The EU Green Deal and the Climate, Environmental Protection and Energy Aid Guidelines [CEEAG] allow Member States to grant more aid, in diversity and amounts, to incentivise companies to invest in greener technologies and energy.
However, when multiple Member States grant aid for the same purpose, there is a risk of overcompensation of undertakings that operate across Member States. This is especially true when state aid is granted to green energy in one Member State and then that energy is exported to another Member State.
As the judgment of the General Court of 21 December 2022, in case T-626/20, Landwärme GmbH v European Commission, showed, if Member States ignore cross-border cumulation, there may be overcompensation which is not allowed by state aid rules.
Normally, what must be cumulated is state aid from different sources in the same Member State. But the judgment of 21 December 2022 demonstrates that in situations where the aid is in the form of tax relief, it may be necessary to adjust the amount of the tax relief so that imported energy does not receive an unfair advantage. This is a complex process because Member States also have to comply with Article 110 TFEU that prohibits discriminatory taxes.
Landwärme, a German company producing biogas, appealed against the Commission decisions concerning cases SA.56125, SA.49893 & SA.56908 on Swedish exemptions from taxes on energy and CO2 in favour of biogas and biopropane. Sweden has long pursued a policy of levying energy taxes and granting exemptions from energy taxes to certain products and undertakings.
The Commission considered the tax exemptions to be state aid which, however, were compatible with the internal market on the basis of the Guidelines on state aid for environmental protection and energy 2014-2020 [EEAG].
The taxes in question were borne by the consumers of energy products. The exemptions benefitted, in the first place, consumers of biogas, and, in the second place, producers and suppliers of biogas. The purpose of the tax exemptions was to make biogas competitive with fossil gases, despite the fact that the production costs of the former were higher than those of the latter.
Landwärme claimed that it was harmed by the measure because the Commission ignored to take into account the fact that Danish producers of biogas also benefitted from Danish state aid and therefore enjoyed “overcompensation” which gave them a competitive advantage in the Swedish market. It contended that the Commission should have cumulated the aid granted by the two Member States.
Landwärme had submitted a study to the Commission according to which the geographic market for biogas was transnational and included Denmark, Sweden, Germany and the United Kingdom. The study indicated that biogas could be supported both by production aid and by demand incentives, such as tax exemptions. It was clarified that, while these different forms of support could coexist in a single Member State, it was not permissible to cumulate them at national level. Thus, according to that study, in Germany, energy generated from biogas which had received production aid could not benefit from other aid provided for the sale of renewable energy. However, cumulation could occur and result in “double subsidisation” where production aid and tax exemptions emanated from different Member States. The study also explained that overlaps between aid schemes adopted by different Member States could lead to overcompensation and distortion of competition.
Appropriates and cumulation of aid
The first point of contention was the interpretation of point 116 of the EEAG. Point 116 simply states that “the Commission presumes the appropriateness of aid and the limited distortive effects of the aid, provided all other conditions are met”. The Commission argued that, according to point 116, it could not take into account state aid granted by other Member States and cumulate it with Swedish aid. Indeed, none of the state aid guidelines provides for cumulation of aid from different Member States.
The General Court, first, reiterated established case law that the Commission, by adopting guidelines, limits itself in the exercise of its discretion and cannot deviate from those guidelines. [paragraph 51 of the judgment]
Then the General Court pointed out that point 116 of the EEAG did not specify which “other conditions” were referred to. [para 52] Those other conditions must have been those set out in point 131 of the EEAG. [para 53] Point 131 laid down rules for the prevention of overcompensation when operating aid is granted to support energy, other than electricity, from renewable sources.
The Court noted that the EEAG did not state that the only overcompensation which had to be avoided in order for aid to be proportionate was that which resulted from the cumulation of aid from one and the same Member State. For this reason the Court concluded that the Commission was wrong to assert that the EEAG precluded it from examining the overcompensation which could result from the cumulation with aid granted by other Member States. [para 60]
It is true that point 81 of the EEAG stipulates that “the total amount of State aid for an activity or project does not exceed the limits fixed by the aid ceilings laid down in these Guidelines.” Point 81 does not explicitly limit the amount of state aid to the aid granted by a single Member State. So, strictly speaking, the General Court was right in its finding. But the practice of the Commission has always been to limit the application of cumulation to single Member States. Perhaps here the General Court was too quick to conclude that aid from other Member States should have also been taken into account. This is because the amount of aid granted any Member State would depend on what the other Member States do. This would result in unpredictability and loss of legal certainty.
At any rate, the Court went on to hold that the applicant had communicated to the Commission the study mentioned earlier with information relating to the possible effects of cumulation of the tax exemptions granted by Sweden and aid for the production of energy from biogas granted by other Member States, in particular Denmark. [para 73]
The Court concluded that the Commission had information that should have been taken into account on the cumulation of the aid granted by different Member States. [paras 75 & 85]
However, even if aid from different Member States had been cumulated, it did not automatically follow that the tax exemptions at issue gave rise to overcompensation that was prohibited by the EEAG. Consequently, the Court proceeded to examine whether the aid measure in question resulted in overcompensation.
In this connection, the Commission explained that, when verifying the absence of overcompensation, it had confined itself to examining the possible cumulation of the tax exemptions with other aid measures adopted by Sweden. In its view, taking into account of aid granted by another Member State was not required either by the EEAG or other provisions of EU law. [para 89]
The Court found that the Commission checked only for overcompensation that was likely to result from the cumulation of several aid measures implemented by Sweden. In so doing, the Commission ruled out the possibility that the cumulation with Danish aid could give rise to serious difficulties in determining the compatibility of the aid scheme with the internal market, which could only be clarified by a formal investigation. It was therefore necessary to ascertain whether that exclusion was justified. [para 91]
Overcompensation and impact on intra-EU trade
The Court held that the Commission, before deciding whether state aid was compatible with the internal market under Article 107(3)(c), was required to examine its effects on trade between Member States. [para 94]
However, the Commission, on the basis of the information which the applicant had submitted to it, could not have been unaware that imports into Sweden of biogas produced in other Member States, in particular Denmark, had increased appreciably in the years preceding the notification of the aid scheme at issue, to the detriment of biogas from other Member States, because of the cumulation of aid from different sources. [para 96]
Therefore, the Commission had to take into account the impact of the cumulation of aid on the growing importance of imports from certain Member States. [para 97]
Nevertheless, its examination of the existence of possible overcompensation was limited to aid granted by Sweden. [para 98]
Consequently, the fact that the Commission analysed the absence of overcompensation insufficiently and incompletely, in that it did not take account of the cumulation of aid, was sufficient for the General Court to find that serious difficulties existed which prevented the authorisation of the aid in question without the Commission first opening the formal investigation procedure. [para 99]
Then the Court added that although the procedure laid down in Articles 107 and 108 TFEU conferred on the Commission considerable discretion in determining the compatibility of a state aid measure with the internal market, it nevertheless followed from the general scheme of the Treaties that that procedure could never lead to results contrary to the general principles of Union law; such as the principle of equal treatment, or against specific provisions of the Treaties, including those relating to internal taxation and duties such as Article 110 TFEU. Furthermore, aid could not be introduced or granted by one Member State in the form of tax discrimination against goods from other Member States. [para 101]
In other words, if the Swedish tax exemptions in practice discriminated against foreign products, the Commission was obliged to prohibit them. Although this is a well-established principle in the case law, it is a different point than the cumulation of aid in one Member State with aid from another Member State.
The principle of non-discrimination
Discrimination exists when similar products or companies are treated differently or different products or companies are treated the same. Therefore, in order to determine whether a tax or a tax exemption results in discriminatory treatment, it is first necessary to establish whether domestic and foreign products [or companies] are in a similar situation.
Then the Court held that, in the light of the objective of the schemes at issue, the sale of biogas for which the higher production costs had been compensated did not constitute a situation comparable to that of the sale of biogas for which the higher production costs had not yet been compensated. The tax exemptions at issue were intended to make biogas competitive with fossil gases. [paras 105-106]
Then, the Court observed that if the costs of producing biogas, which were higher than those of fossil gas, were already offset by aid granted by the Member State in whose territory it was produced, the granting of the tax exemptions biogas imported into Sweden lacked purpose. [para 107]
In effect, for biogas produced in Sweden, the Commission ensured that there was no overcompensation resulting from the cumulation of the tax exemptions with other aid granted by the Swedish authorities for the production of biogas in that Member State. But it did not check whether the difference between the production cost of biogas and fossil gas had also been compensated in other Member States. [para 108]
Consequently, unless there was objective justification, the two situations could not be treated in the same way. They could not benefit from the same tax exemption, regardless of whether the biogas sold in Sweden was produced on national territory or was imported. [para 109]
The Court held that in the contested decisions, the Commission did not take account of the overcompensation likely to result from the cumulation of aid. In doing so, it did not apply the principle of non-discrimination. This fact revealed the existence of serious difficulties that should have triggered the formal investigation procedure. [para 110]
Accordingly, the Court concluded that the need to comply with the principle of non-discrimination did not rule out the existence of serious difficulties as regards the impact of the cumulation at issue on the compatibility of the contested schemes with the internal market. [para 112]
Application of Article 110 TFEU
The Commission argued that Article 110 TFEU prevented it from taking account of aid granted by other Member States.
Article 110 provides that “no Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products.
Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products.”
The Court noted that pursuant to Article 110 TFEU, differentiation of internal taxes levied on products is compatible with EU law only if its objective is also compatible with EU law and if its detailed rules are such as to avoid any form of discrimination, direct or indirect, against imports from other Member States, or protection for competing domestic production. Thus, in compliance with those requirements, EU law does not restrict the freedom of each Member State to establish a system of differentiated taxation for certain products, even similar products within the meaning of the first paragraph of Article 110 TFEU, on the basis of objective criteria, such as the nature of the raw materials used or the production processes. [para 115]
The legality of tax exemptions, in particular where they intend to enable production which, without those tax exemptions, would no longer be profitable because of the increase in costs, is subject to the condition that Member States which make use of them extend the same benefit, in a non-discriminatory and non-protective manner, to imported products. [para 116]
Article 110 TFEU is complied with where the legislation of a Member State permits the application to goods originating in another Member State of a tax system which may be regarded as being equivalent to the system that is applied to those goods when they are produced in the first Member State. [para 117]
In the present case, all biogas sold in Sweden, whether produced in that Member State or imported from elsewhere, benefitted from the same tax exemptions. Moreover, as regards imported biogas, those exemptions were granted without distinguishing according to whether or not the Member State in which that biogas was produced had granted aid for the production of energy from biogas. [para 119]
In order to avoid any overcompensation, biogas imported from certain Member States could then be subject in Sweden to internal taxation which would be higher than that imposed on biogas produced in Sweden. However, that result would not necessarily be discriminatory. [para 121]
In other words, the existence of overcompensation could be regarded as an objective criterion for applying the tax exemptions at issue solely to biogas, whether domestic or imported, for which additional production costs compared with fossil gases have not already been offset by other aid, irrespective of the Member State which granted that other aid. That differentiation, based on an objective criterion, was such as to avoid discrimination resulting from compensation already granted to biogas imported from certain Member States. [para 122]
The General Court concluded that, in the absence of measures taken to avoid the overcompensation which may result from cumulation of aid, the schemes at issue create reverse discrimination against biogas produced in Sweden in favour of biogas produced in other Member States which grant aid for the production of energy from biogas. That result cannot be regarded as being imposed by the obligation to comply with Article 110 TFEU whose purpose of which is to prevent Member States from favouring their own products to the detriment of those of other Member States. Moreover, Article 110 TFEU is not applicable where a Member State grants more favourable tax treatment to imported products from a certain Member State than to similar products imported from other Member States. [para 124]
It then proceeded to annul the Commission decisions at issue.
This is a very interesting judgment. Although its interpretation of Article 110 is rather novel in this context, it is not surprising. Member States must ensure that their taxes do not discriminate overtly or covertly against imports. Sometimes, as in this case, they may have to tax foreign products to achieve equal treatment with domestic products.
However, the position of the General Court on cumulation of aid granted by different Member States is questionable. The General Court did not think through the consequences of such cumulation. In fact, it could have reached the same conclusion had it confined itself to analysis of Article 110.
 The full text of the judgment in languages other than English can be accessed at: