Government measures taken to allocate EU ETS emission allowances within the framework of the National Allocation Plans (NAPs) can be the source of distortions of competition. NAPs, and to a varying degree allocation mechanisms, can lead to distortions that influence firms' propensity to collude and abuse.
Allocation formats employed by the NAPs can, for example, create 'barriers to entry'. Such barriers will be created if the allocation format affords incumbents an absolute cost advantage over new entries. NAPs granting preferential treatment to incumbents or which do not afford new entrants equal treatment in the presence of resource depletion or transfer rules, can give rise to such barriers. Their existence gives rise to concern from a competition policy perspective since they facilitate cartelization and abuse of dominant positions that work to the detriment of society. The frequently employed grandfathering allocation mechanism5 appears more likely to give rise to unequal treatment of undertakings than the Performance Standard Rate (PSR) system.6 Within the so-called Performance Standard Rate system there is no absolute cap identifying the total amount of allowed emissions. Instead, a relative approach is taken by establishing a performance standard, indicating the allowed amount of emissions per unit of production, or per unit of fuel. If an
5 There are three bases which can be used for (historical) grandfathering: input-based (used historic energy input), output-based (e.g. kilowatt-hours of electricity production) or emission-based (direct or indirect i.e. total emission from emitting facilities). Furthermore, the base period for historic data has to be determined, Harrison and Radov (2002), p. 60.
6 The System contains all elements of an Emission Trading System and thus goes beyond an allocation system. See Weishaar (2007a).
operator were to produce fewer emissions than indicated by this relative standard, it could sell these credits to other industries or reserve these credits for future use. If an operator exceeds the relative standard, it is obliged to cover the extra emissions with an emission-credit, bought from another industry, or taken from its own reserve. Since the same rules are applicable to incumbents and new entrants the only source of distortions is thought to stem from depletion of the new entrants' reserve. The same concern is present under the proposed amendment to Directive 2003/87/EC that envisages a benchmarking system with a 5% new entry reserve available to all new entrants that can benefit from free allocation.7
Besides barriers to entry, entrenchment of market shares is identified as facilitating collusion. Compensation for losers of market shares under the grandfathering allocation system, for example, renders winning of market shares more difficult and emphasizes the recognition of interdependence between undertakings, which in turn can alter their propensity to collude. Here too, a PSR system does not appear to give rise to such concerns, since undertakings that have historically been polluting more cannot benefit from cross-subsidising present production by selling allowances. A similar finding may be warranted under a Community-wide benchmark system that is envisaged under the proposed amendment to Directive 2003/87/EC.8
It should be noticed, however, that such distortions of competition that could stem from allocation mechanisms have been subject to compensatory justification balancing acts under State aid investigations where the European Commission compared environmental benefits to distortions of competition.9 Upon finding a positive societal effect, State measures were declared to be compatible with the common market.10 Even though it is unlikely that the ECJ would call into question the substance of the Commission's Decision, a number of interesting academic questions arise.
Legislative interventions11 by Member States are largely contained through the application of the four freedoms, while EC Competition law is geared to the containment of competitive distortions arising in particular from undue behaviour of firms. The legislator has introduced Article 86 EC Treaty to contain State measures affecting public undertakings and the granting of special or exclusive rights to undertakings by bringing them within the field of
7 See explanatory memorandum recital 18 and Article 10 (a) (2), (3) and (6) C0M(2008)16 final of 23.01.2008.
8 See explanatory memorandum recital 18 and Article 10 (a) (1) C0M(2008)16 final of 23.01.2008.
9 See the second part of this chapter.
10 See Weishaar (2007a).
11 As contrasted to subject matters dealt with under State Aid legislation.
application of EC law in general and Competition law in particular. The scope of this Article was and is, however, too narrow to address all possible anticompetitive measures Member States can take. The resulting legal gap in the Treaty placed some State measures inducing cartelization and abuse beyond reach of the four freedoms and Competition law alike. The European Court of Justice (ECJ) has recognized this shortcoming.
Based on Articles 3(g), 10(2), 81 or 82 EC Treaty, the Court in 1977 developed case law establishing that Member States are obliged to abstain from taking measures which could deprive Articles 81 and 82 of their effectiveness (effet utile). This jurisprudence was intended to contain undue State interference with the objectives of the EC Treaty. In its case law the ECJ established clear parallels to Article 86(1) EC Treaty and the Articles were applied jointly in a myriad of contexts including price regulations, social security provisions and maximum credit rates.12
In the following two sections the current application of these Articles is dealt with in the context of the EU ETS in order to examine if they can be employed to guide Member States towards selecting the least distortive allocation measures. First cartelization is presented and subsequently abuse.
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