Court of Justice 21-03-2013 ECLI:EU:C:2013:191 C-566/11, C-567/11, C-580/11, C-591/11, C-620/11, C-640/11

– The schematic need for the ‘windfall profit’

52. The argument put forward by the undertakings is ultimately based on the idea that a levy on the ‘windfall profit’ runs counter to the scheme. Since Directive 2003/87 allocates to them, free of charge, allowances which they can exploit commercially, they should also be able to retain the return from those allowances, that is to say, the ‘windfall profit’ in the present case.

53. It is correct that the scheme of the directive accepts the possibility of such a ‘windfall profit’ and neither prescribes a levy nor at any point expresses disapproval of ‘windfall profits’.

54. However, it is contrary to fundamental principles of equity, in particular the principle of equal treatment, if the European Union grants certain undertakings advantages which are not quid pro quo or based on some other justification. In the present case, electricity-producing undertakings receive allowances free of charge without providing anything in return. They are able to sell them or use them to produce electricity and, on selling the electricity, to integrate the opportunity costs for the allowances into their price. Undertakings not covered by Directive 2003/87 do not receive any allowances, on the other hand. If those other undertakings are engaged in local electricity supply, when purchasing electricity they even have to finance the advantage enjoyed by the power plants, their ‘windfall profit’.

55. Directive 2003/87 cannot therefore be interpreted as preventing the Member States from depriving electricity-producing undertakings of the advantages of using allowances allocated free of charge. The argument put forward by the undertakings can only therefore be accepted if the ‘windfall profit’ is necessary for other reasons set out in the directive.

– The step-by-step introduction of the scheme

56. According to the Commission proposal for Directive 2003/87, the allowances for the relevant period were to be allocated free of charge because there were not yet any international commitments to limit greenhouse gas emissions.⁽⁹⁾ The price for emission allowances was also still unknown.⁽¹⁰⁾ The Commission intended to decide on the method of allocation for the subsequent allocation periods on the basis of the experience gained.⁽¹¹⁾ This is consistent with the step-by-step approach which characterises the introduction of the allowance trading scheme.⁽¹²⁾

57. That approach may justify allocating allowances free of charge initially. However, it does not rule out the possibility of absorbing the advantage stemming from that allocation if its extent can be determined.

– International competition

58. It must also be assumed that allocation free of charge comes within the aim mentioned in recital 5 in the preamble to Directive 2003/87 of the least possible diminution of economic development and employment. It is consistent with this fundamentally legitimate aim⁽¹³⁾ above all to limit the burden on undertakings which are in international competition. As the Commission argues, it is difficult for them to integrate the costs of allowances into their prices if their competitors do not have to bear any such costs.

59. However, electricity-producing undertakings are generally not in international competition. They are therefore able to integrate the costs of allowances into their prices to a very large extent⁽¹⁴⁾ and do not require that protection.

– Competition on the internal market

60. According to recital 7 in the preamble to Directive 2003/87, however, European Union provisions relating to allocation of allowances are also necessary to contribute to preserving the integrity of the internal market and to avoid distortions of competition.⁽¹⁵⁾ Allocation free of charge as far as possible therefore also serves those aims.

61. Competition on the internal market could be impaired in principle if some undertakings benefit from ‘windfall profits’ by virtue of integrating opportunity costs of allowances allocated free of charge, whilst others are required to pay out those profits.⁽¹⁶⁾ This also holds for the electricity sector, as Spain maintains supplier relationships with France and Portugal.⁽¹⁷⁾

62. However, full harmonisation of levies is unnecessary even in an internal market. Differences in the laws of the Member States may be to the advantage of the person concerned or not, according to circumstance.⁽¹⁸⁾ Consequently, having regard to the protection of competition within the internal market as well, the principle of the allocation of allowances free of charge cannot preclude any burden which Member States link indirectly to allocation.

63. It must also therefore be crucial that the Spanish levy is not linked to the allocation of allowances, but to their use for the production of electricity. Whilst allocation is subject to the common rules of Directive 2003/87, that does not apply to levies on the use of allowances. The levy on an additionally accruing ‘windfall profit’ has much less impact on competition than different costs for the allocation of allowances, namely the acquisition of the necessary means of production.

64. The necessary protection of the internal market is ensured because in collecting a levy on a ‘windfall profit’ the Member States are also required to comply with European Union law,⁽¹⁹⁾ in particular the fundamental freedoms. However, a quantitative restriction on exports within the meaning of Article 35 TFEU, as is relevant here, requires that the actual effect of the measure in question is greater on exports than on marketing in the domestic market.⁽²⁰⁾ The contested levy absorbs the ‘windfall profit’ in the case of exports in exactly the same way as in the case of electricity sold on the domestic market.

65. Some of the undertakings involved also object to the levy on the ground that it applies only to electricity production, but not to other economic sectors which also received emission allowances free of charge.

66. It is not clear, however, that electricity production is in direct competition with other economic sectors. The provision of grid-based electrical energy cannot really be substituted on economically viable terms. The difference in treatment of economic sectors cannot therefore impair competition or the effectiveness of the market mechanism appreciably.

– Interim conclusion

67. In summary, the market mechanism under Directive 2003/87 does not preclude the levy at issue in the main proceedings.

– Consumer prices

69. A first conflict with the aim of reduction could stem from the levy’s effects on consumer prices. The electricity producers involved argue that when it adopted Directive 2003/87 the Union legislature assumed that the value of allowances allocated free of charge would be integrated into prices.⁽²¹⁾

70. This argument is essentially well-founded. If the opportunity costs of the allowances are integrated into consumer prices, that price signal gives consumers an additional incentive to consume less electricity and thus to help to reduce greenhouse gas emissions.

71. Although Directive 2003/87 does not expressly mention this incentive for final consumers, it is consistent with the logic of the market mechanism created by it. That mechanism is intended to put a price on environmental pollution so that those costs are included in the decision-making of all relevant actors.

72. Nevertheless, a levy on the ‘windfall profit’ stemming from the inclusion of those costs is not necessarily contrary to this objective of the market mechanism. The price signal to final consumers is not impaired because electricity-producing undertakings are required to pay out any surplus revenue on the wholesale market.

73. The contested levy could be inconsistent with this mechanism, however, in so far as it is intended to relieve final consumers of the ‘windfall profit’ made by the electricity-producing undertakings.

74. According to the Tribunal Supremo, it is connected with a claim which will probably have to be satisfied in future by private final consumers. That claim corresponds to the ‘tariff deficit’. The deficit arises because consumer prices in Spain are fixed by the State. For some years the prices fixed in this way have been too low to cover the costs of local electricity suppliers which purchase electricity on the wholesale market. A deficit is thus created for those undertakings. The contested levy is deducted from the amount of that deficit pursuant to the additional provision to Order ITC/3315/2007, thereby contributing to its reduction. If it is assumed that the Spanish State will at some point impose the tariff deficit of local suppliers on consumers by means of higher electricity prices, the levy would therefore relieve the burden on consumers indirectly.

75. This effect of relieving the burden is nevertheless too uncertain to impair the price signal. That signal is instead prevented by the fact that consumer prices are fixed by the State, since they are so low that the integrated opportunity costs do not reach consumers.

76. Any relieving of the burden on consumers through the levy as such is not therefore contrary to Directive 2003/87.

– Discrimination against more energy-efficient power plants

77. Iberdrola and Tarragona Power, supported by Gas Natural, Bizkaya Energia and Bahía de Bizkaia Electricidad, argue that the levy discriminates against more energy-efficient power plants. In fact, in the case of the particularly energy-efficient COGAS power plants, a much higher proportion of the market value of the allowances allocated free of charge is absorbed than in the case of less energy-efficient power plants. In examples described by Iberdrola and Tarragona Power,⁽²²⁾ for a COGAS power plant allowances worth around EUR 11.9 million were allocated and a levy of EUR 7.4 million was collected, that is to say, around 62%. For a coal-fired power plant which received allowances worth around EUR 12.7 million, on the other hand, levies amounting to only EUR 3 million were incurred, that is to say, 23.6%. They claim that this different intensity of burden constitutes unjustified discrimination.

78. This argument is based on the idea expressed in recital 20 in the preamble to Directive 2003/87 that the reduction of greenhouse gas emissions is also to be achieved by means of more energy-efficient production. Measures which adversely affect the incentives to use more energy-efficient technologies would run counter to that aim.

79. The burden on types of power plant appears unbalanced only as regards the allocation of allowances, however. In fact, all types of power plant have the same burden, equal to the windfall profit accrued. However, this does not correspond in every case to the quantity of allowances allocated free of charge.

80. This effect stems from the fixing of electricity prices on the wholesale market in Spain, as described above.⁽²³⁾ Because the price is determined by the bids from COGAS power plants, all more cost-effective generating power plants in any case receive for their electricity a profit margin amounting to the difference between their other costs and the price bid by the COGAS power plants. The ‘windfall profit’ corresponds solely to the proportion of that profit margin by which it increases on account of the integration of opportunity costs of the allowances for the COGAS power plants. This is also shown by the fact that this ‘windfall profit’ is absorbed in the same amount even in the case of power plants which do not require or have not received any allowances at all.⁽²⁴⁾

81. A more extensive levy for other power plants would no longer be justified by the ‘windfall profit’. It would fall back on revenue which would have accrued even without the integration of opportunity costs for allowances allocated free of charge.

82. The particularly energy-efficient COGAS power plants are not therefore discriminated against compared with other power plants. Rather, their proportionately heavier burden stems from the fact that they determine the price of electricity and the opportunity costs of the allowances integrated by them represent the ‘windfall profit’ to be absorbed. This is ultimately the necessary consequence of their higher production costs.

– Discrimination against energy efficiency improvements

83. However, the Spanish levy is structured in such a way that it adversely affects the incentive to reduce emissions. In response to a question from the Court, Spain confirmed that the levy increases on the basis of the formula applied if the energy efficiency of a power plant is improved.

84. This effect is caused by the structure of the formula for calculating the levy. It includes a division of the emission factor of a COGAS power plant by the emission factor of the power plant whose levy is to be calculated. The emission factor of an installation is the quantity of carbon dioxide in tonnes which is produced in the generation of one megawatt hour of electricity.

85. As a result of an improvement in the energy efficiency of a power plant, less carbon dioxide is produced in the activity of electricity generation; its emission factor is therefore lower. Accordingly, the result of the abovementioned division of the emission factor of a COGAS power plant by the reduced emission factor is larger. Since all the other factors in the formula remain the same, the levy must increase in this case.

86. Spain argues that an energy efficiency improvement is economically advantageous because fewer allowances are required. However, this economic advantage is at least reduced considerably because of the higher levy.

87. This is illustrated by an example of the application of Article 4(b) of Order ITC/3315/2007 described by Spain in response to a question from the Court. The hypothetical power plant under examination would originally produce one tonne of carbon dioxide in the generation of one megawatt hour of electricity. With a total production of 2 259 gigawatt hours, 2 258 762 of tonnes of carbon dioxide would be accumulated. At a price of EUR 15.6636 per tonne of carbon dioxide, the necessary allowances would have a value of EUR 35 380 339. The levy would be EUR 9 699 252.

88. If the energy efficiency of that power plant were improved such that in generating one megawatt hour of electricity only 0.8 tonnes of carbon dioxide equivalent were produced, only allowances worth EUR 28 304 271 would be required. The levy would nevertheless be EUR 12 124 065.

89. A cost advantage of EUR 7 076 068 through savings of allowances is therefore reduced by the increase in the levy to EUR 4 651 255.

90. For more energy-efficient types of installation than the example under examination, even larger reductions of the economic advantage are conceivable. Moreover, the levy would fall where energy efficiency worsens.

91. It is therefore undeniable that the graduation of the levy to the detriment of an emissions reduction adversely affects the incentive to increase energy efficiency and to avoid efficiency losses. In this respect, the Spanish levy undermines the scheme established by Directive 2003/87 and is incompatible with it.

92. This does not, however, call into question the levy as a whole. Rather, it is sufficient to apply the legislation in such a way that an improvement in the energy efficiency of a power plant does not result in a higher levy.

– Interim conclusion