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Brussels, 28th September 2006

State aid: Commission investigates proposed new Danish CO2 tax reductions

The European Commission has opened a formal investigation to examine whether Danish plans to grant CO2 tax exemptions to companies covered by the EU’s Emissions Trading Scheme (EU ETS) are compatible with EC Treaty state aid rules. The Commission is concerned that the measure might distort competition by increasing tax differentiation in an area where the EU has harmonised taxes in order to create a level playing field between companies. Furthermore, the Danish measure might run against the “polluter-pays” principle, a leading principle of the EU’s environmental policy, as companies participating in the EU ETS have received most of the emission allowances for free. The opening of a formal investigation gives interested parties the opportunity to comment on the intended measures. It does not prejudge the outcome of the procedure.

The Danish Government proposes to introduce an exemption from the national CO2 tax on fuel consumption for industrial activities covered by the EU ETS. The government wishes to grant a full exemption to energy-intensive businesses covered by the EU ETS, and a reduction down to 50 % of the EU minimum tax levels to businesses covered by the EU ETS who are not energy-intensive. The Government allegedly intends to eliminate double regulation of CO2 emissions, by taxes and emission quotas, arguing that double regulation will not lead to any further CO2 reduction, but only increase the firms’ costs, creating a double burden.

Minimum rates of energy taxes are set out in the Energy Tax Directive (2003/96/EC – see IP/03/1456). In Denmark, the CO2 tax is levied in order to comply with these minimum rates. With the proposed CO2 tax exemptions, the energy tax paid by the firms concerned would be below the minimum rates.

Through the Emissions Trading Directive (2003/87/EC), the EU has put a cap on CO2 emissions from some types of installations. Companies covered by the EU ETS must surrender allowances for their greenhouse gas emissions. The companies either get their allowances for free at the beginning of each trading period or buy them in auctions and/or on the market. In the first trading period running from January 2005 to December 2007, Member States were obliged to allocate at least 95% of the allowances for free. Denmark chose to auction the remaining 5% of allowances in open auctions.

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