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6 The EU Directive on Taxation of Energy Products: State Aids References and Notification Standards
Energy Taxation and State Aid Law
Community policies39 by requiring minimum levels of taxation to be laid down at
Community level for most energy products, including electricity, natural gas and
The Directive entered into force on 1 January 2004. The Directive is
characterised by the following features: new minimum rates were to be set at the
latest by 1 January 2012 for a new period from 2013; the minimum rates are very
low; tailor-made implementation agreements exist for some Member States, sometimes with long transitional periods; there are exemptions for some energyintensive industries and generally lower rates for business and industry; possibilities exist to return the tax revenue to companies/industries which have entered into
energy efficiency agreements. Discussions on whether some exemptions from the
Directive would qualify as illegal State aid were settled by the removal of these
industrial sectors from the Directive.
It is worth to note that the ETD does not consistently help pursuing environmental (and, in particular, climate change) objectives. Minimum tax rates and
exemption clauses addressed to Member States do not always follow an environmental logic. For instance, minimum rates are not defined by taking into account
the emissions intensity of energy products. Consequently, higher taxes may be
imposed—counter intuitively—on renewable energy sources than on fossil
The Proposal of revised Directive aimed to reinforce the environmental character of the Directive.42 Particularly, the Commission proposed to introduce an
“additional uniform CO2-related tax” on energy products falling under the
ETD.43 The proposal of revision has unfortunately been withdrawn in 2015.44
The ‘light’ environmental character of the ETD may, nevertheless, slightly be
reinforced by Directive 2012/27/EU on energy efficiency.45 This Directive imposes
the obligation on Member States to set up energy efficiency obligation schemes.
Under these schemes, “energy savings from taxation measures” should only be
misplaced, and that the tax exemptions and special provisions put in place to mitigate it are
excessively complex in relation to the actual issue at stake”. Ekins and Speck (2008), p. 105.
The ETD can be considered as one of the three EU’s portfolios of energy related environmental
policy instruments. The EU has opted for a three-pronged approach towards selecting a viable
portfolio policy instruments for energy and climate related environmental protection: EU emissions trading, Renewable Energy Directive and Energy taxation. For further information, see
Hasselknippe and Christiansen (2004), p. 27.
See Recital 3 ETD. The requirement of minimum levels of taxation for energy products, such as
is the case of natural gas and coal and electricity is introduced, which to date had not been taxed
European Commission (2011), p. 3.
European Commission (2011), pp. 2 and 3.
European Commission (2011), p. 5.
European Union (2015).
European Parliament and Council of the European Union (2012).
M. Villar Ezcurra
considered for energy savings “exceeding the minimum levels of taxation applicable to fuels as required in Council Directive 2003/96/EC”.46 Unfortunately, most of
the solutions addressed by the Proposal of 2011 for amending the ETD, as the
coordination of energy taxes and ETS via tax exemptions47 or as the improvement
of the environmental concerns,48 will remain unresolved.
It is important to relate the scope of the ETD with the minimum tax rates
obligations and the possibilities of granting an aid. In Article 2 ETD, there is a
definition of the term “energy products” for the purposes of this Directive
(in paragraph 1) and a list of cases to which the Directive shall not apply
(in paragraph 4). CJEU case-law dealing with the ETD mainly focuses on the
delimitation of the scope of the Directive. On one hand, the CJEU interprets the
“use criterion” along with some exemption and non-taxation situations, such as, for
example, the concept of ‘dual use’ or ‘private pleasure air navigation’. On the other
hand, based on some domestic taxes, the Court studies various scenarios where
concrete energy products must be included or excluded from the scope of the
Directive, and explains their potential legal consequences. Nuclear energy, for
example, is excluded from the scope of the Directive. As the CJEU has clarified,
this means that nuclear fuel is not covered by the exemption laid down in Article 14
(1) (a) of that Directive. Consequently, this opens doors to Member States in order
to tax the use of nuclear fuel to produce commercial electricity.49
One key aspect of the discussions of the ETD in the Council had been precisely,
the connections between tax incentives and EU State aid rules. In particular,
Member States and the industry wanted to be certain that the reductions and
exemptions they were negotiating would not be prohibited by the Commission
when transposed in national legislations.50 On this issue, the ETD compulsory
or facultative nature of certain tax reductions and/or exemptions must be
European Parliament and Council of the European Union (2012), Annex V, point 3 (a).
See Soares (2007), and for the non-fiscal nature of the emission trading allowance see the
statements made on the case Air Transport Association of America and Others v. Secretary of
State of Energy and Climate Change, Judgment 21 December 2011, para. 143.
Since the time the ETD was adopted, the underlying framework changed radically. As the
Commission recognised, the current Directive is not consistent with climate change and energy
market policies. For instance, the ETD promotes the use of coal (with a lower tax rate), which is
the product with the highest CO2 content and the current minimum rates are based on the volume
of energy products consumed. Then, they do not reflect the energy content or CO2 emissions of the
energy products leading to inefficient energy uses and distortions of the internal market. A clear
summary of the EU policy framework for energy taxation as an environmental instrument and an
analysis of practical implementation rules are provided by Ingo Schlegel. See Schlegel
(2014), p. 115.
Case C-5/14, Kernkrafwerke Lippe-Ems GmbH v Hauptzollamt Osnabr€
uck, Judgment of 4 June
2015 (EU:C:2015:354), para. 43. As Recital 33 ETD states “the scope of Directive 92/12/EEC
should, where appropriate, be extended to the products and indirect taxes covered by this
See Boesherz (2004).
Energy Taxation and State Aid Law
differentiated. If the tax exemption derives from a Community measure such as a
Directive, without leaving any scope for discretionary application at national level,
the measure is not “imputable” to the State and cannot therefore be considered as a
State aid. Hence, the first condition that the aid must be imputable to the State
(which is to be distinguished from the need to be granted through State resources) is
The circumstances under which Member States can grant tax reductions and/or
exemptions are detailed in the ETD and developed in the Commission guidelines. A
wide range of differentiations and tax exemptions is established which reduce, and
even eliminate in some cases, the effective taxation of certain products. In fact,
three situations may be distinguished: (i) EU standard measures; (ii) measures that
should be notified; and (iii) measures automatically approved.
Under the scope of the ETD, the energy national tax concessions that reflect a
standard measure of the harmonized energy tax regime are, for example, the
exemptions for energy products supplied for use as fuel for the purpose of air
navigation or navigation within Community waters.51 Therefore, these are not
subject to the State aid control under Articles 107 and 108 TFEU. Nevertheless,
in most cases, measures are not “EU standard measures” but are granted at the
discretion of the Member States, based on the authorisation and conditions of
Articles 5 and 15–17 ETD.52 As Article 26 (2) ETD53 clarifies, such preferential
measures might constitute State aid.54 If this is the case, the measure normally has
to be notified to the Commission. However, no need for notification exists to the
extent that the measure is covered by the GBER. On the other hand, under the
provisions set out in Article 19 (1) and (3) ETD, the Council may also authorise any
Member to introduce further exemptions or reductions for specific policy considerations—environmental protection, energy and transport policies are specifically
See Article 14 (1) (b) and (c) ETD. Mandatory exemptions are also provided when energy
products and electricity are, on the one hand, used to produce electricity or, secondly, to maintain
the ability to produce electricity. However, the ETD allows Member States to tax by environmental reasons policy. In this case, compliance with the minimum levels of taxation of the Directive is
Under Articles 15 to 17 ETD, Member States may apply tax exemptions, including the implementation of a level of taxation down to zero and reductions.
Article 26 (2) ETD states as follows: “Measures such as tax exemptions, tax reductions, tax
differentiation and tax refunds within the meaning of this Directive might constitute State aid and
in those cases have to be notified to the Commission pursuant to Article 108 (3) of the Treaty”.
On the issue of imputability in the context of indirect taxation, see Englisch (2013).
Article 19 ETD provides that “the Council, acting unanimously on a proposal from the
Commission, may authorise any Member State to introduce further exemptions or reductions for
specific policy considerations”.
M. Villar Ezcurra
Currently, only certain categories of energy tax incentives—covered by the
ETD—qualify for an automatic approval under Article 44 GBER.56 In addition to
certain general formalities set out in Article 9 GBER, there exist essentially two
requirements that an energy tax relief must fulfill: (i) The beneficiaries of the tax
reduction shall pay at least the Community minimum tax level set by the ETD57 and
(ii) its beneficiaries must not be selected on the basis of opaque or arbitrary criteria.
As regards the legitimacy of the objects pursued by the different categories of
energy tax reliefs, we agree with Prof. English when he asserts that “it is highly
questionable to frame all of those tax benefits as serving environmental protection
objectives, as the GBER implicitly does in its Article 44”.59
The Guidelines’ Criteria on State Aid for Environmental
Protection and Energy 2014–2020
Since 1 July 2014, the European Commission applies new guidelines on State aid
for environmental protection or energy objectives.60 State aids, in the form of
reductions or exemptions of “environmental taxes” are directly addressed in these
Guidelines. To be compatible with EU State aid law, it must be shown that: (i) the
tax exemptions or reductions are necessary for all the suggested categories of
beneficiaries, and (ii) that they are proportional in size. This is assumed to be the
case when beneficiaries pay at least the Community minimum tax level set by the
Article 44 GBER refers to “Aid in the form of reductions in environmental taxes under Directive
2003/96/EC” and states the following: “1. Aid schemes in the form of reductions in environmental
taxes fulfilling the conditions of Council Directive 2003/96/EC of 27 October 2003 restructuring
the Community framework for the taxation of energy products and electricity shall be compatible
with the internal market within the meaning of Article 107(3) of the Treaty, and shall be exempted
from the notification requirement of Article 108(3) of the Treaty, provided that the conditions laid
down in this Article and in Chapter I are fulfilled. 2. The beneficiaries of the tax reduction shall be
selected on the basis of transparent and objective criteria and shall pay at least the respective
minimum level of taxation set by Directive 2003/96/EC. 3. Aid schemes in the form of tax
reductions shall be based on a reduction of the applicable environmental tax rate or on the
payment of a fixed compensation amount or on a combination of these mechanisms. 4. Aid shall not
be granted for biofuels which are subject to a supply or blending obligation”. See also Recital
Such aid is presumed to have an “incentive effect” considering that these reduced rates
contribute at least indirectly to an improvement of environmental protection by allowing the
adoption or the continuation of the overall tax scheme concerned, thereby incentivizing the
undertakings subject to the environmental tax to reduce their level of pollution.
See Englisch (2015).
See Englisch (2015).
See European Commission (2014a), para. 13.
Energy Taxation and State Aid Law
applicable Directive, if any. Otherwise, the necessity will depend on the impact of
the national tax on production costs as well as on the possibility to pass on the tax to
consumers and reduce profit margins. The aid should be proportionate. Proportionality will be assessed in light on whether (and to what extent) the beneficiaries can
further reduce their consumption or emission, pay a part of the national tax or enter
into environmental agreements to reduce pollution.61
The key criteria presented along the text of the Guidelines to ensure compatibility, is that the aid contributes, at least indirectly, to an improvement of the level
of environmental protection and that the tax reductions and exemptions do not
undermine the general objective pursued. The positive effects of the aid should
outweigh its negative effects in terms of distortions of competition, taking account
the polluter pays principle established by article 191(3) TFEU.62 The Commission
authorises aid schemes for maximum periods of 10 years, after which a Member
State can re-notify the measure if the Member State re-evaluates the appropriateness of the aid measure concerned.
Both previous (2008) and current (2014) environmental Guidelines distinguish
between harmonized and non-harmonized taxes and refer specifically to the ETD.
In the first case, the Commission can apply a simplified approach to assess the
necessity and proportionality of the aid. Once the beneficiaries have paid at least the
Community minimum tax level set by the applicable Directive; the choice of
beneficiaries is based on objective and transparent criteria; and the aid is granted
in principle in the same way for all competitors in the same sector, if they are in a
similar factual situation, the Commission will consider the aid necessary and
proportionate. Otherwise,—if the beneficiaries pay less than the Union minimum
tax level set by relevant applicable Directive and for all other non-harmonized
environmental taxes—, the necessity, proportionality and their respective effects at
the level of the economic sectors concerned will be subject to an in-depth assessment under the guidelines’ objective criteria specified on paragraphs 176–180 of
the 2014 Guidelines.
Some scholars point out that the Guidelines’ provisions with respect to reductions of environmental taxes and green levies are inadequate in several respects. In
particular, they are considered to be weak regarding the necessity and proportionality criteria and rather vague, allowing much leeway to Member States.63
Besides, we can add that the concept of “environmental tax” defined in the
Guidelines—and also in the GBER—checked against the notion of “energy tax”,
demonstrates that a specific configuration is used in the field of State aid. The latter
stems from the reference to both the taxable base and the beneficial effects—from
an environmental point of view—obtained from the tax concerned. In our opinion,
See European Commission (2014a), para. 167–179.
See among others, European Commission (2014a), para. 48 and 168.
See Nicolaides and Kleis (2014). See also Nicolaides (2014), p. 164. The author states “it is (. . .)
puzzling how exemption from environmental taxes can protect the environment. Moreover, the
justification for this exemption is often based on weak reasoning”.