Reasoned opinion concerning base-tax on non-refillable packaging

Reference is made to the EFTA Surveillance Authority (hereinafter “Authority”) reasoned opinion dated 16 April 2008 June concerning the Norwegian base tax on non-refillable beverage packaging. The Authority states in its reasoned opinion that Norway by maintaining the base tax (as far as it applies to soft drinks and water) has failed to fulfil its obligation arising from Article 14 EEA. The Authority therefore requires Norway to take the measure necessary within two months following notification thereof. The time-limit has been postponed to 23 June in accordance with e-mail 12 June from the Authority.  

Observations:

The EEA and environmental taxes
As held in our letters of 24 May 2006 and 13 September 2007 a national differentiated tax system will be compatible with the EEA if certain criteria are fulfilled. The legal basis is the case law of The Court of Justice of the European Communities (hereinafter “Court of Justice”) concerning the interpretation of Article 90 of the EC Treaty (“EC”), which is parallel to Article 14 EEA.

It is the Norwegian Government’s view that the base tax on non-refillable beverage packaging is compatible with Article 14 EEA. The base tax is, the Government submits, objectively justified by environmental considerations, and does therefore not imply discrimination in the meaning of Article 14(1) EEA or indirect protection of domestic products in the meaning of Article 14(2) EEA. Additionally – or alternatively – the base tax is legitimate as it is suitable and necessary in achieving environmental objectives.

An important starting point is that the base tax clearly – and undisputedly – cannot be regarded as directly discriminatory. The base tax on non-refillable beverage packaging does indeed apply to both Norwegian and foreign beverage packaging. This fact is indisputable. The Government also makes reference to the fact that the total domestic production of non-carbonated water is on refillable PET bottles, which is applicable to the tax and thus equally taxed as the non-carbonated water imported.

Moreover, it is clear from the case law of the Court of Justice that tax provisions that prima facie may seem to imply indirect discrimination may be compatible with Article 90 EC if they are objectively justified. In that regard, it seems more of theoretical than practical relevance whether this justification is regarded as part of the discrimination test or of the test of ‘mandatory requirements’. Both of these possibilities of justification apply, in the Government’s opinion, in the present situation.

As regard the possibility to justify tax schemes that can prima facie be seen as indirectly discriminatory, the Government refers to, firstly, case law from the Court of Justice confirming that the fact that imported products are more frequently subject to a higher tax than similar domestic products does not automatically imply that there is illegal discrimination (cf. Case 140/79 Chemical Farmaceutici [1981] ECR p. 1), as long as this is an "accidental consequence" of a differentiation which is based on objective reasons. The Government does not share the Authority’s view that this is “a very isolated ruling” (page 10 of the reasoned opinion). Neither is the criterion on which the base tax is based “biased toward imported products” as submitted on the same page. On the contrary, the Government considers the criterion to be objective and non-discriminatory, based on the type of beverage packaging used.

Secondly the Court of Justice has on several occasions accepted national tax schemes that did in some way or another – prima facie – seem to imply indirect discrimination (cf. Case 140/79, cited above, Case 196/85 Commission v France [1987] ECR p. 1597, and Case 200/85 Commission v. Italy [1986] ECR p. 3953). This shows that the reference to direct as well as indirect discrimination in several of these cases from the Court of Justice, does not rule out such a justification.

As regards both of these aspects, the Authority refers (pages 5 and 7), in particular, to Case C-375/95. However, that case, as well as other cases mentioned by the Authority, concerned direct discrimination of important product and is thus of limited significance to the present case. The lack of explicit derogations from Article 14 EEA can be of importance for the possibility to justify directly discriminatory tax provisions, but cannot in any way exclude justification of other national tax measures.

In addition to the cases referred to above, the Government finds support for its view in Case C-213/96 Outokumpu Oy [1998] ECR I-1777. In this case the Court considered the Finnish excise duty charged on electricity of domestic origin at rates which varied according to its method of production, while being levied on imported electricity at a flat rate which was higher than the lowest rate, but lower than the highest rate applicable to electricity of domestic origin. The Court presupposes in that case that environmental considerations could justify different rates for domestically produces and imported electricity, respectively, see, in particular, paragraphs 31-33 of the judgment.

As regards environmental concerns as an objective justification, the Court of Justice has held that the differentiation must be in line with economic policy objectives which are themselves compatible with the requirements of the Treaty and its secondary legislation. The protection of the environment certainly complies with these criteria.

According to the EEA Agreement the protection of the environment is an aim not only compatible with the internal market, but one which also constitutes an integral part of all the common policies. The Government draws attention to Article 73(2) EEA, which reads:

"Action by the Contracting Parties relating to the environment shall be based on the principles that preventive action should be taken, that environmental damage should as a priority be rectified at source, and that the polluter should pay. Environment protection requirements shall be a component of the Contracting Parties' other policies."

It is the Government’s view that environmental protection must be taken into consideration when interpreting Article 14 EEA with respect to the base tax. Environmental protection must be regarded as an objective reason that may justify a differentiated tax system on packaging as long as the tax system is not based on nationality criteria.

Against this background, the Government cannot agree with the Authority when it concludes that the Court of Justice has held that “a pursuit of an environmental objective does not relieve a State from its duty to observe the rule of non-discrimination laid down in Article 14” (page 10 of the reasoned opinion). This may be true as regards directly discriminatory tax measures. It cannot, in the Government’s opinion, apply with regard to tax measures based on other criteria than nationality. This holds true irrespective of whether the base tax is assessed under Articles 14(1) or 14(2) EEA.

Even if the base tax can, in principle, be justified on environmental grounds, the Authority argues that Norway has failed to demonstrate that the contested tax is necessary in order to protect the environment. The Government disagrees, and would like to make the following comments.

The base tax was introduced as an environmental tax and is still regarded as such
The Norwegian Parliament introduced base tax on non-refillable beverage packaging 1 January 1994. Environmental concerns – and such concerns alone – undisputedly motivated the introduction of the tax, its legislative intention being the establishment of an incentive to use refillable rather than non-refillable packaging.

The Government draws the Authority’s attention to the assessment made by the public commission appointed to consider solutions to questions related to waste, reuse and recovery (NOU 1990:28 Avfallsminimering og gjenvinning) (hereinafter “NOU 1990: 28”). The commission, which was set up 29 September 1989 by the Ministry of Environment, consisted of representatives from the Ministry of Environment, the Ministry of Industry, the Norwegian Society for Conservation of Nature, the Norwegian Labour Organisation, the Confederation of Norwegian Business and Industry, the Norwegian Association of Local and Regional Authorities and the Consumer Council. The commission presented its report to the Ministry of the Environment 3 December 1990. It represents a comprehensive analysis of waste-related issues based on what was regarded as environmental concerns and with reference to state-of-the-art technology at the time. The Commission regarded the prevention of waste generation to be a main goal. Generated waste should be recovered at the highest level possible, i.e. reuse should be preferred to material-recycling, which again should be preferred to incineration with energy-recovery (cf. inter alia NOU 1990: 28 chapters 0, 5.2.2, 5.4.3 and 6.3.2).

The Norwegian Government and Parliament have ever since viewed the base tax as an environmental tax. Clearly, the base tax may – as do all other governmental measures – have various and different effects. This cannot, in the view of the Government, disqualify the base tax’s legitimacy as environmental tax in intention and effect. The Government remains convinced that the base tax is justifiable for reasons of its beneficial environmental protection effects. The Government draws the Authority’s attention to the fact that statistics shows a higher return rate in Norway for refillable beverages than for non-refillable beverages. The situation is the same in Sweden and Finland. Return rates in Norway for 2007 are 95 percent for refillable bottles, and 92 and 82 percent for cans and PET bottles respectively (according to the Norwegian Pollution Control Activity). This confirms the environmental protection effects of the base tax. Such facts cannot be irrelevant for the purpose of interpreting and applying Article 14 EEA in the present case.

The Government would also like to draw the Authority´s to the report emanating from the Danish Environmental Project No. 399 1998 Life Cycle Assessment of Packaging Systems for Beer and Soft Drinks (Ministry of Environment and Energy- Danish Environmental Protection Agency). The project concluded that refillable PET bottles are more preferable than disposable PET bottles in terms of environmental protection. See the summary page 18 concerning 50 cl soft-drink packagings: “The energy demand, potential global warming, acidification, nutrification and photochemical ozone formation, are significantly lower for the refillable PET bottles than for the disposable PET bottles of the same size (see Table S.2 and section 14.4). The conclusion is valid for 150 cl bottles as well as for 50 cl bottles. The reason is that recycling of PET demands more fuel and electricity than washing and filling of refillable bottles.”

The Government also respectfully submits that shifting trends in the development of new technologies to address environmental concerns are of relevance in the present matter. Experience shows that views on such things vary over time in accordance with fluctuating political, ideological and academic views. The base tax was considered as a vital means in environmental protection policies in the 1990s. The fact that other means have been developed since then does not change the importance of retaining it as one of several means to protect the environment. It may very well be that the base tax will regain its prominence as an environmental protection means. The Government believes the existence of flexibility from the point of view of Article 14 EEA to be wholly consistent with the dynamics inherent in the law of the EEA and the European Union. The domestic debate in Norway with regard to the tax’s importance as means for the protection of the environment attests to the view that the question of the compatibility of the tax with Article 14 EEA should not be resolved without reference to the relevance of domestic political debate. Moreover, the underlying debate is not singularly Norwegian; it forms part of a discussion also taking place on the European level.

It is a principle in the European Union that reuse and recycling should be considered preferable in terms of environmental impact
The Government considers that maintenance of the base tax is a measure that gives incentives for waste reduction, and more waste being reused. It is therefore a suitable instrument in achieving the national goal of waste prevention, and a measure in line with the principles guiding Norwegian and European waste policies.

It is a fact that the yearly increase of the amount of waste produced contributes to considerable environmental problems, e.g., as regards combustion and deposits. The principle of waste prevention is held out at the European level, most recently in the new Directive 2006/12/EC of 5 April 2006 on waste. Article 3.1 states that “……Member States shall take appropriate measures to encourage: first, the prevention or reduction of waste production and its harmfulness…”  The Government remains convinced that the use of refillable beverage packaging is an appropriate measure in this respect and that it will continue to be so. This has direct impact on the way in which Article 14 EEA should be interpreted.

According to the preamble in Directive 94/62/EC of 20 December 1994 on packaging and packaging waste: “….reuse and recycling should be considered preferable in terms of environmental impact…” Article 5 in the Directive states that: “Member States may encourage reuse systems of packaging, which can be reused in an environmentally sound manner, in conformity with the Treaty.” The Member States are thus given the opportunity to prioritize reuse over recycling, if this may be justified environmentally (“in conformity with the treaty”). The Government makes reference to Case C-309/02 Radlberger Getränkegesellschaft mbH & Co. and S. Spitz KG v Land Baden-Württemberg (ECR 2004 p. 11763), where the Court of Justice held that Article 1(2) in the Directive does not preclude the Member States from introducing measures designed to promote systems for the reuse of packaging” (cf. the Courts answer to the first question).

It is Norwegian policy that reuse and recycling should be considered preferable in terms of environmental impact
Norwegian waste policy builds on the main principle of prevention of generated waste by, e.g., the re-use of beverage packaging. The Norwegian national target, adopted by Parliament, reflects this in stating that the rate of waste generation shall be significantly lower than general economic growth. This environmental policy is also stated clearly in the so-called Soria Moria Declaration, the political platform and overriding steering document for the present three-party majority government. Chapter 12 (“Norway as an environmental nation”) of the Soria Moria Declaration states that “de stadig økende avfallsmengder er en indikator på et økende forbruk og en ressurssløsing som belaster miljøet”. The Declaration further states that the Government will establish a body/structure aimed at working towards waste prevention and recycling. The make-up of the proposed body is not yet finally determined, yet there is no question that its aim is the reduction of negative environmental impact and that this should be accomplished by influencing design, the use of natural resources, production, distribution and consumption. Waste reduction is thought to be a separate and individual aim for the body in question. It is the Government’s position that these important elements of current Norwegian policies underline the strong position of waste reduction in Norway.

Further, the Government believes it is significant in the present case that Norwegian waste policy draws on the principles laid down in the so-called waste hierarchy. The waste hierarchy refers to the management options of reducing, reusing and recycling waste, classifying these waste management strategies according to their desirability. The waste hierarchy draws upon the precautionary principle, a fundamental principle in Norwegian and European environmental policy and, indeed, international law in general, in that it prescribes waste reduction and reuse as general preferred options. Neither is the waste hierarchy a feature unique to Norwegian waste policy. The concept was introduced into the waste policy of the European Community as far back as the Waste Framework Directive of 1975, having since been included in the Community Strategy for Waste Management, and further endorsed in the Commission’s review of this strategy in 1996. The new EU thematic strategy on waste prevention and recycling also builds on this concept. In the opinion of the Government, the base tax is a measure entirely in line with this hierarchy and its underlying principles, as it is intended to and does stimulate re-use and reduction of waste by providing an economic incentive for the reuse of beverage packaging.

Conclusion:
The Norwegian base tax on non-refillable bottles is compatible with Article 14 EEA Agreement; cf. the Court of Justice’s interpretation of EC Treaty Article 90. In the opinion of the Government, the differentiation is justified for the attainment of goals which are compatible with the internal market, namely the protection of the environment. The Government of Norway will therefore not take measures to comply the Authority’s reasoned opinion.

Yours sincerely,

Tor Lande
Deputy Director General

Fredrik Robsahm
Senior Adviser