - 25 øre/kWh 58 øre/kWh* 6600 + 5,6 MWh pr. m2 rotorareal
Onshore §36 21/02/08 - 31/12/13 25 øre/kWh - 22.000
Offshore §36 21/02/08 - 31/12/13 25 øre/kWh - 22.000
On/offshore §38, stk. 1 01/01/05 - 20/02/08 10 øre/kWh - 20 years
On/offshore §38, stk. 3 01/01/03 - 31/12/04 10 øre/kWh 36 øre/kWh 20 years
*The additional price is reduced øre for øre if the market price exceed 33 øre/kWh
46
however not amending or replacing the 2008-Guidelines. The measures covered by the 2012-
Guidelines are:
- Aid to undertaking in sectors and subsectors deemed to be exposed to a significant
risk of carbon leakage due to EU ETS allowance costs passed in in electricity
prices240
.
- Investment aid to highly efficient power plants, including new power plants that are
carbon capture and storage ready241
.
- Aid involved in optional transitional free allowances for the modernisation of
electricity generation242
.
- Aid involved in the exclusion of small installations and hospitals from the EU
ETS243
.
The Guidelines on State aid for environmental protection do not apply for the measures in
the 2012-Guidelines244
, and therefore the 2012-Guidelines is not a part of the analysis, they
however seem relevant to mention.
3.4 Sub-conclusion
By making an EU single cap instead of 27 national caps the Member States has lost a lot of
influence, which can be discovered in the Danish law on CO2 emission allowances. As it
now covers all Member States the Danish Government shall not “worry” about how to
distribute the allocated allowances to minimize the competitiveness gap to other Member
States as much as possible, referring to the Poland v Commission case.
Even though the EU ETS constitutes minimum harmonisation the auctioning is completely
harmonised because of the Auctioning Regulation as this competence is given by the
Directive. Only some of the revenue from the auctioning is up to Denmark itself to spend.
The problems and price history of the EUA will be outlined in chapter 4, but here it is shortly
stated that the price of the EUA has an impact on the coming climate initiatives according to
the newly launched Danish Climate Plan: If the price it high, the action plan becomes
cheaper for Denmark to complete, and more expensive if the EUA price continues to be at a
low level.
By introducing the benchmarking method the competence is also here transferred to the EU,
however a “competence” is also transferred to the companies as they decide how
240
Guidelines (2012), Section 1.1 241
Guidelines (2012), Section 1.2 242
Guidelines (2012), Section 1.3 243
Guidelines (2012), Section 1.4 244
Guidelines (2012), Point 20
47
efficient/good performing they want to be and thereby the chance to get more free
allowances.
If just looking at the EU prohibition on State aid the Danish State would not have been able
to support the facilitation of renewable energy as it does. The PSO-tariff would still have
been allowed as is it a reallocation of the financial burden and not a support given by State
resources. The 2008-Guidelines on State aid for environmental protection establishes State
aid measures which is compatible the single market if they fulfil certain conditions. On the
basis of the Guidelines, Denmark has been able to develop the law on facilitating renewable
energy containing rules on guaranteed and additional prices for, inter alia, wind energy. This
means that Denmark is able to give the companies positive incentives to invest in renewable
energy sources as the producers are secured a more profitable production compared to the
situation where the energy was sold on normal market terms.
The State aid rules play together with the incentives established by the ETS, however, when
the State aid is overlapping the ETS, some experts argue that seen from an environmental
perspective, the Danish State aid does not make sense as the saved EUAs will be sold and
used by over EU-countries.
48
4. The carbon market and the sector experience
This chapter switches the perspective from being legal to being business related. The main
source for answering the third part of the problem statement is the interviews with the sector
representatives, but also statements made by them in the press and in position papers, and
furthermore, Commission information. In addition European Commission and EP papers will
be used for descriptive measures.
4.1 The challenges and impact of the EU ETS
The trading system has been under pressure almost from the beginning, but especially during
the last two years if we leave the pilot phase out of account. By the beginning of the third
period the surplus of allowances were almost 2 billion245
, which means that the surplus
grows very fast: When entering 2012 the surplus was estimated to 955 million allowances as
shown in Appendix 8.
An increasing surplus has resulted in a decreasing price as the demand does not match the
supply. In figure 3 below, the development in the price for allowance to emit one tonne of
CO2 is presented.
Figure 3: Development in the spot price of EUA’s
Source: Figure delivered by the Danish Energy Association
245
European Commission 6 (2013)
49
In 2007 the price was almost equal to zero and thereby free of charge to emit more than the
amount allocated for free. In this situation there were no incentives to invest in green
alternatives or more effective production methods, and so the trading emission system was
pointless. The situation occurred as companies were allocated too many allowances and
therefore the price ended up zero. However, the price rose again. The two main reasons for
this dramatic price rise was the high oil prices and that it became likely that stricter rules for
the carbon market would occur after 2012.
By comparing figure 3 and the figure in Appendix 11 it can be observed that the record in oil
prices occurred on the same time as the price dump on EUAs.
According to Point Carbon246
, high oil prices will lead to more emissions in the short term as
power producers will stick to coal, however, if the oil prices remain high, the resulting high
carbon price will drive additional investments into renewable energy247
. The problem is that
the market never experienced this long term situation, mainly because of the economic crisis
– both the oil price and the EUA price fell dramatically.
The crisis induced lower production levels all over Europe and therefore lower emissions
than expected when creating the system248
, but the Commission does also highlight other
reasons for the increasing surplus, for example249
:
- Record use of international credits250
.
- Auctioning of phase 2 allowances and remaining allowances in the new entrant
reverse.
- Early auctioning of phase 3 allowances.
- Sales of phase 3 allowances to generate funds for the NER300 programme251
.
In 2010 Aalborg Portland was allocated almost double of the allowances the needed. By June
2010 the company had a surplus of emission allowances worth of 133 million DKK and
246 Thomson Reuters Point Carbon is a world-leading provider of independent news, analysis and consulting
services for European and global power, gas and carbon markets. 247
Point Carbon (2008) 248
Appendix 3, Page 10 249
European Commission 6 (2013) 250
Short description in Appendix 10 251
NER300" is a financing instrument managed jointly by the European Commission, European Investment
Bank and Member States (Article 10a(8) of the revised EU ETS Directive) The provision to set aside 300 million
allowances in the New Entrants’ Reserve of the EU ETS for subsidising installations of innovative renewable
energy technology and carbon capture and storage (CCS). The allowances will be sold on the carbon market and
the money raised will be made available to projects as they operate. Source: NER300 web (2013)
50
Maersk Oil had a surplus worth 50 million DKK252
, which indicates the extent of the
problem.
By letting the problems continue to grow into the third trading period the consequences has
only become bigger as more allowances are supposed to be sold by auctioning. In the first
two trading periods the emitters got almost all allowances free of charge, but from 2013
more allowances should be bought and thereby higher costs for emission rose. However,
when the price of the allowances is very low – which is the result of the simple market
mechanism, supply/demand – the extra costs on black and inefficient production is minimal:
There is no business in investing in green and more efficient technologies253
. According to
DE the ETS is not designed to tackle a crisis like the one Europe is experiencing.
The EUA price has gone through a very clear decline. That is a fact. However, it is not
possible to make a clear conclusion on a carbon market in a deep crisis or not.
In the perspective of DE the market does not work254
for what it was supposed to: To make
incentives to invest in green technologies. In Ulrich Bang’s opinion there is a risk that the
ETS could collapse. Troels Ranis agrees on that the low price does not make incentives to
invest255
, however he says: ‘We do not agree on that a collapse of the EUA market is on its
way. There is trading in the market and as the price is not zero it means there is trust in the
system – even though the price is low’256
.
In accordance with Article 10(5) of the revised Directive the Commission published a report
on the state of the European carbon market on 14 November 2012. If the Commission on the
basis of these findings conclude that the carbon market is not functioning properly it shall,
according to Article 29, submit a report which may be accompanied by proposals addressing
measures to improve its functioning. The Commission made this first report to be published
in 2012 instead of 2013 and the Environmental Ministers welcomed the initiative257
. Further,
the Commission combined the requirements of the two Articles.
In the report the Commission addressed the surplus-problem. It summed up the back-loading
plan as being capable of rebalancing the supply-demand258
. The back-loading plan will be
explained and analysed in section 4.1.1. At the same time the Commission makes clear that
252
Politiken (2010) 253
Appendix 3, Page 11 254
Appendix 3, p. 10 255
Appendix 4, no. 6 256
Appendix 4, no. 5 257
European Commission Report (2012), p. 3 258
European Commission Report (2012), p. 6
51
the back-loading will not affect the structural surplus of 2 billion allowances and therefore it
presents options for structural measures. These measures are the subject of analysis in
section 4.1.2.
4.1.1 The emergency solution: Back-loading
An ETS-crisis or not the starting point will be taken in the facts: A back-loading plan is on
its way.
The wording of the EU ETS Directive did not allow the Commission to change the timing of
the auctions259
and therefore it on 25 July 2012 proposed a Decision ‘amending Directive
2003/87/EC clarifying provisions on the timing of auctions of greenhouse gas
allowances’260
. The Commission proposed to amend the first subparagraph of Article 10(4)
of the EU ETS Directive (revised) by adding “The Commission shall, where appropriate,
adapt the timetable for each period so as to ensure an orderly functioning of the market”261
,
however, the final amendment approved by the EP on 3 July 2013 sounds as follows: ‘Where
an assessment shows for the individual industrial sectors that no significant impact on
sectors or subsectors exposed to a significant risk of carbon leakage is to be expected, the
Commission may, in exceptional circumstances , adapt the timetable for the period referred
to in Article 13(1) beginning on 1 January 2013 so as to ensure an orderly functioning of the
market. The Commission shall make no more than one such adaptation for a maximum
number of 900 million allowances’262
.
It was approved by the second plenary voting in EP as it was rejected by the first voting on
16 April 2013. The approval was done on the basis of an amendment of the proposal made
by the standing Committee of Environment263
. In Appendix 6 is the Ordinary Legislative
Procedure, as stated in Article 294 TFEU, presented together with the steps taken in this
case.
As the proposal now has been approved by the EP, the approved text will be transferred to
the Council, who will make a decision on it. If the Council also approves the text264
, the
decision is adopted. If it is rejected, an amended text will be transferred back to the EP for a
second reading and so on according to Appendix 6. It is however expected that the Council
259
Stated in Regulation 1031/2010 pursuant to Directive 2003/87/EC 260
Decision (proposal) 2012/0202(COD) 261
Decision (proposal) 2012/0202(COD), Article 1 262
EP about the 2012/0202 procedure 263
EP Press Release (2013) 264
QMV
52
will approve the text as approved by the EP, even though Germany will not proceed before
after the German election in September 2013. The German chancellor, Angela Merkel, has
already made the support to an intervention of the emission trading market265
.
Once the amendment of the ETS is approved by the Council, the Auctioning Regulation
(1031/2010) will be amended as to the timing of the back-loading. The Auctioning
Regulation has character of an “Implementation Regulation” and is not a legal act266
.
According to Article 291(1) TFEU the Member States shall adopt all measures of national
law necessary to implement legally binding Union acts, but where uniform conditions for
implementing the legal binding acts are needed; those acts shall confer implementing power
on the Commission, according to Article 291(2).
The Commission has made a draft on the amendment of the Regulation stating the
adjustments to the volumes of allowances to be auctioned. However, it is very important to
make clear that the table 5 below will not match the final form of back-loading as the draft
was made in 2012. The path towards the solution has required more time than expected
which now means that the back-loading cannot be started in 2013 but in 2014. Table 5 below
illustrates the process.
Table 5: Adjustments to the volumes of allowances to the auctioned in 2013-2020
Source: Draft Regulation (2012), Annex II
265
Danish Energy Association 1 (2013) 266
Directive 2003/87/EC revised, Article 10(4)
53
The amendment of the Regulation will be adopted by the Commission after approval by the
EU Climate Change Committee and scrutiny by EP and the Council267
.
4.1.1.1 The consequences of the back-loading process
The simple consequence of the back-loading is a smaller supply in the coming years but as
the allowances will be put back on the market in 2019-2020 it shows that this is a wish of a
short term impact.
If there is a need for back-loading is not clear. The Danish Energy Association and the
Minister on Climate, Energy and Building, Martin Lidegaard, have been in favour of back-
loading as an emergency solution to avoid a collapse of the market. This attitude is very
much consistent with the opinion of the Climate Commissioner Conni Hedegaard. She said:
‘The Commission only sees back-loading as a solution to stop the bleeding price and to
prevent it from going in zero. I think it is hard to find somebody who will say that back-
loading in itself will get the prices to rise to a reasonable level’268
. This opinion goes along
with Allan Vittrup’s, Head of CO2 emission allowances in Danske Commodities, assessment
of a price on 6-8 EUR at best if the back-loading is approved by the Council269
.
So if a price rise is not the primary reason to approve the back-loading, what is then?
Ulrich Bang explained that the voting in the EP became very “political”, meaning that it
became a voting about green or black energy: Do we want an ETS and a green changeover or
not? Therefore, it suddenly became very important to get an approval of the back-loading
plan in the EP270
.
That politics determines the EUA price has a broad concord in the energy sector as also
Allan Vittrup and Mike Thygesen, Market Director in Energi Danmark, conclude that it is
the situation271
.
The claim can be supported by facts on the price. When the EP rejected the proposal in April
the price fell from 4,65 EUR (15 April 2013) to 3,12 EUR on the day of the voting and
further to 2,75 EUR the day after. The figure 4 below shows the price development over the
week of the voting.
267
European Commission 6 (2013) 268
Jyllands-Posten (2013) 269
Jyllands-Posten (2013) 270
Appendix 3, p. 13 271
Energiwatch 1 (2013)
54
Figure 4: EUA spot price 15-22 April 2013
Source: Composed on data provided by Danish Energy Association (Appendix 5)
The price stabilized when the market found out that the EP would make another voting272
.
Also DI agrees that politics influence the market, however, it is against the back-loading for
the same reason. Troels Ranis says: “Short-term political involvement create a higher degree
of uncertainty in the EUA market”273
.
On the basis of all the mentioned stakeholders and the fact that the back-loading plan only
will remove less than half of the surplus, the conclusion must be that the back-loading plan
will not result in a significant price rise and thereby not bigger incentives to invest in green
technologies. A section below analysing the consequences of a low/high price level in theory
is added.
4.1.1.2 The consequences of a low/high price level
As the EUA price is not expected to increase significantly this section will analyse the
expected impact from a respectively low and high price – back-loading plan or not.
A high price would result in more green investments as companies would be under a cost-
pressure. Everybody agrees upon that but to what extent will the consequences bee accepted
– and what is the consequences?
272
Appendix 3, p. 13 273
Appendix 4, no. 4
2
2,2
2,4
2,6
2,8
3
3,2
3,4
3,6
3,8
4
4,2
4,4
4,6
4,8Sp
ot
pri
ce, E
UR
O
EUA spot price 15-22 April 2013
Serie1
55
Troels Ranis has no doubt that all sectors and industries care about our common environment
but at the same time he says: ‘We need to look at the willingness to adapt and the
adaptability’274
. Many companies have had very hard times during the economic crisis and
therefore DI does not see this being the right moment to place strain on them by increasing
their indirect production costs significantly.
In DI’s opinion two things has to be considered at the short term (same term as the back-
loading plan): Quietness and competitiveness. In the long term a stabile ETS a valuated so
the long term environmental goals can be reached275
. Quietness/stabile costs of the
production will provide the needed time for planning changes in the production as such
changeover is a long term investment.
The competitiveness issue is one of the most critical and debated issues in the Danish
business community in general. DI puts forward that energy-costs are much higher in Europe
than in USA and Asia, and even higher in Denmark, and therefore it fears that production
and running of companies will be too expensive in Denmark compared to outside Europe –
both for carbon leakage companies and others. This creates a risk for lost jobs in Denmark in
favour of countries with lower production costs276
.
DE stresses on the other hand, that a higher EUA price will make Danish companies stand
better against companies inside the Union as higher price will lower the Danish PSO tariff.
This impact is considered of high importance as 62% of the Danish export goes to EU-
countries (including Norway)277
.
274
Appendix 4, no. 10 275
Børsen (2013) 276
Børsen (2013) 277
Danmarks Statistik (2013): Calculated on basis of table on p. 1
What is the PSO tariff and how does it work?
The PSO (Public Service Obligation) tariff is paid by the consumer by its electricity bill.
Most of the money collected by the PSO if used for support to production of renewable
energy, research in eco-friendly energy etc.
The PSO is determined every quarter and it reflects the price of electricity. In periods with
low electricity prices the support to production of renewable energy needs to be higher to
be profitable and likewise the PSO is lower in periods with high electricity prices.
Source: Energinet.dk (2010)
56
As for example Germany has other PSO tariff rules than Denmark the mutual competitive-
ness situation changes along with the EUA price. DE has made an analysis of the
competitive conditions comparing Danish and German companies using respectively 5 GWh,
20GWh and 200GWh per year.
The result of the 5GWh-scenario is presented below in figure 5, and the two other graphs are
available in appendix 7. In general they show the same tendencies.
Figure 5: Tariff pr. kWh for Danish and German company with yearly consumption of
5 GWh
Source: Danish Energy Association 2 (2013)
With reference to the textbox above the requested PSO tariff is low when the price on
electricity is high. Going from a price of 7,5 EUR/tonne to 30 EUR/tonne the difference in
the total price decrease 5 øre/kWh. With an EUA price of 7,5 EUR/tonne the price difference
between a Danish and a German company is about 100%. With a EUA price at 30
EUR/tonne the difference is around 20%, however still in favour of the German company.
The price of 30 EUR/tonne was the initiate expected price and therefore the Danish
companies experience a weaker competitive situation towards European competitors then
expected278
.
278
Appendix 3, p. 11
57
Denmark is home country for many companies in the green-sector which will also be
favoured by a high EUA price as it increases the demand of green technologies and
solutions. If Denmark comes in a situation where industry jobs leave the country because of
a EUA price the green-tech sector will probably hire an equivalent amount of workers or
more.
A low price like at the moment or even lower can then be both good and bad depending on
whom you ask, however, we also have to look at the environmental perspective as it was the
reason for the ETS to be designed. No matter what, the emission reduction goal will be
reached as the amount of allowances is calculated on the basis of it. However, if the situation
continues like now, the reduction will be met but very few investments in green solutions
will have been made and thereby the companies are not prepared for further reductions after
2020 and especially not if Europe experiences a boom at that time.
The sum-up must be that a clear conclusion cannot be made. Two factors seem to be major
in determining the consequences: The kind of sector; energy/industry and the time
perspective; short/long term.
4.1.2 The structural long-term solution
Both the proponent and the opponent of the back-loading agree that back-loading is not the
optimal solution. DE advocated for the back-loading plan, but only as an emergency solution
to secure the survival of the ETS. DE is working for a structural solution279
: A reform of the
ETS. The same wish has officially been made clear by the Danish Government and several
other Governments about Europe. In a joint statement 7 May 2013, nine EU Member State
Ministers on Energy and Environment advocate for a reform of the EU ETS within 2013.
This statement coincided with the discussions beginning in the EP Environment Committee
after the plenary rejection in April280
. The statement is not insignificant as the three major
countries in the EU were among these nine countries: Germany, France and UK. Denmark,
Sweden, Finland, the Netherlands, Portugal and Slovenia were the remaining co-writers.
The debate on a structural reform of the ETS started in the end of 2012 as the Commission
identified six non-exhaustive options for structural measures to be taken. The options are
listed below281
:
279
Appendix 3, Page 13 280
UK GOV Press Release (2013) 281
European Commission Report (2012), pp. 7-10
58
a) Increasing the EU reduction target to 30% in 2020
b) Retiring a number of allowances in phase 3
c) Early revision of the annual linear reduction factor
d) Extension of the scope of the EU ETS to other sectors
e) Limit access to international credits
f) Discretionary price management mechanisms
After the launch of the options the Commission ran a formal stakeholder consultation
running from 7 December 2012 to 28 February 2013 where citizens, registered and
unregistered organisations and public authorities submitted their remarks282
. It has chosen to
focus on the submitted remarks by DI and DE as they already constitute the basis of the
analysis.
Analysing the submitted hearing statements from DE and DI various disagreements between
the two organisations is observed.
DE gives their top priority to option c as a revision of the linear factor is necessary in order
to meet the reduction goals after 2020 and that an early revision will provide a stable long
term framework which is important for the investors283
. DI on the other hand, abandons
option a-c as they in their opinion increase energy costs of European companies and
households. Furthermore, as we have seen earlier, DI wishes the market just to run by the
market mechanisms and therefore, it does not want changes before 2020284
.
DI is more open to look at options d-f as they more directly address the structural
considerations. In the hearing statement DI is not specific on which of the options it gives
highest priority but tit stresses that too many regulatory and cumulative cost drivers are not
helpful to reach the original three objectives of EU’s energy and climate policy285
:
- The policy should support a strong European industry base across sectors
- The policy should support efforts to reduce internal distortions in Europe
- The policy should support establishment of an internal energy market
In the interview DI became at bit more specific by saying: ‘A reform of the ETS must
fundamentally be based on a modified purpose of the system that is more directly aimed at
supporting investment in the transformation of the energy system. Here, you can of course
consider the possibility of creating some kind of stabilization mechanism, so we ensure a
282
European Commission 7 (2013) 283
Hearing statement, DE (2013), p. 4 284
Hearing statement, DI (2013), p. 2 285
Hearing statement, DI (2013), pp. 1-2
59
greater degree of certainty for businesses in relation to their long-term investment
decisions’286
.
DE also comment on the regulatory aspect regarding option f. DE supports very strongly that
investors should have reduced regulatory risks on the carbon price and therefore it supports a
stabilization mechanism, however, it stresses that it would be desirable if the carbon market
was capable of achieving stability on its own and without regulations287
.
DE supports to an extent all the options, but it makes it very clear that none of the proposals
by themselves address the issue of industrial competitiveness. It seems like DE is most
sceptical towards option d for the reason that investigation is missing and that in case we just
expand the ETS to more sectors, it might be counterproductive because of increased risks
and uncertainty288
.
4.2 Sub-conclusion
First and foremost it can be said that the EUA price does not influence the companies in the
industry sector as much as it was supposed to do, this because of the low price. In the short
term the companies get away with lower indirect production costs. On the other hand,
companies in the green sector get fewer orders because of the low price as other companies
do not have incentives to invest in a changeover.
In the long run it is difficult to say how the current situation will affect the companies as it
also depends on the economic situation in Europe. If Europe experiences a boom again after
2020 some companies may end up in a very difficult situation because of a higher
production, less available allowances and no investments done in the 2013-2020 period.
Concerning the competitiveness situation there seems to be a balance between competition
in-side Europe and out-side Europe as a higher price will increase the Danish companies’
competitiveness towards countries like Germany but the same high price will lower
competitiveness towards non-EU companies. The final statement will depend on which
sector you are operating in.
The one thing being clear is that both DE and DI want the ETS to exist as an important part
of the European environmental policy and also that the ETS needs a reform, but then the
concord stops as they do not agree on how and when changes should be made. DE has been
286
Appendix 4, no. 9 287
Hearing statement, DE (2013), p. 5 288
Hearing statement, DE (2013), p. 4
60
in favour of the back-loading plan to avoid a collapse of the market and to secure a political
willingness to prioritise the green changeover.
Both DE and DI see the need of structural changes, but DE calls for changes as fast as
possible and DI will wait until after 2020.
61
5. Conclusion
The EU being seen as a big multi-layered system whereof the Danish legal system is a
subsystem, it has been interesting to analyse the influence of some of the rules Denmark has
to adapt and implement in our own legislation.
The EU ETS has been developed primarily with an environmental purpose and the Directive
therefore constitutes basis for minimum harmonisation according to the Treaty of Lisbon.
However, it is not as simple as that. Competences established by provisions in the Directives
result in much stronger harmonisation. The singles cap replaces all NAPs and the auctioning
is totally harmonised as the Directive gave the Commission the competence to adopt a
Regulation on the area. The conclusion of all the three areas analysed; the EU single cap;
auctioning and allocation of free allowances, is the same: The level of harmonisation has
increased significantly by entering the third trading period on the basis of the amending
Directive.
The Danish law on CO2 emission allowances, which is the affected law, went through major
chances when the amending Directive was implemented; The provisions covering the
analysed areas are shortened and now it just refers to the EU law.
On basis of the majoritarian- and constitutional democracy it was stated that Danish
politician and citizens often has a negative attitude towards law coming from the EU. Neither
the Commission nor the CJ has the democratic legitimacy like the Folketinget or the EP.
From the analysis of the sector experience it can be concluded that companies – in this area –
do have a much more positive attitude toward EU harmonisation as both DE and DI make it
very clear that they believe in a strongly harmonised EU ETS. However, this does not
necessarily mean that they are happy about the functioning and the current development of
the system.
DI, who represent both companies trading with EU- and non-EU countries, fears that a
higher EUA price will affect the competitiveness towards non-EU countries as the energy
costs are already high in Denmark compared to USA and Asia. This can cost Danish jobs.
DE on the other hand advocates that 2/3 of the Danish export goes to EU-countries and
therefore it is important to strengthen the Danish competitiveness toward them. This will be
the result of a higher EUA price. A better competitiveness toward other EU countries will
create Danish jobs, especially in the green tech sector if the EUA price rises.
62
The development in the carbon market has resulted in a weaker influence of the EU ETS
than exempted as the low EUA price does not give the incentives to make a green
changeover. If the current situation is a problem for the functioning of the EUA market it not
clear throughout the sector. DE fear a collapse of the market without the back-loading plan
whereas DI makes the point that the market is functioning as the price is not zero. They
however agree that the current EUA price level is not making incentives for the companies to
make the green changeover.
When disagreeing on if the market is functioning, the view on if a solution is needed is also
differing. DE sees the need for both the back-loading plan and some structural changes
before 2020. DI does not see the need for changes now as the market is functioning from
their point of view. It however, sees the need for structural changes after 2020 as the ETS
does not encourage to green investments, but the competitiveness and quietness is crucial in
the market at the moment and therefore it is on the long term the changes should be made.
Harmonisation done with legal basis in Article 114 TFEU on the single market constitutes
maximum harmonization. To secure the functioning of the single market, and thereby
fulfilling the harmonization requirements set up by the CJ, the EU made the prohibition on
State aid. However, other aspects than free competition among companies are valuated
important in the purpose of the EU, inter alia, environmental protection. Therefore the
modification of the prohibition has been made. If a measure fulfils the requirements in the
2008-Guidelines (or the General Block Exemption) it is compatible with the single market
and thereby an exemption to Article 107(1) TFEU.
On the basis of the Guidelines, Denmark has developed the Law on facilitating renewable
energy, containing State aid measures for operating windmills. According to the Guidelines
it is compatible with the single market to compensate for the price differences between the
market price and the costs of producing energy from renewable energy source – that is what
Denmark has decided to do by the Law on facilitating renewable energy. Energy produced
from renewable energy sources is not able to compete on normal market terms as the
production costs are higher. By the modified State aid rules, Denmark is able to give the
companies positive incentives to invest in renewable energy sources as the producers are
secured a more profitable production compared to the situation where the energy is sold on
normal market terms.
63
The State aid is made as an incentive to a green changeover, however some experts argue
that seen from an environmental perspective, the State aid is not worth the money if the
sector is covered by the ETS as the EUAs not used are just sold and used by other countries.
64
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Commission of the European Communities v French Republic
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European Parliament v Council of the European Union
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71
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harmonised free allocation of emission allo-
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emission allowance trading within the
Community and amending Council Directive
96/61/EC (L 275/2003, p. 32)
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market in electricity and repealing Directive
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market in natural gas and repealing Directive
2003/55/EC (which repealed Directive
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particular to determine the volumes of
greenhouse gas emission allowances to be
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s/2013_07_08_en.pdf
2012
EP about the 2012/0202 procedure First reading
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2013-310
Received 6 August 2013
73
Reg. (EC) 994/1998 of 7 May 2998 Council Regulation on the application of
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European Community to certain categories of
horizontal State aid
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Reg. (EC) 659/1999 of 22 March 1999 Council Regulation laying down detailed rules
for the application of Article 93 of the EC
Treaty
(L 83/1999, p.1)
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Articles 87 and 88 of the Treaty to de minimis
aid
(L 379/2006, p. 5)
Reg. (EC) 800/2008 of 6 August 2008 Commission Regulation declaring certain
categories of aid compatible with the common
market in application of Articles 87 and 88 of
the Treaty
(General block exemption Regulation)
(L 214/2008, p. 3)
Reg. (EU) 1031/2010 of 12 Nov. 2010 Commission Regulation on the timing, admini-
stration and other aspects of auctioning of green-
house gas emission allowances pursuant to
Directive 2003/87/EC of the European Parlia-
ment and of the Council establishing a scheme
for greenhouse gas emission allowances trading
within the Community
(L 302/2010, p. 1)
Reg. (EU) 601/2012 of 21 June 2012 Commission Regulation on the monitoring and
reporting of greenhouse gas emissions pursuant
to Directive 2003/87/EC of the European
Parliament and of the Council (L 181/2013, p.
30)
TEC Treaty establishing the European Community
(Treaty of Rome), 1957
TEU Treaty on the European Union
(The treaty of Maastricht), 1992
74
TFEU Treaty on the Functioning of the European
Union
(The treaty of Lisbon), 2009
The Single European Act Luxembourg, February 17, 1986
DENMARK
Climate Plan (2013) Regeringens klimaplan – På vej mod et samfund
uden drivhusgasser
August 2013
Energipolitisk Redegørelse (2012) Klima-, energi- og bygningsministerens rede-
gørelse til Folketinget om energipolitikken
9 May 2012
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the state of the European carbon market in 2012
http://ec.europa.eu/clima/consultations/0017/ind
ex_en.htm
Case no.: s2013-055,
Document no.: d2013-2418-12.0
28 February 2013
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on “Consultation on structural options to
strengthen the EU ETS”
http://ec.europa.eu/clima/consultations/0017/ind
ex_en.htm
2013
Law on CO2-emissions Law of 28 November 2012 no 1095 (existing)
Law on CO2-emissions Law of 15 October 2010 no 1222 (historically)
Law on CO2-emissions Law of 9 June 2004 no 493 (historically)
NAP for Denmark 2008-2012 (2007) 6 March 2007
INTERNATIONAL
Kyoto Protocol (1998) to the United Nations Framework Convention
on Climate Change
1998