(CN) – The European Union’s top court cracked down Thursday on Slovakia for levying an 80 percent tax on free greenhouse emission allowances that were supposed to spur emissions-reducing investments.
In 2011, the only year that the tax was in place before Slovakia abolished it, PPC Power had to pay a $369,500 tax for the first half of the year. The company filed suit in Bratislava when its challenge to the payment was rejected and it was told to make another advance payment of $369,500 for the second half of 2011.
PPC’s case has been stayed in advance of input from the Court of Justice on the legality of Slovakia’s tax.
In its ruling Thursday, the Sixth Chamber of the Luxembourg-based court said that Slovakia’s tax defeats the purpose of EU Directive 2003/87, which established the community scheme for trading greenhouse gas emission allowances.
“The allocation of emission allowances of greenhouse gas free of charge is a transitional measure intended to prevent undertakings from losing competitiveness as a result of the scheme for emission allowance trading,” the unsigned opinion by the three-judge chamber states.
Though member states are free to adopt measures that affect the economic implications of using such allowances, the ruling says “such measures may not undermine the objectives pursued by Directive 2003/87.”
Here the system of emission allowance trading is central to Directive 2003/87’s objective of encouraging companies to reduce their emissions.
“It is therefore necessary for the proper functioning of that system that a levy taken by a Member State from the economic value of those emission allowances should not diminish the incentive to reduce greenhouse gas emissions to the point of removing it entirely,” the ruling states.
By taxing up to 80 percent, however, Slovakia “eliminat[ed] virtually all of the economic value of emission allowances,” the court found.
“Thus deprived of 80% of the economic value of the emission allowances, undertakings lose almost all incentive to invest in measures to reduce their emissions which enable them to derive profit from the sale of their unused allowances,” the court added.