Review of Joana Pedroso: “Environmental Taxes from the EU State Aid Perspective”

1 Introduction

On the 22 of March this year, Joana Pedroso successfully defended her thesis Environmental Taxes from the EU State Aid Perspective. A Legal Analysis of the Integration of Environmental Protection1 at the Gothenburg School of Business, Economics and Law.2 The thesis was presented as a thesis in tax law and the examining committee consisted solely of tax law professors. However, it should already at this point be mentioned that the subject of the thesis is to a large extent EU law and state aid, and only to a lesser degree tax law in its traditional meaning.

2 Aim and purpose of the thesis

Pedroso describes a background, where lawmakers in different member states in the EU face multiple challenges when designing environmental taxation. Apart from the obvious one, how to construct a tax that really lower the consumption of harmful substances without too many negative side effects, the member states has to relate to the EU state aid regulations and case law. The problem of state aids in different member states was recognized as early as in the treaty of Rome and was probably of even more practical importance in those days. Nowadays, intentionally designed state aid is most likely uncommon in the member states. The introduction and designing of environmental taxes is, however, one example of national legislation that even unintentionally might give effects that are not consistent with state aid law.

The state aid law is still relying on the fundamental definition in what nowadays is art. 107 of the Treaty on the Functioning of EU, TFEU. The first part of the article has the following wording:

“1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

In the following two parts of the article, exemptions are made when state aid is compatible with the internal market in certain situations. Not only are there several exemptions where a state aid is compatible with the internal market, but there is also an obligation for the EU to safeguard environmental issues in art. 11 of the TFEU:

“Environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development.”

The intention behind art. 11 TFEU is labelled by Pedroso and other scientists as the integration principle.3 The writer aims to identify potential inconsistences in the state aid control system concerning the integration of environmental protection.4 With this background, Pedroso states that an environmental tax in a state aid law perspective can be classified in one of three ways:5

1. As an incompatible state aid.

2. As a compatible state aid.

3. As a general measure, that does not constitute a state aid.

Pedroso then formulates two research questions, supposed to guide the research:6

1. In what circumstances do Member States’ environmental taxes breach the EU’s State aid laws (e.g., Article 107(1), complementary laws to Article 107(3), and other laws)?

2. How, where environmental taxes are concerned, can lawmakers (and even the Commission and EU courts) integrate or further integrate environmental protection requirements (values) into the State aid control system?

The thesis is obviously written primarily with lawmakers in the different EU member states as main target groups.7 Different theses have and will have different target groups and some may be more oriented towards practitioners. As will be shown, Pedroso’s extensive study of EU case law will probably make the thesis valuable also for practitioners in the field.

The relation between taxation and the state aid rules has previously been analysed in Swedish legal science by Mona Aldestam in her thesis EC State aid rules applied to taxes — An analysis of the selectivity criterion.8 Aldestam’s work was published in 2004 and the main difference since then, and the greatest news value, which legitimatises Pedroso’s work, is the introduction of the integration principle after Aldestam wrote her thesis.

3 Content

The thesis consists of eight chapters and 397 pages. The volume of the thesis is therefore both average and desirable. The included chapters have the following content:

Chapter one is an introduction, which includes both defining the research problems, an overview over the State aid system, the theoretical perspective of the integration principle and traditional content of a first chapter in a thesis as methods and materials. The second chapter has the title Environmental Taxes. In this chapter, the author discusses different legal aspects of environmental taxes in connection with the state aid rules. There is no overview description of the current state of environmental taxation in the member states or of the legal designing of different environmental taxes. Pedroso concludes that there are two EU law definitions of an environmental tax. One is in the Commission Regulation 651/2014, which deals with the general block exemption from the state aid rules (GBER). The second is in the Regulation 691/2011 on European environmental economic accounts. The two definitions are similar, but not identical.

In the third chapter, Pedroso deals with the Granted by a Member State or Through State Resources Condition. The condition is of paramount importance in defining a state aid and follows from art. 107 of the TFEU. In this chapter, Pedroso analyses the prerequisites of this conditions and also analyses court decisions where the condition has been tried. Chapter four deals with the selective advantage condition, which also follows from art. 107 of the TFEU. In the chapter, Pedroso analyses the case law concerning what constitutes certain undertakings or certain goods that are favoured according to the state aid rules. The chapter is by far the most extensive in the study and the selective condition is analysed both in a general perspective and more specifically regarding environmental taxes. The following chapter five deals with the Competition and Trade Conditions, which are the two conditions that follows from art. 107 TFEU. A state aid, in order to be incompatible with the internal market, must threaten to distort competition and affect trade between member states. In the last chapters of the thesis, Pedroso analyses how environmental protection can be integrated in other parts of the state aid system.

Chapter six deals with the exemptions from art. 107 TFEU, when a state aid can be deemed as a compatible aid. The most important exemptions are the already mentioned GBER and the Commission guidelines on climate, environmental protection and energy (CEEAG). The last of the material chapters has the title: Further Integrating Environmental Protection Into Other (Formal and Informal) Parts of the System. In this chapter, five other forms of integration of environmental protection are analysed. Among them are the recovery of incompatible aid and the right for individuals or entities to challenge the commission’s state aid decisions in the court. The eighth and last chapter contains final reflections and is only six and a half pages long. In the chapter, the author summarises her main findings.

4 Methodology

Pedroso states that her thesis belongs to the discipline of legal science and that her method is the dogmatic method.9 The author finds the method suitable for both problems that she has identified in the two research questions. There is, however, little stated in the thesis on how the author perceives and defines legal dogmatic research. As sources she uses Council Regulations, Commission’s Regulations, Guidelines, and Notices, along with case law. The choice of method seems to be motivated by the existence of relevant legal sources. On the other hand it could be stated, when a researcher has chosen the type of research questions that have been developed and chosen by Pedroso, there is really no alternative to some kind of legal dogmatic method. However, as stated by Robert Påhlsson, the question of method is also very much a question of approach.10 While the theoretical part of describing and defining legal dogmatic method is quite short, there is a more extensive part describing different methods and approaches used in the various chapters of the thesis. The approaches used in the chapters differ and are depending on the aims with the different chapters.

The author also states that she uses an inductive method for analysing state aid rulings. I suppose that what Pedroso claims to be doing is similar to what has been labelled as legal induction, where the legal findings are generalized into legal rules.11

Further, Pedroso also states, that since she reflects on the Court of Justice’s interpretative actions, she thereby uses the European Legal method, as defined by Neergaard and Nielsen.12 Disregarding that the author does not explain how these writers defines the method, it would have been fruitful if Pedroso had described the relationship between legal dogmatic and European legal method. Now the two methods are mentioned on different pages, with no obvious connection. In my opinion, the EU legal method, if such exists and can be defined, is a variant of legal dogmatic especially adopted to the EU sources of law and EU case law.

Overall, the method chapter does not appear as very extensive or deep compared to many other Swedish theses in tax law, but may stand out quite well compared to some theses from other European countries.

5 Theoretical perspective

Pedroso’s main theoretical perspective that she is developing is the one of the integration principle.13 The author takes the standpoint that the principle has an autonomous normative force and is legally binding for both the EU and its member states. With reference to Nollkaemper, it is however obvious that it is possible to interpret the principle more as a policy or as a rule of reference.14 The notion of the integration principle as legally binding of course has bearings on the outcome of the analysis compared to if the principle would have been seen more as a policy instrument.

6 The study

As already described in the outline of the thesis above, the study constitutes to large extent of an analysis of the prerequisites in art. 107 TFEU and their bearing on the possibility to adopt environmental taxes. As also already stated, a vast part of the thesis is dealing with one criterion in art. 107, namely the selectivity criterion. Pedroso sets up a mind map for analysing this criterion.15 She identifies three steps in an approach for assessing the selectivity criterion.

A first step is to identify a normal tax regime or reference tax regime.16 A geographic identification must be made: is it a general or regional tax regime in the specific Member state? In order to be regional, several conditions need to have been fulfilled, which are described as the three-autonomy test. The tax regime also has to be de facto discriminatory, even if it at first glance seems to be neutral to all taxpayers. No comparison should be made with other Member states.

Secondly, a prima facie analysis of the effects of the Selective advantage should be made in order to establish if an economic benefit is an advantage according to art. 107 TFEU.17 As a third step, a prima facie selective measure can be justified if the effects arise from the basic and guiding principles of the tax system.18 Pedroso uses these criteria in order to analyse court cases concerning environmental taxes and state aid.

The author reaches to the conclusion that the lawmakers in different member states most likely can avoid a breach of the state aid rules in art. 107 TFEU by earmarking a part of the revenue from a tax for environmental purposes.19 The taxation should be proportionate compared to the environmental effects of the enterprise.

7 The approach in the study

A purpose with the thesis has been to assist the lawmaker in designing new environmental taxes that are not in breach of the state aid rules. However, environmental taxes only appear vaguely in the background in the thesis. They seem to be supposed to exist. How could the aim of the study be achieved if the lawmaker is not familiar with different constructions of the taxes?

Environmental taxes are not solely, but to large extent, legally constructed as excise taxes. The notion of an excise tax is surrounded by basic rules in art. 100 TFEU with the ban against fiscal discrimination and fiscal protectionism.20 Further, the excise directive 2020/262 lays a foundation in the member states capacity to introduce new excises. It should neither be overlooked that the VAT directive (art. 401, dir. 2006/112/EC) prohibits turnover taxes that are similar to the VAT, although few taxes have been found incompatible with this article.21 The prerequisites deriving from the case law of these articles must be fulfilled before it is any point in discussing if a tax constitutes a state aid or not.

These prerequisites for designing an environmental tax are not described in the book. If they had been incorporated it would probably have been a quite different study. It can though be concluded that the Swedish Aviation tax is the only one more thoroughly explained environmental tax in the study.22 (Since the publishing of the book, the government has proposed that the tax will be abolished in 2025.) The overall impression is that the thesis is mainly a thesis about State Aid, and not in depth concerning environmental taxes. The thesis was successfully defended as a thesis in tax law, but could probably have been equally successfully defended as a thesis in EU law. An alternative heading for the thesis could have been: “EU State Aid Control System, Environmental Taxes as example.” This objection should not be seen as severe critic. A multidisciplinary approach, as Pedroso has set up in her study, is of course desirable in an analysis whether different parts of EU and national law are incompatible.

8 Formalities

As already mentioned, the length (397 p.) is both average and desirable in a Swedish legal science perspective. The disposition including eight chapters is manageable and all chapters ends with a summary. In addition, the internal disposition of the chapters with subheadings with two or three numbers, without being too cluttered, is sound.

Pedroso is very thorough with her sources for the study and has a frequent use in footnotes to support the text. She also uses a number of boxes, figures and tables in her manuscript to facilitate for the reader to follow the reasoning. However, some smaller objections can be made, regarding both the use of sources, the presentation and the language.

Some footnotes are too long, taking up too much space on a single page. Examples are pages 208, 211 and 216. Information or reasoning that is essential in order to follow the writer should be found in the text, not in the footnotes.

The case C-5/14 Kernkraftwerke Lippe-Ems Gmbh v Haiptzollamt Osnabrücke is introduced as it was a new case, not mentioned before in the study, on at least the following pages: p. 171, 209 and 231. The case is also mentioned on p. 188. There seems to be a lack of disposition in the presentation of this case. It could also be noted that the author uses the abbreviation KernbrStG as meaning the tax on nuclear fuel itself, while the abbreviation in fact is referring to the statute regulating the tax (Kernbrennstoffsteuergesetz) (BGBl. 2010 I, p. 1804).

Pedroso has an impressing table of sources in her thesis. An objection can though be made against the use of Finnish author Kalle Määttä’s book Environmental taxes, an introductory analysis (2006). In a doctoral thesis, it would be natural to use Määttä’s own thesis, with the same main title, from 1997.23

As already mentioned, the Swedish Aviation tax (lag [2017:1200] om skatt på flygresor) is the only environmental tax that is described more closely in the study. However, Pedroso seems to be solely depending on an article by Lind (2021) as source regarding the aviation tax.24 There is no criticism against the use of the article, but in a thesis defended at a Swedish university it would be natural to depart from Swedish preparatory works concerning the tax. One aspect that is missing in the author’s reasoning on the tax is that it is more or less a copy of the equivalent German aviation tax, which to large extent explains why the Swedish legislator has constructed the tax with three different tax rates for taxes inside and outside the EU. If the preparatory works had been consulted, this fact would have been obvious.25

The thesis does not contain an index. This would have facilitated for the reader.

Overall, Pedroso uses a good English language. Some objections can however be made. For example, on p. 117 the author concludes that the C-143/99 Adria-Wien Pipelines case “was about three laws”. Actually, Pedroso probably was aiming to refer to “three acts” or “three statutes”. A passage quite difficult to follow was dealing with the C-487/06 British Aggregate Association case in pp. 207–208. At least for a Swedish reader, the word “aggregate” would suggest some kind of electrical or mechanical apparatus. Not until consulting the webpage of the association is it obvious that it is representing smaller quarry operators in the UK. Pedroso seems to only have used the court decision as her source of knowledge, while it would be quite easy to obtain enough information to describe the business of the members of the association.

9 Final words

In an overall perspective, Joana Pedroso has achieved a thorough analysis of the limitations for EU member states to levy environmental taxes on selected goods or services. Notwithstanding that there have been some objections in this review, they do not take away the impression of an interesting study, performed carefully with the use of relevant sources. The study will certainly be useful for lawmakers in different EU member states in designing environmental taxes that are compliant with the state aid rules. Sadly, Pedroso’s thesis is presented at a time when the political landscape in both Sweden and several other member states does not encourage the introduction of new environmental taxes, but instead abolishing or lowering existing taxes. However, after Pedroso’s achievement with her thesis, it will be interesting to follow her coming research, presumably in other areas of EU law or tax law.

Stefan Olsson is a professor in tax law at Karlstad Business School, Karlstad University.