Notification of CO2 tax exemption - request for additional information

Dear Sir or Madame,

Notification of CO2 tax exemption - request for additional information
1. 
The Ministry of Finance refers to the Authority´s letter dated 10 October 2007 (Case No 63030 Event No 445805) with request for additional information according to Article 5(1) of Part II of Protocol 3 to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice, cf. the Ministry´s notification of 28 September 2007 concerning CO2 tax reductions and increased basic tax on heating oil for the pulp and paper industry.

Below, the Ministry submits the additional information requested by the Authority.

2. 
The Authority`s Competition and State Aid Directorate (CSA) is uncertain whether it will be possible for the new Norwegian emission trading scheme to enter into force on 1 January 2008. In any case, the CSA considers it unrealistic that the Norwegian Allocation Plan will be approved before that date and the Norwegian authorities are thus asked to explain how they will deal with the CO2 tax regime in the period before the climate quota system is in place.

Answer: The CO2 tax exemption and the introduction of basic tax on heating oil for the paper and pulp industry is planned to enter into force 1 January 2008, if approved by the Authority, irrespectively of the date of the approval of the Norwegian allocation plan. 

In our letter of 28 September 2007 our principal justification for the tax exemptions is to avoid double pricing of CO2 emissions from these installations. The proposed date for the entering into force of the revised CO2 tax system is consistent with this justification, even if the Norwegian Allocation Plan is approved at a later date. The general rule is that installations subject to the emissions trading system must after each calendar year surrender allowances equal to their emissions that year. This means that all Norwegian installations subject to the revised emissions trading system will, in 2009, have to surrender a number of allowances equivalent to their total verified CO2 emissions during the year 2008 starting from 1 January 2008. The obligation to surrender emission allowances is not conditional of the amount allowances granted free of charge or ESAs approval of that amount.

In addition Act of 17 December 2004 No.99 relating to greenhouse gas emission allowance trading with the amendments put forward in Ot.prp. nr. 66 (2006-2007) is adopted by the Parliament, and Norwegian installations covered by the Act will be responsible to surrender emission allowances for all emissions in the period. The obligation to surrender emission allowances is not conditional upon the approval of ESA as regards the allocated amount of allowances. Thus, the operators of the installations that are covered by the emission trading system will have to take into account the fact that CO2 emissions after 1 January 2008 will at least have a price equal to the market price of allowances. If the CO2 tax on mineral oil remains unchanged, the price on CO2 emissions from these installations will be accordingly higher from that date.

Our subsidiary justification presented in the notification is based on the fact that the tax rate on fuel oil is exceeding the minimum tax rate laid down in the Energy Tax Directive. This subsidiary justification is not linked to the emissions trading system at all.

3. 
The CSA invites the Norwegian authorities to confirm that the CO2 tax exemption on mineral oil for installations which are subject to the emission trading scheme, is a full exemption.

Answer: The Ministry confirms that the proposed tax exemption is a full exemption from the CO2 tax. Our notification also comprises a planned change in the derogation for the pulp and paper industry from the basic tax on heating oils, i.e. replacing the zero rate with a rate equal to the minimum rate on heavy fuel oil in the Energy Tax Directive. We also informed the Authority that the other installations covered by our notifications are levied the general tax rate on heating oils, (which is proposed to increase from 1 January 2008).  The basic tax on heating oils is levied on the same base as the CO2 tax on mineral oil. When the planned exemption from the CO2 tax is assessed jointly with the basic tax on heating oil, the sectors and installations which are to be exempted from the CO2 tax will from 1 January 2008 be levied a tax on heavy fuel oils that is equal to, or significantly above the minimum level laid down in the Energy Tax Directive.

4. 
The CSA asks if it is correct that the exemption from CO2 tax is applicable to land-based industries and not to petroleum-related offshore industry. If yes, the CSA asks what the tax regime for the latter industry will be.

Answer: There are two different/separate CO2 taxes in Norway;
i) CO2 tax on mineral products
ii) CO2 tax in petroleum industry on the continental shelf

The CO2 tax exemption notified to the Authority concerns the CO2 tax on mineral products. The decision by the Parliament on the CO2 tax on mineral oils applies to mineral oils imported to or produced onshore and does basically not affect CO2 emissions on the continental shelf .
 
The CO2 emissions on the continental shelf are levied CO2 tax according to the decision by the Parliaments concerning CO2 tax in the petroleum industry on the continental shelf (Annex 1). In 2007 the tax is NOK 0.80 per Sm3 gas and NOK 0.80 per litre petroleum. In the Governments budget proposal for 2008 it is proposed that the current CO2 tax on the petroleum industry shall be reduced according to the expected price on emission allowances, i.e. that the tax is reduced to NOK 0.45 per litre/Sm3. (The proposed tax reduction was based on an expected price on emission allowances of NOK 160 per tonne.)

5.
The Norwegian authorities are invited to explain whether there are any discrepancies between the list in Annex 1 of the ETS Directive (activities subject to emission trading) and the activities in Norway subject to emission trading.

Answer: All activities included in the Annex 1, will be subject to the Norwegian emission trading system. Certain additional installations may, however, be included in accordance with article 24 of the ETS Directive.
 
6.
The CSA asks if it is correct that allowances under the emission trading system will be allocated, to a substantial degree, free of charge to the land-based industries, but not to the petroleum-related offshore-sector.

Answer: The land-based industries will be allocated allowances free of charge corresponding to 87 per cent of their average 1998-2001 emissions from energy use and 100 per cent of their average 1998-2001 emissions from processes. No allowances free of charge will be allocated to offshore installations. 

7.
In the Authority´s letter reference is made to the estimated forgone revenue as a result of a full CO2 tax exemption, amounting to NOK 125 million. Norwegian authorities are asked to estimate on the same assumptions of emissions and to the basis of a projected quota price, what the costs for the industry subject to the CO2 tax exemption would be as a result of their purchase of emissions allowances beyond what is received free of charge.

Answer: To avoid any possible misunderstanding we would like to underline that the estimated forgone revenue is the estimated tax expenditure compared to the general CO2 tax level on mineral oils. Compared to the existing rules, the tax revenue forgone is lower, i.e. 85 million NOK, due to the existing reduced tax rate applied to the pulp and paper industry. 

Further, as argued in our notification, the costs of CO2 emissions for the industry subject to the Norwegian emissions trading system will be the price of allowances multiplied by the amount of emissions. The industry`s cost is not affected by the amount of allowances received free of charge. The granting of allowances free of charge is based on the emissions in the fixed historic period 1998-2001, and is not linked to current emissions.  (Provided a fixed basis for granting allocation free of charge, the received amount of allowance may be comparable with a transfer of a certain lump sum to the involved undertakings.)

Based on the same assumptions of emissions as the estimated tax revenue forgone and on the basis of a projected quota price of NOK 176 (which is the market price per 25 October 2007 for allowances delivered in December 2008), the estimated costs of emissions linked to the use of mineral oils for the industry subject to the emissions trading system will amount to about NOK 110 mill per year.

An estimate of the costs for the industry of purchasing emission allowances beyond what is received free of charge will, in our view, give no information of  the costs of emissions for the installations subject to the trading system. Such an estimate will also be a very rough estimate.

The CO2 tax exemption will be applicable to all land-based industries subject to the emission trading system. The use of mineral oils will vary between sectors and installations. In addition, the difference between the historic emissions and current emissions will vary between the involved undertakings, and the exact allocation of emissions allowances free of charge to the single installations is not yet decided/calculated.

However, as a starting point, mineral oil is mostly used in pulp and paper industries, chemical industries (except petrochemical) and district heating systems. Based on the average emissions figures for these undertaking in the fixed period 1998-2001 compared to the 2005-level and a projected price of allowances of NOK 176, the additional cost of purchasing emission allowances beyond what is received free of charge for the industries using mineral oil as the major energy source, is very roughly estimated to approximately NOK 15 million.

8.
Hopefully, this letter provides the information requested by the Authority. Please do not hesitate to contact us if something is unclear or if you have any further questions.

Yours sincerely,
Torbjørn Flørenes
Deputy Director General
                                                            Grethe H. Dahl
                                                            Senior Adviser