By Laurens Ankersmit
In this very interesting Grand Chamber judgment, the Court found Sweden’s scheme promoting the national production of green electricity (in accordance with Directive 2009/28, the so-called RES Directive) to be compatible with article 34 TFEU. The Court’s judgment is particularly notable for its deferential stance towards measures related to environmental protection based on EU rules which – paradoxically – are very nationally oriented although they tackle the global problem of climate change. The judgment is to be welcomed for giving both the EU and its Member States sufficient policy discretion on how to mitigate the effects of climate change. However, it remains problematic that the EU legislator opted for such a national approach, as this is bound to frustrate the achievement of a truly European electricity market. In adopting this deferential approach, the Court had to deal with some interesting legal issues relating to the free movement of goods, in particular:
- The discriminatory nature of the rules in question and, despite this, their possible justification;
- The impact EU legislation has on the proportionality analysis of the Court.
Under EU law (Directive 2009/28), Member States are required to ensure that a certain percentage of their electricity production is green. Directive 2009/28, however, leaves it to the Member States how to ensure this. The Swedes, like the Belgians and the Germans among others, have opted for a feed-in system: green electricity produced domestically is given priority access to the grid, by requiring distributors of electricity in Sweden to surrender green certificates, which Swedish producers of electricity obtain for production of green electricity. Foreign producers cannot obtain these certificates, and in this case the Finnish producer Aland was refused certificates for green electricity produced in Finland. This puts foreign producers at a competitive disadvantage, as Swedish producers can sell these certificates whereas foreign producers cannot. This was particularly so for Aland, as it is actually better connected to the Swedish grid than to the Finnish grid (where the electricity was produced).
Obviously, this system is discriminatory in both aim and effect: the whole point of the system is to finance domestic production in order to comply with the production quota set out by the Directive. Let us consider a hypothetical to highlight how protectionist this system can be: France requires all car dealers in France to surrender a certificate for every car they sell and only French producers get a certificate for every French car they produce. The car dealers need the certificates in order to sell cars, and thus they will purchase these certificates from French producers. Now French producers can be very altruistic towards their German competitors and give all these certificates to the dealers with no strings attached. In that case, the system would only result in a sales limitation: the maximum amount of cars sold equals the amount of cars produced in France. More likely is that the French producers will condition the sale of certificates to the sale of their own cars or sell those certificates for every car exported, giving them a nice handy sum of money that German or other producers of cars will not get. This gives them a competitive advantage not only on the French market, but all markets in which they sell their cars. To be sure, the Swedish situation is different in that there is an environmental objective underpinning it, as well as EU law requiring Member States to produce a certain percentage of green electricity (a matter returned to below).
That being so, the question is whether this is liable to affect imports of electricity in Sweden detrimentally contrary to article 34 TFEU. One could just simply be content with the observation that the system gives Swedish producers a competitive advantage over foreign producers of green electricity on the Swedish market, and therefore was liable to at least indirectly and potentially create an obstacle to trade in electricity from another Member State. However, the Court opted for another approach introducing an – in my opinion – unwarranted reference to the Angry Farmers case.
The restriction on trade
The Court considered article 34 TFEU infringed in two distinct ways. Firstly, ignoring the discriminatory nature of the arrangement, the Court noted that consumers and suppliers were required to purchase certificates for imports of electricity or had to pay a fine if they failed to do so. This made it more difficult for them to import electricity (paras 68-70). There is nothing surprising about this finding, and it is similar to judgments in which licenses or other preconditions to sale of products were found to be obstacles to trade and the Court could have stopped there.
However, the Court goes on to note that the arrangement curbs imports also, because domestic producers of green electricity might create obstacles to trade as a result of inaction by the Swedish government by analogy to the Angry Farmers case (where the Court found that there was a positive duty to act to ensure the free movement of goods). The Court found that the Swedish rules might result in Swedish electricity producers selling their electricity and the certificates ‘as a package’. According to the Court, the fact that Swedish legislation does not prevent this practice, results in an infringement of article 34 TFEU because this ‘failure by a Member State to adopt adequate measures to prevent barriers to the free movement of goods that have been created, in particular, through the actions of traders but made possible by specific legislation that that State has introduced, is just as likely to obstruct intra-Community trade as is a positive act’ (para 74).
I am not entirely convinced that the obstacle to trade is attributable to the conduct of the Swedish green electricity producers. Of course, if they would simply give away their green certificates for free to the suppliers involved, they would level the playing field with their foreign competitors. But is it really up to the Swedish government to prevent the Swedish competitors from doing anything other than that? What would be the point of the Swedish system in the first place?
The obstacle to trade, therefore, is much more the result of the Swedish governments actions than it is of governmental inaction, because it is precisely related to the feed-in system created by the Swedish government. Consider the following example: if a Member State gives domestic producers an optional tax break, and the domestic producers take it, is the discrimination a result of the producers taking the tax break, or because the government gives them the option? I would say the latter, because the government’s actions create a situation in which discrimination is likely to occur. Moreover, I am not a big fan of the Angry Farmers case. It might set a regrettable precedent in which Member States are required to actively ‘police’ society in order to ensure that individuals do not obstruct trade, something that is conceptually different from refraining to act in a way that obstructs the free movement of goods. Unfortunately, the Court remembered us that Angry Farmers is still relevant, which I think should be best left to its facts.
Justifying the restriction on trade
After finding that the Swedish system resulted in obstacles to trade, the Court also found that these obstacles were justified on grounds of environmental protection, and thus compatible with article 34 TFEU. The Court was not only deferential in allowing the Member States discretion in how to tackle climate change within its territory, it also duly noted the EU legislative context in which the measures where adopted. Nonetheless, much of the judgment relates to mere ‘observations’ as opposed to clear reasoning why the particular measure is proportionate.
The Court first basically repeated its case-law in PreussenElektra, noting that a reduction of greenhouse-gas emissions protects the environment, the health and life of humans, animals and plants (in line with article 36 TFEU) and is in line with international commitments of the EU (paras 77-82).
It then went on to assess the measures in light of the proportionality principle. While noting that the characteristics of the EU electricity market had undergone major changes as a result of the liberalization accomplished at EU level (paras 83-86), the Court found that it was not disproportionate for the Swedish government to grant the green certificates to Swedish producers only refusing them to foreign producers. The Court gave three main reasons for why this territorial limitation in the Swedish scheme was not disproportionate.
Firstly, the Court noted that greenhouse gas emissions manifested themselves at the production stage of electricity and since it was difficult to determine the specific method of production once electricity had entered the grid, it would be difficult to systematically identify this origin in practice (paras 95-96). This deferential approach sits uncomfortably with the ruling in Outokumpu Oy where the Court held that ‘while the characteristics of electricity may indeed make it extremely difficult todetermine precisely the method of production of imported electricity and hence the primary energy sources used for that purpose, the Finnish legislation at issue does not even give the importer the opportunity of demonstrating that the electricity imported by him has been produced by a particular method in order to qualify for the rate applicable to electricity of domestic origin produced by the same method’ (para 39 of that judgment). Interestingly enough, this case concerned Swedish hydro power imported into Finland (thus the exact opposite situation from the case at hand!).
Secondly, the Court referred to the mandatory national targets established by Directive 2008/29 which differentiated per Member State and endorsed the territorial nature of existing support schemes (paras 97-99). Lastly, the Court refuted the argument that the territorial limitation was no longer necessary, as Sweden had already fulfilled its requirements relating to those targets, because the schemes establish a certain investor confidence within Sweden in relation to green electricity production: ‘[a]ccordingly, the effectiveness of such a scheme requires by definition a measure of continuity sufficient, in particular, to ensure the fulfilment of the legitimate expectations of investors who have committed themselves to such projects, and the continued operation of those installations’ (paras 100-103).
While the outcome of this judgment is perfectly convincing, it is a bit disappointing the Court did not actually explain why the territorial limitation of the support scheme was in line with the proportionality principle. The Court merely observed the legislative context, the fact that it was difficult to determine the green origin of electricity and that the measures were necessary to strenghten investor confidence, but only implicitly connected the dots without making any explicit normative statements. The Court could have stated, for instance, that to guarantee the proper functioning of the support system for domestic production it was indispensable that there was a territorial limitation and that the choice of only supporting domestic production was justified because it was mandated by the EU legislature. As such the measure was both suitable to achieve the goal of promoting domestic green electricity production, and that it did not go any further than necessary to achieve this goal of domestic production support. Nonetheless, the message conveyed by this judgment is clear: the Court was, is and probably will remain deferential towards the protection of public interests which are important for the EU itself as well, in particular as regards combatting climate change.
Moreover, the outcome of the case demonstrates that if one wants to remove these obstacles to trade which are the result of these nationally oriented schemes, action at EU level is warranted. The current regime clearly encourages the creation of obstacles to trade, which could be done away with through an EU-wide approach. This would avoid the negative effects of regulatory competition among Member States when seeking to promote the use of green electricity, while at the same time removing obstacles to trade in green electricity throughout the EU internal market.