Emission Trading And State

This section examines to what extent the State aid provision of EC Competition law guides Member States to select the least distortive allocation format. As in the previous section, the two free allocation mechanisms examined are grandfathering and the Performance Standard Rate System. In order to address this question, first it has to be established if both allocation mechanisms fall within the ambit of the State aid rules and which one of them gives rise to less anticompetitive concern. Given that the current legislative proposal for amending the EU ETS is not very specific, it is assumed here that the findings will be similar to a PSR system that also uses a benchmarking approach.33 According to Article 87(1) EC Treaty State aid is incompatible with the common market - unless exempted by derogations - if the criteria below cited are fulfilled. Even though criteria v and vi are assessed jointly from a legal point of view, for didactical reasons they are treated separately here.

(i) Transfer of a benefit or an advantage (notion of aid);

(ii) Aid favouring a certain undertaking over others (selectivity principle);

(iii) Granted by the State or through State resources;

(iv) It should be an undertaking or ... production;

(v) Distorts or threatens to distort competition;

(vi) Community dimension: aid capable of affecting trade between Member States.

Each will be treated in turn.34

i) Transfer of a benefit or an advantage (notion of aid) In order to avoid distortions of competition,35 the Commission has the power to interpret the concept of aid.36 The ECJ does not distinguish between measures of State intervention by reference to their causes or aims but determines aid solely based on their effects.37 Transferral of an advantage is the

33 See explanatory memorandum recital 18 and Article 10 (a) C0M(2008)16 final of 23.01.2008. Though it should be noticed that the proposed Directive envisages a uniform benchmarks at EU level and may therefore affect trade between Member States to a lesser degree.

34 For a more extensive examination of State aid and the EU ETS see Weishaar (2007b).

36 Case T-459/93 Siemens SA v. Commission [1995] ECR II-1675, para. 52.

37 Case 173/73 Italy v. Commission [1974] ECR 709, para. 13; Case C-241/94 France v. Commission [1996] ECR I-4551, paras. 19-20; joined Cases T-228/99 and T-233/99, Westdeutsche Landesbank Girozentrale and Land Nordrehein-Westfalen v. Commission, [2003] ECR II-435, para. 180.

objective test employed to determine its existence.38 Given its broad scope, direct benefits and cost reductions constitute aid.39

Both examined allocation formats satisfy this first criterion. Grandfathering constitutes a windfall profit in the form of a lump sum transfer of emission allowances with a market value. Under a PSR system an undertaking's CO2 savings are accredited in the form of intangible assets with a market value. Consequently, undertakings that are more CO2 efficient than the benchmark fixed by the government receive benefits that are satisfying this State aid requirement.

ii) Aid favouring a certain undertaking over others (selectivity principle) This criterion differentiates between aid favouring certain undertakings or the production of goods40 and general State interventions regarding fiscal rules, social security measures, etc. The ECJ looks at the effects in order to distinguish between a selective measure directed to aid certain undertakings and general economic measures.41 The selectivity principle requires that emission allowances are allocated in an objective, non-discriminatory and non-discretionary way.42

EU ETS grandfathering is potentially selective and liable to constitute State aid. Selectivity stems from a Member State's discretion to allocate allowances to particular entities. Furthermore, abatement cost differentials and the setting of historical standards generate discriminatory effects across undertakings and sectors. The underlying differentiation between trading and non-trading sectors that was crucial in the Danish system43 could be extended and brought into the realm of the discussion of covered and uncovered sectors and incumbents and new entrants. How the PSR system is assessed with regard to the

38 Case T-64/94 Ladbroke Racing Ltd. v. Commission [1998] ECR II-1, para. 52; Case T-46/97 SIC v. Commission [2000] ECR II-2125, para. 83; joined Cases T-228/99 and T-233/99, Westdeutsche Landesbank Girozentrale and Land Nordrehein-Westfalen v. Commission, [2003] ECR II-435, para. 180.

39 Case 30/59 De Gezamenlijke Steenkolenmijnen Limburg v. High Authority [1961] ECR I, para. 19.

40 Case T-55/99 CETM v. Commission [2000] ECR II-3207, para. 39; joined Cases T-92/00 and T-103/00 Territorio Histórico de Álava v. Commission [2002] ECR II 1385, para. 48, Case C-143/99 Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fuer Kaernten [2001] ECR I-8365, para. 41.

41 Case 173/73 Italy v. Commission [1974] ECR 709, para. 13; Case C-241/94 France v. Commission [1996] ECR I-4551, paras. 19-20; Case 310/85 Deufil GmbH & Co. KG v. Commission [1987] ECR 901, para. 8.

42 For a more extensive discussion on this point see De Sepibus (2007 pp. 13 ff.).

43 European Commission, (2000), Statsst0ttesag Nr. N 653/1999 - CO2-kvoter, SG(2000) D/, 12.04.2000, pp. 5-6.

selectivity principle is not a trivial question. The answer depends upon the objectiveness of the employed criteria and the scope of the governmental benchmarks. The higher and broader they are, the greater the likelihood that they are judged as being of a general economic nature. Yet, to the extent that covered sectors have heterogeneous abatement cost structures and distinct demand curves, the more likely that a measure, though not directly discriminatory, has such an effect. If, for example, large undertakings were favoured by a PSR, the measure would be selective44 unless justified by the nature or generality of the scheme.45 Therefore the result is ambiguous. In a recent case the CFI has ruled that the Dutch NOx system, the epitome of a PSR system, did not constitute state aid on the basis of the selectivity criterion.46

iii) Granted by the State or through State resources

Aid granted through an institution associated with the State47 or directly or indirectly affecting public accounts falls within the meaning of Article 87(1)48 if the aid is a result of an unilateral and autonomous decision49 of the State and not motivated by its obligations under the EC Treaty. Yet even if there is an advantage granted through State action that goes beyond its obligations aris

44 Case C-143/99 Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fuer Kaernten [2001] ECR I-8365, para.

45 Case C-143/99 Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fuer Kaernten [2001] ECR I-8365, para.

46 Case T-233/04 The Netherlands v. Commission [2004] nyr. para. 96 following.

47 Case 78/76 Steinike v. Bundesamt für Ernährung und Forstwirtschaft [1977] ECR 595, para. 21; joint Cases 67, 68 and 70/85, Van der Kooy BV v. Commission [1988] ECR 219, para. 35; Case C-303/88 Italian Republic v. Commission [1991] ECR I-1433, para. 11; Case C-305/89, Italy v. Commission [1991] ECR I-1603, para. 13; Case C-482/99 France v. Commission [2002] ECR I-4397, para. 48; Case C-200/97 Ecotrade Srl v. AFS [1998] ECR I-7907, para. 35.

48 Case 82/77, Opebaar Ministerie v. Van Tiggele [1978] ECR 25, paras. 23-25; joined Cases C-72/91 and C-73/91 Sloman Neptun v. Bodo Ziesemer [1993] ECR I-887, paras. 19 and 21; Case C-189/91 Kirsammer-Hack [1993] ECR I-6185, para. 16; Cases 213-215/81 Norddeutsches Vieh- und Fleischkontor v. BALM [1982] ECR 3583, paras. 22 and 23; joined Cases C-52/97, C-53/97 and C-57/94 Viscido, Scandella, Terragnolo and Others v. Ente Poste Italiane [1998] ECR I-2629, para. 13, C-295/97, Industrie Aeronautiche e Meccaniche Rinaldo Piaggio SpA v. International Factors Italia SpA [1999] ECR I-3735, para. 35, Cases T-204/97 and T-270/97 EPAC v. Commission [2000] ECR II-2267, para. 80; Case C-200/97 Ecotrade Srl v. AFS [1998] ECR I-7907, para. 43; joint Cases 67, 68 and 70/85, Van der Kooy BV v. Commission [1988] ECR 219, para. 28. See also Quigley, C. and Collins, A. (2003), p. 26.

49 Case T-351/02 Deutsche Bahn v. Commission [2006] nyr., para. 100.

ing from the Treaty, as long as no extra financial burden is placed upon public authorities, there is no aid50 within the meaning of the Article.

Due to its broad concept any grandfathering institution meets the 'State' element. State resources are affected if more than the obliged 90% allowances for the three-year period are allocated free of charge.51 Since in practice it is not discernable whether allowances derive from the permissible amount, all proposals containing over-allocations affect State resources.

Furthermore, in the present trading period Member States are subject to Kyoto obligations to meet particular national targets. Some Member States are also bound to emission targets within the framework of the EU Burden Sharing Agreement. They do, however, enjoy discretion to allocate relatively more or fewer allowances to the trading sector as a whole. Favouring trading sectors at the expense of, for instance, transportation influences the available allowances under the Directive and impacts State resources. It can be concluded that grandfathering mechanisms are liable to constitute State aid.

Regarding PSR systems, the Commission has taken the view that the Dutch NOx system satisfies the criterion of aid granted by the State or through State resources and that it consequently constitutes State aid. This assessment has been upheld by the CFI.52

The Dutch government argues that allowances under a PSR system are proof of compliance with administrative efficiency benchmarks53 and are thus not being distributed.54 In Preussen Elektra support was granted through legislation and in the absence of direct State involvement, the Court was not concerned with the position of the State but with the financial burden placed upon it,55 thus emphasising the question of a financial burden.56 In its recent

50 Case C-379/98 Preussen Elektra v. Schleswag AG [2001] ECR I-2099, para. 58, 63-65, Case T-613/97 Ufex v. Commission [2000] ECR II-4055, para. 108-10.

51 While in the first trading period 2005-2007 the amount was 95%, it has been reduced to 90% for the second period beginning 1 January 2008, see Article 10, Directive 2003/87/EC.

52 Case T-233/04 The Netherlands v. Commission [2004] nyr. para. 78.

53 European Commission, (2003), Steunmaatregelen van de Staten N35/2003 -Nederland Systeem van verhandelbare emissierechten voor NOx, C(2003) 1761 fin, 24.06.2003, under 3.2.

54 The Dutch government thus follows a similar line of argumentation as used in Belgium Green Certificates. European Commission, (2001), Steunmaatregel nr. N 550/2000 België Groenestroomcertificaten, SG(2001) D/290545, 25.07.2001, pp. 5-6.

55 C-379/98 Preussen Elektra v. Schleswag AG [2001] ECR I-2099, paras. 58-61.

56 See Case 53/00 Ferring SA v. Agence centrale des organismes de sécurité sociale [2001] ECR I-9067, para. 27, for direct sales taxes falling within the ambit of 'State aid'.

ruling the Court stressed that the tradability of allowances as such constituted an advantage.57

Regarding transfers of the State, the Commission and the CFI contended in Dutch NOx58 and Netherlands v Commission that allowances constitute intangible assets with market value,59 and that the government was deliberately forgoing revenue while having full discretion to sell allowances to operators60 and that this constitutes State aid.61 This reasoning is criticized because the incorporation of payment schemes like auctioning into a PSR system creates unnecessary uncertainty for investments in environmentally friendly technology, and thus runs counter to the system's environmental objective. This may be viewed to be questionable under the protection of confidence considerations because the PSR system is based on the accreditation of additional emission reductions. The Commission's emphasis placed on the 'willingness to pay' of undertakings is particularly questionable in light of Belgium Green Certificates62 where a similar willingness has been present and the measure was not held to constitute State aid.

While the EC Treaty does not compel Member States to levy taxes or to generate profits, the revenue argument extends the scope of Article 87(1) EC Treaty. Yet in Preussen Elektra the ECJ did not condemn the employment of statutory provisions to fix minimum prices above real market prices and to oblige private parties to bear the costs.63 Despite the fact that tax revenues would be lower,64 it distinguished the cases by reference to emission allowances. This decision therefore contrasts the ECJ's rejection of previous

57 Case T-233/04 The Netherlands v. Commission [2004] nyr. para. 74.

58 European Commission, (2003), Steunmaatregelen van de Staten N35/2003 -Nederland Systeem van verhandelbare emissierechten voor NOx, C(2003) 1761 fin, 24.06.2003.

59 European Commission, (2003), Steunmaatregelen van de Staten N35/2003 -Nederland Systeem van verhandelbare emissierechten voor NOx, C(2003) 1761 fin, 24.06.2003, under 3.1, Case T-233/04 The Netherlands v. Commission [2004] nyr. para. 75.

60 European Commission, (2003), Steunmaatregelen van de Staten N35/2003 -Nederland Systeem van verhandelbare emissierechten voor NOx, C(2003) 1761 fin, 24.06.2003, under 3.2, Case T-233/04 The Netherlands v. Commission [2004] nyr. para. 75.

61 European Commission, (2001), Steunmaatregel nr. N 550/2000 België Groenestroomcertificaten, SG(2001) D/290545, 25.07.2001, pp. 5-7. Case T-233/04 The Netherlands v. Commission [2004] nyr. para. 78.

62 European Commission, (2001), Steunmaatregel nr. N 550/2000 België Groenestroomcertificaten, SG(2001) D/290545, 25.07.2001, pp. 5-6.

63 C-379/98 Preussen Elektra v. Schleswag AG [2001] ECR I-2099, para. 66.

64 C-379/98 Preussen Elektra v. Schleswag AG [2001] ECR I-2099, para. 62.

Commission attempts to extend the field of application of Article 87(1).65 If the argument was motivated by the perception that the measures taken by the Dutch government constitute a fraude a la loi, it has appropriate tools at its disposal and should employ these.

While the above is relevant for a national PSR system, its application in a multilateral context is complicated by the Burden Sharing Agreement which is binding upon the former EU 15 Member States. PSR systems could be set at European levels according to objective criteria and with the aim to minimize competitive distortions for particular product groups. To the extent that the national allocation under the PSR system would not be identical to the number of allowances granted under the Burden Sharing Agreement, transfers between national governments would be required. Such transfers would then imply direct budgetary consequences.

iv) It should be an undertaking or. . . production

It is believed that the notion of undertaking under Articles 87 and 88 EC Treaty is identical to the one applied under Articles 81 and 82 EC Treaty. In Höfner66 the ECJ held that any entity engaged in an economic activity regardless of its legal status and the way it was financed amounted to an undertaking.

Directive 2003/87/EC restricts the allocation of emission allowances to operators67 defined as persons operating or controlling installations.68 Any recipient of allowances fulfils this criterion.

v) Distorts or threatens to distort competition

Under Article 87 EC Treaty aid must distort or threaten to distort competition. In order to determine distortions of competition, the ECJ assesses the direct and immediate effects of aid on the competitive position of the recipient. The market position prior to and after the granting of aid is compared and distortion established if the position of the undertaking is more favourable ex post.69 Any aid granted to an undertaking is held to give an advantage in relation to actual or potential competitors and as affecting competition.70 Even though

65 In C-290/83 Commission v. France [1985] ECR 439, para. 18 the ECJ ruled that the scope of Articles 87 and 88 EC Treaty did not leave sufficient room for a competing concept of 'measures having equivalent effect' to State aid. See also Quigley, C. and Collins (2003, p. 17).

Case C-41/90 Hofner and Elser v. Macroton GmbH [1991] ECR I-1979, para.

67 See Article 11(1) Directive 2003/87/EC.

68 See Article 3(f) Directive 2003/87/EC.

69 Case 173/73 Italy v. Commission [1974] ECR 709, para. 17.

actual proof of an anticompetitive distortion is not required71 and its potential presence is sufficient, the Commission must at least set out those circumstances in the statement of reasons for its decision.72 Thus, unlike under Articles 81 and 82 EC Treaty, here the Commission is under no obligation to prove distortions of competition on relevant product markets and the Court appears to be reluctant to do so.73

The ECJ does not accept arguments that aid lowered the relatively higher costs of a sector or that other States made similar payments.74 The Court looks at the anticompetitive effects without taking into account any grounds for motivation of the aid.

The Commission has promulgated Regulation (EC) No 1998/2006 on threshold levels below which all cumulated aid not exceeding 200 000 EUR, granted within a period of three years, is adjudged not to be capable of distorting competition - the so-called de minimis rule.75 Therefore only aid exceeding this threshold can fall within the ambit of Article 87(1) EC Treaty.

Legal considerations aside, determining the monetary value of allowances granted under a National Allocation Plan is not a trivial issue. 'Aid' should include all economically quantifiable advantages accruing to an entity. This is complicated by the volatility of market prices of allowances and because the marginal benefit of an allowance to an undertaking depends on its ability to pass on increased production costs to consumers. Sectors unable to do this will experience a larger cut in profits. Both from a firm as well as a social welfare point of view, particular regard of the undertakings' marginal abatement cost structures, including expected technological developments and growth forecasts, have to be taken into account. Thus in summary the actual effects of aid granted to undertakings may vary and are not easily determined.

71 Case T-288/97 Regione Friuli Venezia Giulia v. Commission [2001] ECR II-1169, paras. 49-50; Case T-35/99 Keller SpA v. Commission [2002] ECR II-261, para. 85; Case T-214/95, Vlaamse Gewest v. Commission [1998] ECR II-717, para. 67.

72 Joined Cases 296/82 and 318/82, Netherlands and Leeuwarder Papierwarenfabriek v. Commission [1985] ECR 809, para. 24, joined Cases C-329/93, C-62/95 and C-63/95 Germany, Hanseatische Industrie-Beteiligungen GmbH and Bremer Vulkan Verbund AG v. Commission [1996] ECR I-5151, para. 52.

73 Case 730/79 Philip Morris v. Commission [1980] ECR 2671, paras. 9-13; Case 53/00 Ferring SA v. Agence centrale des organismes de sécurité sociale [2001] ECR I-9067, para. 21.

74 Case 78/76 Steinike v. Bundesamt für Ernährung und Forstwirtschaft [1977] ECR 595, para. 24; Case T-214/95, Vlaamse Gewest v. Commission [1998] ECR II-717, para. 54.

75 Article 2(2) of Commission Regulation (EC) No 1998/2006 of 15 December 2006.

Based on the particular constellations between undertakings, one can distinguish four kinds of competitive relationships that can be distorted. These are firstly, relations between incumbents and newly entering firms; secondly, between trading and non-trading sectors; thirdly, relationships between competing firms of the same Member State, in particular regarding covered and non-covered parts of a sector as well as undertakings within a covered sector; and fourthly between trading sectors. Each will be discussed in turn. If any of these relationships demonstrates actual or potential competitive distortions, the measure at hand is liable to fall within the ambit of Article 87(1) EC Treaty, as long as the granted aid exceeds the de minimis threshold.

1) Between incumbents and newly entering firms

Competitive distortions arise from the NAPs if they were not to award potential competitors equal treatment. Granting new entrants relatively fewer allowances sets them at a comparative disadvantage vis-à-vis incumbent undertakings by increasing barriers to entry. This can lead to higher consumer prices and to potential x-inefficiency.76 Thus, competition will be distorted if new entrants were not grandfathered adequate amounts of emission allowances. A full industrial economic analysis is required to determine the substance of such a claim. Yet in practice the Commission is not obliged to prove actual competitive distortions; their mere potential detriment is suffi-cient.77

The Directive 2003/87/EC affords Member States discretion by obliging them to take the need to provide access to allowances for new entrants into account.78 Equally authentic language versions differ in clarity. While the English version speaks of the obligation to take into account the need of new entrants, the Dutch version of the text speaks of the necessity to keep emission allowances available for new entrants.

This ambiguity translates into disadvantages when new entrants' reserves are depleted and new entrants are not entitled to allowances as in most Member States.79 Interestingly enough, while the Commission acknowledges that it is crucial that new entrants have access to allowances, it at the same time states that new entrants' interests are sufficiently safeguarded by afford

76 Frank (1997, p. 412), defines x-inefficiency as a condition in which a firm fails to obtain maximum output from a given combination of inputs.

77 See for example Case 730/79 Philip Morris v. Commission [1980] ECR 2671, para. 11.

78 See Article 11(3) and Annex III criteria 6 of Directive 2003/87/EC.

79 Notable exceptions include Germany (see German NAP, p. 37) and Poland (see Polish NAP, p. 39).

ing them the possibility of buying allowances,80 even though resulting differences in production costs set new entrants at a comparative disadvantage.

Besides resource depletion and direct expenses, new entrants can suffer from unequal treatment. Under the Dutch NAP, incumbent top performers can receive up to 10% more allowances.81 Closure combined with transfer rules can constitute barriers to entry. Rules allowing incumbents to retain allowances for less CO2-efficient plants while shifting production to more efficient installations unilaterally benefits incumbents82 and may even further set them at a comparative advantage if new entry is made in another EU ETS country.83 Thus new entrants are not only set at a disadvantage under grand-fathering schemes but equally so under the existing NAPs.

By way of construction the PSR system is not prone to such fallacies because all undertakings abide identical benchmarks. Yet also here the obligation to comply with costly environmental standards could deter entrance. To the extent that the new entrant is not credit rationed,84 investments are not sunk,85 or the financial burden of lending money is positive, new entrants will require a higher level of profitability to find it attractive to enter a market. To the extent that such effects are not compensated by benefits from new and more efficient technology, barriers to entry could be created.

2) Between trading sectors and non-trading sectors

Distortions of competition arise if competing sectors do not fall under the trading system. Under both allocation formats considered increases in production costs in the sector falling under the EU ETS lead to distortions of relative prices and impact the structure of the economy. To the extent that such price increases reflect the internalization of negative externalities, changes of relative prices can be considered to lead to increases in social welfare. Otherwise society may be worse off.

3) Between competing firms of the same Member State

Distortions between competitors in the same market are related to unequal treatment of undertakings, coverage and entrenched market shares.

83 See Dutch NAP p. 41. For an effective prevention of this see German NAP, section C2 and C3.3.

84 This implies that a potential entrant is unable to attain sufficient funds to make the necessary investments to enter the market.

85 Sunk costs refer to irrecoverable costs once invested. They do not have a bearing on a firm's decision to exit a market but constitute a decisive factor for market entry.

Under grandfathering, distortions stem from temporal production downturns that affect the data used to grant emission allowances, different growth rates, and prior investments in abatement technology.86 Punishment of early movers creates distributive effects impacting undertakings' financial position. Grandfathering is thus directly liable to distort competition on the merits. While the PSR system does not give rise to unequal treatment of covered undertakings, distortions are generated if marginal abatement costs and investment capabilities of firms differ.87 Hence PSR systems are not liable to distort competition within a sector provided that benchmarks reflect the equilibrium market price.

Grandfathering allowances mitigate the direct financial cost burden and alleviate the competitive pressure experienced vis-à-vis non-coverage undertakings. Since it does not take into account the changing of firms' market shares but only their historic emissions, it has an inherently static focus. Under PSR, differences in coverage can give rise to differential cost burdens and to market distortions. The system must be constructed properly so as to mitigate distortions.

Because producers can cross-subsidize under grandfathering and part of the comparative production cost advantage of more competitive producers is absorbed by the necessity to buy additional emission allowances, gaining market share is difficult.88 Such entrenchment of market shares distorts competition, creates real welfare losses and contravenes the polluter pays principle. Under a PSR system there is no compensation for losers of market shares, and winners are not burdened with the obligation to buy additional allowances.

4) Between trading sectors

Unlike grandfathering, the PSR system does not excessively burden sectors depicting different growth or technical innovation potentials. Undue burdens are, however, created anew every trading period if production benchmarks do not reflect marginal sector abatement costs. This distorts the market equilibrium

86 One example that underlines the self-defeating rationale behind the setting of historic standards are Carbon Capture and Storage projects. Electricity producers that could capture and store part of their CO2 emission have an incentive to first pollute in order to be eligible for the grandfathering of emission allowances before they can actually benefit from their investments in CO2 abatement. For a description of such a project see the Vattenfall's newsletter on the C02 free power plant project, No. 3, November 2005.

87 From an economic efficiency point of view losses of inefficient operators constitute pecuniary effects and are the result of a competitive selection process which only allows the fittest market participants to stay on the market.

88 Here a market with a stable market size is assumed.

and leads to inefficient resource allocation. The existence of State aid is thus dependent on the particular benchmarks set by the government and cannot be answered at any level of generality.

If aid creates anticompetitive effects in any of the above situations it will be considered de minimis if it does not exceed a total of 200 000 Euros in the last three consecutive years.89 Any aid below this threshold is presumed not capable of distorting competition adjudged to be compatible with the common market.

vi) Community dimension: aid capable of affecting trade between Member States

Member State trade is affected if the position of an undertaking vis-à-vis undertakings competing in intra-community trade is strengthened.90 Even though limited aid or aid to small recipients also is distortive,91 the de minimis regulation92 applies. Here too, the potential detriment is sufficient.93 Though the Commission must at least set out those circumstances in the statement of reasons for its decision.94

With regard to national Emissions Trading Systems, the same elements cited under the fifth criterion are to be mentioned. They are not repeated here.

The selection of different reference periods under grandfathering can give rise to competitive distortions leading to differential treatment of comparable undertakings. That historical standards differ can easily be seen by comparing

89 Commission Regulation (EC) No 1998/2006 of 15 December 2006.

90 Case 730/79 Philip Morris v. Commission [1980] ECR 2671, para. 11; Case T-214/95, Vlaamse Gewest v. Commission [1998] ECR II-717, para. 50; Case T-288/97 Regione Friuli Venezia Giulia v. Commission [2001] ECR II-1169, para. 41; Case T-152/99 Hijos de Andrés Molina, SA v. Commission [2002] ECR II-3049, para. 220; Cases T-298/97, T-312/97, T-313/97, T-315/97, T-600 to 607/97, T-1/98, T-3/98 to T-6/98, T-23/98, Alzetta Mauro and Others v. Commission [2000] ECR II-2319, para. 81. In joined Cases C-278/92, C-279/92 and C-280/92 Spain v. Commission [1994] ECR I-4103, para. 40, the Court clarified that the beneficiary undertaking itself does not need to engage in exports. See also Case 102/87 France v. Commission [1988] ECR-4067, para. 19; Case C-75/97, Belgium v. Commission [1999] ECR I-3671, para. 47.

91 Case C-142/87 Belgium v. Commission [1990] ECR I-959, para. 43.

92 Commission Regulation (EC) No 1998/2006 of 15 December 2006.

93 Cases T-298/97, T-312/97, T-313/97, T-315/97, T-600 to 607/97, T-1/98, T-3/98 to T-6/98, T-23/98, Alzetta Mauro and Others v. Commission [2000] ECR II-2319, para. 78.

94 Joined Cases 296/82 and 318/82, Netherlands and Leeuwarder Papierwarenfabriek v. Commission [1985] ECR 809, para. 24, joined Cases C-329/93, C-62/95 and C-63/95 Germany, Hanseatische Industrie-Beteiligungen GmbH and Bremer Vulkan Verbund AG v. Commission [1996] ECR I-5151, para. 52.

NAPs. Differences in Member States' closure and transfer rules hinder the free movement of production capacity and competition. 'Barriers to entry' created by NAPs can lead to the reduction of competition and real welfare losses in the form of x-inefficiency and cartelization.95

It is also obvious that a PSR system applied only in one Member State cannot ensure equal treatment of similar enterprises in a multilateral environment; the PSR system is liable to constitute State aid with regard to this criterion. If a PSR system were to be introduced on a European level, it would not be liable to generate intra-community competitive distortions stemming from the selection of historical standards nor would it be subject to diverging closure and transfer rules.96 By the same token the proposed Community-wide benchmarks may not be liable to constitute State aid.97

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