Greenhouse gas emission allowance trading

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


3.2.3 Harmonised allocation rules on free allocation ........................................................................ 33

3.2.3.1 Carbon Leakage ................................................................................................................ 34


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


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




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



European Union Web 2 (2013) 85


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 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


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



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; Preamble 14 121



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



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


‘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 revised, Article 10a(11) 144


Directive 2003/87/EC revised, Preamble 22 146



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)(c) 155

Directive 2003/87/EC revised, Article 10(4)(d) 156


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

.


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)(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


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


Decision 2011/278/EU, Preamble 1 178

Directive 2003/87/EC revised, Article 10c 179


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.


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


Commission Decison 2010/2/EU 185


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


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


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


Guidelines (2008), Point 14 204

Regulation 659/1999 amended by Regulation 734/2013/EU 205


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



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), Section 1.5.1-12 217


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 109(a) 227

Community Guidelines (2008), Point 109(b) 228


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 111 + 100 232


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), 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


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, p. 10 255

Appendix 4, no. 6 256


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


Jyllands-Posten (2013) 269

Jyllands-Posten (2013) 270


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 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


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


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


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


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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COM(2012) 416 final, 25 July 2012

72

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73

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Reg. (EC) 659/1999 of 22 March 1999 Council Regulation laying down detailed rules

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Parliament and of the Council (L 181/2013, p.

30)

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TEU Treaty on the European Union

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74

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the state of the European carbon market in 2012


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NAP for Denmark 2008-2012 (2007) 6 March 2007

INTERNATIONAL

Kyoto Protocol (1998) to the United Nations Framework Convention

on Climate Change

1998





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