Commission’s decision which considered the Dutch emission trading scheme as aid compatible with the common market upheld by the Court of Justice

(i) Background

(ii) The measure at issue

In January 2003 in the context of Directive 2001/81/EC63 which lays down national emission ceilings for certain pollutants, the authorities of the Netherlands notified the Commission of a nitrogen oxides emission trading scheme.

One should note that the Dutch legislation determines obligations for every undertaking (which produces nitrogen oxides) as regards the limitation or reduction of these emissions, whereas the emission trading scheme only applies to industrial facilities with installed total thermal capacity of more than 20 thermal megawatts.  

According to the scheme, facilities do not have to buy emission allowances to engage in production. But each facility must comply with strict emission standard: by reducing its emissions, by buying emission allowances or by a combination of these two options. Emission standards are calculated on the basis of the emission standard concerned and the energy consumption of each facility. Also, credits will be offered to the industrial facilities whose emissions are below the standard.  

Each year, the Dutch authorities verify whether the facilities comply with their emission standard. If a facility exceeds its standard, it must compensate the following year. If a facility fails to comply with its standard, the Dutch authorities will fine them.  

(iii) The Commission’s decision

In June 2003, the Commission adopted its decision concerning this emission trading scheme⁶⁴. It considered that the measure was aid compatible with the common market according to Article 87(3) EC.

In its decision, the Commission stressed that the measure at stake was selective and involved State resources. Indeed, although the Dutch authorities had the option of either selling the emission allowances or putting them up to auction, emission credits were granted free of charge to a specific group of large industrial facilities (which were engaged in trade between Member States) and because of this, the authorities suffered foregone revenues.  

(iv) The action before the Court of First Instance – the judgment on appeal

The Dutch authorities appealed the decision to the Court of First Instance. They mainly called into question the selectivity of the measure as well as the financing through State resources.

In its judgment of April 2008⁶⁵, the Court of First Instance first found that the action was admissible since the contested decision of the Commission gave rise to binding legal effects.

Indeed, the decision enabled the Commission to examine the compatibility of the measure with the common market; it triggered the application of the procedure for existing aid scheme and in particular, the obligation for the Netherlands to submit an annual report; it could also impact the grant of new aid on account of the rules on overlapping aid⁶⁶.

As regards the selectivity criterion, the Court upheld the appellant’s claim by stating that the measure did not favour certain undertakings or the production of certain goods. In fact, the criterion for the application of the measure – which was the total thermal capacity of industrial facilities – was said to be objective and conform to the purpose of the scheme. Thus, the distinction between big polluters and other undertakings was justified by the purpose of environmental protection. Moreover, the factual and legal situation of large undertakings benefiting from the emission trading system and subject to strict emission ceiling was not regarded as comparable to that of other undertakings, which ought not to comply with strict emission standards – which were to be gradually reduced – on penalty of a fine. Thus according to the Court, the measure at issue did not favour certain undertakings.  

Since the selectivity condition was not complied with, the Court of First Instance stated that the measure could not be classified as State aid and consequently, it annulled the Commission’s decision.  

(v) Findings of the Court

The Commission then appealed to the Court of Justice. It claimed that the Court of Justice should set aside this judgment and declare the action of the Netherlands inadmissible or alternatively, dismiss this action. The Netherlands, supported by other Member States, introduced a cross-appeal.

After having confirmed the capacity of a Member State whose aid measure is considered to be compatible to institute proceedings⁶⁷, the Court examined the second plea related to the criterion of selectivity.  

(vi) Examination of the selectivity criterion

Contrary to the judgment of the Court of First Instance, the Court of Justice stated that the Commission clearly set out the selectivity criterion and applied it to the situation. It further recalled that the Commission may confine itself to examining the characteristics of the programme in question in order to determine whether it gives an appreciable advantage to recipients in relation to their competitors.

As a result, the Court of Justice found that the Court of First Instance erred in considering that the Commission failed to demonstrate that the selectivity criterion was fulfilled. Indeed, it was sufficient for the Commission to identify the differentiation made by the Dutch authorities between a specific group of large industrial facilities that enjoy the benefit of the emission trading scheme and other undertakings that are also subject to emission limitations but do not enjoy such advantage.  

(vii) Justification of the emission trading scheme

The appellant further claimed that the distinction made by the trading scheme between undertakings which emit large quantities of nitrogen oxides and other undertakings cannot be justified by the objective of environmental protection or by the nature or structure of the trading scheme.  

On this issue, the Court recalled that Article 87(1) EC does not distinguish between measures of State intervention by reference to their cause or objective but defines them by reference to their effects. Thus, the objective of environmental protection cannot justify the exclusion of selective measures from the scope of Article 87(1) EC⁶⁸.  

In contrast with the Court of First Instance’s conclusion, the Court of Justice then considered that the differentiation between large undertakings – with total installed thermal capacity of more than 20 MWth – and other undertakings could not be justified by the objective of environmental protection, nor could it be justified by the nature or general scheme of the system. It concluded that the measure at issue cannot be deprived of its aid character.  

Then, the Court examined the cross-appeals introduced by the Netherlands and Germany.  

(viii) Cross-appeals of the Netherlands and Germany

The Court of Justice rejected both cross-appeals. It considered that the Court of First Instance had properly interpreted and applied the concept of advantage as well as the condition of financing through State resources according to Article 87(1) EC.

After the Court of Justice substantially upheld the Commission’s appeal, dismissed the cross-appeals, and annulled the judgment of the Court of First Instance in so far as it annulled the Commission’s decision, the Court decided not to refer the case back to the Court of First Instance to allow it to give final judgment on it.

(ix) Final judgment of the Court of Justice on the action at first instance

To sum up, the Court of Justice upheld the Court of First Instance’s conclusion that the emission trading scheme resulted in an advantage that was financed through State resources. However, contrary to the Court of First Instance’s judgment, it held that the advantage derived from the measure was applied selectively.

The Court logically concluded that the first plea put forward by the Netherlands at first instance which was based on an infringement of Article 87(1) TFEU should be rejected⁶⁹.  

Then the Court examined the Netherlands’ second plea at first instance, which had not been considered by the Court of First Instance. The plea was an allegation that there had been an infringement of the obligation to state reasons. The Court of Justice recalled settled case-law on this point and affirmed that the Commission’s reasoning as regards effect on trade between Member States and distortion of competition was sufficient.  

Accordingly, the Court dismissed the action at first instance entirely and upheld the Commission’s decision by finding the emission trading scheme to be aid compatible with the common market.