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Brussels, 8th November 2006

State aid: Commission investigates proposed new Swedish CO2 tax reductions

The European Commission has opened a formal investigation to examine whether Swedish 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 Swedish 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 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 Swedish Government proposes to introduce full or partial exemptions from the national CO2 tax on fuel used in installations covered by the EU ETS. Fuel consumed in the manufacturing process in industrial activities and fuel consumed for heat production in certain ultra-efficient combined heat and power (CHP) plants would be fully exempted from CO2 tax, whereas fuel consumed in other CHP plants and in other installations covered by the EU ETS would continue to pay part of the CO2 tax. 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 Sweden, the CO2 tax is levied in order to comply with these minimum rates. The proposal would lead to a situation where fuel consumed in the manufacturing process in industrial activities and fuel consumed for heat production in certain ultra-efficient CHP plants would not be subject to any energy tax within the meaning of the Energy Tax Directive.

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. Sweden chose to grant all allowances for free.

In a similar case concerning Denmark, the Commission opened the formal investigation procedure on 26thSeptember this year (see IP/06/1274).

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