Compatibility of Finnish fossil fuel tax breaks with the EU State aid legislation

(1)

Compatibility of Finnish fossil fuel tax breaks with the EU State aid legislation

University of Eastern Finland Law School Master’s Thesis 12.5.2020 Author: Tuomo Vartiainen Supervisors:

Harro van Asselt and Kaisa Huhta

(2)

Abstract

UNIVERSITY OF EASTERN FINLAND Faculty

Faculty of Social Sciences and Business Studies

Unit

Law School

Author

Tuomo Vartiainen

Name of the Thesis

Compatibility of Finnish fossil fuel tax breaks with the EU State aid legislation

Major

Environmental Policy and Law

Description

Master’s thesis

Date

Spring 2020

Pages

XIV + 65

Abstract

In 1992 international community first stated the need to “stabilize greenhouse gas concentrations in the atmosphere to the level that would prevent dangerous anthropogenic interference with

the climate system. To limit the most extreme effects of climate change, drastic reductions in the use of fossil fuels are needed as they are the primary cause of increased greenhouse gas emissions.

The EU has together with other G20 countries committed to phasing out inefficient fossil fuel subsidies as they work against the objectives of Paris Agreement by promoting wasteful use of resources and by this way increase emissions.

This Thesis focuses on assessing two Finnish fossil fuel tax breaks and their compatibility with the EU State aid legislation. These two measures are lower tax rate applied to industry and tax rebate of energy intensive industry and they amounted 830 million euros in 2018. Evaluating these measures overlaps with three different policy areas of environment, energy and competition. To be able to evaluate these measures properly, it is necessary to discuss most relevant parts of climate and energy legislation and EU State aid legislation. Assesment of the compatibility of the measures is needed as the EU has committed to phase-out inefficient fossil fuel subsidies. Latest studies in the field of economics has shown that the effects of both of these measures is questionable and this might affect their compatibility with the EU State aid rules.

Main objective of this Thesis is to evaluate whether the lower tax rate applied to industry and tax rebate of energy intensive industry are compatible with the EU State aid legislation. This question already includes numerous sub-questions, which must be answered before it is reasonable to judge the main question. When that is answered this Thesis is able to give reasoned opinion what Finland and the EU should do in order to adhere its international commitments concerning fossil fuels and what reforms Finland’s fossil fuel tax breaks might need in order to be compatible with the EU legislation.

Key words European Union law, Fossil fuels, State aid

(3)

Tiivistelmä

ITÄ-SUOMEN YLIOPISTO

Tiedekunta

Yhteiskuntatieteiden ja kauppatieteiden tiedekunta

Yksikkö

Oikeustieteiden laitos

Tekijä

Tuomo Vartiainen

Työn nimi

Suomalaisten fossiilisen energian verotukien yhteensopivuus Euroopan unionin valtionsääntöoikeuden kanssa

Pääaine

Ympäristöpolitiikka- ja oikeus

Työn laji

Pro Gradu

Aika

Kevät 2020

Sivuja

XIV+65

Tiivistelmä

Kansainvälinen yhteisö totesi jo vuonna 1992 tarpeen tasapainottaa kasvihuonekaasujen määrä ilmakehässä tasolle, joka estää vaarallisen ihmisen aiheuttaman häiriön ilmastoon. Jotta

kaikista vakavimmat ilmaston lämpenemisen vaikutukset voitaisiin välttää, tulee fossiilisten polttoaineiden käyttämistä vähentää voimakkaasti. EU on yhdessä muiden G20-maiden kanssa sitoutunut luopumaan tehottomista fossiilisen energian tuista, koska ne toimivat suoraan Pariisin sopimuksen tavoitteita vastaan ja tukevat resurssien epätaloudellista käyttöä ja näin lisäävät tarpeettomasti kasvihuonekaasupäästöjä.

Tämä Pro gradu-työ keskittyy arvioimaan kahta eri suomalaista fossiilisen energian verotukea.

Teollisuuden alempi verokanta ja energia-intensiivsten yritysten veronpalautus olivat arvoltaan 830 miljoonaa euroa vuonna 2018.Näiden tukien arviointiin liittyy energia- ympäristö- ja kilpailupolitiikan päällekkäisyyttä ja limittäisyyttä. Jotta näitä tukia voisi arvioida

asianmukaisesti, on tarpeen käydä läpi myös tämän työn kannalta keskeisimmät energia- ja ilmasto-oikeuden alalta sekä perehtyä EU:n valtiontukilainsäädäntöön. Näiden tukien arvioinnille on tarve, koska EU on sitoutunut luopumaan tehottomista fossiilisen energian tuista. Viimeisimmät taloustieteelliset tutkimukset ovat tulleet siihen tulokseen, että molempin tässä työssä käsiteltyjen tukien vaikutukset ovat vähintäänkin kyseenalaiset ja tällä voi olla vaikusta siihen, ovat ne yhteensopivia EU:n valtiontukisääntöjen kanssa.

Tämän tutkimuksen päätavoite on arvioida, ovat teollisuuden alempi verokanta ja energia- intensiivisten yritysten veronpalautus yhteensopivia EU:n valtiontukilainsäädännön kanssa.

Tämä kysymys sisältää lukuisia alakysymyksiä, joihin vastaaminen on tarpeellista, jotta pääkysymyksestä voidaan ylipäätään muodostaa jonkinlainen perusteltu tulkinta. Kun pääkysymykseen on saatu muodostettua vastaus pyrkii tämä työ antamaan perustellun suosituksen siitä, mitä Suomen ja EU:n tulisi tehdä jotta ne noudattaisivat kansainvälisiä sitoumuksiaan fossiiliseen energiaan liittyen. Lisäksi tavoite on vastata, miten suomalaisia

(4)

fossiilisen energian verotukia tulisi uudistaa, jotta ne olisivat yhteensopivia EU:n valtiontukilainsäädännön kanssa.

Avainsanat Eurooppaoikeus, Fossiilinen energia, Valtiontuki

(5)

ABBREVATIONS

CJEU The Court of Justice of the European Union (the Court) ECLI European Case Law Identifier

EEAG Commission guidelines for environmental protection and energy 2014-2020 EU European Union

IEA International Energy Agency

EUOJ Official Journal of the European Union TEU Treaty on the European Union

TFEU Treaty on the Functioning of the European Union

UNFCCC United Nations Framework Convention on Climate Change

(6)

Table of contents

1 INTRODUCTION ... 1

1.1 Background ... 1

1.2 Research objectives and methodology ... 3

1.3 Context and scope ... 6

1.4 Outline of Thesis ... 7

2 LEGISLATIVE FRAMEWORK OF EU ENERGY AND CLIMATE LAW ... 9

2.1 Introduction ... 9

2.2 Legislative competences in the EU ... 9

2.3 Energy-specific regulation of the EU ... 13

2.3.1 Energy Taxation Directive ... 15

2.3.2 2020 climate and energy package and 2030 climate and energy framework ... 15

2.4 EU international and supranational commitments focused on fossil fuel subsidies ... 18

2.4.1 EU commitments focused on fossil fuel subsidies ... 18

2.5 Interim conclusions ... 19

3 STATE AID IN THE EU ... 23

3.2 Rationale of EU State aid control ... 23

3.3 State aid legislation in the EU ... 26

3.3.1 Aid by the State or through State resources ... 27

3.3.2 Selective advantage ... 30

3.3.3 Liable to affect trade between the Member States ... 31

3.3.4 Distorts or threatens to distort competition. ... 31

3.4 Exemptions from prohibition of State aid ... 32

3.5 Tax breaks as State aid ... 35

3.8 Interim conclusions ... 37

4 ASSESMENT OF COMPATIBILITY OF FINNISH FOSSIL FUEL SUBSIDIES WITH EU STATE AID LEGISLATION ... 39

4.2 Finnish fossil fuel subsidies ... 39

4.3 Lower tax rate applied to industry... 41

4.4 Tax rebate of energy-intensive industry ... 42

4.5 Compatibility of lower tax rate applied to industry with the EU State aid legislation ... 44

4.5.1 Assesment criteria of the compatibility of lower tax rate applied to industry ... 44

(7)

4.5.2 State aid criteria ... 45

4.5.3 Community/Commission guidelines for environmental protection ... 47

4.5.4 General Block Exemption Regulation ... 49

4.5.5 Interim conclusions ... 52

4.6 Compatibility of tax rebate of energy intensive industry with the EU State aid legislation ... 55

4.6.1 Assesment criteria of the compatibility of tax rebate of energy intensive industry ... 55

4.6.2 State aid criteria ... 56

4.6.3 Community/Commission guidelines for environmental protection ... 56

4.6.4 General Block Exemption Regulation ... 57

4.6.5 Interim conclusions ... 59

5 CONCLUSIONS AND RECOMMENDATIONS ... 62

(8)

BIBLIOGRAPHY

European Union legislation Primary legislation

Consolidated version of the Treaty on European Union. EUOJ C 202, 7.6.2016, p. 13-45.

Consolidated version of the Treaty on the Functioning of the European Union. EUOJ C 202.

7.6.2016, p. 47-199.

Secondary legislation

Council Directive 2003/96/EC of restructuring the Community framework for the taxation of energy products and electricity. EUOJ L 283. 31.10.2003, p. 51-70.

Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines. EUOJ L 336, 21.12.2010, p. 24–29.

Commission Regulation No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation). EUOJ L 336/24. 21.12.2010, p. 24-29.

Council Regulation No 733/2013 of 22 July 2013 amending Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid. EUOJ L204/11, 31.7.2013, p. 11-14.

Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid. EUOJ L 352, 24.12.2013, p. 1–8.

Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty. EUOJ L 187, 26.6.2014, p. 1–

78.

Regulation (EU) 2018/1999 of the European parliament and of the council of 11 December 2018 on the Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives 94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the

(9)

European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council (EU).

EUOJ L328/1, 15.12.2009, p. 1-77.

Judgements of the European Court of Justice

Case 30/59 of the Court of Justice of the European Union De Gezamenlijke Steenkolenmijnen in Limburg v High Authority of the European Coal and Steel Community [1961] ECLI:EU:C:1961:2 C-26/62 of the Court of Justice of the European Union Van Gend en Loos v Nederlandse

Administratie der Belastingen ECLI:EU:C:1963:1.

Case 6/64 of the Court of Justice of the European Union Flaminio Costa v E.N.E.L ECLI:EU:C:1964:66.

Case 173/73 of the Court of Justice of the European Union Italian Republic v Commission of the European Communities ECLI:EU:C:1974:71.

Case 78/76 of the Court of Justice of the European Union Steinike & Weinlig v Federal Republic of Germany ECLI:EU:C:1977:52.

C-248/84 of the Court of Justice of the European Union Federal Republic of Germany v Commission of the European Communities ECLI:EU:C:1987:437.

Case C-387/92 of the Court of Justice of the European Union Banco de Crédito Industrial SA v Ayuntamiento de Valencia, ECLI:EU:C:1994:100.

Case C- 311/ 94 of the Court of Justice of the European IJssel-Vliet Combinatie BV v Minister van Economische Zaken ECLI:EU:C:1996:383

C-379/98 of the Court of Justice of the European Union PreussenElektrav Schleswag AG, ECLI:EU:C:2001:160

C-143/99 of the Court of Justice of the European Union Adria-Wien Pipeline and Wietersdorfer &

Peggauer Zementwerke ECLI:EU:C:2001: 598.

Case C-310/99 of the Court of Justice of the European Union Italian Republic v Commission of the European Communities ECLI:EU:C:2002:143.

C-482/99 of the Court of Justice of the European Union French Republic v Commission of the European Communities. ECLI:EU:C:2002:294.

(10)

Case C-308/01 of the Court of Justice of the European Union GIL Insurance and others v Commissioners of Customs & Excise. ECLI:EU:C:2004:252.

Case C-88/03 of the Court of Justice of the European Union Portuguese Republic v Commission of the European Communities ECLI:EU:C:2006:511.

Case C- 206/ 06 of the Court of Justice of the European Union Essent Netwerk Noord ECLI:EU:C:2008:413

Case 765/18 of the Court of Justice of the European Union Stadtwerke Neuwied GmbH v RI [C-765/18] [2020] ECLI:EU:C:2020:270.

Judgements of the General Court

Proposal for appropriate measures in case E2/98 Irish Corporate Tax, OJ C 395 1998. p. 19.

Case T-214/95 Vlaams Gewest v Commission ECLI:EU:T:1998:77, paragraph 46.

Case T-288/97 Regione autonoma Friuli-Venezia Giulia v Commission ECLI:EU:T:2001:115 Case T-370/11 Poland v Commission ECLI:EU:T:2013:113

Case T-356/15Austria v Commission ECLI:EU:T:2018:439

Decisions of the European Commission

The Commission Decision N 74a/2002, aid to energy-intensive industry – Finland.

The Commission Decision N 892/2006, Differentiated energy taxation – Finland.

The Commission Decision on the State aid SA.33846 – (2015/C) (ex 2014/NN) (ex 2011/CP).

The Commission Decision on aid scheme SA.34045 (2013/c) (ex 2012/nn).

The Commission Decision on State aid SA.44888 (2016/c) (ex 2016/nn).

European Union documents

Community Guidelines on State aid for Environmental Protection (94/C 72/03).

Community guidelines on State aid for environmental protection (2001/C 37/03)

Guidelines on State aid for environmental protection and energy 2014-2020.

The Community guidelines on State aid for rescuing and restructuring firms in difficulty.

(11)

Common Principles for an Economic Assessment of the Compatibility of State aid under Article 87.3.

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. EU State Aid

Modernisation. COM/2012/0209 final.

European Commission, Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Energy prices and costs in Europe. COM/2016/0769 final.

Commission Memo - New Energy Union Governance to deliver common goals. 2016.

State Aid Action Plan: Less and better targeted state aid: a roadmap for State aid reform 2005 – 2009. COM/2005/0107 final.

State Aid Manual of Procedures: Internal DG Competition working documents on procedures for the application of Articles 107 and 108 TFEU.

Green Paper, A 2030 framework for climate and energy policies 27/03/2013. COM (2013) 169.

Buelens, Christian - Garnier, Gaëlle – Johnson, Matthew – Meiklejohn, Roderick: The Economic Analysis of State Aid, p. 6. European Commission Directorate-General for Economic and Financial Affairs 2007.

Legislation of Finland

Laki sähkön ja eräiden polttoaineiden verotuksesta (1996/1260) International Law

United Nations Framework Convention on Climate Change 1992.

Paris Agreement (adopted 12 December 2015, entered into force 4 November 2016).

Literature

Alkio, Mikko - Hyvärinen, Olli - Valtiontuet, section 8.9.2 Muut ryhmäpoikkeusasetuksen kattamat ympäristö- ja energiatuet. Helsinki, Talentum Pro 2016.

(12)

Braun, Jan Frederik - EU Energy Policy under the Treaty of Lisbon Rules, p. 8. 2011. Also, Andoura, Sami – Hancher, Leigh – Van der Woude: Towards a European Energy Community: A Policy Proposal. Notre Europe. 2010.

Berry, Elspeth – Homewood, Matthew – Bogusz, Barbara- Complete EU Law: Text, Cases, and Materials, p. 107. Oxford University Press. 2019.

CAN Europe – ODI - Phase-out 2020: Monitoring Europe’s Fossil Fuel Subsidies.2017.

Craig, Paul - de Búrca, Gráinne - EU Law: Text, Cases, and Materials, p. 73. Oxford University Press. 2015.

Delbeke, Jos – Vis, Peter: EU Towards a Climate-neutral Europe: Curbing the trend. Routledge 2019.

Gormsen, Liza Lovdahl: EU State Aid Law and Transfer Pricing: A Critical

Introduction to a New Saga, Journal of European Competition Law & Practice, Vol. 7, 2016, p.

369-382

Gormsen, Liza Lovdahl – European State aid and the tax rulings, p. 98. Edward Elgar Publishing.

2019

Hancher, Leigh – de Hauteclocque, Adrien – Salerno, Francesco Maria (eds): State aid and the energy sector. Hart. 2018.

Hoffman, Herwig – Micheau, Claire – State Aid Law of the European Union, Oxford University Press. 2016.

Huhta, Kaisa: Capacity Mechanisms in EU Law. Publications of the University of Eastern Finland.

Ingalsuo, Jouni – Teollisuuden energiaverotus Suomessa, p. 31. Laskentatoimen ja rahoituksen yksikkö, Vaasan yliopisto.

Johnston, Angus – Block, Guy: EU Energy Law, p. 10. Oxford University Press 2012.

Laukkanen, Marita. - Ollikka, Kimmo - Tamminen, Saara. The impact of energy tax refunds on manufacturing firm performance: evidence from Finland’s 2011 energy tax reform.

Valtioneuvoston selvitys- ja tutkimustoiminnan julkaisusarja. 2019.

Laukkanen, Marita – Maliranta, Mika: Yritystuet ja kilpailukyky. Official report for the Finnish government.Valtioneuvoston selvitys- ja tutkimustoiminta. 2019.

(13)

Maillo, Jerónimo - Balancing Environmental Protection, Competitiveness and Competition: A Critical Assessment of the GBER and the EEAG, p. 8. European State Aid Law Quarterly Vol. 16, No. 1 (2017).

Markusen, Ann – Nesse, Katherine: Institutional and Political Determinants of Incentive Competition: Reining in the competition for capital. 2007.

Ministry of Economic Affairs and Employment: Finland’s integrated National Energy and Climate Plan. 2019.

Ministry of Economic Affairs and Employment in Finland. Restrictions for the State aid for companies in difficulty and definitions for them in EU State aid legislation. (Vaikeuksissa olevan yrityksen tukemisen rajoitukset ja määritelmä EU:n valtiontukisäännöissä in Finnish.)

Phedon Nicolaides - A critical analysis of reductions from environmental taxes in the new

Guidelines on state aid for environmental protection and energy 2014-2020. Energy & Environment Vol. 26, No. 4, p. 573-586. 2015.

Parliamentary taskforce for the reform of corporate subsidies. (Yritystukien uudistamista koskeva parlamentaarinen työryhmä in Finnish.)

Paukku, Elias – Euroopan unionin politiikan ja tukikilpailun vaikutus valtiontukisääntelyyn, p. 225.

University of Lapland 2020.

Penttinen, Sirja-Leena – Free movement and energy. University of Eastern Finland. 2019.

Pesaresi, Nicola - Siaterli, Christina - Van de Casteele, Koen - Flynn, Leo - EU Competition Law, v. 4, State aid, p. 417. Claeys & Casteels Law Publishers. 2016.

Pistone, Pasquale – Ezcurra, Marta Villar: Energy taxation: Environmental protection and State Aids. IBFD 2016.

Piris, Jean-Claude - The Lisbon Treaty : a legal and political analysis, p. 318. Cambridge University Press. 2010.

Roadmap for sustainable taxation (Kestävän verotuksen tiekartta in Finnish) 2020.

(14)

Skocgaard – Van Asselt (eds.): The Politics of Fossil Fuel Subsidies and Their Reform. Cambridge University Press 2018.

Talus, Kim: EU Energy Law and Policy – A Critical Account, p. 7. Oxford University Press

Van der Burg, Laurie – Trilling, Markus – Gençsü, Ipek: Fossil Fuel Subsidies in draft EU National Energy and Climate Action plans. ODI Working Papers 562. 2019.

VATT – Suomen energiaverotus suosii energia-intensiivisiä yrityksiä. Policy brief 2/2016.

Rauhanen, Timo: Verotuet valtion politiikkavälineenä ja ohjauskeinona, p.2. (VATT julkaisut 71 2017).

Internet sources

Confederation of Finnish Industries.

[https://ek.fi/mita-teemme/talous/verotus/energia-ja-ymparistoverot/] (In Finnish) European Commission - 2020 Climate and Energy Package.

[https://ec.europa.eu/clima/policies/strategies/2020_en]

European Commission - Delivering together on EU’s Energy Union and Climate Objectives.

[https://ec.europa.eu/clima/news/energy-union-commission-calls-member-states-step-ambition- plans-implement-paris-agreement_en]

European Commission > Energy, Climate Change, Environment > Climate Action > Climate Change, [https://ec.europa.eu/clima/change/causes_en]

European Commission > Environment Action Programme to 2020 [https://ec.europa.eu/environment/action-programme/]

European Commission - General Block Exemption Regulation: Frequently Asked Questions.

[https://ec.europa.eu/competition/state_aid/legislation/practical_guide_gber_en.pdf]

European Commission > Competition > State Aid.

[https://ec.europa.eu/competition/state_aid/overview/index_en.html]

European Parliament declaration of climate emergency.

[https://www.europarl.europa.eu/news/en/press-room/20191121IPR67110/the-european-parliament- declares-climate-emergency]

(15)

Eur-Lex - Summary about the legal basis in the field of energy in the EU.

[https://eurlex.europa.eu/summary/chapter/energy.html?root_default=SUM_1_CODED%3D18,SU M_2_CODED%3D1805&locale=en]

Eurostat

[https://ec.europa.eu/eurostat/web/environmental-data-centre-on-natural-resources-old/natural- resources/energy-resources/fossil-fuels]

G7 Chair’s Summary: G7 Rome Energy Ministerial Meeting. 9-10 April 2017. Rome, 2017.

[http://www.g7italy.it/sites/default/files/documents/energy_chairs_summary_0/index.pdf]

G20 Leaders Communique Hangzhou Summit. 4-5 September. Hangzhou, 2016.

[http://www.g20chn.org/English/Dynamic/201609/t20160906_3396.html].

Global Subsidies Initiative stated that fossil fuel consumption subsidies were 3 times more than renewable energy consumption subsidies.

[https://www.iisd.org/gsi/what-we-do/focus-areas/renewable-energy-subsidies-fossil-fuel-phase- out?page=7]

International Energy Agency - Energy related CO2 emissions, 1990-2019.

[https://www.iea.org/articles/global-co2-emissions-in-2019]

International Institute for Applied Systems Analysis - Linking Climate and Sustainable Development.

[https://pure.iiasa.ac.at/id/eprint/16235/1/CD-Links-for-web_final_November_2019.pdf]

International institute for sustainable development, Fossil Fuel Subsidies and Climate Change.

[https://www.iisd.org/gsi/what-we-do/focus-areas/fossil-fuel-subsidies-climate-change]

IPCC - Global warming of 1,5 °C: Summary for Policymakers. 2018.

Ministry of Finance of Finland > Energy Taxation (In Finnish) [https://vm.fi/energiaverotus]

Murray, John L. - Methods of Interpretation – Comparative Law Method.

[https://curia.europa.eu/common/dpi/col_murray.pdf]

Nicolaides, Phedon - The Non-Equivalence of the Various Methods of Supporting Green Electricity.

(16)

[http://stateaidhub.eu/blogs/stateaiduncovered/post/531]

OECD Glossary of Statistical Terms.

[https://stats.oecd.org/glossary/detail.asp?ID=3254]

Statistics Finland - Production of electricity and heat.

[https://www.stat.fi/til/salatuo/2018/salatuo_2018_2019-11-01_tie_001_en.html]

The World Energy Council.

[https://www.worldenergy.org/publications/entry/world-energy-trilemma-index-2019]

Turner, Sharon – Genard, Quentin – Roberts, Josh – Luebbeke, Imke - Four key messages for the governance of European climate and energy policies after 2020. 2015.

[http://d2ouvy59p0dg6k.cloudfront.net/downloads/four_key_messages_for_the_governance_of_eu_

climate_and_energy_policies_after_2020_v2.pdf]

WTO Ministerial conference - Fossil Fuel Subsidies Reform Ministerial Statement, WT/MIN(17)/54, 12 December 2017.

[https://www.tralac.org/images/Resources/MC11/mc11-fossil-fuel-subsides-reform-ministerial- statement-11-december-2017.pdf]

News:

Eija-Riitta Korhonen blogpost.

[http://eijariitta.puheenvuoro.uusisuomi.fi/191508-yksi-vihrea-valhe],

About the amount of the fossil fuel subsidies when compared to renewable energy subsidies.

www.energypost.eu

[https://energypost.eu/400bn-in-global-fossil-fuel-consumption-subsidies-twice-that-for- renewables/]

Former lead Author of IPCC Bill Hare about the coal subsidies and their incompatibility with other EU policies.

The Guardian

[https://www.theguardian.com/environment/2018/dec/19/eu-coal-subsidy-phase-out-completely- inconsistent-paris-climate-deal]

About Finnish energy tax reform.

(17)

Finnish Boradcasting Company YLE.

[https://yle.fi/uutiset/3-10770596]

About Finnish corporate subsidies.

Finnish Boradcasting Company YLE.

[https://yle.fi/uutiset/3-10095106]

(18)

1 INTRODUCTION

1.1 Background

In 1992 international community first stated the need to “stabilize greenhouse gas concentrations in the atmosphere to the level that would prevent dangerous anthropogenic interference with

the climate system."¹ Since then, there has been multiple international agreements to reduce greenhouse gas emissions but despite these efforts, climate is still warming.² To limit the most extreme effects of climate change, drastic reductions in the use of fossil fuels are needed as they are the primary cause of increased greenhouse gas emissions.³

Fossil fuels⁴ have been the driver of economic growth since the 19^th century and since then, markets for fossil fuels have increased drastically. Production and consumption of fossil fuels is subsidized for multiple different reasons to intervene the energy sector to achieve favourable policy goals such as improved energy security and affordable energy for citizens. Subsidies can be in different forms, such as direct funding and tax reductions.⁵ Fossil fuel subsidies usually aim to achieve a particular objective by lowering the price of fossil fuels. This objective may be economic, environmental or social, including typical government aims of energy security, creating jobs and improving access to energy.

However, the use of fossil fuels and fossil fuel subsidies have several negative effects. While they may lower the price of energy and stimulate economic growth, they also give advantage for the most polluting form of energy usage. By promoting use of unsustainable form of energy, they

1 United Nations Framework Convention on Climate Change 1992, Article 2.

2 IPCC estimates that it is extremely likely that more than half of the observed increase in global average surface temperature from 1951 to 2010 was caused by the anthropogenic increase in GHG concentrations and other

anthropogenic forcings together and anthropogenic global warming is currently increasing at 0.2°C per decade due to past and ongoing emissions. Also emissions of CO2 from fossil fuel combustion and industrial processes contributed about 78% of the total GHG emissions increase from 1970 to 2010, with a similar percentage contribution for the increase during the period 2000 to 2010. IPCC: Global warming of 1,5 °C: Summary for Policymakers.

3 European Commission > Energy, Climate Change, Environment > Climate Action > Climate Change, [https://ec.europa.eu/clima/change/causes_en], accessed 5.9.2018.

4 Eurostat’s definition: “Fossil fuel is a generic term for non-renewable carbon-based energy sources such as solid fuels, natural gas and oil that have their origins in plants and animals that lived millions of years ago on earth and underwent transformation through chemical and physical processes.”

[https://ec.europa.eu/eurostat/web/environmental-data-centre-on-natural-resources-old/natural-resources/energy- resources/fossil-fuels], accessed 8.10.2019.

5 There is an abundant body of literature about definition of a concept of a subsidy. Read more: Whitley, Shelag – van der Burg, Laurie: Chapter 3: Reforming Fossil Fuel Subsidies. In book Skocgaard – Van Asselt (eds.): The Politics of Fossil Fuel Subsidies and Their Reform. Cambridge University Press 2018 or Rubini, Luca -

The Definition of Subsidy and State Aid: WTO and EC Law in Comparative Perspective. Oxford University Press.

2009.

(19)

produce unnecessary harm to environment. Studies have shown that the same policy goals, which fossil fuel subsidies are aimed to, could be achieved with less costly alternatives.⁶ Therefore inefficient fossil fuel subsidies increase the production of fossil energy and consumption, which again increases the production of fossil energy and consumption of fossil fuels.⁷ G20 countries, and the EU as part of them, has called for phase-out of inefficient fossil fuel subsidies to be as they deteriorate transition towards clean energy forms and increase greenhouse gas emissions.⁸ Despite this declaration, the amount of fossil fuel subsidies has not decreased.⁹ Global community has agreed in Paris Agreement to find necessary measures to limit global temperature rise well below 2°C and to pursue efforts to limit this increase to 1.5°C and changing financial flow to be create a pathway towards low greenhouse gas emissions and climate-resilient development. Despite these commitments, fossil fuel subsidies have remained as a policy tool in the field of energy. This has resulted a negative effect for achieving objectives of Paris Agreement and currently global community and the EU are not in a way of achieving its objectives.¹⁰

Although the sustainability problems of fossil fuels have been known several decades and G20 countries have declared to remove them, the transition towards decarbonized energy system and economy has been slow.¹¹ As the transition has been difficult, the EU has increased the difficulty by aiming to achieve it in cost-effective way.¹² Cost-effectiveness is pursuable as it means achieving climate objectives with the least amount of economic input and the least harm to other sectors (such as trade). Subsidies work against these objectives as they promote wasteful use of resources and by this way increase emissions.¹³

6. Skocgaard, P – Van Asselt, H (eds.): The Politics of Fossil Fuel Subsidies and Their Reform, p. 47. Cambridge University Press 2018.

7 International institute for sustainable development, Fossil Fuel Subsidies and Climate Change,

[https://www.iisd.org/gsi/what-we-do/focus-areas/fossil-fuel-subsidies-climate-change], accessed 13.8.2019.

8 European Commission,Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - Energy prices and costs in Europe.

9 Climate Action Network Europe, Phase-out 2020: Monitoring Europe’s Fossil Fuel Subsidies. September 2017.

[https://www.odi.org/sites/odi.org.uk/files/resource-documents/11762.pdf], accessed 9.9.2019.

10The Commission: Delivering together on EU’s Energy Union and Climate Objectives. [

https://ec.europa.eu/clima/news/energy-union-commission-calls-member-states-step-ambition-plans-implement-paris- agreement_en], accessed 11.12.2019.

11 International Energy Agency - Energy related CO2 emissions, 1990-2019.

[https://www.iea.org/articles/global-co2-emissions-in-2019], accessed 5.9.2019.

Also G20 Declaration to phase-out inefficient fossil fuel subsidies in Pittsburg Summit.

[https://www.iea.org/articles/global-co2-emissions-in-2019]

12 Delbeke, J – Vis, P: EU Towards a Climate-neutral Europe: Curbing the trend p. 17. Routledge 2019.

13 Fossil Fuel Subsidies Reform Ministerial Statement, WT/MIN(17)/54, 12 December 2017, WTO, Geneva Also, Skocgaard, P – Van Asselt, H (eds.): The Politics of Fossil Fuel Subsidies and Their Reform, p. 51-52.

Cambridge University Press 2018.

(20)

One issue with fossil fuel subsidies concerns their compatibility with EU’s internal market

legislation and State aid rules. As general rule, State aid is prohibited by the EU law.¹⁴ Rationale for the prohibition of State aid is that a company which receives government support gains advantage over its competitors, which distorts the free market.¹⁵ Although, there are several exemptions from this prohibition and for reasons that support well-functioning and equitable economy, State aid may be approved by after the Commission has reviewed it.¹⁶ Therefore, the prohibition is not absolute.

Fulfilling the State aid criteria of Article 107 TFEU subjects the measure under procedural provisions of Article 108 TFEU. This gives the Commission extensive competence to review the measure and evaluate, do the exemptions apply.¹⁷

Finland subsidises the use of fossil fuels with multiple measures.¹⁸ This Thesis will focus on tax rebate for energy-intensive industry and lower tax rate applied to industry. These two subsidies are the most significant ones, as they are approximately fifth of all the fossil fuel subsidies in Finland.¹⁹ These tax measures are topical as the Commission has started to review several long-standing subsidies as incompatible with the State aid legislation. In some of the cases the Commission has decided to force Member State to recover unpaid taxes.²⁰ Decisions made by the Commission are significant for Finland, as the two tax subsidies evaluated in this Thesis were 830 million euros only in 2018.²¹ This is a significant amount of economic input as the positive results of these tax

measures remain unsure.

1.2 Research objectives and methodology

This Master’s thesis will examine the Finnish fossil fuel subsidies and their compatibility with the EU’s state aid legislation. The primary research question is are Finnish fossil fuel subsidies

14 Article 107 TFEU

15 European Commission > Competition > State Aid

[https://ec.europa.eu/competition/state_aid/overview/index_en.html], accessed 11.9.2019.

16 As this is the general rule, there are also situations when the Commission does not review the measures such as de minimis-rule and General Block Exemption Regulation.

17 Huhta, K - Capacity Mechanisms in EU Law, p. 112. Publications of the University of Eastern Finland. 2019.

18 Finland calls these subsidies in its NECP as “environmentally harmful energy subsidies” and questions whether these subsidies, which promote the use of fossil fuels as energy, are fossil fuel subsidies.

[https://ec.europa.eu/energy/sites/ener/files/documents/fi_final_necp_main_en.pdf]

19 Article by Finnish public broadcasting company Yleisradio reporting state aids for stock companies.

[https://yle.fi/uutiset/3-10095106], in Finnish, accessed 20.9.2019.

20 Commission decision on the state aid SA.33846 – (2015/C) (ex 2014/NN) (ex 2011/CP) implemented by Finland for Helsingin Bussiliikenne Oy.

21 Article by Finnish public broadcasting company Yleisradio reporting state aids for stock companies.

(21)

compatible with the EU State aid legislation? Sub-questions, which will further on specify the research, are

a) is the tax rebate of energy intensive industry compatible with articles 107 and 108 TFEU and;

b) is the lower tax rate applied to industry compatible with article 107 and 108 TFEU?

Fossil fuel subsidies have been lesser known factor in climate and energy policy. Majority of the public discussion has focused on how EU could support companies to decrease their greenhouse gas emissions and the harmful effects of the current subsidy schemes are, if not forgotten, at least underestimated in the public climate discussion. As renewable energy subsidies have increased substantially in the last years, the fossil fuel subsidies remain still several times larger.²² In a world, where 195 countries²³ have signed Paris agreement and are committed to limit the global warming under 2 ° Celsius, it seems unreasonable that there is significant financial support for the source of the warming. There is clear contradiction between climate objectives and these subsidies.

Discussion about the climate objectives and how to effectively achieve them is consequential and has relevance for this topic. However, due to the breadth of this discussion, this will not be discussed in detail in the study.²⁴

The approach of this thesis will be mainly doctrinal with some policy elements due to the

interdisciplinary nature of fossil fuel subsidies as a research subject.²⁵ EU’s energy legislation and overlaps with multiple policy areas and therefore, the perspective must be expanded to the areas of policy.

22 Global Subsidies Initiative stated that fossil fuel consumption subsidies were 3 times more than renewable energy consumption subsidies.

[https://www.iisd.org/gsi/what-we-do/focus-areas/renewable-energy-subsidies-fossil-fuel-phase-out?page=7], accessed 5.9.2019.

IEA experts Wataru Matsumura and Zakie Adam stated in their raport that “at over $400bn in 2018, global fossil fuel consumption subsidies are more than double those for renewables.”

[https://energypost.eu/400bn-in-global-fossil-fuel-consumption-subsidies-twice-that-for-renewables/], 10.9.2019.

Depending of the year the consumption subsidies for fossil fuels are double or more times higher than those for renewable energy. These statements do not discuss the subsidies for fossil fuels energy production. Other estimation from Oil Change International states that “G20 countries provided four times as much public finance to fossil fuels as they did to clean energy.

23 Paris Agreement.

24 NGO report of pathways to sustainable climate policy

[https://pure.iiasa.ac.at/id/eprint/16235/1/CD-Links-for-web_final_November_2019.pdf], accessed 6.4.2020.

25 Skovgaard, P – Van Asselt, H (eds.): The Politics of Fossil Fuel Subsidies and Their Reform, p. 7. Cambridge University Press 2018.

(22)

To be able to answer to the research questions, it must be defined what fossil fuel subsidies are and are these subsidies compatible with the EU legislation. As recent cases have shown, the answer to these questions is rather complex.²⁶

This thesis will use international, EU and national legal and policy sources. International sources include reports and agreements by multilateral organizations such as World Trade Organization (hereinafter WTO), Organisation for Economic Co-operation and Development (hereinafter OECD) and United Nations (hereinafter UN). Sources of EU legislation include the primary and secondary legislation of the EU currently in force as well as cases from the CJEU and preparatory documents.

Thesis will also consider probable evolution of the EU’s policy on fossil fuel subsidies and how the EU’s State aid legislation will relate to this development. The most relevant primary legislation for compatibility of fossil fuel subsidies are Articles 107 and 108 of TFEU. The most significant

secondary legislation is Energy Taxation Directive and Guidelines for environmental protection and energy is a soft law measure strongly steering the use of fossil fuel subsidies. National sources will include policy reports such as energy and climate strategy, and evaluation of application of EU State aid law in Finland. National policy sources will provide information which are the fossil fuel tax subsidies in Finland and this Thesis will evaluate them in the light of EU State aid law.

Legal relevance of this topic is about the primacy of the EU law. As many Member States have had various types of energy support, the EU has not interfered to them until lately. In the light of recent cases, the Finnish fossil fuel tax subsidies seem problematic from the view of EU State aid

legislation. Evaluation of Finland’s fossil fuel subsidies and their compatibility with the EU State aid legislations offers a possibility to discuss the arguments which the Commission has used for approving State aid. Findings on the fossil fuel subsidies of Finland may offer results which help to systematize EU State aid legislation and apply these findings to the measures of other Member States.

If the Finnish fossil fuel subsidies would turn out as illegal State aid, Finland would be forced to increase the tax of energy for fossil fuel intensive industry due to the primacy of EU law. Other

26 European Commission decision after the investigation about tax returns from Germany to certain large electricity users, European Commission Press Release, 28 May 2018 [http://europa.eu/rapid/press-release_IP-18-3966_en.htm], European Commission decision after the investigation about Luxembourg’s illegal tax breaks for French company Engie, European Commission Press Release, 20 June 2018 [http://europa.eu/rapid/press-release_IP-18-4228_en.htm], accessed 16.5.2019.

(23)

consequence would be full recovery of the illegal aid by the Commission. For example, ten years and 600 million a year would result 6 billion euros cost to the Finnish exporting industry.²⁷

1.3 Context and scope

This Master’s thesis focuses on compatibility of Finland’s fossil fuel tax subsidies with EU State aid legislation. The challenge of this topic is that the definition of both “subsidy” and “State aid”

must be first identified. Despite the legislative importance of these definitions and their possible impacts, there is still some debate about the exact definitions of these.²⁸ When discussing about fossil fuel subsidies, this Thesis is referencing to measures, which are defined by the World Trade Organization (hereinafter WTO), since it is used by the most of the international organizations.²⁹ However, there are several different definitions for subsidy and there is an on-going discussion about them.³⁰ According to WTO, subsidies are not only direct transfer of funds but also government revenue that is not collected, such as tax breaks, and this is likewise the consensus opinion in the field of economics.³¹ In public discussion this is occasionally questioned³² and certainly the EU has allowed the use of national tax breaks for fossil fuels. However, it must be stated that regardless of the definition of fossil fuel subsidies, aid measures may still be compatible or incompatible with the EU State aid legislation, and this is a separate question. These two

questions are legally separate but related, and their relevance to this Thesis is in policy and politic elements. States have different political objectives and therefore also the concept of fossil fuel subsidy is politically charged. At the EU, the Member States and the Commission have policy goals, where the expanding or narrowing the definition of State aid can help them to achieve. WTO definition of subsidy will be discussed together with the EU State aid rules, but main research questions concern strictly the compatibility in the context of the EU law.

For a long time, the EU has allowed several different types of national subsidies in the field of energy industry. There are historical reasons for this, as the energy has been considered as a very

27 Monetary value of Finnish fossil fuel subsidies varies by year, but two subsidies discussed in this Thesis amounted 830 million euros only in 2019.

[Article by Finnish public broadcasting company Yleisradio reporting state aids for stock companies.

28Skovgaard, P – Van Asselt, H(eds.): The Politics of Fossil Fuel Subsidies and Their Reform, p. 7. Cambridge University Press 2018.

29 WTO: Agreement on Subsidies and Countervailing Measures: Part 1 Article 1: Definition of a subsidy.

30 Skovgaard, P – Van Asselt, H(eds.): The Politics of Fossil Fuel Subsidies and Their Reform, p. 23-30. Cambridge University Press 2018.

31 Rauhanen, T - Verotuet valtion politiikkavälineenä ja ohjauskeinona, p.2. (VATT julkaisut 71 2017).

32 A blogpost from Finnish former member of the European Parliament comparing subsidies for renewable energy and fossil energy and stating that tax breaks are not a subsidy, [http://eijariitta.puheenvuoro.uusisuomi.fi/191508-yksi- vihrea-valhe], accessed 21.5.2019.

(24)

sensitive area in political sense.³³ The subject of energy law cannot be separated from energy

policy.³⁴ Compatibility of certain fossil fuel subsidy schemes with EU State aid legislation has only been questioned lately.³⁵ This is a part of larger, on-going transition of European energy markets, from monopolistic and state-driven to competitive and market-driven.³⁶

This Master’s thesis will limit its evaluation to Finland’s fossil fuel tax subsidies and their

compatibility with the EU State aid legislation. Scope of this Thesis is limited to Finland, because in the light of recent cases in the CJEU, Finnish fossil fuel tax subsidies are certainly problematic.

State intervention in a form of subsidy must be “good aid” established in the State aid

modernisation.³⁷ It is defined as “aid which is well-designed, targeted at identified market failures and objectives of common interest, and least distortive”³⁸ and Finnish economists have repeatedly and clearly stated that neither of the subsidies studied in this Thesis fulfills this criteria.³⁹ Author of this research is also a native Finn, which enables the use of sources in Finnish.

This evaluation of national fossil fuel subsidies and EU State aid legislation aims to systematize legal research and in this way be useful when evaluating national fossil fuel subsidies of different Member States of the EU. Despite, say at least, the controversiality of subsiding fossil fuels with national policies, there has not been much prior research about fossil fuels subsidies compatibility with the EU State aid legislation.

1.4 Outline of Thesis

This Thesis has the following structure. Chapter 1 is the introduction, which will provide the background for this study and research objectives, methodology, context and scope. Chapter 2 discusses first the legislative competences of the EU and the Member States in different policy areas relevant to this Thesis. After this, Chapter 2 discusses energy and climate sector-specific

33 Johnston, A – Block, G - EU Energy Law, p. 10. Oxford University Press 2012.

34 Talus, K - EU Energy Law and Policy – A Critical Account, p. 7. Oxford University Press 2013.

35 European Commission decision after the investigation about tax returns from Germany to certain large electricity users, European Commission Press Release, 28 May 2018 [http://europa.eu/rapid/press-release_IP-18-3966_en.htm], accessed 16.5.2019. European Commission decision after the investigation about Luxembourg’s illegal tax breaks for French company Engie, European Commission Press Release, 20 June 2018 [http://europa.eu/rapid/press-release_IP-18- 4228_en.htm], accessed 16.5.2019. More about invidual State aid cases from

[http://ec.europa.eu/competition/sectors/energy/state_aid_to_secure_electricity_supply_en.html].

36 Talus, K - EU Energy Law and Policy – A Critical Account, p. 269-270. Oxford University Press 2012.

37 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. EU State Aid Modernisation. COM/2012/0209 final.

38State Aid Action Plan Less and better targeted state aid: a roadmap for state aid reform 2005 – 2009. State Aid Action Plan: Less and better targeted state aid: a roadmap for State aid reform 2005 – 2009. COM/2005/0107 final.

39Laukkanen, M – Maliranta, M - Yritystuet ja kilpailukyky. Valtioneuvoston selvitys- ja tutkimustoiminta. Official report for the Finnish government.

Laukkanen, M - Ollikka, Kimmo - Tamminen, S - The impact of energy tax refunds on manufacturing firm performance: evidence from Finland’s 2011 energy tax reform.

(25)

legislation in the EU with specifically in relation to fossil fuel subsidies. Chapter 3 establishes EU State aid legislation and CJEU case law of State aid. After this chapter considers tax breaks role in State aid legislation. Chapter 4 evaluates two of the most significant fossil fuel subsidies in Finland and their compatibility to EU State aid legislation. Chapter 5 concludes the findings of this Thesis and gives recommendations based on those findings.

(26)

2 LEGISLATIVE FRAMEWORK OF EU ENERGY AND CLIMATE LAW

2.1 Introduction

This Chapter aims to introduce the legal framework of the EU that, aside from State aid legislation, shape the policies that have an effect to the two Finnish fossil fuel subsidies evaluated in this Thesis.

Firstly, the chapter establishes the different type of competences in the EU law and discusses how policies are divided between these competences. Also, the first part aims to explain one of the key points showing why the EU has difficulties in regulating fossil fuel subsidies.

After this, the Chapter discusses the EU legislation with the relevance to energy policy, climate policy and fossil fuel subsidies. Energy and climate policies are discussed in the same chapter as they are inextricably linked together. Transition from fossil fuel-based energy system to a decarbonized one is in the core on international and EU-level climate policies as the necessary emission cuts to reach the targets of Paris Agreement cannot be reached without the reform of the energy system. This Chapter restricts its scope to the most relevant energy-specific regulation from perspective of fossil fuel subsidies and the research questions of this Thesis.

Energy and climate legislation relates also to fossil fuel subsidies. Aims to reduce the greenhouse gas emissions are one of the main reasons why the role of the fossil fuel subsidies is questioned.

Also, as it is discussed later in this Thesis, when fossil fuel subsidies are evaluated as a part of the EU State aid policy, there are also strong links to energy and climate legislation.

In the end of the Chapter the Thesis takes a look at regulation focused solely to EU’s fossil fuels subsidies and aims to connect them to the international setting of fossil fuel regulation.

2.2 Legislative competences in the EU

The principle of conferral means that the EU can only act within the limits of the competences that the Member States have conferred upon it in the Treaties.⁴⁰ This is what is meant by saying that the EU has attributed competence.⁴¹

Before the Lisbon Treaty, it was somewhat unclear what where precisely the division of

competences between the EU and the Member States.⁴² Because the limits of the EU’s competences

40 Article 5(2) TEU.

41 Craig, P - de Búrca, G - EU Law: Text, Cases, and Materials, p. 73. Oxford University Press. 2015.

42 Gormsen, L – European State aid and the tax rulings, p. 87. Edward Elgan Publishing. 2019.

(27)

were not clear, it resulted as creeping competence of the EU. This means a situation where EU started to increasingly use its power in areas of policy which were it did not have a specific competence.⁴³

In 2009 Lisbon Treaty established two constituent treaties, the Treaty of the European Union (hereinafter TEU) and the Treaty on Functioning of the European Union (hereinafter TFEU), which defined the scope of the EU’s competences.⁴⁴ Articles 2-6 TFEU designate three different type of EU competences.⁴⁵ These three types are exclusive competence of the EU, shared competence between the Member States and the EU and supportive competences of the EU.

Exclusive competence means that only the EU can legislate legally binding acts in certain sector.

The Member States may legislate in these sectors only if empowered to do so by the EU.⁴⁶ Exclusive competences include customs union, competition rules for internal market, monetary policy of the euro, conservation of marine biological resources under common fisheries policy and common commercial policy.⁴⁷ The sectors under exclusive competence of the EU are relatively narrow and it includes policy areas, which enables free trade in the single market.⁴⁸

Shared competence means that the Member States and the EU can both make legislation for a specific area. The Member States can exercise their competence if the EU has not done so and in case when EU has decided not to legislate further on.⁴⁹ The famous landmark decision of the Court of Justice of the European Union (hereinafter CJEU) of Costa v Enel decided that in case when both the EU and the Member State have legislation in specific sector the EU legislation over rule the national law due to the primacy of the EU law.⁵⁰ In accordance with Article 4 TFEU, shared competences include internal market, social policy, economic, social and territorial cohesion, agriculture and fisheries, environment, consumer protection,

transportation, trans-European networks;, area of freedom, security and justice, common safety concerns in public health matters and the most relevant one for this subject, energy.⁵¹

Supporting competence means that the EU may support, coordinate or supplement the actions of the Member States. Supporting competences include protection and improvement of human health,

43 Gormsen, L – European State aid and the tax rulings, p. 7. 2019.

45 TFEU Title 1 Categories and Areas of Union Competence. Articles 4-6.

46 Article 2(1) TFEU

48 Craig, P - de Búrca, G- EU Law: Text, Cases, and Materials, p. 102. Oxford University Press. 2015.

50 Case 6/64 of the Court of Justice of the European Union Flaminio Costa v E.N.E.L [1964] ECLI:EU:C:1964:66

(28)

industry, culture, tourism, education, civil protection and administrative cooperation.⁵² The EU cannot harmonize the law in these area, but it can pass legally binding acts if the specific Treaty provisions allow it.⁵³

For the relevance of this Thesis, also the Commission’s competence concerning State aid must be discussed. The Commission has wide discretion in assessing the compatibility of State aid measures with the internal market.⁵⁴ This means that the decisions of the CJEU do not bind the Commission, which is an exception when compared to the most of other areas of policy.

However, the CJEU has a strong interpretational role and it can accept or reject decisions of the Commission on State aid.⁵⁵ The CJEU’s role in the legal order of the EU is established in Article 19(1) TEU. Article 19(1) TEU states that CJEU “shall ensure that in the interpretation and application of the Treaties the law is observed.” CJEU’s relevance for this Thesis is particularly specified in Article 19(3)(b) TEU. According it the CJEU shall in accordance with the Treaties: (b) give preliminary rulings, at the request of courts or tribunals of the Member States, on the interpretation of Union law or the validity of acts adopted by the institutions.”⁵⁶ The CJEU interprets EU law to make sure it is applied in the same way in all Member States and settles legal disputes between national governments and EU institutions. The CJEU’s case law is integral part of legal sources in EU law. The interpretation of concept of State aid has developed in case law of CJEU and numerous individual cases about the definition of State aid and compatibility of State aid measures with the internal market offer comprehensive

secondary legal source to address this topic.⁵⁷

Fossil fuel subsidies discussed in this Thesis are part of competition, energy and environmental sector. Energy and environmental sectors are areas of shared competence and therefore the Member States may legislate in situations when the EU has not decided to use its legislative power.⁵⁸ State aid measures in general are part of the EU’s competition policy.⁵⁹ Competition policy differs from these two and it is an area of the EU’s exclusive competence. The State aid measure may overlap

52 Article 6 TFEU

54 Hancher, Leigh – de Hauteclocque, Adrien – Salerno, Francesco Maria (eds): State aid and the energy sector., p. 55- 57. Hart. 2018.

55 Hoffman, H – Micheau, C – State Aid Law of the European Union, p. 21-24. Oxford University Press. 2016.

56 19(3)(b) TEU.

57 Penttinen, S – Free movement and energy. p, 25. Publications of the University of Eastern Finland. 2019.

58 Article 4 TFEU

59 TFEU lists “Aids granted by States” under TITLE VII: Common Rules on Competition, Taxation and Approximation of Laws.

(29)

with all of these three areas and it is therefore subject to EU’s exclusive competence and shared competence between the Member States and the EU.

Subsidies in general are addressed under EU’s competition policy and State aid legislation and this grants the EU exclusive competence. This is necessary in order to preserve effective competition and free trade in the single market. Shared competence between the EU and the Member States could result a subsidy race between the Member States. EU’s exclusive competence means that it can in general prohibit the use of subsidies and prevent distractions in the internal market. Article 194(2) TFEU provides that the Member States have right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply. Indeed, the General court of the European Union has strengthened the interpretation that even though the energy policy of the EU and especially Article 194(1) TFEU set the objectives of the EU’s energy policy, the Member States are entitled to choose between different energy sources.⁶⁰ Objectives of the energy policy of the EU are related to other policies, such as

environmental and competition polices, the Member States competence is limited. Case-law of the EU has shown that Article 194(2) is not applicable in situations where actions taken by the EU are within a framework of other policy area.⁶¹

Treaty on the European Union (hereinafter TEU) states the three important principles, which assess both the limits of EU’s competence and the limits of use of these competences. The limits of the EU’s competence are based on the principle of conferral. This means that the EU shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to achieve the objectives of the Treaties.⁶² The Member States retain their competences in all other sectors.⁶³ Relevance of principle of conferral to the topic comes from the overlap of different policy areas. State aid rules are part of the EU’s competition policy but as discussed before in this Thesis, fossil fuel subsidies are also part of energy and environmental sectors. Therefore, the use of competences depends which policy field Finnish fossil fuel tax subsidies are considered part of.

Lower tax rate applied to industry and tax rebate of energy-intensive industry are also taxation measures. The Member States have exclusive competence to decide their own economic policy and

60 Case T 356/15Austria v Commission ECLI:EU:T:2018:439 paragraph 110-114.

61 Case T-370/11 Poland v Commission ECLI:EU:T:2013:113paragraph 12.

62 Article 5(1) TEU

63 Huhta, K - Capacity Mechanisms in EU Law, p. 57. Publications of the University of Eastern Finland. 2019.

(30)

taxation. If the prohibition of State aid is used to harmonise energy taxation over the level of minimum taxation set in Energy Taxation Directive, the Commission surpasses its competence.⁶⁴ Principle of proportionality limits the EU for using its power only when necessary. It means that the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties. Criteria for applying it are established in the Treaties. To Finnish fossil fuel subsidies this affects in three ways through three different policy areas of environment, energy and competition.

Firstly, the EU must use its power to achieve the goals of energy policy set in Article 194 TFEU and goals of environment policy set in Article 191 TFEU. Also, the EU must ensure the functioning of internal market and limit the use of State aid.

In circumstances, where the EU shares competence with the Member States, the principle of subsidiarity is applied to determine whether legislative action should be taken at the EU or national level.⁶⁵ The EU shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to achieve the objectives of the Treaties.⁶⁶ The Member States have granted the EU exclusive competence in internal market and shares the competence with it in energy and environment policies.

2.3 Energy-specific regulation of the EU

The majority of significant energy-specific legal regulation in the EU is established in Article 194 TFEU. It was introduced in Treaty of Lisbon in 2009. It introduces the legal basis for the field of energy based on the shared competences between the EU and the Member States.⁶⁷ Article 194 states that the EU energy policy aims to:

(a) ensure the functioning of the energy market, (b) ensure security of energy supply in the Union,

(c) promote energy efficiency and energy saving and the development of new and renewable forms of energy and

(d) promote the interconnection of energy networks.⁶⁸

64 Pesaresi, N - Siaterli, C - Van de Casteele, K - Flynn, L - EU Competition Law, v. 4, State aid, p. 417. Claeys &

Casteels Law Publishers. 2016.

65 Berry, E – Homewood, M – Bogusz, B- Complete EU Law: Text, Cases, and Materials, p. 107. Oxford University Press. 2019.

66 Article 5(2) TEU

67 Summary about the legal basis in the field of energy [https://eur-

lex.europa.eu/summary/chapter/energy.html?root_default=SUM_1_CODED%3D18,SUM_2_CODED%3D1805&local e=en], accessed 15.5.2019.

68 Article 194 TFEU

(31)

Due to the vital role of energy in our modern society, the first paragraph of Article 194 states that the EU aims to ensure the functioning of the energy markets, which enables the EU and the Member States to achieve the objectives of the EU energy policy; secure, sustainable and affordable energy for the people of the Member States. These three objectives and dimensions of energy trilemma⁶⁹ are stated in the paragraphs b-d of the article 194(1) TFEU. Article 194(1)(a) introduces the aim for functioning of the energy markets and three objectives of 194(1)(b)-(d) must fulfill in order to aim this wider objective of 194(1)(a). Article 194 TFEU is the main legal basis for new energy

regulation.⁷⁰ This means that every new regulation in the field of energy must contribute to the objectives stated in Article 194(1) a-b.

Before Treaty of Lisbon, energy was not included as an area of the EU competence. Without its own legal basis, energy was regulated under internal market legal basis Article 114 TFEU and environmental legal basis of Article 192 TFEU. Despite that energy now has its own legal basis, these Articles remain relevant. Still in 2020, the CJEU gave a decision on the basis of the 2003 energy package. In the case of Stadtwerke Neuwied GmbH v RI, the contractual arrangement was made on the basis of the 2003 energy package.⁷¹

Every energy sector-specific instrument from 2010 and before has used some different legal basis than Article 194 TFEU. Many of these instruments might not fulfill the requirements of Article 194 TFEU as they were designed and introduced before it. Before the Lisbon Treaty there was not an independent provision concerning energy. Even so, the EU had competence to legislate the field on energy through other policy areas, such as Article 192 TFEU (then Article 175 TEC) concerning environmental protection and Article 114 TFEU (Article 95 Tec) about internal market.⁷²

Establishing a legal basis for energy in the Lisbon Treaty new energy provisions formalized the shared ownership of competences in the field of energy.⁷³

69 The World Energy Council’s definition of energy trilemma is objectives of energy Security, energy equity, and environmental sustainability of energy systems. Balancing these three goals constitutes a Trilemma.

[https://www.worldenergy.org/publications/entry/world-energy-trilemma-index-2019], accessed 27.4.2020.

70 This has not always been the case. The legal basis changed from Article 114 TFEU to Article 194 TFEU after the Third Energy Package.

71 Case 765/18 The Court of Justice of the European Union Stadtwerke Neuwied GmbH v RI (C-765/18) [2020]

ECLI:EU:C:2020:270.

72 Piris, J - The Lisbon Treaty : a legal and political analysis, p. 318. Cambridge University Press. 2010.

73 Braun, J - EU Energy Policy under the Treaty of Lisbon Rules, p. 8. 2011. Also, Andoura, S – Hancher, L – Van der W: Towards a European Energy Community: A Policy Proposal. Notre Europe. 2010.