The polluter pays principle is defined neither in the EC Treaty nor in the case law of the European courts. Article 175 EC refers to it as one of the guiding principles of Community law, and it is at the basis of the guidelines on environmental state aid.27 The ECJ related the polluter pays principle to the principle of proportionality in Standley.28 In that case, a number of farmers
26 Van den Bergh (2000).
27 Community Guidelines on State Aid for Environmental Protection, OJ C 82, 1.4.2008.
28 Case C-293/97 Standley  ECR I-2603.
challenged several decisions made by the Secretary of State of the UK regarding the implementation in the UK of Council Directive 91/676/EEC of 12 December 199129 concerning the protection of waters against pollution caused by nitrates from agricultural sources. The directive required the identification of areas affected by nitrate pollution, and the restriction of economic activity within them. The farmers claimed that the directive imposed a disproportionate burden upon them, because other pollution sources were left unaddressed. According to the farmers, the directive infringed the polluter pays principle, the principle of rectification at source, the principle of proportionality and the fundamental right to property. The British court made a preliminary reference to the ECJ. In relation to the polluter pays principle, the ECJ ruled that the directive does not mean that farmers must take on burdens for the elimination of pollution to which they have not contributed.30 Further, according to the Court, the Member States are to take account of the other sources of pollution when implementing the Directive and, having regard to the circumstances, are not to impose on farmers costs of eliminating pollution that are unnecessary. Viewed in that light, the polluter pays principle reflects the principle of proportionality on which the Court has already expressed its view.31
Jans considers that this means that European measures must avoid putting burdens on persons and undertakings for the elimination of pollution to which they have not contributed.32
Leaving aside definitional problems with the principle,33 it has two aims: on the one hand, to ensure that polluters internalize the social costs generated by pollution, thereby reducing production to the socially optimal levels; on the other, to ensure that such internalization is made by all companies within a market, in order to avoid distortions of competition stemming from different environmental regulations.34
The socially optimal level is generally equated with the level set by the government, though this does not have to be the case, and there seems to be a trend towards governments seeking to find and prescribe the optimal level of
31 Standley, above, para. 52.
33 De Sadeleer (2002). Two difficult questions must be answered to make the principle operational: (1) who is the polluter; (2) how much must the polluter pay?
34 See the Communication from the Commission to the Council regarding cost allocation and action by public authorities on environmental matters, OJ L 1975, 194/1. See Gaines (1991). See also Jans and Vedder (2007, p. 42).
pollution. This would seem to be the objective of the EU when adopting a (non-legally binding) long-term target for the entire EU of 60-80% emissions reduction by 2050, a reduction considered necessary to ensure a global average increase in temperature below 2 degrees Celsius.35 On the other hand, there is deep disagreement among economists about what constitutes the optimal level of pollution, and the choice of a certain level may seem ultimately rather arbitrary.36 From a regulatory perspective, the principle requires ensuring that environmental regulations implement a relatively similar level of internalization across countries in order to avoid distortions of competition. However, it does not require complete harmonization of the content of regulatory approaches.
As mentioned, the polluter pays principle is at the core of the Community guidelines on state aid for environmental protection,37 which refer explicitly to tradable permit schemes.38 The guidelines consider that ETS can lead to state aid when a Member State grants allowances to companies below their market value, which is by definition the case when allowances are allocated for free. According to the guidelines, 'when the global amount of permits granted by Member States is lower than the global expected needs of undertakings, the overall effect on the level of environmental protection will be positive'.39 Hence, state aid will be allowed. Further, at the individual level of each undertaking, if the allowances granted do not cover the totality of expected needs of the undertaking, the state aid will be also allowed. In order to limit distortions of competition, no over-allocation of allowances can be justified and provision must be made to avoid barriers to entry.40 These criteria apply to the second trading period 2008-2012. But the approach of the guidelines seems legally problematic. How to calculate the expected needs of installations? How to calculate the expected needs of each undertaking? What does over-allocation precisely mean? Which provisions must be made to avoid barriers to entry? The guidelines lead to a substantial amount of legal uncer-tainty,41 and this indicates the difficulty of shaping precise rules on the basis of the polluter pays principle.
36 Risbey (2006). See for the calculation of economics costs of abatement Hope (2006).
37 Community guidelines on state aid for environmental protection, OJ C 82/1, 1.4.2008.
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