The principle of equality and the allocation rules

Once the cap has been set at a level that ensures the attainment of the environmental objective, and a market is introduced that ensures allocative efficiency, the allocation rules may be used to achieve a certain conception of fairness, subject to compliance with the principle of equal treatment and freedom of establishment. Indeed, differential treatment is only the first step in finding a breach of equality, the second being that the difference cannot be justified. The CFI has acknowledged the right of Member States to introduce ex post allocation rules in order to preserve the integrity of the internal market and to avoid distortions of competition, despite the strong opposition of the Commission. This indicates that the principle of equality does not reduce in advance the freedom of Member States to choose allocation rules when they can be justified by the logic of the scheme.105

102 Case T-27/07, US Steel Kosice v Commission; Case T-489/04, US Steel v Commission; Case T-130/06 Drax Power and Others v Commission; Case T-387/04, EnBW Energie Baden-Wurttemberg v Commission.

103 French Council of State, Arrest No. 287110 of 8 February 2007, Article 3.

104 Belgian Arbitration Court, Arrest No. 92/2006 of 7 June 2006, B.15.

105 Case T-374 Germany v Commission, paras. 140-42.

Indeed, the use of different allocation methodologies in different Member States in the first two trading periods led to a situation in which competitors did receive substantially different amounts of allowances. Criterion 5 of Annex III of the Directive requires that NAPs do not discriminate between installations. This criterion sets a test independent from that of state aid. Hence, even if a NAP were to be found to comply with state aid rules, it could still be assessed under this criterion and be found in breach of it. Now, this criteria cannot require complete harmonization. For instance, the Commission has used criterion 5 to require that Germany has the so-called allocation guarantees for new installations, which gave them an advantage over slightly older installations by ensuring them a compliance factor of zero for 14 years.106 The Commission considered that the starting date could not be used as a criterion to justify discrimination between existing installations.107 Further, the Commission has considered that allocations on the basis of the emissions in one year may constitute state aid, since it damages installations with particularly low emissions in that year.108 Moreover it has also criticized the use of benchmarks based on average technology to power producers using fossil fuels while applying benchmarks based on best-available technology to others using gas, since that rule favors the former.109 The principle of non-discrimination could provide a rationale to eliminate those type of rules without requiring full harmonization of the allocation rules

Nevertheless, it must be recognized that the 'level playing field' argument is consistently used to seek further harmonization, even by Member States themselves, in order to prevent a race to the bottom. Whether this is really a danger does not matter, since often the mere appearance of a danger is enough to justify tackling it. The question then becomes whether harmonization may deliver what it promises.

First, adopting auctioning as the general allocation method may actually discriminate in favor of companies that have more technical and financial capacity to participate in auctions. Small installations may be particularly penalized by this approach, if they cannot participate themselves in the auctions and need to purchase allowances in the secondary market.

Second, Member States can use the revenues from auctioning in very diverse manners, for instance to reduce corporate taxation, or to finance public spending. Since fiscal matters are beyond the competence of the Community, different approaches will have an impact on companies located in different Member States in different ways, and new 'distortions' in the internal market will be generated.

106 German NAP of the German Allocation Act, Section 11, para. 1.

107 European Commission, Decision on the second German NAP, 29.11.2006.

108 Decision on the second Polish NAP, 26.3.2007, para. 23.

109 Decision on the second Spanish NAP, 26.2.2007, paras. 8-9.

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