This chapter has examined competition law issues arising under the European Emissions Trading System. How EC Competition law can limit distortions of competition stemming from Member State measures that are taken pursuant to Directive 2003/87/EC has been examined.

With regard to the first section, the examination of the joint application of Articles 3(g), 10(2) and 81 and 82 EC Treaty, it has been found that the current jurisprudence is unlikely to prevent Member States from taking measures that create incentives for undertakings to engage in anticompetitive practices. Concerning cartelization little guidance has been found as to how the joint application of these Articles is interpreted in the absence of pre-existing agreements. The benchmark employed by the Court that violations of Article 81 EC

109 Important design characteristics are that the State assumes a less central role in the granting of allowances and that the PSR system in its generic form as established under the Dutch NOx system does not have a legally enforceable cap. Yet with regard to the EC emissions trading system it is clear that a cap is intended.

110 See Weishaar (2007b).

111 The polluter pays principle, may however be considered and support the selection of a system that burdens operators employing less environmentally efficient means of production.

Treaty can only be reinforced by State measures if they include part of the cartel agreement is criticized as very legalistic and as a prohibitively high standard of reference.

Similarly little direct guidance can be inferred from the jurisprudence pertaining to the joint application of Articles 3(g), 10(2) and 82 EC Treaty. It is through the drawing of parallels to its application under Article 86 EC Treaty, in particular to the absolute competition approach, that the Court would theoretically be able to close the perceived legal gap and bring State measures taken under the EU ETS within the realm of Competition law. Whether the Court would be inclined to do so will, however, ultimately depend on the impairment of the effet utile of Community law.

Regarding the second section of the chapter, the overall finding is that grandfathering systems are liable to constitute State aid while PSR systems should not. Clearly, the Commission has the power to interpret the concept of aid and held that the Dutch NOx system, as an epitome of a PSR system, constitutes State aid. The Court held that there are State resources involved in a PSR system but that it was not selective and hence did not constitute State aid. In addition, a PSR system established on an EU-wide level would not impede trade between Member States and hence undermine a further criterion for State aid. If a PSR system were to fall within the ambit of Article 87(1) EC Treaty, it may fall under a derogation and be declared compatible with the common market.

It also appears that the required level of environmental benefit as a precondition for the granting of aid is lower for a PSR system than for grandfather-ing. With regard to the balancing test, a PSR system is therefore preferable to grandfathering. Since the balancing test does not entail an examination of all possible aid formats that could be employed to address the market failure under consideration, it is concluded that State aid rules also may not be effective in guiding Member States towards selecting the least distortive allocation measures.

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