THE EFTA SURVEILLANCE AUTHORITY,

HAVING REGARD TO the Agreement on the European Economic Area 1Hereinafter referred to as the “EEA Agreement”., in particular to Articles 61 to 63 thereof,

HAVING REGARD TO the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice 2Hereinafter referred to as the “Surveillance and Court Agreement”., in particular to Article 24 and Protocol 3 3It has to be noted that amendments to Protocol 3 to the Surveillance and Court Agreement, following an agreement between EFTA States of 10 December 2001, amending Protocol 3 to the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice, entered into force on 28 August 2003. These amendments incorporated “Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of [ex] Article 93 of the EC Treaty” into Protocol 3. thereof,

HAVING REGARD TO the Procedural and Substantive Rules in the Field of State Aid 4Guidelines on the application and interpretation of Articles 61 and 62 of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance and Court Agreement, adopted and issued by the EFTA Surveillance Authority on 19 January 1994, published in OJ L 231, 3.9.1994 and EEA Supplement to the OJ No 32, 3.9.1994, last amended by the Authority’s Decision No 62/04/COL of 31 March 2004, not yet published; hereinafter referred to as the “Authority’s State Aid Guidelines”., in particular Chapter 15 thereof 5Chapter 15 of the Authority's State Aid Guidelines on Aid for Environmental Protection, as adopted by the Authority’s Decision No 152/01/COL of 23 May 2001 and published in the OJ L 237, 6.9.2001, p. 16 and EEA Supplement to the OJ No 6, 24.1.2002, hereinafter referred to as the “Environmental Guidelines”.,

HAVING REGARD TO the Authority’s decision to open the formal investigation procedure 6EFTA Surveillance Authority Decision No 149/02/COL of 26 July 2002 regarding environmental tax measures (Norway), published in OJ L 31, 6.2.2003, p. 36 and EEA Supplement to the OJ No 8, 6.2.2003, p. 2.,

HAVING CALLED ON interested parties to submit their comments 7Notice informing EFTA States, EU Member States and interested parties of the opening decisions and inviting them to submit their comments thereto within two weeks from the publication of the notice, published in OJ C 105, 1.5.2003, p. 38 and EEA Supplement to the OJ No 22, 1.5.2003., pursuant to the provisions laid down in Chapter 5 of the Authority's State Aid Guidelines 8In particular, point 5.3.2. of the Guidelines., and having regard to their comments,

WHEREAS:

I. FACTS

A. Procedure

By decision of 26 July 2002, the Authority initiated the formal investigation procedure provided for under Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement.

By letter dated 26 July 2002 (Doc. No. 02-5603-D), which was also sent by fax to the Norwegian Mission to the European Union, the Authority invited the Norwegian Government to submit its comments to the opening decision and to provide the Authority with all information necessary to assess the measures in question. The answer from the Norwegian Government had to reach the Authority within two months from the notification of the decision (i.e. 26 September 2002).

A meeting between representatives from the Norwegian authorities and the Authority took place on 3 September 2002 in Brussels.

Following an extension of the deadline, the Norwegian Government submitted its comments to the opening of the formal investigation procedure and submitted some additional information by letter from the Ministry of Finance dated 7 October 2002, received and registered by the Authority on 10 October 2002 (Doc. No. 02-7327-A).

At a meeting between the Authority and the Norwegian authorities, which took place on 22 October 2002 in Oslo, the Authority reminded the Norwegian Government of its obligation resulting from the Authority’s decision of 26 July 2002 “…to submit all information enabling the Authority to examine the compatibility of the tax measures in question with the EEA Agreement”.

The Norwegian Government submitted further information by letter from the Ministry of Trade and Industry dated 9 January 2003, forwarding a letter from the Ministry of Finance dated 19 December 2002, received and registered by the Authority on 15 January 2003 (Doc. No. 03-209-A).

By letter dated 24 January 2003 (Doc. No. 03-471-D), the Authority acknowledged receipt of the comments submitted by the Norwegian authorities in October 2002, as well as the additional information submitted by the Norwegian authorities in January 2003.

On 6 February 2003, the decision to open the formal investigation procedure was published in the EEA Section of the Official Journal of the European Communities and the EEA Supplement thereto 9See footnote 6..

In a letter from the Ministry of Trade and Industry dated 18 February 2003, received and registered by the Authority on 21 February 2003 (Doc. No. 03-952-A), the Norwegian Government submitted its views on the qualification of the measures as “existing aid”.

The Authority acknowledged receipt of these additional comments by letter dated 25 February 2003 (Doc. No. 03-1135-D).

By letter dated 25 February 2003, received and registered by the Authority on 28 February 2003 (Doc. No. 03-1215-A), the Federation of Norwegian Process Industries (PIL) submitted comments to the opening of the formal investigation procedure.

By letter dated 11 March 2003 (Doc. No. 03-1463-D), the Authority transmitted these comments to the Norwegian Government, to provide the opportunity to reply to these comments within one month from receipt of the Authority’s letter.

By letter from the Ministry of Trade and Industry dated 14 April 2003, received and registered by the Authority on 17 April 2003 (Doc. No. 03-2506-A), the Norwegian Government submitted its comments to the third party submission.

On 1 May 2003, the Authority published a notice informing EFTA States, EU Member States, and other interested parties of the opening decision and inviting them to submit their comments, within two weeks from the date of publication of the notice, to the measures for which the formal investigation procedure had been opened 10See footnote 7..

By letter dated 13 June 2003 (Doc. No. 03-3796-D), the Authority informed the Norwegian Government of its views concerning the information and comments submitted by Norway and third parties and asked the Norwegian Government to provide further clarification. The issues addressed in this letter were also discussed at a bilateral meeting between the Authority and the Norwegian authorities on 27 June 2003 in Oslo.

By letter from the Ministry of Finance dated 8 July 2003, received and registered by the Authority on 14 July 2003 (Doc. No. 03-4679-A), the Norwegian Government provided further clarification.

B. Description of the relevant aid measures

1. Exemptions from tax on electricity consumption

a) The exemption from the tax on electricity consumption for the manufacturing, the mining and the greenhouse growing industries

The tax on electricity consumption was first introduced in 1971. According to the Norwegian Government, the objective of the tax was to ensure a more efficient use of electric power and thus lead to positive environmental effects that would not otherwise occur.

Since the introduction of the electricity tax, certain industries (in particular the energy intensive industries) have benefited either from reduced rates or total exemptions. As from 1 January 1994 and until 31 December 2000, the manufacturing 11The relevant provision makes reference to the statistical classification D, which corresponds to NACE D Chapters 15 to 37., the mining 12The relevant provision makes reference to the statistical classification C, which corresponds to NACE C Chapter 10 to 14. and the greenhouse growing 13There is no reference to any statistical classification; however, the sector would seem to fall within NACE A. industries were fully exempted from the electricity tax (cf. the annual budgetary decisions of the Norwegian Parliament and the relevant implementing regulation 14Regulation of 23 December 1992 no. 1203, “Forskrift om avgiftsmessig avgrensning og praktisering av fritak og lettelser i avgift på elektrisk kraft for industrien m.v.”.).

As from 1 January 2001, the exemption from the electricity tax for the manufacturing, the mining and the greenhouse growing industries continued to apply but should, according to the annual budgetary decision of the Norwegian Parliament, be limited to uses in the industrial process as such (“Fritaket omfatter kun elektrisk kraft som benyttes i selve industriprosessen”). This limitation was implemented by way of reference to use of electricity by the manufacturing, the mining and the greenhouse growing industries in administration buildings, which should be taxed (“Fritaket gjelder ikke elektrisk kraft som leveres til administrasjonsbygg”) 15Cf. Regulation of 23 December 1992 no 1203, “Forskrift om avgiftsmessig avgrensning og praktisering av fritak og lettelser i avgift på elektrisk kraft for industrien m.v.”, as amended by Regulation of 21 December 2000 no. 1344..

As from 1 January 2002 the tax exemption for the manufacturing, the mining and the greenhouse growing industries and the exclusion of electricity used in administration buildings from the tax exemption were implemented by the Regulation on Excise Duties (cf. §§ 3-12-4 and 3-12-5 of Chapter 3-12 of the Regulation on Excise Duties 16Regulation of 11 December 2001 no. 1451, “Forskrift om særavgifter”.).

The amendment in 2001, which was maintained throughout 2002 and 2003, followed a request from the Norwegian Parliament to examine how companies exempted from the tax could pay tax on electricity used for other purposes than production.

The amendment implied that the manufacturing, the mining and the greenhouse growing industries, which were in principle exempted from the electricity tax, would be subject to the tax on electricity used in administration buildings. In order to be defined as “administration building”, a minimum of 80% of the building space had to be used for administrative purposes. If a building qualified as an “administration building”, all electricity used in that building was taxed, even though part of the electricity consumption was in fact related to production processes. On the other hand, if production activities occupied more than 20% of the total building space, the electricity delivered to that building was not taxed, even though part of the electricity was used for administrative purposes. This was, according to the Norwegian Government, seen as the only practical way of taxing electricity used for purposes other than production.

As from 1 January 2002, the general rate of the electricity tax was reduced to NOK 0.093 per kWh (approximately 0.012 € per kWh) and was, as from 1 January 2003, set at NOK 0.095 per kWh (approximately 0.013 € per kWh) 17The applicable conversion rate for Norway was, as from 3 January 2002, 8.0105 NOK= 1 € and, as from 3 January 2003, 7.2360 NOK = 1 € (http://www.eftasurv.int/fieldsofwork/fieldstateaid/dbaFile791.html)..

According to information from the Norwegian Government, the losses in tax revenues in 2002 due to the sectoral exemptions amounted to NOK 4 605 million (approximately 575 million €).

As from 1 January 2004, the tax on electricity consumption was no longer levied on undertakings, only on households.

b) The exemption from the tax on electricity consumption for users in certain regions (municipalities)

Pursuant to the annual budgetary decisions of the Norwegian Parliament, the electricity tax was not levied in the county of Finnmark and seven municipalities in North Troms (Karlsøy, Kvænangen, Kåfjord, Lyngen, Nordreisa, Skjervøy og Storfjord). This implied that both household and industry consumption were exempted from the electricity tax in these geographical areas.

According to information from the Norwegian Government, the losses in tax revenues in 2002 due to the regional exemption amounted to NOK 160 million (approximately 20 million €).

The regional exemption was maintained in 2004 as regards households. As mentioned above, no tax was levied on undertakings.

2. Derogations under the CO2 tax regime

A CO2 tax on mineral oils and petrol was introduced in 1991 and a tax on coal and coke in 1992. When these taxes were first introduced, they were integrated elements of the existing excise tax system on mineral oils, petrol and coal and coke. As part of a green tax reform in 1999, the CO2 tax was established as a separate tax in the legislation. According to the Norwegian authorities, the CO2 tax on coal and coke was introduced in order partly to avoid the risk of conversion from mineral oils (taxed) to coal and coke (previously not taxed) and partly to stimulate the use of more environmentally friendly products. The tax levied on coal and coke covered products used for energy purposes.

Due to an amendment to the tax legislation, as from 1 January 2003, coal and coke were no longer subjected to a CO2 tax.

The use of coal and coke as raw materials in industrial processes was exempted from the CO2-tax according to the annual budgetary decisions of the Norwegian Parliament. The exemption was adopted in 1992 when the tax on coal and coke was introduced.

According to a provision in the Regulation on Excise Duties, the use of taxed products as raw materials was eligible for refund to the extent that CO2 emissions were less than the carbon content of the respective products would indicate. However, this provision was not applied to the use of coal and coke as raw materials as this specific use was considered to fall outside the scope of the tax altogether.

Pursuant to the annual budgetary decisions of the Norwegian Parliament and § 3-6-4 of Chapter 3 of the Regulation on Excise Duties (as applicable until 31 December 2002), the use of coal and coke as reducing agents was exempted from the tax. The exemption covered only the amount of the products necessary for the reduction process. According to the explanatory notes issued by the Customs and Excise Duties Directorate, in some cases, coal and coke were a necessary part of the chemical process, but would not be included as a part of the finished product. In such cases the level of CO2 emissions was comparable to emissions from the use of coal and coke for energy purposes. The reason for the exemption was said to be that there were no alternative materials for such processes.

According to the Norwegian authorities, coal and coke were used as raw materials in the production of anodes and electrode mass. Coal and coke were used as reducing agents in the production of primary aluminium, ferroalloys (ferrosilicon, silicon metal and manganese alloys) and titanium dioxide slag. In the production of silicon carbide, coal and coke were used both as raw materials and reducing agents.

Furthermore (as applicable until 31 December 2002), the use of coal and coke for the production of clinker in the manufacturing of cement and leca 18Light Expanded Clay Aggregate. was exempted from the CO2 tax on coal and coke. The exemption was established in 1992, when the tax on coal and coke was introduced. In the production of clinker, coal and coke were used for energy purposes.

The majority of coal and coke was used as raw materials or reducing agents in industrial processes. Coal and coke were mainly used for energy purposes in the cement and leca industry. Outside this industry there was very limited use of coke for heating in the engineering industry and in households. The Norwegian authorities anticipated that the loss of tax revenue resulting from the abolishment of the CO2 tax on coal and coke in 2003 was around NOK 500 000 (approximately 69 000 €).

The paper and pulp industry paid a reduced rate of the CO2 tax on mineral oils (i.e. 50% of the general rate) since 1993. As from 1 January 2002, the general rate was set at NOK 0.49 per litre (approximately 0.06 € per litre), the reduced rate was NOK 0.245 per litre (approximately 0.03 € per litre). As from 1 January 2003, the general rate was set at NOK 0.5 per litre (approximately 0.07 € per litre), the reduced rate was NOK 0.25 per litre (approximately 0.035 € per litre).

3. Partial abolishment of the SO2 tax

In 1970, a sulphur tax on mineral oils was introduced. All or part of that tax could be reimbursed on application if emissions from the use of the product were less than the content of sulphur would indicate. All users of mineral oils were eligible to apply for reimbursement.

As from 1993, the tax was based on the content of sulphur in the oil and increased according to the percentage of the content of sulphur. The tax base covered petroleum, gas oil, solar oil, diesel oil and fuel oil or any oil that could be used as fuel oil.

In 1999 as part of a green tax reform, a SO2 tax was established as a separate tax in the legislation covering the following three components: the sulphur tax on mineral oils, a new tax on the use of coal and coke and a new tax on SO2 emissions from oil refinery plants.

A differentiated tax rate was applied for the tax on the use of coal and coke depending on the presumed sulphur content of different categories of coal and coke. The reimbursement scheme that applied to mineral oils, as referred to above, was extended so as to cover also the new products subject to taxation.

As regards the new tax on SO2 emissions from oil refinery plants, a provision was introduced to avoid double taxation. This provision stipulated that if products already taxed (i.e. mineral oils) caused the emission covered by the new emission-based tax the former tax should be deducted from the tax payable on emissions. Hence, insofar as the use of mineral oils was concerned, emissions from oil refineries had been taxed indirectly through the tax and reimbursement scheme prior to 1999. After 1999 the tax was formed directly as an emission tax. However, emissions which were caused by the use of crude oil in the refinery process had not previously been taxed, but were taxed under the new regime.

The basic SO2 tax rate on mineral oils in 2002 was NOK 0.07 (approximately 0.009 €) per litre for each commenced 0.25 per cent content of sulphur. The rate of the SO2 tax on the use of coal and coke in 2001 was between NOK 2.58 per 100 kg to NOK 18.54 per kg depending on the type of coal or coke and the sulphur content thereof. The rate on emissions from refineries in 2001 was NOK 3.09 per kg SO2.

As from 1 January 2002, the SO2 tax on the use of coal and coke and on emissions from oil refineries was abolished. The Norwegian Government explained that the industry, which was previously covered by these taxes, would instead be regulated through emission permits in accordance with the Pollution Control Act 19Associated with implementation of Council Directive 96/61/EC concerning integrated pollution prevention and control, the IPPC Directive, (OJ L 257, 10.10.1996, p. 26, as amended by Directive 2003/87/EC OJ L 275, 25.10.2003, p. 32), as incorporated into the EEA Agreement by Joint Committee Decision No 27/97 (OJ No L 242, 4.9.1997, p. 76 and EEA Supplement No 37, 4.9.1997, p. 100), The Act has to be operated in accordance with the Directive's requirements by 30 October 2007..

According to the Norwegian Government, the tax abolishment had to be seen against the background of the Norwegian State’s commitments under the 1999 Gothenburg Protocol to the UN Convention on Long-range Trans-boundary Air Pollution. The 1999 Gothenburg Protocol sets a ceiling on Norwegian SO ₂ emissions at 22,000 tonnes per year in 2010. In order to achieve that emission limit, the annual Norwegian SO ₂ emissions would have to be decreased by 7,000 tonnes. Calculations made by the Norwegian Pollution Control Authority had shown that the reduction in SO ₂ emissions would be best made by the process industry and that the SO ₂ tax, as introduced in 1999, would not result in the necessary emission reductions.

On 19 September 2001, a non-binding “Agreement of Intent” which aimed at achieving the necessary emission reductions, was concluded between the Norwegian Ministry of Environment and the Federation of Norwegian Process Industries (PIL). In this agreement the Norwegian process industry committed itself to take measures to reduce SO ₂ emissions while the Norwegian Government undertook to propose to the Norwegian Parliament that the SO ₂ tax on coal and coke be removed from 1 January 2002 20According to the agreement, PIL declared, on behalf of the companies listed in an appendix (the sectors covered are: oil refineries, chemical/ceramic materials, cement, ferro alloys and aluminium), that they would develop technology and build cleansing plants that would reduce Norway's emission of SO2 by a minimum of 5,000 tonnes per year. Furthermore, PIL would make concrete proposals on how such an emission reduction could be carried out and propose how a total reduction of 7,000 tonnes could be achieved. PIL established a so-called “Process Industries' Environment Fund” (“the Fund”) with the purpose of contributing to the reduction of the companies’ SO2 emissions. An “Implementation Agreement” was concluded between the participating companies and the Fund on 18 December 2001 according to which the individual companies were obliged to make consecutive payments to the Fund calculated on the basis of the individual companies’ SO2 emissions and rates fixed by the Fund. All initiatives entitled to support from the Fund should be completed prior to the end of 2009. The Implementation Agreement came into force on 1 January 2002 and will expire on 31 December 2009..

C. Authority’s doubts expressed in the opening decision

1. Exemptions from the tax on electricity consumption

a) The exemption from the tax on electricity consumption for certain industries

In the opening decision, the Authority took the preliminary view that the exemptions from the electricity tax for certain sectors of industry constituted State aid within the meaning of Article 61(1) of the EEA Agreement. In the Authority’s view, the structure of the electricity tax system as it resulted from the relevant provisions was based on the rule that all consumption of electricity was subject to the tax. Exemptions from this rule were defined by reference to statistical classification of individual sectors. In addition, the Authority had doubts as to whether the exemptions could be regarded as reflecting a limitation of the scope of the tax to electricity used for purposes other than production, given that the Norwegian authorities had not provided a clear definition of what was to be understood by “production purposes”.

Furthermore, the Authority expressed doubts as to whether the exemption from the electricity tax for certain sectors of the economy could be regarded as compatible with Article 61(3)(c) of the EEA Agreement, in combination with the Environmental Guidelines. In particular, the Authority observed that the exemption was neither conditional on the conclusion of environmental agreements, nor did firms eligible for an exemption pay a significant proportion of the national tax. In addition, the Norwegian Government had neither shown that the derogations were temporary, nor had it given any commitment as regards the limitation of the aid measures in time.

b) The exemption from the tax on electricity consumption for users in certain regions (municipalities)

In the opening decision, the Authority took the preliminary view that the exemption from the tax on electricity consumption for undertakings in certain regions constituted a selective measure caught by Article 61(1) of the EEA Agreement 21On regional tax exemptions as State aid, see: Case E-6/98 The Government of Norway v EFTA Surveillance Authority [1999] Report of the EFTA Court, p. 74.. In the absence of a justification, the Authority had doubts that the regional exemption could be regarded as compatible with the EEA State aid rules.

2. Derogations under the CO2 tax regime

a) The exemption of coal and coke used as raw materials or as reducing agents in industrial processes

In the opening decision, the Authority took the preliminary view that the exemption of coal and coke used as raw materials or as reducing agents from the CO2 tax on coal and coke constituted State aid within the meaning of Article 61(1) of the EEA Agreement. In the Authority’s initial view, the exemption of coal and coke used for the specified purposes in particular industries would necessarily seem to benefit only certain undertakings and was therefore regarded as selective. The Authority expressed doubts, as to whether the exemption could be justified by the nature and logic of the CO2 tax regime, given that the Norwegian authorities had not demonstrated that the use of coal and coke for the described purposes would not contribute to CO2 emissions. As regards the alleged lack of alternative inputs for the industrial processes in question as a justification for the exemption, the Authority had doubts as to whether an exemption in such circumstances would be compatible with the polluter-pays-principle.

The Authority announced that it would assess in more detail the relevance of the Commission’s decision regarding the UK Climate Change Levy in which the Commission accepted that it was within the logic and nature of an environmental tax system to levy the tax on energy products used for fuel purposes, but to exempt energy products used purely for non-fuel purposes (the non-fuel exemption) and principally for non-fuel purposes (the dual-use exemption) 22Commission’s Decision of 3 April 2002 regarding the dual-use exemption from the Climate Change Levy in the UK (State aid No C 18/2001 and C 19/2001), OJ L 229, 27.8.2002, p. 15.. The Authority would also evaluate the pertinence of the Commission’s proposal regarding a new framework for energy taxation within the European Union 23COM (1997) 30 final, OJ C 139, 6.5.1997, p. 14. to the exemption from the Norwegian tax of coal and coke used as raw materials or reducing agents 24In the meantime Council Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity (“the Energy Tax Directive”) was adopted on 27 October 2003 (OJ L 283, 31.10.2003, p. 51), not incorporated into the EEA Agreement..

Furthermore, the Authority expressed doubts regarding the compliance of the exemption with the Environmental Guidelines, in particular because the exemption from the CO2 tax on coal and coke was neither conditional on the conclusion of environmental agreements, nor did it seem that firms eligible for an exemption/refund had paid a significant proportion of the national tax.

b) The exemption of coal and coke used for energy purposes in the production of cement and leca

In the opening decision, the Authority took the preliminary view that the exemption from the CO2 tax on coal and coke for the production of cement and leca constituted State aid within the meaning of Article 61(1) of the EEA Agreement. In the Authority’s view, the exemption was sector-specific. Moreover, the Authority considered that the exemption for the cement and leca industry was contrary to the general rule established under the CO2 tax system, i.e. that all uses of coal and coke for energy purposes should be subject to the tax.

Furthermore, the Authority expressed doubts concerning compliance of the exemption with the Environmental Guidelines, in particular because the exemption was neither conditional on the conclusion of environmental agreements, nor did it seem that firms eligible for an exemption had paid a significant proportion of the national tax.

c) The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry

In the opening decision, the Authority took the preliminary view that the reduced rate of the CO2 tax in favour of the paper and pulp industry was State aid within the meaning of Article 61(1) of the EEA Agreement.

The Authority expressed doubts concerning the compatibility of the reduced rate for the paper and pulp industry. In particular, with reference to point 46.1.(b) second alternative of the Environmental Guidelines, the Authority did not exclude that the reduced tax rate applicable to companies in the paper and pulp industry of 50% of the normal CO2 tax rate could be regarded as a “significant proportion” of the national tax. However, without information on the effects of this reduced rate on the behaviour of the industry concerned, and in particular whether this rate served as an incentive to improve environmental protection, the Authority could not conclude that the requirements in the guidelines were fulfilled.

3. Partial abolishment of the SO2 tax

In the opening decision, the Authority took the view that the abolishment of the SO ₂ tax on the use of coal and coke and on emissions from oil refineries might be regarded as State aid within the meaning of Article 61(1) of the EEA Agreement.

The Authority noted that the abolishment of the SO2 tax on coal and coke limited the scope of the SO2 tax, without distinguishing between different categories of undertakings or sectors and that the scope of the tax was determined by excluding the use of specific products, namely the use of coal and coke. Thus, the abolishment of the SO2 tax on coal and coke would in principle benefit all undertakings in Norway using coal and coke. However, as there were indications that the abolishment was targeted at specific sectors of industry the Authority could not exclude that the abolishment of the SO2 tax on the use of coal and coke led to a different tax treatment between industries which were – from an environmental point of view – in a comparable situation.

Moreover, the Authority could not exclude, without more detailed information, that the abolishment of the tax on the use of coal and coke as fuel, would benefit certain undertakings compared to undertakings in the process industry using mineral oils for fuel purposes. Therefore, there could be a distortion of competition within the various industry sectors depending on the degree they made use of taxed and non-taxed products.

As regards the abolishment of the SO2 tax on emissions from oil refineries, the Authority took the view that this limitation of the scope of the SO2 tax regime was sector specific.

Hence, the Authority concluded that the abolishment of the SO2 tax on the use of coal and coke and on emissions from oil refineries conferred a financial benefit on undertakings in certain sectors and was thus, in effect, comparable to a tax exemption. The Authority also considered that the Norwegian Government, in practice, had waived its right to receive tax payments from firms in the sectors concerned, thus conferring upon them an economic advantage.

4. Qualification as “new aid”

By accepting the appropriate measures proposed by the Authority, the Norwegian Government was, in the preliminary view of the Authority, legally bound to bringing existing aid schemes in line with the requirements set out in the Environmental Guidelines before 1 January 2002. Thus, any aid scheme which was not in accordance with the requirements set out in the new Environmental Guidelines should have been abolished as from 1 January 2002.

In the Authority’s view, the Norwegian Government’s acceptance of the appropriate measures also implied that any aid scheme applicable after 1 January 2002, and incompatible with the requirements laid down in the new Environmental Guidelines, had to be regarded as “new aid”. For this reason, the Authority reminded the Norwegian Government that unlawful aid would have to be recovered from the recipients if the Authority, in its final decision, were to find the relevant tax measures incompatible with the EEA Agreement.

D. Comments from the Norwegian Government on the opening decision

1. Exemptions from the tax on electricity consumption

a) The exemption from the tax on electricity consumption for certain industries

The Norwegian Government recalled that, as from 1 January 2001, the tax base was extended so as to include the use of electricity in administration buildings in manufacturing and mining enterprises. Therefore, the Government considered that the exemptions from the electricity tax covered all uses of electricity for production purposes. Thus, the exemption for the manufacturing, the mining and the greenhouse growing industries was to be considered a “general measure” not covered by Article 61(1) of the EEA Agreement.

The Norwegian Government acknowledged that it could not be ruled out that also non-exempted sectors might use electricity for production. In the Government’s view, this problem was due to the lack of a clear definition of what was to be regarded as “production processes” and “administrative purposes”. The Norwegian Government expressed that “there may be doubts as to whether the current system in all its elements is constructed in a way that makes it a general measure falling outside Article 61(1)” and that it had decided to propose a modification to the current system. The new system, to come into effect as from 1 January 2004, would be formally notified to the Authority. The date for the entry into force for the new system was later postponed until 1 July 2004.

The Norwegian Government stated that in the energy intensive industry, electricity was a large part of operating costs. Consequently, these industries had strong incentives to implement energy efficiency measures, even without a tax on electricity consumption. Furthermore, households, the service sector and administration buildings would have the highest energy saving potential.

b) The exemption from the tax on electricity consumption for users in certain regions

The Norwegian Government stated that the reason for this exemption was to curb depopulation in the regions concerned.

2. Derogations under the CO2 tax regime

In the Norwegian Government’s view a tax measure that was limited to a particular product or a particular use of that product would be a “general measure”, not falling within the definition of State aid.

a) The exemption of coal and coke used as raw materials or as reducing agents in industrial processes

The Norwegian Government maintained that the limitation of the scope of the CO2 tax by excluding a particular use of coal and coke from the scope of the tax (here the use as raw materials and reducing agents), did not constitute an exemption granted to certain undertakings or for the production of certain goods. The derogation was open for all undertakings that used coal and coke for this purpose. Moreover, the rationale of this exemption had not been a general lack of, or reduction of, CO2 emissions from the industrial processes in question. This exemption reflected the purpose of the CO2 tax which was mainly oriented towards energy-related emissions. Hence, emissions resulting from uses other than for energy purposes were not regarded as falling within the scope of the CO2 tax.

The Norwegian Government explained that coal and coke fed into reduction processes would always exceed the theoretical minimum need for carbon. The “excess carbon” would contribute to the melting (and thus reduce the use of electricity). However, the Norwegian authorities considered that the use of coal and coke in these processes was to be regarded as for non-energy purposes, since “excess carbon” could not technically be avoided. This understanding was in line with official environmental statistics, which considered all CO2 released in reduction processes as process emissions.

As regards the question to what extent coal and coke could be substituted for other products in relation to the exempted uses, the Norwegian Government informed the Authority that in the industrial processes in question the use of other products was either technologically impossible or would not necessarily lead to lower CO2 emissions. However, in some industries, the substitution of other products for coal and coke was feasible, but regarded as unprofitable 25This was, according to the Norwegian authorities, the case for the production of silicon metal and ferrosilicon..

Imposing the CO2 tax on industrial processes in Norway would not be likely to reduce global greenhouse gas emissions. Therefore, the Norwegian Parliament had decided to implement an emission trading system from 2005 on for emissions and climate gases not covered by the CO2 tax system.

b) The exemption of coal and coke used for energy purposes in production of cement and leca

The Norwegian Government acknowledged that this exemption benefited the production of certain goods. The Norwegian Government informed the Authority that due to the lack of a domestic gas distribution system, gas was not available as a low-cost substitute for the Norwegian cement and leca industry. The exemption was introduced because large-scale substitutes for coal and coke would be unprofitable and because the industry was exposed to international competition.

The CO2 tax was extended to coal and coke to avoid conversion from mineral oils (taxed) to coal and coke (not previously taxed). However, the cement industry used coal and coke, and not mineral oils, for energy purposes already prior to the extension. In the Government’s view, this circumstance could justify the exemption. It admitted, however, that “there may be doubts as to whether the stated reason could be a sufficient justification based on the environmental policy considerations underlying the legislation at issue.” On that basis, the Government had proposed to abolish the CO2 tax on coal and coke in the State Budget for 2003. The Norwegian Government did not expect any conversion to coal and coke, due to the abolishment of the tax, since a large-scale introduction of coal and coke would require new emission permits for the undertakings.

c) The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry

The Norwegian Government took the view that the application of a reduced rate was in line with the conditions set out in the Environmental Guidelines. The industry paid a rate that was above the minimum rate set under the EC Mineral Oil Directive 26Council Directive No. 92/82 EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils (OJ L 316, 31.10.1992, p. 19). or, alternatively, paid a significant proportion of the tax. The Norwegian Government requested that the Authority take into account the cumulated effect of the reduced rate of the CO2 tax and the full exemption from the basic tax on heating oil when determining what would amount to a significant proportion, although the basic tax on heating oil was not covered by the scope of the opening decision. 27The basic heating oil tax was introduced in 2000 with the purpose of discouraging a changeover from electricity to oil for heating purposes. This tax was levied on the same tax base as the CO2 tax on mineral oils. The paper and pulp industry has been fully exempted from the basic tax on heating oil since its introduction. It pointed out that the general rates of the CO2 tax and the basic tax on heating oil amounted to NOK 0,49 per litre (approximately 0.06 € per litre) and NOK 0,389 per litre (approximately 0.05 € per litre), respectively in 2002. Paying NOK 0,245 per litre of the former and being exempted from the latter resulted in the industry paying approximately 28% of the taxes on mineral oils.

In the Norwegian Government’s view both taxes should be assessed together, given that they both have the same effect on the use of mineral oils, are levied on the same products and administered by the same authorities.

Based on recent studies, the Norwegian Government informed the Authority that the application of the reduced CO2 tax on mineral oils for the paper and pulp industry had led directly to a reduction in CO2 emissions of 60 000 tons by 1999.

Finally, it was stated that there would be an emission trading system as from 2005 applicable to all CO2 emissions and other greenhouse gases. Energy-intensive and emission-intensive industries would thus be obliged to surrender quotas equivalent to the quantity of greenhouse gases they emit, not currently subject to tax. Against this background, the Norwegian Government requested that the Authority, as part of the formal investigation procedure, approve the current reduction for the paper and pulp industry, on the condition that the reduction be abolished in 2005 and with the possibility for the Government to apply for a subsequent extension.

3. Partial abolishment of the SO2 tax

The Norwegian Government maintained that a tax system that taxed some products or a certain conduct as opposed to others, was not selective in nature. Hence, in the opinion of the Norwegian Government, the abolishment of the SO ₂ tax on the use of coal and coke could not be considered as State aid within the meaning of Article 61(1) EEA.

As far as the oil refineries used mineral oils in the refinery process, the amendment in 1999 was de facto merely a technical one. From being taxed on emissions indirectly through a reimbursement scheme, the tax was formed directly as an emission tax. As far as the tax represented a “new” tax, this tax was selective as it only applied to oil refineries. The abolishment of the selective tax measure could not be regarded as selective in the sense that it represented State aid within the meaning of Article 61(1) EEA.

Finally, it was referred to that practically all companies, including all companies with significant emissions, which previously were covered by the SO2 tax on emissions from coal and coke, were now covered by the Agreement of Intent between the Ministry of Environment and PIL and the Implementation Agreement between the Fund set up by PIL and the participating undertakings.

4. Qualification as “new aid”

In the Norwegian Government’s view, the aid measures under scrutiny should be classified as “existing aid”. The Norwegian Government did not contest that it was bound by its acceptance of the appropriate measures to bring existing aid schemes in line with the requirements of the new Environmental Guidelines by 1 January 2002. It argued, however, that the non-compliance of the Government with the obligations assumed by the acceptance of the appropriate measures would not imply a re-qualification of existing aid schemes into new aid with the possible consequence of recovery from the aid recipients.

The appropriate measures were, according to the Norwegian Government, vague and general in nature without individualising the alleged unlawful aid measures. They did not assess any concrete aid schemes and consequently did not conclude that any such schemes were in breach of the State aid rules. Existing aid schemes could only be regarded as unlawful after individual evaluation and a final decision in this respect. Furthermore, recovery from the aid recipients would require a negative decision on each individual aid scheme. The acceptance of appropriate measures could not replace a negative decision as the legal basis for recovery.

The Norwegian Government also claimed that the procedure as laid down in Chapter 7 of the Authority's State Aid Guidelines had not been followed in the present case. Furthermore, the issue of recovery had not been discussed between the Authority and the Government prior to the acceptance of appropriate measures.

Finally, the Norwegian Government claimed that recovery from the recipients would be in breach of the general principle of legitimate expectations.

E. Comments from third parties on the opening decision

PIL was the only third party which submitted comments to the opening decision.

1. Exemptions from the tax on electricity consumption

PIL argued that the exemptions were not selective. A general and indefinite measure which was restricted to a particular input factor or to a particular use of that product, or a particular conduct, would have to be regarded as a general measure. As opposed to the factual circumstances underlying the “Adria Wien” judgment 28Case C-143/99 Adria Wien Pipeline [2001] ECR I-8365, para. 49., the exemption from the electricity tax in Norway was of general application to all production processes and not limited to undertakings manufacturing goods. PIL also highlighted that due to the changes, which came into effect as from 1 January 2001, the electricity tax was designed in such a way as to tax only the use of electricity for purposes other than production processes.

PIL also took the view that the exemptions were justified by the nature and logic of the tax scheme. The electricity tax was aimed at reducing energy consumption in those sectors of the economy which had the largest potential for savings and where the expected growth of consumption was most significant, particularly by households. According to PIL, the logical consequence of this objective was to retain exemptions for industrial production purposes. Therefore, the exemptions were perfectly in line with the logic of the electricity tax.

Finally, PIL argued that the Authority would be obliged to carry out a proper market analysis in order to determine whether the measures under investigation were distorting competition. This market analysis should take into account “…all major factors that are reaching some degree of harmonisation…”. In this respect, reference was made to far-reaching harmonised obligations under the IPPC Directive 29See footnote 19 above., the future emission trading system under an EC Directive 30Directive 2003/87/EC of the European Parliament and the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (OJ L275 25.10.2003, p. 32), not incorporated into the EEA Agreement. as well as the draft EC Directive on energy taxation 31The Directive was later adopted as Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, 31.10.2003, p. 51).. PIL claimed that the exemption from the electricity tax would not strengthen the position of Norwegian undertakings with respect to their European competitors, since companies in other EEA countries would all benefit from tax systems granting similar benefits.

2. Derogations under the CO2 tax regime

a) The exemption of coal and coke used as raw materials or as reducing agents in industrial processes

PIL argued that the exemption was defined with reference to a specific use and not specific sectors. Consequently, the measures were not selective. It also informed the Authority that coal and coke were hardly ever used for energy generation in Norway and that the use of coal and coke for purposes other than as raw materials or reducing agents would be limited. In this respect, it pointed to the fact that the revenue effects of abolishing the CO2 tax on the use of coal and coke were estimated to be less than NOK 500 000 32Reference is made to St.prp.nr. 1 (2002-2003)..

PIL also argued that the exemption was justified by the nature and general scheme of the tax system at issue. The overall objective of the CO2 tax was to reduce CO2 emissions. The use of coal and coke for energy purposes was therefore punished as other domestic supply sources involved lower emissions (hydropower was virtually emission-free). On the other hand, based on best available techniques, there was no means of substituting other products for coal and coke as raw materials and reducing agents in industrial processes without incurring excessive costs. Taxation of such use would therefore not encourage the use of alternative and more environmentally friendly products. In PIL’s view, environmental incentives had to focus on limiting emissions to the extent possible, taking into account that coal and coke in any case were necessary input factors in the relevant industrial processes.

Finally, PIL submitted its views concerning the abolishment of the CO2 tax on coal and coke as from 1 January 2003. With reference to the limited use of coal and coke for energy purposes, it was said that the maintenance of this tax would not yield results in terms of environmental protection. There would be no risk that coal and coke would replace more environmentally friendly energy sources as a result of the removal of the tax. The abolishment of the CO2 tax on coal and coke was not liable to favour certain undertakings and would therefore have to be regarded as being free of aid.

b) The exemption of coal and coke used for energy purposes in production of cement and leca

PIL pointed out that this exemption was motivated by the fact that this industry could not replace coal and coke with electricity without incurring excessive costs. As a consequence, taxation of the use of coal and coke for such purposes would serve no purpose. Therefore, the exemption was in line with the logic of the general tax scheme. That conclusion was, moreover, supported by the draft EC Directive on energy taxation 33See footnote 31 above., which exempted from its scope the taxation of mineralogical processes, such as those in question.

c) The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry

PIL admitted that the reduced rate for the paper and pulp industry could involve aid. However, such aid would be compatible with the functioning of the EEA Agreement, in particular since the tax had indisputably an appreciable environmental effect.

3. Partial abolishment of the SO2 tax

PIL noted that in the absence of “harmonised instruments in the EEA”, for the attainment of the objectives of the Gothenburg Protocol to the UN Convention on Long-range Trans-boundary Air Pollution, it must be for the national Governments to decide the mix of policy instruments by which their obligations should be attained, while respecting the principles of the EEA Agreement.

According to PIL, the abolishment of the SO2 tax was not a selective measure. PIL endorsed the view of the Norwegian Government, as regards the question of selectivity of the tax at issue, as it was conceived in 1999, and with respect to its subsequent abolishment.

PIL argued that the SO2 tax, which was introduced in 1999 and abolished as of 1 January 2002, was a tax different from the sulphur tax on mineral oils which was introduced in 1970 and still remained in force. In PIL’s view, a Contracting Party to the EEA Agreement was free to introduce a tax and to abolish the same tax at its own discretion, without this abolishment amounting to State aid within the meaning of Article 61 of the EEA Agreement.

4. Qualification as “new aid”

In PIL’s view, the Authority had no power to order recovery of aid ex tunc since the alleged aid measures would constitute existing aid until the formal investigation procedure was closed. The Authority’s decision to propose appropriate measures was not preceded by an assessment of the individual environmental tax measures and whether or not these measures could be regarded as being in compliance with the new Environmental Guidelines. The appropriate measures were too unclear to confer any other obligation on the Norwegian Government, and even more to create burdens for Norwegian industries. The same lack of specificity also implied that the Norwegian Government’s acceptance of the proposed measures only meant that the Government was willing to continue the scrutiny of potential aid scheme with a view to implementing the Guidelines by 1 January 2002. This was all the more so since the Authority apparently had signalled to the Norwegian authorities that the actual compliance with the guidelines could be postponed until 1 January 2003. The Norwegian Government could only be bound by its own understanding of the acceptance.

PIL also maintained that the Authority had not acted in conformity with the duty of sincere co-operation laid down in Article 1(1) in Part I of Protocol 3 to the Surveillance and Court Agreement, since it had not given Norway any precise guidance as to which measures were regarded as environmental aid and as to the implementation of the guidelines. The principle of co-operation implied, according to PIL, a duty to examine each scheme individually.

Finally, even if the relevant aid measures should be classified as new aid, it was PIL’s opinion that a recovery order would be contrary, to both the principle of legitimate expectations and the principle of proportionality. Norwegian enterprises could not have predicted that the tax rules in question constitute aid in the sense of Article 61 of the EEA Agreement and they had no way of foreseeing the legal consequences of the Norwegian Government’s acceptance of the appropriate measures. In any event, a recovery would not be suitable in order to restore the previously existing competitive situation, given the exceptions which undertakings enjoyed in other EEA States.

II. APPRECIATION

A. Scope of the decision

The present decision is limited to assessing whether the Norwegian Government complied with its obligations stemming from the appropriate measures proposed by the Authority and accepted by the Norwegian Government.

The decision concerns, firstly, the exemption from the tax on electricity consumption, which was applicable until 31 December 2003, in favour of the manufacturing and mining industries and certain regions (municipalities). In contrast, it does not apply to the similar exemption for the greenhouse growing industry given that this industry concerns goods falling outside the scope of products to which the provisions of the EEA Agreement apply, including those related to State aid (cf. Article 8(3) of the EEA Agreement). With regard to mining, the EEA Agreement applies to trade in coal and steel products, except where the bilateral Free Trade Agreement 34Agreement between the Member States of the European Coal and Steel Community, of the one part, and the Kingdom of Norway, of the other part (OJ L 348, 27.12.1974, p. 17). This bilateral Free Trade Agreement remains in force after the expiry of the ECSC Treaty. The rights and obligations of this Agreement were transferred from the ECSC to the European Community as a result of the decision of the Conference of the Representatives of the Governments of the EC Member States from 19 July 2002. With the expiry of the ECSC Treaty in July 2002, the treatment in the Community of State aid to the ECSC steel sector was integrated into the general legal framework of the EC Treaty. contains specific provisions which have not been set aside by Protocol 14 to the EEA Agreement. Consequently, this decision applies to the mining industry, without prejudice to the products which are still governed by the bilateral Free Trade Agreement and to which this decision does not apply 35With regard to the steel sector, see Protocol 26 to the EEA Agreement in conjunction with Article 5 of Protocol 14 to the EEA Agreement. With regard to the other products, see Articles 1 and 2(1) of Protocol 14 to the EEA Agreement, as well as Article 1 and its Annex, which lists the products referred to in Article 1, of the bilateral Free Trade Agreement..

Secondly, the present decision concerns the exemptions from the CO2 tax of coal and coke when used as raw materials or reducing agents and when used in the cement and leca industry. These exemptions were applicable until 31 December 2002. Moreover, the decision concerns the reduced rate of the CO2 tax on mineral oils in favour of the paper and pulp industry.

Thirdly, the present decision concerns the abolishment of the SO2 tax on the use of coal and coke and the SO2 tax on emissions from oil refineries as from 1 January 2002.

B. State aid within the meaning of Article 61(1) of the EEA Agreement

Article 61(1) of the EEA Agreement reads: “any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between the Contracting Parties, be incompatible with the functioning of this Agreement.”

The introduction of environmental taxes is not as such caught by Article 61(1) of the EEA Agreement, insofar as they are general measures which do not favour particular firms or sectors of industry 36See point 17B.3.1. (1) of Chapter 17 B of the Authority's State Aid Guidelines on the application of State aid rules to measures relating to direct business taxation.. Exceptions to a general tax do, however, fall under that provision, if they are targeted at certain firms or sectors of industry, and without these exemptions being justified by the nature or general scheme of the tax system in question 37See point 17B.3.1. (4) of Chapter 17B of the Authority's State Aid Guidelines and Case 173/73 Italy v Commission [1974] ECR 709, para. 15..

The assessment of whether or not certain measures constitute exemptions or derogations from a general rule/common system takes, as a starting point, the structure of a given tax measure: Based on the legal provisions governing the tax measures in question, the general system needs to be established 38See point 17B.3.1. (4) of Chapter 17B of the Authority's State Aid Guidelines.. It then needs to be examined whether the measure at issue constitutes a derogation, by virtue of its actual nature, from the general system in which it is set 39See Opinion of Advocate General Darmon in Joined Cases C-72 and 73/91 Firma Sloman Neptun Schiffahrts [1993] ECR I-887, para. 50.. In case of a positive answer it would then, as a second step, have to be ascertained whether there is a “justification for this exemption on the basis of the nature or general scheme of this system" 40Case 173/73, cited above, para. 15..

It is against this background that the Authority has assessed the various tax measures.

1. Exemptions from tax on electricity consumption

a) The exemption from the tax on electricity consumption for the manufacturing and the mining industries

The general rule under the electricity tax system was that all uses of electricity were liable to taxation. An exemption was made from this rule for the use of electricity by the manufacturing and the mining industries. The scope of this exemption was defined by reference to certain sectors in the statistical classification of economic activities. The exemption was therefore sectoral in nature.

The Norwegian Government argued that the amendment as from 1 January 2001 established a system under which all enterprises using electricity for production purposes would be exempted from the tax and that the exemption for this reason should be viewed as a general measure not covered by Article 61(1) of the EEA Agreement.

The Authority cannot subscribe to this point of view.

It follows from the case law of the Court of Justice that national measures which provide for a rebate of energy taxes on electricity only in the case of undertakings whose activities are shown to consist primarily in the manufacturing of goods must be regarded as State aid 41Case C-143/99, cited above, para. 55. See also Case C-75/97 Belgium v Commission [1999] ECR I-3671, para. 31, where the Court of Justice held that “the limitation of the increased reductions to certain sectors rendered those reduction measures selective, so that they fulfilled the condition of specificity.”. Neither the large number of eligible undertakings nor the diversity and size of the sectors to which those undertakings belong provide any grounds for concluding that a State initiative constitutes a general measure of economic policy 42Case C-143/99, cited above, para. 48; and Case C-75/97, cited above, para. 32.. Moreover, a tax measure which favours the manufacturing industry as opposed to the service sector is selective in nature 43See State aid No N 449/2001 – Germany, Continuation of ecological tax reform after 31 March 2002; State aid No C 42/03 (ex NN 3/B/2001 and NN 4/B/2001) – Sweden, Energy Tax Scheme; State aid No NN 75/2002 – Finland, Differentiated energy tax rates on electricity..

The amendment of the Norwegian legislation on the electricity tax in 2001 limited the scope of the exemption for the manufacturing and the mining industries by taxing to a certain extent the electricity used by the beneficiaries of this exemption, namely the use of electricity in buildings which were classified as “administration buildings”. Both the general rule that the use of electricity was subject to taxation and the sectoral exemption prevailed. The result of the amendment was merely that the sectoral exemption was more narrowly defined than before.

Against this background, the Authority maintains the view expressed in the opening decision that the tax exemption for the manufacturing and the mining industries was selective in the sense of Article 61(1) of the EEA Agreement. The question is, therefore, whether there was a justification for the exemption on the basis of “the nature or general scheme” of the system.

In this regard it should be recalled that in the Adria Wien-judgment, the Court of Justice held that:

“…any justification for the grant of advantages to undertakings whose activity consists primarily in the production of goods is not to be found in the nature or general scheme of the taxation system…” 44Case C-143/99, cited above, para. 49.

A distinction between industries based on the respective scope for energy saving measures or a general distinction between energy-intensive and other industries can hardly be regarded as being in the nature or general scheme of the system 45State aid No C 33/2003 (ex NN 34/2003) – Austria, refund from Energy Taxes on Gas and Electricity in 2002 and 2003; State aid No N 449/2001 – Germany, Continuation of ecological tax reform after 31 March 2002; State aid No NN 3/A/2001 and NN 4/A/2001) – Sweden, Prolongation of CO2 tax scheme; State aid No. C 18/2001 (N 123/2000) – United Kingdom, the Climate Change Levy.. The fact that the energy saving potential is different in different industries does not eliminate the steering effect of the tax.

The Authority takes the view that the exemption for the manufacturing and the mining industries did not derive directly from the basic or guiding principle of the electricity tax system and, therefore, that no justification existed.

The Authority cannot agree with the Norwegian Government that the tax system after the amendment in 2001 was a system under which all enterprises using electricity for production purposes were exempted from the tax.

As the Norwegian Government acknowledged, it cannot be excluded that some industries might as well have used electricity for production purposes without being exempted from the electricity tax 46The electricity tax applied e.g. in full to the construction industry (“Bygge- og anleggsvirksomhet”) which falls under the statistical classification F, corresponding to NACE F.. Conversely, it cannot be excluded that some exempted industries were relieved from paying tax on electricity used for purposes other than production 47The Norwegian electricity tax could have led to situations where, for example, 75% of the office space was used for administrative purposes with the result that all electricity consumption for the entire building was exempted from the electricity tax.. Thus, de facto it would appear that the tax did not apply exclusively to use of electricity for purposes other than production nor did the tax exemption apply exclusively to use of electricity in production processes.

In the Authority’s view, it is rather arbitrary that a tax on electricity consumption for non-production purposes is exempted in cases where production activities occupy slightly above 20% of the total building space. The real consumption of electricity should have been taken into account, rather than the mere physical occupation of a building. Moreover, in the absence of a clear definition of what exactly was meant by “production processes”, it cannot be verified whether the selection of sectors benefiting from the exemption can be justified with the fact that only these sectors use electricity for production purposes.

The Authority notes that the Norwegian Government limited itself to arguing that the exclusion of electricity used in administration buildings for the manufacturing and the mining industries was the only practical way of ensuring that the tax would only be levied on electricity used for non-production purposes. The Authority has not received any further explanation in this respect. The Authority cannot see that the imposition of a tax on electricity used in administration buildings, as defined, in the manufacturing and the mining industries could be regarded as implementing a system under which the electricity tax was only levied on non-production purposes.

It is true that the Commission, prior to the Adria Wien ruling, accepted that a Danish tax scheme on electricity did not entail State aid because the differentiations within that system “derived directly from the basic principle of the electricity tax system” 48State aid No N 416/1999 – Denmark, Electricity reform. See point 16 of the Commission’s notice on the application of the State aid rules to measures related to direct business taxation (OJ C 384, 10.12.1998, p. 3) and the corresponding point 17B.3.1(4) of Chapter 17B of the Authority’s State Aid Guidelines (OJ L 137, 08.06.2000, p. 22 and EEA Supplement No. 26, 08.06.2000, p. 12)., that is to say was justified by the nature or general scheme of the system. In this case the Commission accepted that the principle of the Danish system was to burden only household and comparable consumption with the tax. However, under the Danish system detailed, almost meticulous, rules were laid down with the purpose of ensuring that all household and comparable use was being taxed and all other uses were not taxed 49See in particular Section 11 of the Danish Act, “Lov om afgift af electricitet”, available at http://147.29.40.90/DELFIN/HTML/A1998/0068929.htm.. This entailed a methodology under which VAT registered enterprises measured their consumption of electricity for household-like purposes (such as heating of office space etc.) and paid the normal rate for such consumption while they did not pay tax on consumption deemed not to be comparable to household consumption. The Norwegian electricity tax exemption was clearly distinguishable from the Danish tax, firstly, due to the Norwegian exemption being limited to the manufacturing and the mining industries as defined in the statistical classification, and, secondly, due to the inaccurate way in which these enterprises’ electricity consumption for non-production purposes was measured.

On the basis of the above, the Authority must conclude that the exemption from the electricity tax for the manufacturing and the mining industries constituted a selective measure favouring certain undertakings within the meaning of Article 61(1) of the EEA Agreement.

All other elements of State aid in the meaning of Article 61(1) of the EEA Agreement were fulfilled. The sectoral exemption from the electricity tax constituted a loss of tax revenues for the Norwegian State and an advantage for certain undertakings. Given that the industries benefiting from the exemption were engaged in activities open to competition on markets in which there is trade between EEA Contracting Parties, the tax exemption was liable to distort competition and affect trade between the Contracting Parties.

The Authority is not obliged to carry out a market analysis as requested by PIL before being able to conclude that the measures in question distort competition and affect trade. For the qualification of a tax relief as aid it is irrelevant whether the companies exempted from a specific tax measure had to bear other costs related to environmental protection. Furthermore, the fact that the manufacturing and the mining industries in other countries of the EEA also may have benefited from tax exemptions or that other countries had not yet introduced comparable taxes has no bearing on the qualification of the exemption as aid. It is in the context of the assessment of the derogations under Article 61(3)(c) of the EEA Agreement, in combination with the Environmental Guidelines, that the aspect of international competitiveness is taken into account.

Consequently, the Authority concludes that the sectoral exemption from the electricity tax constituted State aid within the meaning of Article 61(1) of the EEA Agreement.

b) The exemption from the tax on electricity consumption for users in certain regions (municipalities)

In the opening decision, the Authority took the preliminary view that exemptions for undertakings located in certain regions (municipalities) were to be regarded as selective measures constituting aid within the meaning of Article 61(1) of the EEA Agreement.

The Authority sees no reason to deviate from its initial viewpoint. The exemption constituted a loss of tax revenues for the Norwegian State and an advantage to undertakings located in the regions (municipalities) concerned. Given that the tax exemption applied to all sectors, it cannot be excluded that the activities carried out by the undertakings in the regions concerned are subject to competition and trade and that the exemption therefore was liable to distort competition and affect trade between Contracting Parties. Consequently, the Authority considers that the regional derogations from the electricity tax constituted State aid within the meaning of Article 61(1) of the EEA Agreement.

2. Derogations under CO2 tax regime

a) The exemption of coal and coke used as raw materials or as reducing agents in industrial processes

As mentioned in point I.C.2.a) above, the Authority announced in the opening decision that it would assess in more detail the relevance of the Commission’s decision regarding the non-fuel use exemption and the dual-use exemption under the UK Climate Change Levy 50See footnote 22 above.. Subsequent to this decision similar exemptions were at issue in a case concerning the prolongation of the CO2 tax in Sweden.

In the Swedish case the Commission stated that “the starting point for the Swedish taxation of energy products is that tax should only be levied on energy products when used for fuel purposes. It is not levied on energy products used for purposes other than as motor fuels or as heating fuels” 51State aid No NN 3A/2001 and NN 4A/2001 – Sweden, prolongation of CO2 tax scheme. See points 3.5 and 4.3 of the decision.. The Commission further noted that where an energy product was used mainly as a raw material in production processes not involving combustion and in reduction processes the full use of the product would be exempt under the Swedish system. With reference to the Climate Change Levy decision, the Commission concluded that the exemptions under Swedish legislation were justified by the logic and nature of the system.

The Commission’s approach is also reflected in the Energy Tax Directive according to which energy products, as defined in Article 2(1) of the Directive, are not subject to taxation when used for purposes other than motor fuel or heating fuel. Hence, such energy products used as raw materials and dual use of energy products, e.g. use both as heating fuel and reducing agents, are excluded from the framework 52Article 2(4)(b) of the Directive.. It is recognised that the extent to which energy products should essentially be subject to the Community framework when used as heating fuel or motor fuel, it is in the nature and logic of the tax system to exclude from the scope of the framework dual uses and non-fuel uses of energy products 53Recital 22 of the Directive..

The Authority would like to point out in this context that tax harmonisation as such, and thus the Energy Tax Directive, is outside the scope of the EEA Agreement. However, for State aid purposes the Energy Tax Directive can be used, in the same manner as Commission practice, as a point of reference for the Authority, without implying that the EFTA States are obliged to comply with Community tax legislation 54Chapter 15 of the Authority’s State Aid Guidelines, Introduction, paragraph 5., that is not a part of the EEA Agreement.

Before the entry into force of the EEA Agreement, the Norwegian authorities introduced a tax on the use of coal and coke for energy purposes. The rationale behind this tax was partly to avoid the risk of companies replacing mineral oils (taxed) with coal and coke (not previously taxed) for energy purposes and partly to promote the use of more environmentally friendly energy products. Industries using coal and coke for other purposes were therefore not targeted by the tax. According to the Norwegian Government, the Norwegian tax system was mainly oriented towards energy-related emissions. In light of these explanations, the Authority accepts that the Norwegian CO2 tax on coal and coke was designed to cover only energy-related uses of these products. The Norwegian Government explained that the use of coal and coke in industrial processes might also serve for energy purposes as an unavoidable side effect. The Authority accepts that this does not affect the qualification of the exempted purpose. Consequently, the Authority accepts that the exemption of coal and coke used as raw materials or reducing agents was within the nature and logic of the Norwegian tax system.

In light of the above considerations, the Authority concludes that the exemption of coal and coke used as raw materials or reducing agents from the CO2 tax on coal and coke did not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.

b) The exemption of coal and coke used for energy purposes in production of cement and leca

The Authority notes that the exemption from the CO2 tax in favour of the cement and leca industry deviated from the general rule, namely that the CO2 tax was levied on coal and coke used for energy purposes.

The objective of the CO2 tax on coal and coke was partly to avoid a risk of conversion from mineral oils to coal and coke for energy purposes and partly to promote the use of more environmentally friendly energy products.

The Norwegian Government has claimed that there was limited scope for a producer to change the type and amount of energy product required for the process. In the course of the formal investigation procedure, the Norwegian Government, however, acknowledged that there might be doubts as to whether this circumstance could be a sufficient justification for the exemption in light of the underlying environmental objectives of the tax.

The information submitted by the Norwegian authorities did not show that the replacement of coal and coke for energy purposes with other products was technically impossible. Nor did the authorities demonstrate that the cement industry could not have reduced the consumption of coal and coke for energy purposes through measures increasing energy efficiency. Finally, the exemption only concerned the production of cement and leca, but submitted other mineralogical processes to the CO2 tax 55Under the Energy Tax Directive it is considered to be in the nature and the logic of an environmental tax system to exclude mineralogical processes from the framework (Article 2(4)(b) and recital 22). However, it cannot be in the nature and logic of the system to exclude some, but not all, mineralogical processes from an energy tax such as under the Norwegian tax system.. Therefore, the Authority does not consider that an exemption of this industry only from the tax could be regarded as being within the nature and logic of the system.

Furthermore, the exemption of coal and coke used for energy purposes in the production of cement and leca constituted a loss of revenue for the Norwegian State and a financial benefit to certain undertakings. Given that the industry in question is active on markets in which there is trade between EEA countries, the exemption was liable to distort competition and trade between the Contracting Parties.

The Authority takes note of the fact that the CO2 tax on coal and coke was abolished as from 1 January 2003, including as a consequence the exemptions subject to the present investigation procedure. Hence, as from 1 January 2003, the aid element contained in the exemption for the cement and leca industry had come to an end.

c) The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry

The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry is sector specific. Furthermore, the reduced rate is not justified by the nature and or general scheme of the CO2 tax system.

The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry constitutes a loss in tax revenues for the Norwegian State and a financial benefit to certain undertakings. Given that the industry in question is active on markets in which there is trade between EEA countries, the reduced rate is also liable to distort competition and trade between the Contracting Parties. Consequently, the reduced rate for the paper and pulp industry constitutes State aid within the meaning of Article 61(1) of the EEA Agreement.

3. The abolishment of the SO2 tax on the use of coal and coke and on emissions from oil refineries

a) The abolishment of the SO2 tax on the use of coal and coke

With regard to the SO2 tax on the use of coal and coke, the Authority maintains that the abolishment of the tax in 2002 conferred a financial benefit on undertakings to which the tax applied and led to a loss of revenue for the Norwegian State. However, on the basis of the information now available, the Authority takes the view that the abolishment cannot be regarded as being selective in the meaning of Article 61(1) of the EEA Agreement.

As the Authority noted in the opening decision, the abolishment of the SO2 tax on the use of coal and coke limited the scope of the SO2 tax, without distinguishing between different categories of undertakings or sectors. The scope of the tax was determined by excluding the use of coal and coke. The general rule after the abolishment in 2002 was therefore that the use of coal and coke was not liable to any SO2 tax. The abolishment of the SO2 tax on the use of coal and coke therefore benefited, in principle, all undertakings in Norway using coal and coke.

The doubts expressed in the opening decision that the abolishment nevertheless might have been selective were removed during the investigation procedure.

There were no indications suggesting that an objective of the Norwegian authorities, when abolishing the SO2 tax on the use of coal and coke, was to influence the competitive relationship between manufacturers, which were in direct competition with each other. Nor has the Authority’s investigation revealed that there were any risks that the abolishment of the SO2 tax on the use of coal and coke would have such effects. From the information at the Authority’s disposal, there did not appear to be any manufacturers benefiting from the abolishment of the tax in question (because they used coal and coke in their production processes), which were in direct competition with other manufacturers in Norway not benefiting from the abolishment, because they used mineral oil in similar production processes 56By contrast cf. Case C-53/00 Ferring SA v Agence centrale des organismes de sécurité sociale (ACOSS) [2001] ECR I-9067, in which the Court of Justice found that a tax levied on direct sales of medicines to pharmacies, but not on wholesale distributors, equated to granting the wholesale distributors a selective tax exemption. In that case the two groups of distributors were in direct competition with each other, the tax in question had direct effects on the competitive relationship between them and a particular objective of the French authorities had been to create such effects.. Finally, there were no indications that the abolishment of the tax was a mechanism for circumventing the EEA rules on State aid by means of discriminatory taxation 57Cf. the opinion of Advocate General Tizzano in Case C-53/00, Ferring, cited above, para. 38.. It appeared that the abolishment of the tax was the result of the Norwegian authorities’ conclusion that measures other than taxation were best suited to curb SO2 emissions.

It is therefore concluded that the abolishment of the SO2 tax on the use of coal and coke in 2002 did not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.

b) The abolishment of the SO2 tax on emissions from oil refineries

With regard to the SO2 tax on emissions from oil refineries, it is noted that the use of mineral oils as fuel in the refinery process was subject to taxation prior to the green tax reform in 1999 and continued to be taxed after the changes in the tax system that resulted from this reform. Thus, the use of mineral oils as fuel in the refinery process remained liable to taxation throughout.

Moreover, as mentioned in point I.B.3 above, a provision was introduced in 1999 with the view of ensuring that the use of mineral oils by oil refineries would not be subject to double taxation (the regular SO2 tax on mineral oils and the new emission based tax). This led to a situation where emissions from oil refineries resulting from the use of crude oil in the refinery process were taxed in addition to emissions from the use of mineral oils as fuel. The abolishment in 2002 of this tax entailed that the provision preventing double taxation was removed and that the use of mineral oils as fuel in the refinery process was covered in full by the regular SO2 tax on mineral oils. It would therefore be correct to consider that the abolishment of the tax on emissions from oil refineries in reality was an abolishment of a tax on the use of crude oil in the refinery process.

It is the Authority’s understanding that crude oil is used in the refinery process not as a motor fuel or heating fuel but rather as a raw material. In accordance with the Commission’s practice 58See footnote 22 and 51 above. and the view taken by the Council when adopting the Energy Tax Directive as regards the use of energy products for purposes other than heating fuel or motor fuel, the Authority finds that it is in the nature and logic of the tax system not to tax the use of crude oil in the refinery process insofar as crude oil is not used for fuel purposes.

It follows that the decision of the Norwegian State in 2002 to abolish the tax on emissions from oil refineries did not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.

C. Compatibility assessment

The compatibility with the functioning of the EEA Agreement of those tax measures which have been found to constitute State aid within the meaning of Article 61(1) of the EEA Agreement will be assessed below. These measures will be analysed under Article 61(3)(c) of the EEA Agreement in combination with the Environmental Guidelines.

According to section D.3.2 of the Environmental Guidelines, EFTA States might deem it necessary to make provisions for temporary exemptions from environmental taxes notably because of the absence of harmonisation at European level or because of the temporary risks of a loss of international competitiveness. However, as can be seen from point 42 of the Environmental Guidelines, these exemptions constitute operating aid, which have to fulfil the requirements set out in the Guidelines.

Point 46.1 of the Environmental Guidelines sets out that when an EFTA State, for environmental reasons, introduces a new tax in a sector of activity or on products in respect of which no corresponding European Community tax harmonisation exists or the tax exceeds that provided for in Community legislation, exemption decisions covering a ten year period may be justified:

(a) when these exemptions are either conditional on the conclusion of agreements between the EFTA State concerned and the recipient firms whereby the firms undertake to achieve environmental protection objectives, or

(b) when the amount paid by the firms after the tax reduction remains higher than the Community minimum (where a Community tax exists – first indent) or constitutes a significant proportion of the national tax (where the tax does not correspond to a harmonised Community tax – second indent).

Under certain conditions stipulated in point 46.2 of the Environmental Guidelines, the above will also apply to existing taxes. The detailed conditions of these exemption possibilities will be analysed for each of the measures concerned below.

1. Exemptions from tax on electricity consumption

a) The exemption from the tax on electricity consumption for the manufacturing and the mining industries

The Norwegian Government did not show that the conditions under point 46.1(a) of the Environmental Guidelines (environmental agreements or other measures having similar effects) were fulfilled.

There were no harmonised electricity taxes in the European Community in 2002 and 2003. Point 46.1(b) first indent of the Environmental Guidelines is therefore not applicable. In any event, the Norwegian Government did not show that the undertakings in question paid an amount which remained higher than the Community minimum under the Energy Tax Directive applicable as from 1 January 2004 59That is to say 0,5 Euro per MWh, see Article 10 in conjunction with Annex I Table C of Council Directive 2003/96/EC (cited above)..

The Norwegian Government did not submit information about the consequences of the amendments in 2001 in terms of collection of the electricity tax. The Authority has therefore not been in a position to confirm that some of the exempted companies could be regarded as paying a significant proportion of the electricity tax (point 46.1(b) second indent of the Environmental Guidelines). More importantly, the electricity tax regime at issue did not contain any provisions which would have ensured that companies paid a significant proportion of the tax.

The limitation of the scope of the exemption for the manufacturing and the mining industries as from 1 January 2001 resulted in companies in these sectors paying for the use of electricity to the extent that their buildings qualified as “administration buildings”. Thus, depending on the circumstances, some of these companies might have paid the tax on most of their electricity consumption which related to administrative activities. Other companies might have paid very little tax, if anything at all, on such consumption because they had buildings in which less than 80% of the space was used for administrative purposes. In any event, assuming that many of these beneficiaries used considerable amounts of electricity in their production processes, the overall tax burden on these undertakings might have been very low.

Consequently, the Authority concludes that the sectoral exemption from the electricity tax for the manufacturing and the mining industries was incompatible with the functioning of the EEA Agreement.

b) The exemption from the tax on electricity consumption for users in certain regions

The Authority did not receive information which showed that the requirements under the Environmental Guidelines were fulfilled as from 1 January 2002.

In particular, given that undertakings in these regions were fully exempted from the electricity tax, they cannot be regarded as having paid a significant proportion of the tax (point 46.1(b) second indent of the Environmental Guidelines).

In the course of the preliminary investigation procedure, the Norwegian Government argued that due to harsh weather conditions and long distances, the exemption from the electricity tax for users in certain regions might be justified as regional development aid. However, the Authority did not receive information which would have enabled it to confirm that the exemptions could be justified under the Regional Aid Guidelines 60Chapter 25 of the Authority’s State Aid Guidelines..

Consequently, the Authority concludes that the exemption from the electricity tax to the benefit of undertakings located in Finnmark and seven municipalities in North Troms (Karlsøy, Kvænangen, Kåfjord, Lyngen, Nordreisa, Skjervøy og Storfjord) was incompatible with the functioning of the EEA Agreement.

2. Derogations under the CO2 tax regime

a) The exemption of coal and coke used for energy purposes in production of cement and leca

The Norwegian Government did not show that the conditions under point 46.1(a) of the Environmental Guidelines (environmental agreements or other measures having similar effects) were fulfilled.

There were no harmonised taxes on coal and coke in the European Community prior to 1 January 2004. Therefore, point 46.1(b) first indent of the Environmental Guidelines was not applicable. The beneficiaries were fully exempted from the CO2 tax on coal and coke and there were no other taxes on the use of coal and coke after 1 January 2002. Thus, the second indent of point 46.1(b) of the Environmental Guidelines was not applicable either.

Consequently, the Authority concludes that the aid measure in question was incompatible with the functioning of the EEA Agreement.

b) The reduced rate of the CO2 tax on mineral oils for the paper and pulp industry

Point 46.1 of the Guidelines may be applied to existing taxes when the conditions in point 46.2(a) and (b) are fulfilled. According to point 46.2(a) the tax in question must have an appreciable positive impact in terms of environmental protection. Point 46.2(b) first alternative requires that the derogations for the firms concerned must have been decided on when the tax was adopted.

The CO ₂ tax on mineral oils leads to reduced use of fossil fuels and must be considered to have an appreciable positive impact in terms of environmental protection. The Authority notes that according to information submitted by the Norwegian authorities, the paper and pulp industry had reduced CO ₂ emissions by 60 000 tons by 1999. In addition, according to the Norwegian Government’s report, “Norway’s third national communication under the Framework Convention on Climate Change” (June 2002 61http://odin.dep.no/archive/mdvedlegg/01/17/T1386032.pdf.):

“ … CO ₂ emissions from energy use in industry have been reduced considerably as a result of improved energy efficiency and changes in the energy mix…. In the industrial sector, electricity and bio energy have to a large extent replaced mineral oils as an energy source. This has been especially pronounced in the pulp and paper industry, which is increasingly using bark and other biological waste products as fuel.”

The Authority therefore considers that the condition in point 46.2(a) of the Environmental Guidelines is fulfilled.

The paper and pulp industry has paid the reduced rate of the CO ₂ tax on mineral oils since 1993, prior to the entry into force of the EEA Agreement on 1 January 1994. Consequently, the Authority considers that, in accordance with the requirement in point 46.2(b) of the Environmental Guidelines, the derogation for the firms concerned was decided when the tax in question was adopted.

Pursuant to point 46.1(b) first indent of the Environmental Guidelines, an exemption from an environmental tax may be justified in cases where the reduction concerns a tax corresponding to a harmonised European Community tax, and where the amount effectively paid by the firms after the reduction remains higher than the European Community minimum in order to provide the firms with an incentive to improve environmental protection.

Information provided by the Norwegian Government shows that the reduced tax rate on mineral oils paid by the paper and pulp industry is higher than the corresponding minimum rate under Community law.

The tax rate paid by the paper and pulp industry was NOK 0.245 per litre in 2002 (approximately 33.62 € per 1000 litre), NOK 0.25 per litre in 2003 (approximately 31.25 € per 1000 litre) and is NOK 0.26 in 2004.

In the European Community, the minimum rates for 2002 and 2003 were stipulated in Council Directive 92/82EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils 62OJ L 316, 31.10.1992, p. 19.. The relevant minimum rate for gas oil and kerosene was 0.18 € per 1000 litre and 13 € per 1000 kg (12.3 € per 1000 litre) for heavy fuel oil.

From 1 January 2004 minimum levels of excise duties on energy products are stipulated in the Energy Tax Directive 63Council Directive 2003/96/EC restructuring of the Community framework for the taxation of energy products and electricity, cited above.. The minimum rate is 21 € per 1000 litre for gas oil and kerosene used as motor fuels for stationary motors et al. For heating fuels the minimum rate is 21 € per 1000 litre for gas oil, 0 € for kerosene and 15 € per 1000 kg (14.3 € per 1000 litre) for heavy fuel oil.

Thus, the condition in point 46.1(b) first indent is fulfilled.

According to point 46.1 of the Environmental Guidelines, an exemption decision covering a period of ten years with no degressivity may be justified when the other conditions in point 46.1 are fulfilled. The Norwegian Government requested that the Authority, as part of the formal investigation procedure, approve the current reduction of the CO ₂ tax on mineral oils in favour of the paper and pulp industry, on the condition that this reduction be abolished in 2005 and with the possibility for the Government to apply for a subsequent extension.

Against this background, the Authority considers it appropriate to approve the aid until 31 December 2004. If the Norwegian Government wishes to continue the aid beyond 31 December 2004, it would have to notify the Authority of the aid measure in accordance with Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement.

Finally, the Authority notes that the above conclusion also remains valid if the reduced rate of the CO ₂ tax were to be assessed together with the exemption from the basic heating oil tax in favour of the paper and pulp industry. The CO ₂ tax and the heating oil tax together have an appreciable positive impact in terms of environmental protection as they lead to reduced use of fossil fuels. The paper and pulp industry has been exempted from the heating oil tax since the introduction of this tax in 2000. The conditions in point 46.2 would therefore be fulfilled. The assessment under point 46.1(b) first indent of the Environmental Guidelines would remain the same as long as the paper and pulp industry pays the reduced rate of the CO ₂ tax on mineral oils. However, it would be required that the exemption from the basic heating oil tax be limited in time. This exemption could therefore only be authorised until 31 December 2004 together with the reduced rate of the CO ₂ tax on mineral oils, but with the possibility for the Government to apply for a subsequent extension.

D. Qualification as “new aid” as from 1 January 2002

a) The binding effect of the acceptance of appropriate measures

Pursuant to Article 62(1) of the EEA Agreement, “[a]ll existing systems of State aid in the territory of the Contracting Parties…shall be subject to constant review as to their compatibility with Article 61.” Furthermore, in accordance with Article 1(1) in Part I of Protocol 3 to the Surveillance and Court Agreement, “[t]he EFTA Surveillance Authority shall, in cooperation with the EFTA States, keep under constant review all systems of aid existing in those States. It shall propose to the latter any appropriate measures required by the progressive development or by the functioning of the EEA Agreement.”

Appropriate measures may be proposed after the EFTA State concerned has been informed about the Authority’s preliminary view that an existing aid scheme is not, or is no longer, compatible with the functioning of the EEA Agreement.

Alternatively, where a review is initiated with respect to an undetermined number of existing aid schemes, the Authority will normally prepare guidelines, which lay down the conditions under which State aid can be regarded as being compatible with the functioning of the EEA Agreement. New guidelines, such as the Environmental Guidelines, constitute an expression of how the basic State aid rules of the EEA Agreement will be interpreted and applied by the Authority. The Authority may consider that existing aid schemes which do not fulfil the requirements set out in the new guidelines are not, or are no longer, compatible with the functioning of the EEA Agreement. Consequently, in the context of the adoption of new guidelines, the Authority would propose as appropriate measures to the EFTA States that existing aid schemes be brought in line with these new requirements. This conclusion does not need to be preceded by an assessment of individual cases, but may be based on general considerations regarding the compatibility of aid in certain sectors or for certain purposes.

Therefore, the adoption of appropriate measures with respect to all – not necessarily individualised – existing aid schemes constitutes one way for the Authority, in conjunction with the EFTA States, of carrying out the constant review of existing aid 64See in this context: Case C-242/00 Germany v Commission [2002] ECR I-5603, para. 28..

If an EFTA State accepts the proposed measures, these measures become legally binding on that state 65Case C-242/00 Germany v Commission, cited above, para. 28. The binding effect of the acceptance of appropriate measures is now explicitly laid down in Article 19(1), second sentence, in Part II of Protocol 3 to the Surveillance and Court Agreement.. The fact that the new conditions for granting aid are the outcome of an agreement between the EFTA States and the Authority neither alters the objective significance of those conditions nor their binding effect 66See in this context, Case C-313/90 CIRFS [1993] ECR I-1125, para. 36..

By decision of 23 May 2001 the Authority adopted the new Environmental Guidelines and proposed, as appropriate measures, “ that EFTA States should bring their existing environmental aid schemes into line with these guidelines before 1 January 2002.” The Norwegian Government signified its agreement to the proposed appropriate measures by letter from the Ministry of Trade and Industry dated 6 July 2001.

The binding effect of the Norwegian Government’s acceptance of the proposed appropriate measures cannot be questioned by reference to alleged procedural improprieties as the co-operation procedure was fully respected in the present case. The EFTA States were informed in writing about the Commission’s two draft proposals for new guidelines, including a reference to the envisaged appropriate measures. The Norwegian Government was invited to submit its comments to these proposals. In addition, on two occasions EFTA States were invited to participate in multilateral meetings, i.e. on 21 March 2000 and 16 October 2000, at which time the new Environmental Guidelines were on the agenda. By letter dated 11 April 2001 (Doc. No. 01-2734-D), the Norwegian Government was invited to submit its comments on the Authority’s final draft Environmental Guidelines including certain amendments to the guidelines as adopted by the Commission, which became necessary in order to take into account EEA relevant issues. The draft Environmental Guidelines included a reference to the envisaged appropriate measures. Finally, a bilateral meeting took place between representatives from the Authority and the Norwegian Government in April 2001, at which time the Environmental Guidelines and the envisaged appropriate measures were discussed in detail.

b) Consequences of the binding effect

In line with consistent Commission practice 67Cf. e.g. State Aid No C 42/2003 - Sweden; State Aid No E 10/2000 – Germany; and State Aid No C 37/2000 - Portugal., the Authority takes the view that the binding effect of the Norwegian Government’s acceptance of the proposed appropriate measures implies that aid granted in violation of the obligations assumed by Norway constitutes “new aid” as from the date on which Norway promised to bring its aid schemes in line with the Environmental Guidelines (i.e. on 1 January 2002).

With a proposal to accept appropriate measures, the Authority asks the EFTA States, to the extent indicated, to forgo exercising the rights to grant aid which they may derive under hitherto applicable rules. In itself the request to accept the appropriate measures does not have any bearing on the classification of an aid scheme as new or existing. In contrast, a State’s acceptance of the proposed appropriate measures implies that State’s promise to, if necessary, change its legislation to comply with the appropriate measures by a given date. Any aid not in conformity with the appropriate measures after that date must hereafter be classified as new aid. Thus, as held by the Court of Justice in the “CIRFS case”, a Member State’s acceptance of new rules to fill out the discretion afforded to the Commission (the Authority) has “ the effect, inter alia, of withdrawing from certain aid falling within its scope the authorization previously granted and hence of classifying it as new aid and subjecting it to the obligation of prior notification” (emphasis added) 68Case 313/90, CIRFS, cited above, para. 35.. In this respect, a State’s acceptance of appropriate measures replaces a formal investigation procedure by the Authority against all existing aid schemes with a view to imposing the requirement to bring existing aid schemes in line with the requirements of the new guidelines by way of a final and binding decision. Any aid granted after the compliance date set out in such a decision would constitute “new aid”.

Accordingly, the Authority does not concur with the Norwegian Government and PIL that aid schemes having the character of “existing aid” before the acceptance of appropriate measures can only turn into “new aid” after an individual assessment of each scheme including a finding, by the Authority, that the particular scheme is not in compliance with the guidelines.

Nor does the Authority accept that a distinction has to be made between, on the one hand, proposals for appropriate measures in relation to specifically identified provisions in national law and, on the other hand, proposals of a general character. In the above mentioned CIRFS case the relevant agreed measures (the so-called “discipline”) was drafted in general terms 69Cf., Para. 14 of the Report for the Hearing [1993] ECR-1151.. Moreover, the Commission had made no findings that the measure infringed the said “discipline”. Nevertheless, the Court of Justice found that the national measure in question constituted new aid to the extent that it did not comply with the said “discipline” 70Similarly, in the above mentioned opening-decision with regard to environmental taxes in Sweden, the Commission has taken the view that Sweden’s acceptance of the appropriate measures in itself has had the effect of turning hitherto existing aid into new aid to the extent that the aid schemes do not comply with the new guidelines. Like in the present case, the Commission had not, prior to the adoption of the opening decision, carried out any individual assessment of the different Swedish’ schemes, cf. State aid No C 42/2003.. Indeed, any other conclusion would hardly have been reconcilable with the above mentioned case law according to which the binding effect of an acceptance of appropriate measures does not depend upon whether or not the Authority has carried out an individual assessment of existing aid schemes prior to the proposal of appropriate measures 71Case C-242/00, cited above, para. 28..

Thus, the fact that the Authority’s decision to propose appropriate measures referred to the requirements set out in the new Environmental Guidelines, without proposing specific measures with respect to individual aid schemes, did not imply that aid incompatible with Norway’s acceptance of the appropriate measures would not turn into new aid when the agreed compliance date had passed. It merely meant that it was up to the Norwegian Government itself to carry out the necessary assessment of which aid schemes that had to be changed, subject to any later control by the Authority.

For the same reason, the Authority considers it immaterial that Norway’s accep­tance of the appropriate measures did not imply that the Government acknowledged that the relevant aid schemes were in breach of the State aid rules.

In its comments to the opening decision, the Norwegian Government argued that the appropriate measures issued cannot constitute a sufficient legal basis for recovery. In the opinion of the Authority that statement is correct but immaterial. It is true that recovery cannot be based solely on a breach of obligations resulting from the acceptance of appropriate measures. A possible recovery order needs to be based on a decision finding the aid measures in question to be incompatible with the functioning of the EEA Agreement (cf. Article 14 in Part II of Protocol 3 to the Surveillance and Court Agreement). Moreover, such a negative decision needs to be preceded by a formal investigation procedure in which individual aid schemes are examined. This does not, however, mean that an aid scheme can only be classified as “new aid” after a final decision terminating a formal investigation procedure against individual aid schemes. In this respect the situation is not different from cases where aid is qualified as new aid because it is granted without respecting the conditions laid down in an approved aid scheme or after the expiry of such an aid scheme. In such cases, aid granted in breach of an EFTA State’s commitment to respect new conditions under which aid is granted, or to abolish any incompatible aid from a certain moment in time, is to be qualified as new aid. Moreover, also in these cases, the final conclusion as to whether the aid granted is covered or falls outside approved schemes can only be made after a formal investigation procedure has been carried out. That notwithstanding, any such aid granted outside approved schemes (or binding conditions) would constitute new aid from the moment it was granted and not from the moment the Authority adopted a final (negative) decision 72Case C-36/00 Spain v Commission [2002] ECR I-3243, paras. 24, 25 and 32..

In conclusion, the Authority maintains the view that the sectoral exemption and the regional derogations from the electricity tax as well as the exemption from the CO2 tax on coal and coke for energy purposes in favour of the cement and leca industry, applicable after 1 January 2002 and incompatible with the requirements laid down in the new Environmental Guidelines, are to be regarded as new aid.

E. Recovery

1. Legitimate expectations

The sectoral exemption and the regional derogations from the electricity tax and the exemption from the CO2 tax on coal and coke for energy purposes in favour of the cement and leca industry were not notified to the Authority and were aid granted in conflict with the requirements laid down in Article 61(3)(c) of the EEA Agreement and the new Environmental Guidelines. These exemptions therefore constituted unlawful and incompatible aid after 1 January 2002., This aid is thus subject to recovery to the extent that this would not be in conflict with general principles of EEA law, notably, legitimate expectations on the part of the beneficiary 73See Article 14 in Part II of Protocol 3 to the Surveillance and Court Agreement and prior to the entry into force of the amendment to Protocol 3, on 28 August 2003, point 6.2.3 of Chapter 6 of the Authority’s State Aid Guidelines..

According to the case law of the Court of Justice, a diligent trader should himself be able to verify that new aid has been put into effect in accordance with the applicable procedural rules, notably Article 88 EC, corresponding to Article 1 in Part I of Protocol 3 to the Surveillance and Court Agreement. For that reason, the beneficiary of new aid, granted in contravention of that provision, can only in exceptional circumstances claim that he had legitimate expectations barring the repayment of the aid 74Cf. Case C-169/95 Spain v Commission [1997] ECR I-135, para. 51; Case C-24/95 Alcan Deutschland [1997] ECR I-1591, para. 25; and Case T-55/99 Confederación Española de Transporte de Mercancías (CETM) [2000] ECR II-3207, para. 121 to 131..

In the present case, the unlawful aid concerned was originally to be classified as existing aid. It only, as from 1 January 2002, became new aid as a consequence of the Norwegian Government’s acceptance of the proposed appropriate measures. Therefore, the question arises at what date sufficient information available to aid recipients ought to make a diligent recipient aware that the aid concerned might take – or already had taken - the form of unlawful aid.

In the opinion of the Authority, the publication of the Authority’s proposal for appropriate measures did not provide undertakings concerned with such information. Firstly, the proposal did not in itself entail that any existing aid scheme changed its status into a new aid scheme. Such an effect could only occur after the EFTA State concerned had accepted the proposed appropriate measures. Second, it was stated in paragraph 70 of the new Environmental Guidelines (to which the proposal for appropriate measures referred) that in the absence of any reply from the EFTA States, the Authority would take it that the relevant State did not agree to the proposed measures.

In contrast, the Authority takes the view that a publication of the EFTA State’s acceptance of the proposed appropriate measures, in combination with the proposed measures, could provide a diligent aid recipient with enough information to be aware that the aid received had to be in compliance with the new Environmental Guidelines. Hence, aid recipients would be in the position to carry out an assessment as to whether the relevant aid scheme would be compatible with the new Environmental Guidelines after the compliance date that the EFTA State had agreed to. However, as the amendments to Protocol 3 to the Surveillance and Court Agreement, incorporating the EC procedural State aid Regulation 75Council Regulation (EC) No. 659/1999 of 22 March 1999 laying down detailed rules for the application of [ex] Article 93 of the EC Treaty., had not yet entered into force at the time when Norway accepted the appropriate measures, the Authority did not – as now foreseen in Article 26(1) in Part II of Protocol 3 to the Surveillance and Court Agreement – publish the Norwegian Government’s acceptance of the appropriate measures. Information about the acceptance of the appropriate measures was only provided in the Authority’s decision to open a formal investigation procedure in the present case.

That opening decision was published in the Official Journal of the European Union and in the EEA Supplement thereto on 6 February 2003 76See footnote 6.. Moreover, the publication not only contained information about the Norwegian Government’s acceptance of the appropriate measures, but also identified the national aid schemes that were under investigation and could have the character of unlawful and incompatible aid. Finally, it was explicitly stated that the Authority took the initial view that any aid which was found to be incompatible with the new Environmental Guidelines had to be classified as new aid subject to recovery. For that reason, the Authority takes the view that after the publication of the opening decision at the very latest, diligent aid recipients could no longer enjoy legitimate expectations that the aid still had the character of lawful and compatible aid measures 77In fact, it seems likely that most aid recipients obtained knowledge about Norway’s acceptance of the appropriate measures and the doubts pertaining to the compatibility of the aid schemes either in May 2002, when the public was informed hereof in the Norwegian Government’s Revised Budget for 2002, in October 2002 when the Government published its comments to the Authority’s opening decision on the internet and, moreover, informed the public about the main content of the opening decision in the State Budget for 2003, or, at the latest, in December 2002 when the Government published a report about the consequences of the new Environmental Guidelines for the electricity tax..

It follows from the above that aid granted between 6 February 2003 and 31 December 2003 in the form of the exemption from the electricity tax for the manufacturing and the mining industries and the exemption for undertakings in Finnmark and seven municipalities in North Troms shall be recovered from the beneficiaries.

As regards the exemption from the CO­2 tax on coal and coke for energy purposes in favour of the cement and leca industry, which was applicable until 31 December 2002, the Authority decides, in the light of the above assessment on legitimate expectations, that no recovery is required.

2. The amount to be recovered

According to point 46.1(b) second indent of the Environmental Guidelines, beneficiaries are required to pay a significant proportion of a national tax which does not correspond to a tax subject to harmonisation at European Community level. The rationale for this requirement is to leave the beneficiaries with an incentive to improve their environmental performance. The same principle is enshrined in point 46.1(b) first indent of the Environmental Guidelines which provides that reductions concerning a tax corresponding to a harmonised European Community tax may be authorised if the amount effectively paid by the beneficiaries remain higher than the European Community minimum “in order to provide the firms with an incentive to improve environmental protection”.

While there was no harmonised European Community tax during the period between 1 January 2002 and 31 December 2003 when the derogations from the electricity tax were applicable, such harmonised taxes have been established under the Energy Tax Directive with effect from 1 January 2004. The Energy Tax Directive takes the objective of environmental protection explicitly into account (cf. recitals 3, 6, 7 and 12). On this basis, the Authority considers that an amount paid by undertakings which equals the European Community minimum as laid down in the Energy Tax Directive will provide undertakings with an incentive to improve environmental protection. It can therefore be accepted that a tax which equals the minimum rate for electricity in the Energy Tax Directive, i.e. 0.5 € per MWh, would also amount to a significant proportion of the national tax under point 46.1(b) second indent of the Environmental Guidelines 78This is in line with the practice of the Commission (cf. State aid No C33/2003 – Austria) although the Commission prior to the adoption of the Energy Tax Directive only had considered a rate down to 20-25 per cent of the general tax rate as amounting to a significant proportion of the national tax (State aid No N 449/2001 – Germany; State aid No NN 3A/2001 and NN 4A/2001 – Sweden.. Consequently, what needs to be recovered is a significant proportion of the national tax which at the very least must equal the minimum rate for electricity laid down in the Energy Tax Directive.

F. Final conclusions

The sectoral exemption and the regional derogations from the electricity tax constituted State aid within the meaning of Article 61(1) of the EEA Agreement. The Authority concludes that these tax measures were incompatible with the functioning of the EEA Agreement. Recovery with interest 79See Article 14(2) in Part II of Protocol 3 to the Surveillance and Court Agreement and Chapter 34 of the State Aid Guidelines). shall take place with regard to aid received from 6 February 2003 onwards.

The Authority further concludes that the exemption from the tax on coal and coke used as raw materials or reducing agents did not constitute State aid within the meaning of Article 61(1) of the EEA Agreement. Likewise, the Authority concludes that neither the abolishment of the SO2 tax on coal and coke nor the abolishment of the SO2 tax on emissions from oil refineries as from 1 January 2002 constituted State aid within the meaning of Article 61(1) of the EEA Agreement.

On the other hand, the exemption from the CO2 tax on coal and coke for energy purposes in favour of the cement and leca industry constituted State aid within the meaning of Article 61(1) of the EEA Agreement. The Authority cannot conclude that this aid measure was compatible with the functioning of the EEA Agreement. However, no recovery shall take place in relation to this aid measure.

The Authority also concludes that the reduced rate of the CO2 tax on mineral oils in favour of the paper and pulp industry constitutes State aid within the meaning of Article 61(1) of the EEA Agreement. The Authority takes the view that the reduced rate for the paper and pulp industry is compatible with the functioning of the EEA Agreement, in particular Article 61(3)(c) thereof, in combination with the Environmental Guidelines until 31 December 2004.

HAS ADOPTED THIS DECISION:

1. The following Norwegian measures constitute State aid within the meaning of Article 61(1) of the EEA Agreement:

1. the exemption from the tax on electricity consumption for the manufacturing and the mining industries;
2. the exemption from the tax on electricity consumption for undertakings located in Finnmark and seven municipalities in North Troms (Karlsøy, Kvænangen, Kåfjord, Lyngen, Nordreisa, Skjervøy og Storfjord);
3. the exemption from the CO2 tax on coal and coke used for energy purposes in the cement and leca industry;
4. the reduced CO2 tax rate on mineral oils for the paper and pulp industry.

2. The exemption from the CO2 tax for coal and coke used as raw materials and reducing agents does not constitute aid within the meaning of Article 61(1) of the EEA Agreement.

3. The abolishment of the SO2 tax on the use of coal and coke and the abolishment of the SO2 tax on emissions from oil refineries as from 1 January 2004 do not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.

4. The measures referred to under point 1 of the present decision constitute new aid as from 1 January 2002.

5. The measure referred to under point 1 d) of the present decision is compatible with the functioning of the EEA Agreement until 31 December 2004.

6. The measures referred to under point 1 a), b) and c) of the present decision are incompatible with the functioning of the EEA Agreement.

7. As regards the incompatible aid referred to in point 1 c) of the present decision, recovery shall not be required.

8. The incompatible aid referred to under point 1 a) and b) of the present decision must be recovered from the aid recipients from 6 February 2003 onwards. Recovery shall be affected without delay and in accordance with the procedures of national law, provided that they allow the immediate and effective execution of the decision. The amount of recovery should equal a significant proportion of the national tax, and at least the minimum rate of 0.5 € per MWh laid down in the Energy Tax Directive (Council Directive 2003/96/EC). The aid to be recovered shall include interest from the date on which it was at the disposal of the beneficiaries until the date of its recovery. Interest shall be calculated on the basis of the reference rate used for calculating the grant-equivalent of regional aid and shall be annually compounded.

9. The Norwegian Government is requested to inform the Authority within two months from receipt of this decision of the measures taken to comply with the present decision.

10. This Decision is addressed to the Kingdom of Norway.

11. This Decision is authentic in the English language.

Done at Brussels, 30 June 2004.

For the EFTA Surveillance Authority