The European CO2 Emission Trading System and State Aid. An assessment of the grandfathering allocation method and the Performance Standard Rate system

The center piece of the European Climate Change Program is the ambitious Greenhouse Gas Emissions Trading Scheme (EU ETS, Directive 2003/87/EC) which helps Member States to fulfill their Kyoto commitments. It particularly facilitates the old EU 15 Member States to make progress towards meeting their particular greenhouse gas emissions reduction goals committed under the Burden Sharing Agreement. EU Member States have developed national greenhouse gas allowances allocation plans and distributed these allowances to around 5000 operators with approximately 12.000 installations. Differences between allocations can give rise to severe anticompetitive effects. European Competition law (Article 87 EC Treaty) seeks to contain government based interference with the competitive positions of market participants (so called undertakings). That is generally referred to as the granting of 'State aid'. The paper examines how (historical) grandfathering and the Performance Standard Rate system (PSR) are to be assessed under State aid rules and how they compare with this regard to each other. The PSR System is a relative benchmark system with an intended cap for all participants but without a cap for individual operators. This alternative approach has been developed and is actually in use for the Dutch NOx Emission Trading System. After the introductory part relevant State aid criteria (Article 87(1) EC Treaty) are cited. Each is introduced in turn and followed by an assessment of the grandfathering system and the PSR system. Subsequently relevant derogations of European State aid rules (Article 87(3) EC Treaty) are introduced and applied to both systems. A conclusion highlights the main points.