State Aid for Environmental Protection

We refer to the Authority’s letter of 23 May 2001 (Doc. No. 01-3596-D) referring to Decision No. 152/01/COL and Annex 1. We also refer to the Ministry of Trade and Industry’s letter of 29 June 2001, signifying the Norwegian Government’s agreement to the appropriate measures concerning state aid for environmental protection as proposed by the EFTA Surveillance Authority and to our letter of 21 December 2001.

In the following, the Ministry of Finance gives an account of exemptions and reduced rates that currently apply to Norwegian taxes that are considered as environmental taxes. We state our views on their compatibility with the EEA Agreement and the Authority’s State Aid Guidelines regarding aid for Environmental Protection. The letter also describes our plans for further work in this area.

Shortage of time has meant that we have not been able to obtain figures for all matters discussed in the enclosure. Most figures are updated till 1998 or a later year. If required, we will be able to provide you with more recent figures at a later date.

The Norwegian taxes and levies on consumption and emission of CO ₂ and SO ₂, consumption of heating oils etc., and on electricity consumption are designed to provide incentives for positive environmental effects. The provisions outlined and explained in the text below are hence designed to promote "any action designed to remedy or prevent damage to our physical surroundings or natural recourses, or of encourage the efficient use of these recourses" as required in point 7 of the new Environmental Guidelines. 1EFTA Surveillance Authority New Environmental Guidelines, point B 7

1.CO ₂ tax

1.1Overview

The CO ₂ tax is a product tax levied on the use of mineral oil, petrol, coal and coke. The tax on mineral oil applies to petroleum, kerosene, gas oil, auto diesel oil, special distillates and fuel oils. The tax levied on coal and coke applies to products used for energy purposes. The CO ₂ tax has been levied on mineral oil and petrol since 1991 and on coal and coke since 1992. The tax was first introduced as an integrated element of the overall taxation system for mineral oil, petrol, coal and coke. As part of the green tax reform in 1999, the CO ₂ tax was established as a separate tax.

The purpose of the tax is to set a price on the damage caused to the environment by use of the taxed products. The tax rate is determined on the basis of the polluter pays-principle, and the Ministry therefore considers this tax to be an environmental tax. The provisions outlined and explained in this chapter, are hence designed to promote "any action designed to remedy or prevent damage to our physical surroundings or natural resources, or to encourage the efficient use of these resources" as required in point 7 of the new Environmental Guidelines. 2EFTA Surveillance Authority New Environmental Guidelines, point B 7 CO2 levies on energy consumption, both for private consumption and on production are applied to ensure a more efficient use of resources and thus lead to positive environmental effects that would otherwise not occur.

When the EEA Agreement came into force in 1994, the Norwegian government submitted the Authority a standard form for information on existing aid with information about the CO ₂ tax, including the current exemptions and reduced rates. We therefore consider tax measures introduced before 1994 to be existing aid in accordance with point 7.2 of the State Aid Guidelines.

1.2 Mineral oil for use in international flights

Overview

Mineral oil for use in international flights is exempted from the tax in accordance with bilateral agreements that have entered into force at different times. The agreements are not limited in time. The Ministry understands that the EU has concluded similar agreements with the same states, as Norway in this area. The exemption was codified in the Parliament’s annual tax decision from 2001.

Compatibility assessment

Because the agreements are mutually binding, and the EU has similar agreements, the Ministry is of the opinion that this exemption neither distorts nor threatens to distort the competition in a way that affects trade between the Contracting Parties. The exemption is therefore considered to be outside the scope of Art. 61 EEA.

1.3 Fishing vessels operating in distant waters

Overview

Fishing vessels operating in distant waters are also exempted from the CO ₂ tax, and have been so since the CO ₂ tax was introduced in 1991.

Compatibility assessment

Provisions on trade in fish and other marine products are set out in Protocol 9 to the EEA agreement, which does not refer to Art. 61 EEA. We therefore consider the aid to be outside the competence of the EFTA Surveillance Authority.

1.4 Ships in foreign trade

Overview

Mineral oil used in ships in foreign trade has been outside the scope of the CO ₂ tax since it was introduced in 1991. The scope of the Norwegian excise duties is in general domestic use of taxed products. Mineral oil used abroad, like ships in foreign trade, is therefore outside the scope of the tax. It is codified in the Parliament’s annual tax decision that CO2 tax is not to be paid for mineral oil purchased for such use.

Compatibility assessment

Since the use of taxed products abroad falls outside the scope of the tax, the Ministry is therefore of the opinion that this not constitutes an exemption that falls within the scope of Art. 61 EEA.

1.5 Diplomats and NATO Headquarters, forces and personnel

Overview

Diplomats and NATO Headquarters, forces and personnel are exempted in accordance with international agreements. These agreements, like those for international flights, are bilateral and mutual binding. The Ministry understands that the EU has concluded corresponding agreements. The exemption was codified in 2000, but has been practised since the tax was implemented.

Compatibility assessment

Because the agreements are mutually binding, and the EU has similar agreements, the Ministry is of the opinion that this exemption neither distorts nor threatens to distort the competition in a way that affects trade between the Contracting Parties. The exemption is therefore considered to be outside the scope of Art. 61 EEA.

1.6 Historic ships, museum railways and technical installations in the museum sector

Overview

In 1997, exemptions were introduced for historic ships, museum railways and technical installations in the museum sector. From 2000 cultural monuments have also been exempt. These exemptions are estimated to entail a total revenue loss of only NOK 91 715 per year. Unfortunately it is not possible to estimate the proportion of the total amount that goes to each item.

Compatibility assessment

The Ministry assumes that aid to the above mentioned groups does not affect trade between the Contracting Parties, nor does it distort or threaten to distort competition in any way and and the exemption is therefore not aid in the meaning of Art. 61(1) EEA. If the exemption is considered to be aid covered by Art. 61(1) the Ministry maintains that the " de minimis" rule is applicable. Point 12.1 of the State Aid Guidelines states that aid below a certain amount can be considered not to have any appreciable effect on trade and competition between the Contracting Parties to the EEA Agreement. The loss of revenue in this case is so small that the Ministry finds the exemptions to be in accordance with the " de minimis" rule.

1.7 Fishing vessels operating in Norwegian waters

Overview

The use of mineral oil by fishing vessels operating in Norwegian waters is exempted from CO ₂ tax. This exemption was established when the CO ₂ tax was introduced in 1991, and should therefore be considered as existing aid in accordance with chapter 7 of the State Aid Guidelines.

Compatibility assessment

As mentioned above, provisions on trade in fish are set out in Protocol 9 to the EEA Agreement. We therefore consider this aid to be outside the competence of the EFTA Surveillance Authority.

1.8 Coal and coke used as raw materials or reducing agents in industrial processes

Overview

The use of coal and coke as raw materials or reducing agents in industrial processes is exempted from the CO ₂ tax. The reasons for this exemption are that available technologies are based on the use of carbon materials and that the producers are exposed to international competition. The exemption was established when the CO ₂ tax levied on coal and coke was introduced in 1992. The exemption is not limited in time. Coal and coke are used as raw materials or reducing agents mainly in production of carbides, ferro alloys, primary aluminium and magnesium (appr. 30 units). These industries are also energy-intensive, and would not be viable by a removal of current exemptions on energy and CO ₂ taxes.

Compatibility assessment

This exemption favours certain undertakings, and the Ministry is of the opinion that it is state aid in the meaning of Art. 61(1) EEA. As the measure dates from the time when the CO ₂ tax on coal and coke was introduced, the Ministry finds it to be existing aid in accordance with chapter 7 of the State Aid Guidelines.

According to point 15.4.3 item 3 of the old Environmental Guidelines and point 42 and 43 of the new Environmental Guidelines, temporary exemptions may be justified to offset losses of competitive strength internationally. By doing so they also constitute operating aid caught by Art. 61(1) EEA. To the best of the Ministry’s knowledge, there is no corresponding European Community tax nor any Community directive that requires a tax to be levied on the use of coal and coke. It thus seems like the loss of competitive strength is likely to be a long-term problem. The Ministry recognises that the exemption in its current form may not be considered to be temporary, but as long as the Community has no corresponding tax, the exemption is necessary to help these undertakings stay competitive. In the ferro alloys industry the CO ₂ tax on coal and coke would amount to almost 70 per cent of average gross operating profits 1994–1998, in the carbides industry ca. 45 per cent, and in the primary light metals industry ca. 15 percent.

In Report No. 54 (2000-2001) to the Storting (Parliament) on Norwegian climate policy, the previous government proposed the negotiation of voluntary agreements with the branches of industry that are exempt from the CO ₂ tax, with the aim of reduceding emissions. In its policy statement in October (the Sem Declaration), the new Government stated that it would review the introduction of a domestic emissions trading system based on quotas in an additional white paper. This white paper will be submitted in the course of spring 2002, and the government intends to propose the introduction of an emissions trading system from 2005. The effect of this would be that industries that are currently exempted from the tax would have to satisfy requirements in order to make their activities more environmentally sound.

1.9 Coal and coke used for energy purposes in the manufacture of cement and Leca aggregate

Overview

The CO ₂ tax does not apply to coal and coke used for energy purposes in the manufacture of cement and Leca aggregate. This exemption dates from 1992, when the tax was first levied. The grounds for this tax measure are that possible large-scale substitutes for coal and coke would be unprofitable, and that the industry is exposed to international competition. Natural gas is not available at the locations of the plants. In the cement industry the CO ₂ tax on coal and coke would amount to more than 50 per cent of average gross operating profits 1994–1998.

Compatibility assessment

Like the exemption mentioned in point 1.8 above, this measure is considered to be state aid within the meaning of Art. 61(1) EEA. Since the exemption was introduced at the same time the tax was introduced, this is considered to be existing aid in accordance with chapter 7 of the State Aid Guidelines.

To the best of the Ministry’s knowledge, there is no corresponding harmonised tax within the European Community, nor any Community directive that requires a corresponding tax to be levied. Energy taxes in Sweden and Denmark include the cement industry, but at very low rates. The conclusions reached in point 1.8 above therefore also apply to this exemption.

1.10 Domestic flights

Overview

In 1999, the CO ₂ tax base was expanded to include petrol and mineral oil used for domestic flights, but at a reduced rate. This was done for environmental reasons, but as a full tax rate would have a serious impact on the aviation sector, a reduced rate was applied. The reduced rate is meant to be temporary. For information about the rates, please see enclosure point 1.1. Information about this measure was included in the detailed annual report for 1999.

Compatibility assessment

Since this measure favours certain undertakings and therefore may affect trade between Contracting Parties, the Ministry is of the opinion that the tax measure falls within the scope of Art. 61(1) EEA.

In accordance with point 46.1 of the new Environmental Guidelines, exemptions covering a 10-year period may be justified in two cases, the second of which is applicable here (section 46.1 b). This justification may be invoked if one of two alternative conditions is satisfied. The first is that the reduction concerns a tax corresponding to a harmonized EC tax and the amount effectively paid by the firms after the reduction remains higher than the EC minimum tax. The Ministry interprets this alternative as meaning that the total tax levied on the particular product should be taken into consideration not just the part referred to as the CO ₂ tax.

Below you will find a table with the Norwegian rates compared to the minimum rates within the EU, cf. Council Directive 92/82 EEC. To the best of the Ministry’s knowledge, these are the existing minimum rates within the EU. We acknowledges the Authority’s request for CN codes in this comparison, but as the codes have been changed since this directive was implemented, we have not been able to obtain this. If required, we will be able to provide you with the current CN codes at a later date.

Mineral oils – NOK/litre

CO ₂ SO ₂ Total EU

Petrol – NOK/litre

CO ₂ Petrol 3Unleaded petrol Total EU

The table above shows that the effective tax rate paid by firms after the reduction remains higher than the EC minimum tax. The Ministry therefore is of the opinion that the requirements of point 46.1 (b) in the new Environmental Guidelines are satisfied.

As a secondary argument, the Ministry would like to add that in its opinion, the reduced rate is in accordance with the second alternative in section 46.1 b of the new Environmental Guidelines. Firms that are eligible for the reduction pay 56 per cent of the ordinary tax rate, which we consider to be a significant proportion of the national tax.

This also means that the overall objective of the tax is still being met. The Ministry is of the opinion that the tax measure makes a significant contribution to protecting the environment, cf. point 45 of the new Environmental Guidelines.

In 1999 about 3 per cent of the total emissions of CO ₂ came from the domestic flight sector.

1.11 Installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities

Overview

When the tax was adopted in 1991, an exemption was introduced for the use of petrol and mineral oil in installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities. In 1999 the CO ₂ tax base was expanded to include these uses, but at a reduced rate. This was done for environmental reasons, but as a full tax rate would have had a serious impact on the sector, a reduced rate was applied. The reduced rate is meant to be temporary. Information about this measure was included in the annual report sent to the Authority for 1999.

Compatibility assessment

The reduced rate is considered to be state aid within the meaning of Art. 61(1) EEA as it is favouring certain undertakings and therefore threatens to distort competition and affect the trade between the Contracting Parties.

According to chapter 15, point 46.1, of the Authority’s new Environmental Guidelines, exemptions covering a 10-year period may be justified in two cases, the second of which is applicable here (section 46.1 b). This justification may be invoked if one of two alternative conditions is satisfied. The first is that the reduction concerns a tax corresponding to a harmonized EC tax and the amount effectively paid by the firms after the reduction remains higher than the EC minimum tax. The Ministry interprets this alternative as meaning that the total tax levied on the particular product should be taken into consideration, not just the part referred to as the CO ₂ tax.

Below you will find a table with the Norwegian rates compared to the minimum rates within the EU, cf. Council Directive 92/82 EEC. To the best of the Ministry’s knowledge, these are the existing minimum rates within the EU. We acknowledge the Authority’s request for CN codes in this comparison, but as the codes have been changed since this directive was implemented, we have not been able to obtain this. If required, we will be able to provide you with the current CN codes at a later date.

Mineral oils – NOK/litre

CO ₂ SO ₂ Total EU

Petrol – NOK/litre

CO ₂ Petrol 5Unleaded petrol Total EU

According to these figures, the rate paid by firms after the reduction remains higher than the EC minimum tax, cf. section 46.1 b, first alternative. Viewed in this light, the Ministry is of the opinion that the reduced rate is in accordance with Art. 61 EEA.

As a secondary argument, the Ministry would like to add that in its opinion, the reduced rate is in accordance with the second alternative in section 46.1 b of the new guidelines. Firms that are eligible for the reduction pay 56 per cent of the ordinary tax rate, which we consider to be a significant proportion of the national tax.

This also means that the overall objective of the tax is still being met. The Ministry is of the opinion that the tax measure makes a significant contribution to protecting the environment, cf. point 45 of the new Environmental Guidelines.

About 1.5 per cent of the total emissions of CO2 in 1999 came from installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities.

1.12 Domestic sea freight

Overview

When the CO ₂ tax was adopted in 1991, the use of mineral oil and petrol in domestic sea freight was exempted. In 1999, a CO ₂ tax was introduced for mineral oil and petrol for such use, but at reduced rates. The rates are the same as those specified in the previous paragraph. The reduced rates are not time-limited. Information about this expansion was included in the annual report sent to the Authority for 1999.

Compatibility assessment

The Ministry considers that this tax measure may be aid that threatens to distort competition, and therefore that it is state aid within the meaning of Art. 61(1) EEA.

It follows from point 46.1 of the new Environmental Guidelines that exemptions covering a 10-year period with no degressivity may be justified in two cases. In the Ministry’s opinion, the second is applicable here. The reason for this is as follows.

According to point 46.1 b, the exemption need not be conditional on the conclusion of agreements if the reduction concerns a tax corresponding to a harmonized European Community tax, and the effective amount paid by the firms after the reduction remains higher than the European Community minimum in order to provide the firms with an incentive to improve environmental protection.

The use of mineral oil as fuel for navigation within Community waters is to be exempted from the tax on mineral oil by the Member States, cf. Council Directive No. 92/81/EEC, article 8, section 1, letter c. It follows from article 8, section 2, letter b that Member States may completely or partially exempt mineral oil used for navigation on inland waterways. The Ministry finds that this measure has the same scope as that concerning. Since the Community legislation involves a mixture of complete and partial exemption for the use of mineral oil for domestic sea freight, and Norway has introduced a reduced tax rate, the Ministry is of the opinion that the requirements in 46.1 (b) of the new Environmental Guidelines are met.

As a subsidiary argument, the Ministry would like to add that in its opinion, the reduced rate is in accordance with the second alternative in section 46.1 letter b of the new guidelines. Firms that are eligible for the reduction pay 56 per cent of the ordinary tax rate, which we consider to be a significant proportion of the national tax.

This also means that the overall objective of the tax is still being met.The Ministry is of the opinion that the tax measure makes a significant contribution to protecting the environment, cf. point 45 of the new guidelines.

Domestic sea freight contributed in 1999 to about 2 per cent of the total emissions of CO2.

1.13 Pulp and paper industry

Overview

The pulp and paper industry has paid the CO ₂ tax on mineral oil at a reduced rate (half of the full rate) since 1993. The reason for this reduction is that the industry is exposed to international competition, and the relaxation of the tax was meant to be temporary. The pulp and paper industry comprises 33 units, see tables 3 and 4 of the enclosure.

Compatibility assessment

As the reduced rate favours certain undertakings, and therefore might threaten to distort competition, the tax measure may be considered as aid covered by Art. 61(1) EEA. As the reduced rate was introduced from 1993, this is existing aid measure in accordance with chapter 7 of the State Aid Guidelines in relation to the new Environmental Guidelines.

According to point 15.4.3 item 3 of the old Environmental Guidelines, temporary relief from environmental taxes may be authorised where it is necessary to offset a loss of competitive strength. The reduction of the CO ₂ tax amounts to 7 per cent of average gross operating profits 1994–1998 in the four pulp and paper units with the largest utilisation of fuel oils. As the industry in question is exposed to international competition, the Ministry is of the opinion that this exemption is compatible with the old Environmental Guidelines.

The minimum tax rate on the use of mineral oil within the EC is EUR18 per 1000 litres (NOK 0.14 per litre), cf. Council Directive No. 92/82 EEC. As the CO ₂ tax on the use of mineral oil in the pulp and paper industry is NOK 0,245, the reduced rate remains higher than the corresponding EU tax. The Ministry therefore finds that section 46.1, letter b, first alternative of the new Environmental Guidelines is fulfilled, cf. the explanation in section 1.10 above, and that this tax measure is in line with Art. 61 EEA.

As a secondary argument, the Ministry would like to add that in its opinion, the reduced rate is in accordance with the second alternative in section 46.1 letter b of the new Environmental Guidelines. Firms that are eligible for the reduction pay 50 per cent of the ordinary tax rate, which we consider to be a significant proportion of the national tax.

This also means that the overall objective of the tax is still being met. The Ministry is of the opinion that the tax measure makes a significant contribution to protecting the environment, cf. point 45 of the new guidelines.

Emissions from the pulp and paper industry contributed to about 1.2 per cent of the total CO ₂-emissions in 1999.

1.14 Producers of herring and fishing meal

Overview

Producers of herring and fish meals pay the same CO ₂ tax rate on mineral oils as the pulp and paper industry. This reduced rate was established in 1993, and was meant to be temporary. The reason for this measure was that the industry is exposed to international competition. The reduction of the CO ₂ tax amounts to 7–8 per cent of average gross operating profits 1994–1998 in the fish meal and oil industry.

Compatibility assessment

Provisions on trade in fish and other marine products are set out in Protocol 9, cf. Art. 20 EEA. We therefore consider the aid to be outside the competence of the EFTA Surveillance Authority.

2. SO ₂ tax

2.1 Overview

In 1970, a sulphur tax on mineral oil was introduced. From 1993, the tax rate was based on the sulphur content of the oil and increased with the percentage by weight of sulphur. The tax base included petroleum, gas oil, auto diesel, diesel oil and fuel oil or any oil that might be used as fuel oil. In 1999, the tax was reorganized as a tax on SO ₂ released, which is levied on mineral oil, coal and coke and emissions from oil refineries. Information about the expansion of the tax base was included in the annual report for 1999. As the tax is levied on products that cause damage to the environment, the Ministry considers this to be an environmental tax. The rate is also fixed on the basis of the polluter pays-principle. The provisions outlined and explained in chapter two below, are hence designed to promote "any action designed to remedy or prevent damage to our physical surroundings or natural resources, or to encourage the efficient use of these resources" as required in point 7 of the new Environmental Guidelines. 7EFTA Surveillance Authority New Environmental Guidelines, point B 7 SO ₂ levies on energy consumption, both for private consumption and on production are applied to ensure a more efficient use of resources and thus lead to positive environmental effects that would otherwise not occur.

2.2 Fishing vessels operating in distant waters

Overview

Mineral oil used in fishing vessels that operate in distant waters is exempted from the SO ₂ tax. Mineral oil for such use has been exempted by law from 1988, but has in practice been exempted since the SO ₂ tax was introduced in 1970. The exemption is therefore considered to be existing aid in accordance with chapter 7 of the State aid Guidelines and is not temporary.

Compatibility assessment

Provisions on trade in fish and other marine products are set out in Protocol 9 to the EEA Agreement, which does not refer to Art. 61 EEA. We therefore consider this aid to be outside the competence of the EFTA Surveillance Authority.

2.3 Ships in foreign trade

Overview

Mineral oil used in ships in foreign trade has been outside the scope of the CO ₂ tax since it was introduced in 1991. The scope of the Norwegian excise duties is in general domestic use of taxed products. Mineral oil used abroad, like ships in foreign trade, is therefore outside the scope of the tax. To make it clearer that CO ₂ tax is not to be paid for mineral oil purchased for such use, an exemption is included in the Parliament’s annual tax decision.

Compatibility assessment

Since the use of taxed products abroad falls outside the scope of the tax, the Ministry is therefore of the opinion that this not constitutes an exemption that falls within the scope of Art. 61 EEA.

2.4 Diplomats and NATO Headquarters, forces and personnel

Overview

Diplomats and NATO Headquarters, forces and personnel are exempted in accordance with international agreements. These agreements, like those for international flights are bilateral and mutually binding. The Ministry understands that the EU has concluded corresponding agreements. The exemption was codified in 2000, but has been practised since the tax was implemented.

Compatibility assessment

Because the agreements are mutually binding, and the EU has concluded similar agreements, the Ministry is of the opinion that this exemption neither distorts nor threatens to distort competition in a way that affects trade between the Contracting Parties. The exemption is therefore considered to be outside the scope of Art. 61 EEA.

2.5 Historic ships, museum railways and technical installations in the museum sector

Overview

In 1997, exemptions were introduced for historic ships, museum railways and technical installations in the museum sector. From 2000 cultural monuments have also been exempt. These exemptions are estimated to entail a total revenue loss of only NOK 6 900 per year. Unfortunately it is not possible to estimate the proportion of the amount that goes to each item.

Compatibility assessment

The Ministry assumes that aid to the above mentioned groups does not affect trade between the Contracting Parties, nor does it distort or threaten to distort competition in any way and the exemption is therefore not aid within the meaning of Art. 61(1) EEA. If the exemption is considered to be aid covered by Art. 61(1) the Ministry maintains that the " de minimis" rule is applicable. Point 12.1 of the State Aid Guidelines states that aid below a certain amount can be considered not to have any appreciable effect on trade and competition between the Contracting Parties to the EEA Agreement. The loss of revenue in this case is so small that the Ministry finds the exemptions to be in accordance with the " de minimis" rule.

2.6 Domestic flights

Overview

In 1999, the SO ₂ tax base was expanded to include petrol and mineral oil used for domestic flights, but at a reduced rate. This was done environmental reasons, but as the full tax rate would have had serious impact on the aviation sector, a rate reduced was applied. The reduced rate is meant to be temporary. Information about this measure was included in the detailed annual report sent to the Authority for 1999.

Compatibility assessment

Since this exemption is identical to that for the CO ₂ tax, we refer to the explanation under point 1.10 in this letter. Thus, the Ministry is of the opinion that this tax measure is in line with Art. 61(1) EEA, cf. point 46.1 b of the new Environmental Guidelines.

As a secondary argument, the Ministry would like to add that in its opinion, the reduced rate is in accordance with the second alternative in section 46.1 b of the new guidelines. Firms that are eligible for the reduction pay 40 per cent of the ordinary tax rate, which we consider to be a significant proportion of the national tax.

This also means that the overall objective of the tax is still being met. The Ministry is of the opinion that the tax measure makes a significant contribution to protecting the environment, cf. point 45 of the new guidelines.

About 0.4 per cent of the total emissions of SO ₂ come from the domestic flights sector in 1999.

2.7 Installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities

Overview

An exemption for use of petrol and mineral oil in installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities has been practised since the tax was implemented. In 1984 the exemption was codified. In 1999 the SO ₂ tax base was expanded to include such use, but at a reduced rate. This was done for environmental reasons, but as this sector is exposed to international competition, a reduced rate was applied. The reduced rate is meant to be temporary. Information about this extension was included in the annual report sent to the Authority for 1999.

Compatibility assessment

The reduced rate is considered to be state aid within the meaning of Art. 61(1) EEA as it favours certain undertakings and therefore threatens to distort competition and affect trade between the Contracting Parties.

Since this exemption is identical to that for the CO ₂ tax, we refer to the explanation under point 1.11 in this letter. Thus, the Ministry is of the opinion that this tax measure is in line with Art. 61(1) EEA, cf. point 46.1 b of the new Environmental Guidelines.

As a secondary argument, the Ministry would like to add that in its opinion, the reduced rate is in accordance with the second alternative in section 46.1 b of the new guidelines. Firms that are eligible for the reduction pay 40 per cent of the ordinary tax rate, which we consider to be a significant proportion of the national tax.

This also means that the overall objective of the tax is still being met. The Ministry is of the opinion that the tax measure makes a significant contribution to protecting the environment, cf. point 45 of the new guidelines.

About 1 per cent of the total emissions of SO2 comes from this sector in 1999.

2.8 Emissions of sulphur dioxide from oil refineries and emissions of sulphur dioxide from the use of coal and coke

Overview

A tax on emissions of sulphur dioxide from oil refineries and from the use of coal and coke (including emissions from industrial processes with negligible omissions) was introduced in 1999, at a tax rate of NOK 3 per kg SO ₂. The measure was introduced for environmental reasons.

The SO ₂ tax on the use of coal and coke and on oil refineries was abolished from 1 January 2002. However, SO ₂ emissions from the process industry are already being regulated through emission permits pursuant to the Pollution Control Act. The emission permits will now be reviewed in order to reduce SO ₂ emissions further. Enterprises will be allowed some flexibility in the way in which they co-operate in meeting the requirements set out in the new emission permits, to the extent permitted by the IPPC directive, local environmental conditions and the Pollution Control Act. The Norwegian Pollution Control Authority will penalize emissions that exceed the limits set out in emission permits.

Compatibility assessment

The 1999 Gothenburg Protocol sets a ceiling of 22 000 tonnes on Norwegian emissions of SO ₂ in 2010. Preliminary figures indicate that Norwegian emissions must be reduced by 7000 tonnes in order to comply with the protocol. Studies carried out by the Norwegian Pollution Control Authority show that this reduction should be made by the process industry, since this is where the most cost-effective measures can be implemented. In order to ensure cost-effective compliance with the Gothenburg Protocol, a letter of intent was signed with the Federation of Norwegian Process Industries on 19 September 2001 (enclosed). In this agreement the industry undertook to reduce SO ₂ emissions by 5000 tonnes by the year 2010 and to present a plan by 2003 for a further reduction of 2000 tonnes after this.

Our understanding of the guidelines from ESA is that exemptions from taxes, such as the exemptions for the use of coal and coke and for the oil refineries, are permissible provided that they are of limited duration and that other measures to reduce emissions, such as agreements or discharge permits, are implemented. This is now the situation in Norway.

3. Basic tax on heating oil

3.1 Overview

The basic tax on heating oil was introduced in 2000 to discourage a changeover from electricity to oil for heating purposes. It was intended to equalize the tax rates for heating oils and electricity. The tax applies to any oil used for heating (kerosene, heating oils etc). Since the purpose of this tax is to discourage a changeover from electricity to oil, and thus promote efficient use of different energy sources that would otherwise not occur, this provision is considered to be an environmental tax in accordance with point 7 of the new Environmental Guidelines,

3.2 Fishing vessels operating in distant waters

Overview

Fishing vessels operating in distant waters are exempted from the basic tax on fuel oil, and have been so since the tax was introduced in 2000. The exemption is not meant to be time-limited.

Compatibility assessment

Provisions on trade in fish and other marine products are set out in Protocol 9 to the EEA agreement, which does not refer to Art. 61 EEA. We therefore consider this aid to fall outside the competence of the EFTA Surveillance Authority.

3.3 Ships in foreign trade

Overview

Mineral oil used in ships in foreign trade has been outside the scope of the CO ₂ tax since it was introduced in 1991. The scope of the Norwegian excise duties is in general domestic use of taxed products. Mineral oil used abroad, like ships in foreign trade, is therefore outside the scope of the tax. To make it clearer that CO ₂ tax is not to be paid for mineral oil purchased for such use, an exemption is included in the Parliament’s annual tax decision.

Compatibility assessment

Since the use of taxed products abroad falls outside the scope of the tax, the Ministry is of the opinion that this not constitutes an exemption that falls within the scope of Art. 61 EEA.

3.4 Diplomats and NATO Headquarters, forces and personnel

Overview

Diplomats and NATO Headquarters, forces and personnel are exempted in accordance with international agreements. These agreements, like those for international flights, are bilateral and mutually binding. The Ministry understands that the EU has concluded corresponding agreements. The exemption was adopted as the tax was levied.

Compatibility assessment

Because the agreements are mutual binding, and EU has similar agreements, the Ministry is of the opinion that this exemption neither distorts nor threatens to distort competition in a way that affects trade between the Contracting Parties. The exemption is therefore considered to be outside the scope of Art. 61 EEA.

3.5 Historic ships, museum railways and technical installations in the museum sector

Overview

When the basic tax on heating oil was implemented in 2000, historic ships, museum railways and technical installations in the museum sector were exempted. The exemptions are estimated to entail a total revenue loss of only NOK 20 013 per year. Unfortunately it is not possible to estimate the proportion that goes to each item.

Compatibility assessment

The Ministry assumes that aid to the above mentioned groups does not affect trade between the Contracting Parties, nor does it distort or threaten to distort competition in any way and the exemption is therefore not aid within the meaning of Art. 61(1) EEA. If the exemption is considered to be aid covered by Art. 61(1) the Ministry maintains that the " de minimis" rule is applicable. Point 12.1 of the State Aid Guidelines states that aid below a certain amount can be considered not to have any appreciable effect on trade and competition between the Contracting Parties to the EEA Agreement. The loss of revenue in this case is so small that the Ministry finds the exemptions to be in accordance with the " de minimis" rule.

3.6 Fishing vessels operating in distant waters

Overview

The use of mineral oil by fishing vessels operating in distant waters is also exempted from basic tax on heating oil. This exemption was established when the tax was introduced in 2000. The tax measure is not meant to be temporary.

Compatibility assessment

As mentioned above, provisions on trade in fish are set out in Protocol 9 to the EEA Agreement. We therefore consider this aid to be outside the competence of the EFTA Surveillance Authority.

3.7 Installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities

Overview

When the tax was adopted in 2000, an exemption was introduced for the use of petrol and mineral oil in installations for the exploitation of natural resources in waters outside Norwegian territorial limits, transport between the mainland and such installations and special vessels engaged in such activities. This sector is not using mineral oil for heating purposes, and use of mineral oil in this sector is therefore outside the scope of the tax.

Compatibility assessment

The exemption is considered to be state aid within the meaning of Art. 61(1) EEA as it favours certain undertakings and therefore threatens to distort competition and affect the trade between the Contracting Parties.

Since the basic tax on heating oil applies for the same products as the CO ₂ tax, the Ministry would like to refer to the explanation under section 1.11 above. Despite this exemption, the industry in question pays a higher overall tax rate for the use of mineral oil than the corresponding EU tax levied on mineral oil (see table in section 1.11). Thus, it is the Ministry’s opinion that this tax measure is in compliance with Art. 61 EEA.

3.8 Domestic sea freight

Overview

When the basic tax on heating oil was adopted in 2000, the use of mineral oil in domestic sea freight was exempted. The exemption is not meant to be temporary, and the reason for the exemption is that this sector is exposed to international competition.

Compatibility assessment

The Ministry considers that this tax measure may be aid that threatens to distort competition, and therefore is state aid within the meaning of Art. 61(1) EEA.

According to point 15.4.3 item 3 of the old Environmental Guidelines, temporary relief from environmental taxes may be authorized where it is necessary to offset a loss in competitive strength. As the industry in question is exposed to international competition, the Ministry is of the opinion that this exemption is in accordance with the old Environmental Guidelines.

The use of mineral oil in domestic sea freight is exempted from the basic tax on heating oil, but subject to both the CO ₂ tax and the SO ₂ tax (see section 1.12 above). We refer to the assessment under section 1.12, and would like to point out that firms that use mineral oil in domestic sea freight pays a higher overall tax than the corresponding EU tax. The Ministry is therefore of the opinion that this tax measure is compatible with Art. 61, cf. point 46.1 b of the new Environmental Guidelines.

3.9 Pulp and paper industry

Overview

The pulp and paper industry, which pays the CO ₂ tax at a reduced rate, is completely exempted from the basic tax on heating oils etc. The industry has been exempted since the tax was adopted, and the exemption is not time-limited. The reason for the exemption is that the industry is exposed to international competition. The exemption from basic tax, together with reduction of the CO ₂ tax, amounts to 15–20 per cent of average gross operating profits 1994–1998 in the four pulp and paper units with the largest utilisation of fuel oils.

Compatibility assessment

According to point 15.4.3 item 3 of the old Environmental Guidelines, temporary relief from environmental taxes may be authorized where it is necessary to offset a loss in competitive strength. As the industry in question is exposed to international competition, the Ministry is of the opinion that this exemption is compatible with the old Environmental Guidelines.

Despite complete exemption from the basic tax on heating oil, this industry still pays a higher overall tax rate for the use of mineral oil than the corresponding EC tax levied on mineral oil, see section 1.13 above. As mentioned above, the Ministry does not consider the exemption for this particular industry to be incompatible with Art. 61 EEA. This view is based on Chapter 15, section 46.1 b, first alternative, of the Authority’s new Environmental Guidelines.

3.10 Producers of herring and fish meal

Overview

Producers of herring and fish meal are, like the pulp and paper industry, exempt from basic tax on heating oil, and have been so since the implementation of the tax. The exemption from basic tax, together with reduction of the CO ₂ tax, amounts to 20–25 per cent of average gross operating profits 1994–1998 in the herring and fish meal industry.

Compatibility assessment

Provisions on fish and other marine products are set out in Protocol 9, cf. art. 20 EEA. We therefore consider this aid to be outside the competence of the EFTA Surveillance Authority.

4. Tax on electricity consumption

Overview

The tax on electricity consumption was first introduced in 1971. Since then, various exemptions and reduced rates have been applied at different times for specific industries, mainly the pulp and paper industry and the energy-intensive manufacturing industries (primary aluminium, steel, ferro-alloys etc). The provisions outlined and explained in chapter four below, are designed to promote "any action designed to remedy or prevent damage to our physical surroundings or natural resources, or to encourage the efficient use of these resources" as required in point 7 of the new Environmental Guidelines. 8EFTA Surveillance Authority New Environmental Guidelines, point B 7 Taxes on consumption of electricity are applied to ensure a more efficient use of electrical power and thus lead to positive environmental effects that would otherwise not occur. As it is also explained below, electricity consumption for production purposes in manufacturing and mining industries is exempt from any electricity tax to offset losses of competitiveness. If a full tax rate were to be imposed on energy-intensive manufacturing industries, it would cause increases in production costs and subsequent decreases in profitability that most likely would imply close-downs of many production units, cf. the figures in table 6 in the annex. This exemption is however currently being reviewed in the light of the new Environmental Guidelines, but imposing a full rate on energy-intensive industries is not considered as a future option.

At present, the tax on electricity consumption applies to all domestic use of electricity with the exception of use by manufacturing industries. This exemption covers all manufacturing industries and not only specific sectors as before. The tax rate was raised in 2000 and 2001, and the rate for 2001 was NOK 0.113 per kWh. In January 2001 the tax base was extended to include the use of electricity in administration buildings in manufacturing and mining enterprises, so that only electricity used in production processes is exempt from the tax. In January 2002 the tax rate was reduced to NOK 0.093 per kWh. In all, the existing exemptions from the tax on electricity consumption apply to about 45 per cent of total electricity consumption in Norway and about 70 per cent of the electricity consumption in all the industries. Most electricity for production purposes in industries is therefore exempted from the tax.

As can be seen from enclosure point 1.4, the tax rate has remained unchange in real terms form 1993 to 2000. In 2000 and 2001 the tax was raised by 0.025 NOK per kWh, but in 2002 the tax was reduced by 0.020 NOK per kWh.

4.1 Diplomats and NATO Headquarters, forces and personnel

Electricity used by diplomats and NATO Headquarters, forces and personnel is not liable to excise duty according to international agreements. As mentioned before, the Ministry considers this exemption to be outside the scope of Art. 61 EEA (see sections 1.5, 2.4 and 3.4 above).

4.2 Greenhouse industry

Greenhouse industry has been exempted from the tax since 1993. According to Art. 8, number 3, of the EEA Agreement, the provisions of the agreement do not apply to the products specified in Protocol 3, which deals with processed agricultural products. It is the Ministry’s opinion that this means that Art. 61 EEA does not apply to the greenhouse industry.

4.3 Consumers in Finnmark and Troms

Overview

From 1990, all consumers in Finnmark and seven municipalities in northern Troms (Karlsøy, Kvænangen, Kåfjord, Lyngen, Nordreisa, Skjervøy and Storfjord) have been exempted from the tax. The exemption applies both to household consumption and to all commercial activities.

Compatibility assessment

The guidelines do not apply to aid to private individuals, and the Ministry therefore considers the exemption for private individuals to be outside the scope of Art. 61 EEA.

Regarding the exemption for commercial activities, this is considered to be state aid within the meaning of Art. 61(1) EEA, as the exemption favours certain undertakings. Although the exemption applies to all commercial activities, and thus has a very wide scope, the Ministry realizes that, as currently applied, it may threaten to distort competition, and therefore may be contrary to the EEA Agreement.

The Norwegian Government has appointed a working group to look more closely into the exemptions from the tax on electricity consumption. According to the mandate the group will review the new guidelines for environmental aid and the consequences for the Norwegian electricity tax. It will also review the basic tax on heating oil. The working group is to deliver a preliminary report by 1 July 2002 with a view to implementing appropriate measures from 1 January 2003 as stipulated in the group’s mandate.

4.4 Manufacturing, mining etc.

Overview

Till 1992 the tax on consumption of electricity comprised all industries, but over certain periods whole or parts of power-intensive industry and pulp and paper industry paid a lower rate than other consumers. In 1993 these industries were completely exempted. In 1994 the exemption was extended to all manufacturing and mining industries. From 1997, this exemption has also applied to labour market enterprises that carry out manufacturing activities. There are about 12 000 units in manufacturing and mining. Out of this, only 80–100 units can be characterised as energy-intensive (including the pulp and paper industry). The reason for the reduced tax rate on electricity consumption is that the energy-intensive industries are exposed to international competition. The exemption limited to only energy-intensive units was abandoned in 1994, since the definition was unclear and could not be maintained.

Compatibility assessment

The exemption covers manufacturing and mining in general. However the exemption does not cover e.g. service industries and primary industries. Thus, this exemption may be considered to favour certain undertakings, and therefore might be covered by Art. 61(1) EEA.

According to point 15.4.3 item 3 of the old Environmental Guidelines and point 42 and 43 of the new Environmental Guidelines, temporary exemptions may be justified in order to offset a loss of international competitive strength. To the best of the Ministry’s knowledge, there is no corresponding European Community tax nor any Community directive, that requires a tax to be levied on electricity consumption. It thus seems like the loss of competitive strength is going to be a long-term problem. The Ministry acknowledges that the exemption in the current form may not be viewed as temporary, but as long as the Community has no corresponding tax, the exemption is necessary to help these undertakings stay competitive.

As mentioned in point 4.3, the Norwegian Government has appointed a working group to look more closely into the exemptions from the tax on electricity.

5. Tax on final waste treatment

Overview

A tax on final waste treatment was introduced on 1 January 1999. It applies to waste delivered to landfills and incineration plants. The purpose of the tax is to put a price on the emissions resulting from final treatment of waste. By making final treatment of waste more expensive the tax provides an incentive to reduce the amount of waste and to recycle waste. The tax also gives an incentive to reducing emissions of methane from landfills, and is one of several measures designed to help fulfil Norway’s obligations according to the Kyoto Protocol. By promoting recycling of waste and reducing emissions from waste landfills the tax has a positive environmental effect that would otherwise not occur. It is also in accordance with the principles of the "polluter pays" and "prices to reflect costs" in point 7 of the new Environmental Guidelines and has a positive environmental effect. 9EFTA Surveillance Authority New Environmental Guidelines, point B 7 Thus, the tax should be considered as an environmental tax. The tax rate has been unchanged in real terms since 1999. For further information about the tax rates, please see enclosure point 1.5. For information about tax income and expense, see enclosure point 2.3.

5.1 Hazardous waste

The tax does not apply to hazardous waste. Hazardous waste is delivered to reception facilities designed for such waste, and the Ministry considers this to be outside the scope of the tax. The exemption for hazardous waste is a way of stating more explicitly that this waste is outside the scope of the tax, and is therefore not considered to be aid in the meaning of Art. 61 EEA.

5.2 Waste delivered for recycling, reuse or to be sorted for recycling

Waste delivered for recycling, reuse or to be sorted for recycling is not delivered to landfills or for incineration, and is therefore not subject to the tax on final treatment either. Since this waste does not come within the scope of the tax, the measure does not constitute an exemption that falls within Art. 61 EEA.

5.3 Homogenous inorganic materials

Waste which consists of homogenous inorganic materials and which is disposed of in separate storage sites is also exempted from the tax on final waste treatment. Storage of this type of waste does not lead to emission of greenhousegasses, and does not come within the scope of the tax. The exemption is therefore not considered to be aid in the meaning of Art. 61.

5.4 Residual waste from utilization of recycled fibres in the pulp and paper industry

Overview

Residual waste from utilization of recycled fibres in the pulp and paper industry is exempt from the tax. The reason for this exemption is that this industry is exposed to international competition, and that some of the states that have introduced a similar tax have also adopted the same exemption. When a tax on landfills was implemented in Sweden in 1999, an exemption was adopted for this industry. To the best of the Ministry’s knowledge, this exemption is still existing. A taxation of this industry in Norway would have caused a reallocation for this industry from Norway to Sweden. The number of production units entitled to exemption is estimated to be 2-4 units, cf. enclosure point 3.3. Please notice that the figures are merely estimates based on retained reports from the enterprises and qualified guessing out of knowledge of the enterprises.

Compatibility assessment

Since this exemption applies only to a specific industry, it might threaten to distort competition in a way that affect trade between the Contracting Parties, and is therefore covered by Art. 61(1) EEA.

The exemption was not meant to be temporary and is not degressive, and the Ministry sees that the exemption may be contrary to the new guidelines. However, the Government has appointed a working group that is considering changing the tax on final waste disposal from a tax per tonne of waste delivered to a tax on emissions. This exemption will be considered at the same time, also in view of fulfilling our obligations under the EEA Agreement. A proposal to this effect will be submitted in the national budget for 2003.

5.5 Incineration plants in manufacturing enterprises

Incineration plants in manufacturing enterprises that use fuel based on waste are also exempted from the tax on final waste treatment. The reason for this is that such plants are considered to be waste recovery plants, and therefore fall outside the scope of the tax. As the exemption is not considered to be aid, it falls outside the scope of Art. 61.

6. Final remarks

Norwegian environmental policy focuses on giving industries and individuals incentives to protect the environment. A number of different instruments are used for this purpose, but taxes and excise duties are very important. They give enterprises and industries an economic incentive to make their activities less damaging to the environment.

On the other hand, there are some industries and businesses that cannot easily make their activities more environmentally sound, either because improved technology is not available or because the taxed product is the dominant energy source, raw material or intermediate product in the industrial process. In these cases the industry needs exemptions or reduced rates to stay competitive as long as no corresponding taxes are implemented in competing countries.

When assessing exemptions and reduced rates in relation to state aid, it is the Ministry’s opinion that it is important to compare them with the corresponding tax rates in other EEA countries. If enterprises pay a higher tax rate than in EU countries, the Ministry is of the opinion that it would be wrong to see national exemptions as a distortion of competition.

If the exemptions and reduced rates described above are considered to be non-authorized state aid, the Norwegian government has two main policy options. General tax rates could be reduced to bring them in line with Art. 61 EEA. However, this option provides no incentive to make environmentally sound investments. The second option is to phase out the exemptions and reduced rates, and let enterprises either close down or move to countries that have no environmental taxes at all. In the Ministry’s view, there is no environmental benefit to be gained from penalizing enterprises that are already paying higher taxes than competing enterprises elsewhere by raising tax rates further.

As mentioned above, there are certain exemptions in the Norwegian tax regime that may be contrary to the guidelines. A working group is set up to assess exemptions from the tax on electricity consumption in the light of the new Environmental Guidelines. As regards the other exemptions, the Ministry of Finance will begin a process of bringing them in line with Art. 61 EEA. We hope to maintain a dialogue with ESA during this process. The Ministry will return to the adaptation of environmental taxes in Norway to the new Environmental Guidelines in the budget proposal for 2003.

Yours sincerely,

Thorbjørn Gjølstad

Director General

Tor Lande

Deputy Director General