10.6092/issn.2531-6133/17358
Since the Treaty of Rome, the protection of local producers by Member States is, in principle, prohibited. Indeed, the Court of Justice of the European Union has, throughout the decades, done its utmost to ensure that the Treaty provisions on the free movement of goods and services serve the goal of greater European integration. While reading these judgments, it is very easy to overlook the fact that taxation was at their core. Indeed, throughout the 1960s and 1970s, numerous taxes on imports and exports became the object of the Court’s most foundational cases, and current legal literature still praises their unifying effect. Seventy years later, Europe, like the rest of the world, must face up to two unprecedented global crises: the collapse of biodiversity on the one hand, and climate change on the other. The recent alarming reports regarding climate change and biodiversity loss mean that, from now onwards, the Union and its Member States must deploy all measures conceivable to reach the objectives set out in international agreements such as the Paris Agreement on Climate Change, the Glasgow Climate Pact and the latest Kunming-Montreal Global Biodiversity Framework. The object of this paper is to analyze which fiscal measures Member States and the Union may adopt to prevent further damage from being done to the environment. Damage which some would say has been primarily caused by failures in the market which the Court of Justice set out to create during the first two decades following the Union’s inception. In this context, the author identifies all the legal constraints which Union law imposes on the design of environmental taxes at national level, together with the constraints which primary law places upon the potential conception of a European-wide environmental tax. The paper opens with a general discussion of the theoretical foundations of environmental taxes. It demonstrates that there exists, at least in theory, an elementary understanding of the essential functions which environmental taxes should possess. It then goes on to discuss the avenues open at the European level for the institutions to act in the fiscal field by adopting Europe-wide environmental taxes. Although the Union seems badly equipped to introduce a general tax on activities which are environmentally harmful, its efforts in matters of indirect taxation merit both praise and critical discussion. In the second part of the paper, the author discusses the principal provisions of Union law which guide Member States in their adoption of environmental taxes. Finally, the author demonstrates that the actual state of Union law does, indeed, permit the utilization of environmental taxes to shift economic demand in favor of environmentally friendly goods. Although Member States continue to enjoy a large margin of appreciation in the field of taxation, the author still believes that a more comprehensive response to the current environmental crisis should ideally originate from the institutions - even if part of it means creating a European-wide environmental tax.
application/pdf
2531-6133
17358
1
en
https://creativecommons.org/licenses/by/4.0
University of Bologna Law Review
Circular Economy
The Limits Imposed by Union Law on the Design of Fiscal Instruments Intended to Protect the Environment
Text.Serial.Journal
https://bolognalawreview.unibo.it/
8
Articles & Essays
2023-06-23
2023-06-22
2023-05-08
2023-06-23
79-128
UBLR
Mark Soler
2023/06/23
10.6092/issn.2531-6133/17358
79
College of Europe
2531-6133
1
Circular Economy
en
128
The Limits Imposed by Union Law on the Design of Fiscal Instruments Intended to Protect the Environment
https://bolognalawreview.unibo.it/article/download/17358/16207
8
llVOLUME 8                                   llISSUE 1                       ARTICLES & ESSAYS



                           UNIVERSITY OF BOLOGNA LAW REVIEW
                          https://doi.org/10.6092/issn.2531‐6133/17358

            Received: 15 Oct. 2022 | Accepted: 18 Nov. 2022 | Published: 23 June 2023

                                                  A

       The Limits Imposed by Union Law on the Design of Fiscal
          Instruments Intended to Protect the Environment


                                           MARK SOLER
Dr. Mark Soler is a Maltese advocate and alumnus of the Éliane Vogel-Polsky Promotion of the
College of Europe (Bruges, Belgium). In 2017, he graduated as Doctor of Laws from the University of
Malta (Malta) after presenting a thesis on the protection of legitimate expectations by the Maltese
courts and tribunals. He made the Dean’s list three times during his studies and went on to practice
corporate and business law at the offices of Mamo TCV Advocates in Valletta. After graduating from
the College of Europe in 2022, Dr. Soler moved to Paris to work at a private law firm. In September
2023, he will begin his doctoral studies at the European University Institute in Florence (Italy). Dr.
Soler’s heartfelt thanks go to Professors Franco Roccatagliata, Edoardo Traversa, Robert Attard,
Pasquale Pistone and Nicolas de Sadeleer for their gentle and enthusiastic guidance.

 @ mark.soler@coleurope.eu
  ID
       0009-0003-6821-4734


                                             ABSTRACT

Since the Treaty of Rome, the protection of local producers by Member States is, in principle,
prohibited. Indeed, the Court of Justice of the European Union has, throughout the decades, done
its utmost to ensure that the Treaty provisions on the free movement of goods and services serve
the goal of greater European integration. While reading these judgments, it is very easy to
overlook the fact that taxation was at their core. Indeed, throughout the 1960s and 1970s,
numerous taxes on imports and exports became the object of the Court’s most foundational
cases, and current legal literature still praises their unifying effect. Seventy years later, Europe,
like the rest of the world, must face up to two unprecedented global crises: the collapse of
biodiversity on the one hand, and climate change on the other.
The recent alarming reports regarding climate change and biodiversity loss mean that, from now
onwards, the Union and its Member States must deploy all measures conceivable to reach the
objectives set out in international agreements such as the Paris Agreement on Climate Change,
the Glasgow Climate Pact and the latest Kunming-Montreal Global Biodiversity Framework. The
object of this paper is to analyze which fiscal measures Member States and the Union may adopt
to prevent further damage from being done to the environment. Damage which some would say
has been primarily caused by failures in the market which the Court of Justice set out to create
during the first two decades following the Union’s inception. In this context, the author
identifies all the legal constraints which Union law imposes on the design of environmental taxes
at national level, together with the constraints which primary law places upon the potential
conception of a European-wide environmental tax.




                                                 79
llVOLUME 8                                    llISSUE 1                         ARTICLES & ESSAYS



The paper opens with a general discussion of the theoretical foundations of environmental taxes.
It demonstrates that there exists, at least in theory, an elementary understanding of the essential
functions which environmental taxes should possess. It then goes on to discuss the avenues open
at the European level for the institutions to act in the fiscal field by adopting Europe-wide
environmental taxes. Although the Union seems badly equipped to introduce a general tax on
activities which are environmentally harmful, its efforts in matters of indirect taxation merit
both praise and critical discussion. In the second part of the paper, the author discusses the
principal provisions of Union law which guide Member States in their adoption of environmental
taxes.
Finally, the author demonstrates that the actual state of Union law does, indeed, permit the
utilization of environmental taxes to shift economic demand in favor of environmentally friendly
goods. Although Member States continue to enjoy a large margin of appreciation in the field of
taxation, the author still believes that a more comprehensive response to the current
environmental crisis should ideally originate from the institutions - even if part of it means
creating a European-wide environmental tax.


                                              KEYWORDS
             Environmental Taxation; Internal Market; Ecotaxes; State Aid; Circular Economy


                                         TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
        1. Can an Intrinsically European Environment be Protected by National Fiscal Regimes? 84
        1.1. The Theory Underlying Modern Environmental Taxation . . . . . . . . . . . . . 85
        1.2. Is a Union-Wide Environmental Tax Possible? . . . . . . . . . . . . . . . . . . . 88
           1.2.1. Some Preliminary Clarifications . . . . . . . . . . . . . . . . . . . . . . . . 88
           1.2.2. Limited Legal Bases For European Action . . . . . . . . . . . . . . . . . . . 90
        1.3. Preliminary Conclusions Providing a Structure for the Second Part of this Paper 93
2. The Compatibility of Environmental Taxes with Union Law . . . . . . . . . . . . . . . . . 94
        2.1. Environmental Taxes and Fundamental Freedoms . . . . . . . . . . . . . . . . . 95
           2.1.1. Free Movement of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
                    2.1.1.1. Fiscal Barriers to Trade . . . . . . . . . . . . . . . . . . . . . . . . 95
           2.1.1.1.1. Articles 28 to 30 T.F.E.U. . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
           2.1.1.1.2. Article 110 T.F.E.U. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
           2.1.1.1.2.1. Similar Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
           2.1.1.1.2.2. Non-similar Products . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
           2.1.1.1.2.3. Articles 30 and 110 T.F.E.U.: what Distinguishes them? . . . . . . . . . 103
                    2.1.1.2. Non-Tariff Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . 105
           2.1.2. Free Movement of Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
        2.2. The Compatibility of Environmental Taxes with Secondary Legislation . . . . . 108
           2.2.1 V.A.T. Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
           2.2.2. Energy Tax Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
           2.2.3. C.B.A.M. Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
        2.3. Environmental Tax Incentives Under the Union’s State Aid Regime . . . . . . . 117
           2.3.1. Material Selectivity of Tax Advantages Pursuing Environmental Objectives . 118
           2.3.2. The Compatibility of Environmental Tax Advantages with the Internal Market 122
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Annex I: Eurostat Graph on Member State Revenue from Environmental Taxes . . . . . . . . 128




                                                   80
2023]                             UNIVERSITY OF BOLOGNA LAW REVIEW                                        [Vol. 8:1


      INTRODUCTION

By ratifying the Paris Agreement of 2015, the European Union has set itself the goal of
becoming carbon neutral by 2050.1                      Under the guidance of the von der Leyen
Commission, all legislative and administrative measures of the Union and its Member
States must aim to respect the 1.5°C threshold on global temperatures envisaged in the
Agreement. In a 2018 Communication, the Commission notes two things on the role that
taxation ought to play in the fight against climate change. First, taxation is one of the
most effective tools to implement this strategy, and secondly, taxes should be applied
with the aim of offsetting negative environmental impacts and satisfying demand for
more efficient and less polluting energy technology.2                          Four years before that, the
Institute for European Environmental Policy observed an ever-increasing use of
environmental taxes in Europe, and it appears that this trend is set to continue.3
          Unfortunately, the climate crisis has also been accompanied by enormous rates
of biodiversity-loss globally.              This situation has been dubbed a global “double
emergency” by the World Wildlife Fund [hereinafter W.W.F.] which states, in its most
recent flagship report, that climate change is also a significant cause of biodiversity loss.4
The W.W.F. reports that wildlife populations have plunged by an average of sixty-nine
percent between 1970 and 2018.5                  Similarly, the Food and Agriculture Organization
[hereinafter F.A.O.] reported in 2020 that an estimated 420 million hectares of forest have
been lost through deforestation since 1990 (a territory approximately the size of Libya).6
This dramatic state of affairs has led to the adoption of the Kunming-Montreal Global
Biodiversity Framework which, while being hailed as a “Paris Biodiversity Agreement”,
has set out a widely publicised “30 by 30” nature conservation and restoration goal (i.e.,
to bring the loss of areas of high biodiversity importance close to zero by 2030, to restore
thirty percent of degraded land and sea ecosystems globally by 2030, and to conserve
and manage thirty percent of terrestrial, inland water, and coastal and marine areas by
1
  See Climate Action and the Green Deal, European Commission (Sept.                                      18,   2022),
  https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/climate-action-and-
  green-deal_en.
2
  See Communication from the Commission to the European Parliament, the European Council, the Council, the European
  Economic and Social Committee, the Committee of the Regions and the European Investment Bank, A Clean Planet for all
  A European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy, COM (2018)
  773 final (Nov. 28, 2018).
3
  See Final report of the Institute for the European Environmental Policy (IEEP) on the “Environmental
  tax reform in Europe:          Opportunities for the future”, (May 30, 2014), https://ieep.eu/wp-
  content/uploads/2022/12/ETR_in_Europe_-_Final_report_of_IEEP_study_-_30_May_2014.pdf
4
  See WWF, Living Planet Report 2022 Building a Nature-Positive Society, 16 (Oct.                          13, 2022),
  https://wwfint.awsassets.panda.org/downloads/embargo_13_10_2022_lpr_2022_full_report_single_page
  _1.pdf.
5
  See id. at 32.
6
  See FAO, Main Report of the Global Forest Resources Assessment 2020, at 18 (Nov. 12, 2020).


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    THE LIMITS IMPOSED BY UNION LAW ON THE DESIGN OF FISCAL INSTRUMENTS INTENDED TO
                               PROTECT THE ENVIRONMENT


2030).7      Both the Union and its Member States participated in the Biodiversity
Framework,8 which means that they must use all policy tools necessary to reach the
targets set therein including fiscal instruments. Indeed, biodiversity-relevant taxes have
been on the increase globally since 1980,9 and recent economists have pointed out the
usefulness of tropical carbon taxes in simultaneously tackling the twin threats of climate
change and biodiversity loss.10
           In light of the above, this paper analyzes the Member States’ latitude of
maneuver in their adoption of environmental tax policies which pursue current climate
change and nature restoration ambitions. Given the evolving nature of environmental
taxes, the author has decided to focus only on the essentials. This paper does not provide
a description of all environmental taxes in Europe. Instead, it takes the elementary
features of such taxes and tests them under the provisions of Union law as interpreted by
the Court of Justice. In particular, the author searches for an answer to the question of
which types of environmental tax are incompatible with the internal market. That
question can be subdivided as follows: to what extent can a Member State adopt fiscal
tools to: (i) discourage methods of production, distribution and consumption of products
and services considered destructive to our planet; and (ii) promote the production,
distribution and consumption of products and services that are respectful of our
environment.




7
   See UN Environment Assembly decision, Kunming-Montreal Global Biodiversity Framework (GBF), at 1-3
   (Dec. 19, 2022).
 8
   See European Commission Press Release IP/22/7834, COP15: Historic global deal for nature and people (Dec.
   19, 2022).
 9
   See Organization for economic cooperation and development [OECD], Tracking Economic Instruments and
   Finance for Biodiversity, at 5 (2021) https://www.oecd.org/environment/resources/biodiversity/tracking-
   economic-instruments-and-finance-for-biodiversity-2021.pdf.
10
   See E. B. Barbier, R. Lozano, C.M. Rodriguez & S. Troëng, Adopt a carbon tax to protect tropical forests, NATURE,
   (Feb. 12, 2020), https://www.nature.com/articles/d41586-020-00324-w. According to the authors, a tropical
   carbon tax will finance adaptation and mitigation initiatives in biodiversity-rich countries where private
   investment alone has not registered much progress in this regard.


                                                        82
2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


To answer these questions, the paper is divided into two sections and addresses both the
proscriptive and the permissive facets of Union law in this sector. In the first section, the
author analyzes the theoretical and legal foundations of tax instruments that are
intended to protect not just a national but also the European environment. In the second
section, the author then deals directly with the compatibility of environmental taxes
with Union law. Since the scope of this paper is environmental taxation, generally, other
complex market-intervention measures conceived to fight climate change (such as the
E.U. Emissions Trading System) will only be discussed briefly and to the extent that they
serve to place matters in their proper context.11
          Throughout the paper, one sees that a unique paradox exists in Europe. While it
is the Member States who possess the major fiscal initiative to deal with the current
environmental emergency, the use of fiscal tools has implications for the entire Union
and its citizens.12        Therefore, the author also explains how the current division of
competences within the field of taxation conditions the type, the extent, and the quality
of the fiscal solutions available. One point to be made here is that the current division of
competences has not set things in stone. The field of environmental taxation is moving,
and it is moving fast. As we speak, major proposals in the field are being discussed within
the institutions, such as the proposal for a new minimum tax on aviation fuel, the Carbon
Border Adjustment Mechanism [hereinafter C.B.A.M.] proposal, or even the latest calls
for a Union-wide windfall tax.13 It is precisely in these urgent times that one cannot help
but think that the deeper into crisis the world plunges, the bolder and swifter E.U. action
in this field will become.




11
   For the differences and interactions between environmental taxes and market-based
   mechanisms such as the European Union Emission Trading Scheme [hereinafter E.U. E.T.S.],
   see Organization for economic cooperation and development [OECD], Environmentally Related
   Taxes and Tradable Permit Systems in Practice,                    COM/ENV/EPOC/CTPA/CFA(2007)31/FINAL,
   (2008), https://one.oecd.org/document/com/env/epoc/ctpa/cfa(2007)31/final/en/pdf;
   see      also    Organisation      for       economic      cooperation        and     development       [OECD],
   Interactions    Between       Emission       Trading     Systems      and       Other     Overlapping     Policy
   Instruments, COM/ENV/EPOC/CTPA/CFA(2011)4/FINAL,                (2011),       https://www.oecd.org/env/tools-
   evaluation/Interactions%20between%20Emission%20Trading%20Systems%20and%20Other%20Overlapping
   %20Policy%20Instruments.pdf.
12
   See Alina Vysochnya et al., Convergence trends of environmental taxation in European countries, E3S WEB CONF. 1,
   2 (2020).
13
   See    Resolution      on    the      E.U.’s    response     to    the      increase    in     energy    prices
   in Europe,        Eur.          Parl.           Doc.          PV 58(II) (1994).2022/2830(RSP), (2022),
   https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?lang=en&reference=2022/2830(RSP).


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     THE LIMITS IMPOSED BY UNION LAW ON THE DESIGN OF FISCAL INSTRUMENTS INTENDED TO
                                PROTECT THE ENVIRONMENT


       1. CAN AN INTRINSICALLY EUROPEAN ENVIRONMENT BE PROTECTED BY
       NATIONAL FISCAL REGIMES?

While environmental protection is a global goal enshrined in the United Nations
Sustainable Development Goals [U.N SDGs] and the Treaty on the Functioning of the
European Union [hereinafter T.F.E.U.],14 tax regimes see their application boxed into the
four corners of each Member State. This is due to the age-old principle of international
law that a sovereign state does not recognize and enforce the taxes of other sovereign
states in its own territory. So how can one or a few Member States truly make a
difference at the global level? With the environmental landscape that stretches from the
French overseas territories to the ancient forests on Poland’s eastern border, one
question which arises is whether a Member State can adopt an environmental tax policy
which affects trade both in its own territory and in other parts of the Union. We will see
that the territorial confines of tax regimes in general have not prevented them from
targeting harmful activities or goods which originate abroad. Indeed, a large part of the
case-law on the free movement of goods concerns fiscal measures adopted by one
Member State on goods originating in another Member State - sometimes on the basis
that such measures protect the environment defined in the broadest sense. These types
of measures can be especially effective if demand for a particular good or service is
concentrated within the Member State that decides to tax it. Any tax imposed on such
goods or services is very likely to affect production abroad by influencing consumers
back home. Therefore, the idea that fiscal measures, albeit territorial, may still pursue a
general vocation to protect the environment, wherever that environment may be
situated. And this has given rise to a functional theory of environmental taxation which
inspires legislators to this day. It is this theory which serves as the rational basis for the
measures and legislative acts of Member States and the Union respectively.15 It is in the
second Paragraph that we ask the question of whether a European-wide environmental
tax, based on the theory discussed in the first Paragraph, is at all legally possible.




14
   Consolidated versions of the Treaty on the Functioning of the European Union art. 191(1), June 7, 2016, 2016
   O.J. (C 202) 47 [hereinafter TFEU]; UN Department of Economic and Social Affairs, sustainable development
   goals, (jan. 29, 2023) https://sdgs.un.org/goals, see Goals 11-15.
15
   This theory has been reproduced in Communication from the Commission, see Communication from the
   Commission, Guidelines on State aid for climate, environmental protection and energy 2022, at 8-9, COM (2022) C 80/01
   (Feb. 18, 2022)[hereinafter C.E.E.A.G.].


                                                          84
2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


     1.1. THE THEORY UNDERLYING MODERN ENVIRONMENTAL TAXATION

An environmental tax can be defined simply as “a tax whose tax base is a physical unit
(or a proxy of a physical unit) of something that has a proven, specific negative impact
on the environment”.16 It is nothing more than a charge imposed on taxpayers that is
sensitive to the environmental damage caused by human activities, notably large-scale
industry that has become dominant due to the globalisation of value chains.                               The
Organisation for Economic Co-operation and Development [hereinafter O.E.C.D.] offers
an even more detailed definition: “Environment-related taxes are any compulsory,
unrequited payment to the general government levied on tax-bases deemed to be of
particular environmental relevance”.17 In this regard, the environmental taxes most
found in European countries include taxes on energy products, motor vehicles, waste,
pollutant emissions, and natural resource exploitation.18
          But why use taxation to achieve environmental goals? To answer this we must
first look at the two principal alternatives. The traditional alternative to environmental
taxes is regulation. This instrument functions on the idea that actors should incur
pecuniary, administrative or penal sanctions when they fail to respect precise
environmental obligations laid down by law.19                         Environmental regulation and
environmental taxation are not diametrically opposed, and a recent O.E.C.D. report
highlights their synergetic effects on the restoration of ecosystems (regulation restricts
activity while tax can create positive incentives for restoration by ensuring that the true
costs of degradation are appropriately priced into economic activity).20 A more modern
alternative may be found in a hybrid system that combines both regulatory and fiscal
elements. Such is the negotiable permit (market) mechanism which lays out rules for the
concession of “permits to pollute” through State auction. These permits allow their
acquirer to release a given volume of pollution into the environment over a given period

16
   See      Eurostat,     Environmental        taxes:        A     statistical    guide,    at    9,    (2013)
   https://ec.europa.eu/eurostat/documents/3859598/5936129/KS-GQ-13-005-EN.PDF.pdf/706eda9f-93a8-
   44ab-900c-ba8c2557ddb0?t=1414782946000. See also Regulation 2011/691, of the European Parliament and
   of the Council of 6 July 2011 on European environmental economic accounts, art. 2(2), 2011 O.J. (L192) 1,
   which contains an identical definition.
17
   Organization for economic cooperation and development [OECD], The Political Economy
   of     Environmentally    Related    Taxes,      at   26,      (2006),      https://www.oecd.org/env/tools-
   evaluation/thepoliticaleconomyofenvironmentallyrelatedtaxes.htm.
18
   See generally ADRIANO DI PIETRO, LA FISCALITA’ AMBIENTALE IN EUROPA E PER L’EUROPA [ENVIRONMENTAL TAXATION
   IN AND FOR EUROPE] 52 (Cacucci ed., 2016) (It.).
19
   See V. SEPULCHRE, LA FISCALITE ENVIRONNEMENTALE EN BELGIQUE [ENVIRONMENTAL TAXATION IN BELGIUM] 11
   (Larcier eds., 2009).
20
   See Report of the Organization for Econmic cooperation and development [OECD], Biodiversity: Finance
   and the Economic Business Case for Action prepared for the G7 Environment Ministers Meeting of 5-6 May 2019,
   at 51, (2019), https://www.oecd.org/environment/resources/biodiversity/G7-report-Biodiversity-Finance-
   and-the-Economic-and-Business-Case-for-Action.pdf.


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     THE LIMITS IMPOSED BY UNION LAW ON THE DESIGN OF FISCAL INSTRUMENTS INTENDED TO
                                PROTECT THE ENVIRONMENT


and may be freely exchanged with economic actors. Under this system, operators facing
high costs for reducing their emissions will attempt to buy permits from operators
incurring lower costs for such a reduction. The intended effect is to drive operators
towards more efficient modes of production.                    It is worth noting that a system of
negotiable pollution permits is not based on Pigouvian theories of internalising
externalities,21 and its principal setback lies in the fact that its design, in practice, can
only cover certain targeted sectors of economic activity.22
           According to some authors, since fiscal instruments are more flexible than
regulation they can eliminate environmental problems by creating a double effect.23 On
the one hand, they stimulate the economy through incentives. And on the other, they
discourage environmentally harmful activities through expansion of the tax base and
increase in the rate of environmental taxes.24 Taking the above-cited definitions, it is
hard not to notice that they are built around the idea of discouraging human activities
which are harmful to the planet. Indeed, their common basis is the internalisation of
negative externalities (i.e., environmental damage), caused by the production,
distribution and consumption of a product or service into the cost of that same product
or service. This additional cost, once passed on to the consumer, will make him choose
whether to pay more for a product or service that is of greater cost to the environment.
           We cannot talk about environmental externalities without mentioning the work
of Arthur C. Pigou.25 The British economist had theorised a type of “corrective taxation”
that compensated for the negative externalities of goods traded on the market, such as
pollution. This laid the basis for the famous Pigouvian tax,26 which takes the form of an
indirect tax on harmful goods or activities and which serves as inspiration for the
polluter-pays principle.27            According to Pigou, a negative externality could be
categorised as a market failure because its external cost was passed on to society at large
rather than being reflected in the price set by the seller and buyer (the parties to a
contract do not normally factor social costs into the agreed price).28 This phenomenon
resulted in the creation of economic inefficiencies that could not be taken into account
by the economic models of the time. Applying the polluter-pays principle to the private
individuals signifies that it is the person who makes use of or puts the product into
circulation who must bear the cost of compensating the negative externality.
21
   See Sepulchre, supra note 19, at 23.
22
   See id. at 29.
23
   See id. at 13.
24
   See Vysochnya, supra note 12, at 3.
25
   See A. C. PIGOU, THE ECONOMICS OF WELFARE (Palgrave Macmillan, 4th ed. 1932); see also NICOLAS CARUANA, LA
   FISCALITE ENVIRONNEMENTALE [ENVIRONMENTAL TAXATION], 69-78 (L’Harmattan ed., 2015).
26
   See R. C. Williams III, Environmental Taxation 2 (National Bureau of Economic Research: Working Paper 22303,
   2016).
27
   See Caruana, supra note 25, at 80.
28
   See Pigou, supra note 25, at 185-86.
                                                      86
2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


According to Pigou, only a tax imposed on the harmful product could correct an
externality.29 If the tax equals the external damage caused to society by one unit in
addition to the product, the damage will be compensated by the price of the transaction,
forcing the buyer to pay the marginal social cost of the product as well.30 This tax
encourages operators to reduce the externalities of their products so as to attract more
buyers; it therefore shifts demand in favour of products that cost less to society in
general.
          While sound in theory, the theory of negative externalities suffers some major
difficulties when put into practice. First, the degree of damage caused by a product is
very difficult to calculate. Pollutants diffuse easily and can persist in the environment
for several decades, thus requiring calculations to be made on the future environmental
effects of certain productions. Secondly, the intricate design of a Pigouvian tax may
create large administrative costs for fiscal authorities.31 Thirdly, political acceptance of
Pigouvian taxes may be lacking in certain countries as they may be considered to impose
an unfair burden on low-income households - while allowing those who can afford it to
pollute to their heart’s content.
          Quite apart from their compensatory nature, environmental taxes can be a good
source of government revenue. From this perspective, environmental taxes may be used,
not only to correct negative externalities, but also to contribute to the State’s public
expenses.32 This idea has given rise to the modern “double-dividend” theory. According
to this theory, a shift towards the levy of environmental taxes will allow Member States
to reform their tax systems in such a way as to achieve a high level of environmental
protection with a lower rate of unemployment (without increasing the overall tax
burden in Member States).33 To achieve this, Member States need to review the very
nature of our current tax systems, which are still mainly based on general income tax
provisions. The principle underpinning the double-dividend theory is that Member
States should increase taxation on anti-social activities (such as pollution), in order to be
able to decrease taxation on human activities that are considered virtuous (such as
labour).34

29
   Pigou envisaged a tax system which would make private marginal cost match social marginal cost. However,
   he remains a liberal economist who did not recommend a systematic form of state intervention outside the
   realm of taxation: see Caruana, supra note 25, at 76-77.
30
   See Williams, supra note 26, at 3.
31
   See OECD, supra note 17, at 21.
32
   See Williams, supra note 26, at 4.
33
   See Commission proposal for a Council Directive of 12 March 1997 restructuring the Community framework for the
   taxation of energy products, at 1-2, COM(97) 30 final, (Mar. 12, 1997).
34
   See generally David Luckin & Simon Lightfoot, Environmental taxation in contemporary European politics, 5
   CONTEMP. POL. 243, 249 (1999).


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       1.2. IS A UNION‐WIDE ENVIRONMENTAL TAX POSSIBLE?

       1.2.1. SOME PRELIMINARY CLARIFICATIONS

Many experts have communicated their wish to create a single instrument harmonising
environmental taxation at the supranational level. One can note three major movements
in the evolution of environmental taxes within the Union. For a long period, all was left
in the hands of the Member States.35 In the 1980s, there was a slow progression towards
higher levels of environmental levies.36 Everything accelerated in the 1990s when the
Nordic countries adopted the first legislation against climate change.37 Soon afterwards,
environmental taxation quickly lost its popularity and, from 2007 onwards, fell back to its
1980s level.38 Current Eurostat statistics show that environmental tax revenues represent
only 2.2% of E.U. Gross Domestic Product (G.D.P.); 77.2% of these revenues being due to
energy taxes.39
           As for the latter statistic, it is worth pointing out that not all energy taxes pursue
environmental objectives. Historically, they have been used as a broad instrument for
Member States to raise revenues. Such was, after all, the initial motivation behind the
Energy Taxation Directive - although the Commission has admitted that the
environmental aspect of this directive has now gained relevance.40 Moreover, the Joint
Research Council has demonstrated that excise taxes on energy consumption (as well as
related emissions and resource use) do not necessarily converge with classical Pigouvian
theory, as Member States often resort to such taxes to achieve other goals, such as fixing
distortions in the energy market or achieving socio-economic objectives.41
Paradoxically, the more effective a carbon tax levied on fossil fuels is at penalising their
use and shifting behaviour towards cleaner methods of energy production, the greater
the reduction in a Member State’s tax base will be.



35
   See generally ELOI LAURENT & JACQUES LE CACHEUX, UNE UNION SANS CESSE MOINS CARBONEE ? [A Union with
   Increasingly Less Carbon?] 26 (Notre Europe ed., 2009) (Fr.).
36
   See id.
37
   See id.
38
   Id.
39
   See Eurostat Website, Environmental tax statistics, (April 24, 2022), https://ec.europa.eu/eurostat/statistics-
   explained/index.php?title=Environmental_tax_statistics&action=statexp-seat&lang=fr; see also R. Hertzog,
   Pourquoi la fiscalité de l’environnement ne prospère pas [Why Environmental Taxation is Not Flourishing], GESTION &
   FINANCES PUBLIQUES [MGMT. & PUB. FIN.] 51 (2021) (Fr.).
40
   See European Environment Agency (EEA), The role of (environmental) taxation in supporting sustainability
   transitions, Briefing no. 22/2021, at 17 (Jan. 30, 2023) https://www.eea.europa.eu/publications/the-role-
   of-environmental-taxation.
41
   Joint Research Council science for policy report on the Energy Taxation and its Societal Effects, at 8-9, EUR 30552 EN,
   (Jan. 14, 2021).


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Since the adoption of the “Fit for 55” package,42 the Commission is now committed to
align its energy policy with its climate objectives, thereby placing greater emphasis on
the environmental aspects of energy taxation.43
           Coming back to our discussion regarding a possible European environmental tax,
two statements are worth noting since they witness the first efforts to initiate
environmental tax reform at supranational level. In 1998, the European Environment
Agency (E.E.A.) published a communication indicating the great potential for job
creation that a European-wide environmental tax reform could bring.44 At the European
Council in Copenhagen, the then President of the Commission, Jacques Delors, went as
far as communicating his preference in favour of a new European double-dividend tax
policy.45        We feel that these very general statements in favour of promoting
environmental taxes in Europe can be misleading since they fail to explain the type of
concrete measures envisaged by the people making them. They therefore require some
clarification.
           When in the realm of taxation more generally, a distinction must be drawn
between, first, the power to create a purely European tax which contributes to the
Union’s budgetary resources, secondly, the power to obligate Member States to tax
persons, products or services in a certain manner and, thirdly, national taxes adopted on
the Member States’ initiative and which are only legal in so far as they are compatible
with Union law, including secondary legislation. It suffices to say that regarding the first
type of tax (or purely European tax) the Union has no competence to impose taxes
directly on Union citizens or residents.46 This would require a total revision of the
treaties, as there is currently no single treaty article which confers this power on any of
the Union’s institutions. So, the statements calling for a regional and purely European
environmental tax must be interpreted as excluding this possibility, simply because the
Treaties do not and have not envisaged it since the Treaty of Rome.
The second and third scenarios are discussed further below.




42
   Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and
   the Committee of the Regions, “Fit for 55”: delivering the E.U.’s 2030 Climate Target on the way to climate neutrality,
   COM (2021) 550 final (July 14, 2021).
43
   See Commission proposal for a Council Directive, restructuring the Union framework for the taxation of energy products
   and electricity (recast), COM (2021) 563 final (July 14, 2021).
44
   European Environment Agency (EEA), Environmental Taxes: Implementation and Environmental Effectiveness, at 7,
   (Aug. 1996), https://www.eea.europa.eu/publications/92-9167-000-6/file.
45
   Bulletin des Communautés européennes No 6/93, at 18 (1993).
46
   See V. Dussart, L’impossible création d’un impôt européen? [Is the Introduction of a European Tax Impossible?], 144
   REVUE FRANçAISE D’ADMINISTRATION PUBLIQUE [FRENCH REV. PUB. ADMIN.] 1085, 1088 (2012) (Fr.).


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       1.2.2. LIMITED LEGAL BASES FOR EUROPEAN ACTION

The Treaties offer few legal bases by virtue of which the Union can act in tax matters.
Those legal bases, as we shall see, are in turn modelled around the strict dichotomy
between direct and indirect taxes, thereby conditioning the type of legal act the Union
can adopt in the direct and indirect tax fields. Coming back to the distinction drawn in
the last Subparagraph, we can say that the Union, although lacking the power to impose
its own taxes, may force Member States to tax (or not to tax) a particular product,
service, person, or activity. The main legal bases for doing so are Articles 113 and 115
T.F.E.U.
             Direct taxes do not fit easily into the definitions of environmental taxes cited
earlier in this Section. However, it is not impossible to imagine a tax system which
charges profits differently according to the harmfulness of the principal activity
generating them. Such a system may, for instance, be used to incentivise a double shift
towards less harmful production methods and employment.                Furthermore, there is
nothing generally to prevent a Member State from granting tax breaks on profits
generated from activities related to environmental protection, provided that state aid
rules on selectivity are observed. In this respect, the Court has refused to recognise any
argument in favour of automatically excluding a fiscal measure from the scope of Article
107 T.F.E.U., particularly the criteria on material selectivity, simply because it pursues an
environmental protection objective (see the discussion in Paragraph 2.3 below).
             At this stage, the question one would need to answer is whether the Union has
the competence, at all, to adopt measures for the harmonisation of direct and indirect
environmental taxes. Article 115 T.F.E.U. enables the Council to act unanimously under a
special legislative procedure with a view to issue directives for the approximation of such
laws, regulations or administrative provisions of the Member States as directly affecting
the establishment or functioning of the internal market. Only directives can be used to
harmonise national tax provisions, thereby excluding the use of regulations which aim to
uniformise direct taxes, and the harmonisation must have as its object of improvement
of the conditions for “the establishment or functioning of the internal market”.47 In the
author’s view, this latter element was introduced into the Treaty of Rome to ensure that
the Union will not be able to harmonise indiscriminately, but only to the extent necessary
to be able to reinforce and guarantee the exercise of the fundamental freedoms of Union
citizens. In no case can the Union harmonise on the simple pretext that it wishes to replace



47
     Case C-376/98, Tobacco Advertising I, 2000 E.C.R I-08419, ¶ 83.


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the Member States’ tax systems with a system which it believes is better suited to meet
the objectives it sets for itself.
          Another striking feature of Article 115 is the requirement of unanimity. While
some inroads have been made in the field of direct taxation, the diversity of fiscal
policies between Member States means that a total harmonisation of Member States’ tax
bases is almost impossible to achieve. On this point, De Sadeleer notes that the special
legislative procedure,where the Council is the sole legislator and decides by unanimity,
used since the Treaty of Rome to harmonise the tax provisions of the Member States, has
prevented the adoption of a holistic system of environmental taxation at the
supranational level.48 Indeed, since the 1978 Spinelli Report, the creation of a direct tax
at the European level, even if levied by the Member States, remains impossible in
practice, since it would require the harmonisation of the tax bases of the Member States
to such an extent that all disparities between them would be eliminated.49 Naturally,
while Member State sovereignty is currently the rule in the area of direct taxation, this
does not mean that European law has no impact on the design of direct taxes. National
tax provisions adopted in areas not subject to harmonisation must still comply with the
fundamental freedoms and the fundamental rights set out in the Charter.50 In other
words, where a Member State adopts fiscal tools to incentivise a green transition towards
environmentally friendly jobs or production processes, the provisions governing the
granting of state aid, freedom of establishment and free movement of workers remain
applicable.51
          Historically, the Commission’s initiatives to introduce environmental taxes have
tended to focus on indirect taxes, i.e., taxes on transactions. Indeed, the first indirect tax
in the history of the Union was envisaged by the Delors Commission with the creation of
a CO2 ecotax. This initiative was rejected in 1992 by the Ecofin Council.52 Nevertheless, it
seems that the Commission retains a strong belief in this approach. Since the Lisbon
Treaty, the current legal basis for the harmonisation of indirect taxes is found in Article
113 T.F.E.U.53 According to this Article, the Council, acting unanimously in accordance
with a special legislative procedure, shall adopt provisions for the harmonisation of
legislation concerning turnover taxes, excise duties and other forms of indirect taxation.
Once again, the Council may act only to the extent that harmonisation is necessary to
48
   NICOLAS DE SADELEER, EU ENVIRONMENTAL LAW AND THE INTERNAL MARKET 238 (Oxford University Press ed.,
   2014) (UK).
49
   See Dussart, supra note 46, at 1088; see also ALEXANDRE MAITROT DE LA MOTTE, DROIT FISCAL DE L’UNIONS
   EUROPEENNE [European Union tax law] 27-35 (Bruylant ed., 3rd ed. 2022) (Fr.).
50
   See Case C-446/03, Marks & Spencer plc, 2005 E.C.R. I-10837, ¶ 29.
51
   See PETER J. WATTEL ET AL., EUROPEAN TAX LAW, VOLUME I, 12 (Wolters Kluwer ed., 7th ed. 2018).
52
   See Dussart, supra note 46, at 1089.
53
   See Wattel et al., supra note 51, at 34.


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ensure the establishment and functioning of the internal market and to avoid distortions
of competition. Article 113 T.F.E.U. is considered by some authors as conferring a specific
mandate on the Union to bring about a holistic and positive harmonisation of the
internal market, such a mandate not being readily identifiable in the case of direct
taxes.54 Over time, the Union has adopted or proposed several legislative acts on the
basis of Article 113 T.F.E.U. that have an impact on national environmental tax provisions
such as the Energy Products Tax Directive,55 the Excise Directive,56 the Heavy Vehicle
Tax directive,57 and the Proposal for a Directive on Passenger Car Related Taxes.58
           A third legal basis for the harmonisation of national environmental taxes has
been inserted into the Treaties by the Single European Act. Article 192(2)(a) T.F.E.U. is
more specific, and allows for the adoption of “provisions primarily of a fiscal nature” in
the Union’s promotion of a coherent European environmental policy. According to this
Article, the Council shall, before adopting fiscal measures of an environmental nature,
act unanimously in accordance with a special legislative procedure, and only after
consulting the Parliament, the Economic and Social Committee and the Committee of
the Regions. A couple of remarks can be made at this stage. First, the unanimity
requirement in Article 192(2)(a) has been inserted to ensure that the article is not used to
bypass the other legal bases discussed above. Secondly, any tax measures adopted on the
basis of this Article must have a primarily environmental character and be based on the
polluter-pays principle. Thirdly, although the wording of Article 192(2)(a) encapsulates
the general principle that the Union will only harmonise exceptionally in the field of
taxation, there is one stark difference between this article and Articles 113 and 115
T.F.E.U.: for the Council to be able to adopt a fiscal measure of an environmental
character, there need not be a link subsisting between the measure and the need to
ensure the proper functioning of the internal market. This means that the pure objective
of environmental protection may be freely pursued when harmonising environmental
taxes under Article 192(2)(a). The Directive establishing a scheme for greenhouse gas
emission allowance trading within the Union,59 as well as the proposed regulation for a
C.B.A.M.,60 are based on Article 192(2)(a) T.F.E.U.

54
   Id.
55
   Council Directive 2003/96, 2003 O.J. (L 283) 51 (EC).
56
   Council Directive 2020/262, 2020 O.J. (L 58) 4 (EU).
57
   Directive 1999/62/EC, of the European Parliament and of the Council of 17 June 1999 on the charging of
   heavy goods vehicles for the use of certain infrastructures, 1999 O.J. (L 187).
58
   Commission Proposal for a Council Directive on passenger car related taxes, COM (2005) 261 final (July 5, 2005).
59
   Directive 2003/87/EC, of the European Parliament and of the Council of 13 October 2003 establishing
   a scheme for greenhouse gas emission allowance trading within the Community and amending Council
   Directive 96/61/EC, 2003 O.J. (L 275) 32.
60
   Commission proposal for a Regulation of the European Parliament and of the Council establishing a carbon border
   adjustment mechanism, COM (2021) 564 final (July 14, 2021).


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At this point, it would be interesting to know the precise scope of the words “provisions
primarily of a fiscal nature”. This is because under the general scheme of Article 192,
an environmental measure not of a fiscal nature can be adopted through the ordinary
legislative procedure. The response is not easy and can indeed depend on the legal culture
and background of the person interpreting the words. What is sure is that at the European
level there is no definition of “tax” and charges aiming to protect the environment which
can serve eminently regulatory purposes too. This could open a whole debate about what
is essentially “fiscal” in nature and what is not. It suffices to say that according to the
classic definition attributed to Gaston Jèze, there is no tax that does not serve to cover
public expenses.61 We have seen that what may be generally called an environmental tax
or charge may not necessarily be designed with the purpose of increasing government
revenues, but to force a polluter to pay for the damage he has caused to society (in line
with the polluter-pays principle derived from the Pigouvian theory of externalities).62 As
Caruana says, environmental taxation is an ambivalent notion,63 and can manifest itself as
a sanction-type measure to be found often in instruments of a regulatory character.64 The
question has not been addressed by the Court, but an instrument like the Energy Taxation
Directive has generally been taken to contain “fiscal” measures despite the fact that one
of its objectives is to ensure that some of the damage caused by the consumption of fossil
fuels is compensated through a minimum rate of taxation.65



     1.3.    PRELIMINARY CONCLUSIONS PROVIDING A STRUCTURE FOR THE
     SECOND PART OF THIS PAPER

Paragraph 1.1. has discussed the general theory underpinning environmental taxes.
According to this theory, environmental taxes serve to internalise negative externalities
into the costs of products and services on the market. In Section 1.2 we saw that a system
of environmental taxation in Europe is possible, but the current division of competences
has brought about a situation where Union intervention is entirely sectoral and heavily
61
   See Maitrot De La Motte, supra note 49, at 44: où l’impôt est défini comme une «prestation pécuniaire requise
   des particuliers par voie d’autorité, à titre définitif et sans contrepartie, en vue de la couverture des charges
   publiques» [where tax is defined as «a pecuniary benefit required from individuals by means of authority,
   definitively and without compensation, for the purpose of covering public charges»].
62
   See Caruana, supra note 25, at 78-89.
63
   See Di Pietro, supra note 18, at 83: “. . . non esiste un’apposita e autonoma disciplina positiva della
   fiscalità ambientale. . .la fiscalità ambientale si presenta come un sistema eterogeneo e frammentato e,
   soprattutto, privo di disposizioni organiche” [“there is not a specific and autonomous positive regulation of
   environmental taxation. . .environmental taxation is a heterogeneous and fragmented system, and, above
   all, without organic provisions”].
64
   Caruana, supra note 25, at 289; see also Hervé Raimana Lallemant-Moe, Les Deux Visages de l’impôt à finalité
   écologique [The Two Faces of the Ecological Tax], 161 POUVOIRS 147, 151-52 (2017).
65
   Council Directive 2003/96, supra note 55, at Preambles 6-7.


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focused on the creation of indirect taxes. It is, as yet, highly doubtful whether a holistic
harmonisation of direct taxes in pursuit of a green transition is possible, since this would
require all Member States to renounce their sovereign tax base. Such an outcome can
hardly be said to have been envisaged by the treaty drafters. However, Article 115
T.F.E.U. allows the Union to harmonise the direct tax laws of the Member States, albeit
limited to the extent that these directly affect the establishment or functioning of the
internal market.     This latter requirement limits all attempts to harmonise direct
environmental taxes to the achievement of very specific goals. The imposition of a
one-time retroactive “windfall” tax on fossil fuel companies could be one example,
although politically difficult to achieve in practice.
        We now propose approaching Section 2 of this paper in the following manner.
Our focus will turn to the case-law of the Court which deals directly with the
compatibility of national environmental taxes with various provisions of Union law,
including the fundamental freedoms (Paragraph 2.1) and pieces of secondary legislation
(Paragraph 2.2). Finally, the assessment of environmental taxes under the state aid
provisions will be tackled (Paragraph 2.3).




     2. THE COMPATIBILITY OF ENVIRONMENTAL TAXES WITH UNION
     LAW

Since the Treaty of Rome, the process of economic integration in Europe has been based
on the free market with the Court of Justice of the European Union taking on the role
of guardian of the internal market. Neo-protectionist measures incompatible with the
fundamental freedoms of the Treaties were quickly set aside by the jurisprudence of the
Court. In this second part of the paper, we discuss whether that jurisprudence has any
bearing on the creation of environmental taxes by the Member States.




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     2.1. ENVIRONMENTAL TAXES AND FUNDAMENTAL FREEDOMS

The compatibility of any environmental measure adopted by Member States is assessed
in a twofold way. If there is an act of secondary legislation fully harmonising an aspect of
the internal market, and the measure falls within the scope of that act, it will be assessed
in accordance with its provisions. If, on the other hand, there is no act harmonising an
area of the internal market, or if the harmonisation is not complete, the legality of the
environmental measure will be assessed in the light of the Treaties.66



     2.1.1. FREE MOVEMENT OF GOODS

When studying the free movement of goods, a distinction is made between fiscal (or tariff)
barriers on the one hand (Sub-Subparagraph 2.1.1.1.), and non-fiscal barriers on the other
(Sub-Subparagraph 2.1.1.2.). In this paper, we will focus mainly on the former, i.e., the
prohibitions contained in Articles 28 to 30 and 110 T.F.E.U. We will discuss non-tax barriers
(Articles 34 to 36 T.F.E.U.) only insofar as they might be relevant to the implementation and
collection of environmental taxes by Member States.


     2.1.1.1. FISCAL BARRIERS TO TRADE
           Our starting point is the observation that there is no harmonisation of
environmental taxes in Europe. As a result, Member States are free to implement their
own environmental tax policy,67 a freedom that manifests itself through the differences
in the base and rate of environmental taxes within the Union.68 However, the fiscal
autonomy of Member States is not absolute, as they are bound by the Treaties when
introducing new environmental taxes.69
           Normally, the financial nature of an environmental tax is sufficient to bring it
within the scope of Articles 28 to 30 and 110 T.F.E.U., with the consequence that the
Treaty articles dealing with quantitative measures are excluded.70 What distinguishes
customs duties and charges, having an equivalent effect to customs duties [hereinafter
C.E.E.], from internal taxation is their operative event.              According to the Court’s
definition, a C.E.E. is a “pecuniary charge. . .imposed unilaterally on domestic or foreign goods
by reason of the fact that they cross a frontier, and which is not a custom’s duty in the strict sense
[. . .]”.71 By contrast, an internal tax is a charge “under a general system of internal
66
   See De Sadeleer, supra note 48, at 230-31.
67
   Id. at 238.
68
   Id. at 239.
69
   Id.
70
   Id. at 240.
71
   See Case C-24/68, Comm’n v. Italy, 1969 E.C.R. 193, ¶ 9.
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charges applying systematically to domestic and imported products according to the
same criteria”.72



       2.1.1.1.1. ARTICLES 28 TO 30 T.F.E.U.

The Customs Union is a fundamental part of the Union and is based on three things: a
single external border; a single customs tariff; and a common legislative framework.73
Article 28 T.F.E.U. provides that the Union shall comprise a customs union covering all
trade in goods including the prohibition between Member States of customs duties on
imports and exports; and of all charges having equivalent effect; and the adoption of a
common customs tariff in their relations with third countries. Article 3 T.F.E.U. provides
that the Union has exclusive competence in this area. It is therefore not open to Member
States to legislate in this area. Any possibility of introducing a tariff regime, whether
protective of the environment or not, is thereby excluded.
           The Court has always applied the tariff prohibition rigorously, particularly,
because of the automatically discriminatory and protectionist nature of these types of
charges.74 From the outset of its jurisprudence, the Court decided that the goal of
protecting the environment cannot in any way justify these charges.75 And, in addition,
the revenues collected by customs tariffs used to finance, or in some way carry out, a
national environmental policy, have no bearing on the classification of a customs tariff.76
In principle, even the smallest charges are prohibited and the form, description and
method of collection of the charge do not affect its classification as a C.E.E.77
           The Court’s rigorous approach is illustrated in Case C-72/03.78 The municipality
of Carrara in Italy had imposed a tax on the export of marble extracted on its territory
with a rate that changed according to the weight of the marble. The Court declared such
a tax incompatible with Article 30 T.F.E.U. because its chargeable event was the crossing
of the municipality’s borders by the marbles. It specified that the fact that the tax was
levied to compensate for damage caused to the municipality by the marble industry could


72
   See Case C-130/96, Fazenda Pública v. Solisnor-Estaleiros Navais SA, 1997 E.C.R. I-5053; Case C-28/96, Fazenda
   Pública v. Fricarnes SA, 1997 E.C.R. I-4939, ¶ 21.
73
   See MARIE LAMENSCH ET AL., EUROPEAN TAX LAW, VOLUME II 3 (Wolters Kluwer ed., 2018) (Neth.).
74
   See CATHERINE BARNARD, THE SUBSTANTIVE LAW OF THE EU 42-45 (Oxford University Press ed., 6th ed. 2019)
   (UK).
75
   See Case 2-69, Diamantarbeiders, 1969 E.C.R. 211, ¶ 19; Case 29/72, S.p.A. Marimex v. Italian Fin. Admin., 1972
   E.C.R. 1309, ¶ 7.
76
   See also De Sadeleer, supra note 48, at 242.
77
   See also id.
78
   See Case C-72/03, Carbonati Apuani Srl v. Comune di Carrara, 2004 E.C.R. I-8027.


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not alter the solution adopted. Therefore, a C.E.E. cannot be justified, even if the money
collected is used to maintain the urban or natural environment of a municipality.
          Another Italian case before the Court concerned a tax imposed on the
consumption of natural gas (from Algeria) on Italian territory.79 A law of the Sicilian
region provided for a tax on the ownership of gas pipelines that transported methane
gas through Sicilian territory. The basis of the tax was the volume of the pipelines: i.e.,
the more methane gas was transported, the more was paid. For the Commission, the tax
constituted a C.E.E. despite its environmental purpose. On the other hand, the Italian
Government argued that the precautionary principle (a general principle of law
contained in the Treaties) allowed for the introduction of such a tax despite the
provisions of Article 30 T.F.E.U. The Court, having noted that the environmental tax was
intended to finance investments aimed at reducing and preventing risks to the
environment, declared it incompatible with that Article. Such is the strength of the
prohibition on the use of C.E.E.s to achieve environmental objectives.
          The Court recognizes only two exceptions to the application of Articles 28 and 30
T.F.E.U.80   First, if a pecuniary charge is imposed as consideration for a service rendered to
the importer, such a service must confer a specific and certain benefit on the individual
importer, as a benefit in the public interest is considered too general and uncertain by the
Court.81 For example, a service provided by public authorities for the recycling of waste
generated by an importer may be considered to fall within this first exception - provided
that the service is not mandatory and the amount charged is proportionate to the volume
of waste generated by the importer.
          The other exception to Articles 28 and 30 T.F.E.U. is the payment for an
inspection made mandatory by Union law. In environmental matters, Article 29 of
Regulation 1013/2006/EC on the shipment of waste between Member States provides
that in the case of shipments of waste within the Union, appropriate and proportionate
administrative costs for the implementation of notification and monitoring procedures
and the usual costs of appropriate analyses and inspections may be charged, inter alia, to
the waste producers.
          The two exceptions to Article 30 T.F.E.U. were addressed jointly in Case
C-389/00.82 In Germany, exporters of waste, before exporting, had to pay a contribution
to the solidarity fund for the return of waste to Germany. This fund was to be used to
implement Germany’s obligations under the Basel Convention, which stipulates that in
79
   See Case C-173/05, Comm’n v. Italy, 2007 E.C.R. I-4917.
80
   See Maitrot De La Motte, supra note 49, at 102-06.
81
   See Case C-305/17, FENS v. Slovak Rep., ECLI:EU:C:2018:986, ¶ 43 (Dec. 6, 2018).
82
   See Case C-389/00, Comm’n v. Germany, 2003 E.C.R. I-2001.


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the event of illegal exporting or non-compliance with a waste export contract, the
illegally exported waste had to be re-imported into Germany. The German Government
considered the fee to be adequate remuneration for services actually and individually
rendered to economic operators. According to the Court, the fact that the charge was
determined exclusively on the basis of the type and quantity of waste to be shipped by
each exporter meant that no individual service was rendered to the operators. In
addition, the economic operators required to pay the fee did not derive any actual,
individual benefit from the activities financed by the fund. With regard to Article 29 of
Regulation 1013/2006/EC, the Court decided that this Article could not be used to impose
charges on operators that are not justified or are not strictly related to the
administrative costs incurred for the implementation of the procedures of notification
and supervision of waste shipments.



       2.1.1.1.2. ARTICLE 110 T.F.E.U.

While C.E.E.s are imposed unilaterally and hit goods because of the crossing of a border,
Article 110 T.F.E.U. applies to taxes that are imposed within a Member State on both local
and imported products.83 A tax measure cannot fall simultaneously within the scope of
Articles 28 to 30 T.F.E.U. and Article 110 T.F.E.U., since the two prohibitions are aimed at
different tax charges altogether.84
           Under Article 110 T.F.E.U., a Member State may adopt charges on foreign products
provided it does not discriminate and the charge does not have a protectionist effect.85
As Craig points out, Article 110 was inserted into the Treaty to ensure that competition
between local and imported products is not distorted once the imported product enters
the market of a Member State, and after having gone past the “operational event” that
normally triggers C.E.E.s.86
           According to the Court, the purpose of Article 110 T.F.E.U. is “[to eliminate] all
forms of protection which might result from the application of discriminatory internal
taxation against products from other Member States, and to guarantee absolute neutrality
of internal taxation as regards competition between domestic and imported products”.87
It is therefore obvious that an environmental tax is only allowed if it is neutral, although
neutrality often turns out to be a difficult notion to seize and apply on a case-by-case basis.

83
   See De Sadeleer, supra note 48, at 243.
84
   See Joined Cases C-78-83/90, Compagnie Commerciale de l’Ouest, 1992 E.C.R. I-1847, ¶ 22.
85
   See De Sadeleer, supra note 48, at 243.
86
   See P. CRAIG & G. DE BURCA, EU LAW: TEXT, CASES AND MATERIALS 682 (Oxford University Press ed., 7th ed. 2020).
87
   See Case 356/85, Comm’n v. Belgium, 1987 E.C.R. 3299, ¶ 6.


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     2.1.1.1.2.1. SIMILAR PRODUCTS

The first Paragraph of Article 110 T.F.E.U. prohibits discrimination between “like”
products, while its second Paragraph prohibits any taxation of an imported product that
is intended to “indirectly protect” other products. It is important to note that under
Article 110 T.F.E.U., once the discriminatory or protectionist character of an internal tax
is demonstrated, no justification is allowed by the text of the Treaty.
          Let us start with the first Paragraph which prohibits Member States from taxing
products from other Member States more heavily than similar local products.88 In order
to apply this Paragraph, it is necessary to find a product manufactured in the importing
Member State that can present an alternative choice to the consumer by fulfilling the
same function as the imported product.89 If no such local production exists at all, the tax
measure will not fall under Article 110 T.F.E.U., but it remains to be seen whether it is of
such a nature as to be prohibited by Article 34 T.F.E.U. (see Sub-Sub-Subparagraph 2.1.1.2.
below on non-pecuniary barriers). Once the “like” product is identified, the importing
Member State must tax the imported product in the same way as the like local product.
This rule extends not only to the rate of tax, but also to the provisions relating to the basis
of taxation and the procedures for collection of the tax.90
          One question that arises is whether similar products may be subject to a different
tax rate, depending on their essential characteristics and their mode of production in light
of the objective of environmental protection. It seems that the Court has accepted this
possibility as an exception to the general prohibition imposed by Article 110 T.F.E.U.91
In Case C-213/96,92 Finland taxed domestically produced electricity at different rates in
accordance with its mode of generation. On the contrary, it charged imported electricity
at a single rate regardless of how it was generated. The differentiation in tax rates was
based entirely on environmental considerations. At Paragraphs 30 and 31, the Court states
that:

            . . .in its present state of development Community law does not
            restrict the freedom of each Member State to establish a tax system
            which differentiates between certain products, even products which
            are similar within the meaning of the first paragraph of Article [110
            T.F.E.U.], on the basis of objective criteria, such as the nature of the

88
   See De Sadeleer, supra note 48, at 251.
89
   See id. at 252.
90
   See Case 55/79, Comm’n v. Ireland, 1980 E.C.R. 481.
91
   See Maitrot De La Motte, supra note 49, at 123.
92
   See Case C-213/96, Outokumpu Oy, 1998 E.C.R. I-1777.


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               raw materials used or the production processes employed.             Such
               differentiation is compatible with Community law, however, only if it
               pursues objectives which are themselves compatible with the
               requirements of the Treaty and its secondary legislation, and if the
               detailed rules are such as to avoid any form of discrimination, direct
               or indirect, against imports from other Member States or any form of
               protection of competing domestic products.
                         Article [110 T.F.E.U.] therefore does not preclude the rate of an
               internal tax on electricity from varying according to the manner in
               which the electricity is produced and the raw materials used for its
               production, in so far as that differentiation is based, as is clear from
               the actual wording of the national court’s questions, on environmental
               considerations.

On the merits, the Finnish tax infringed Article 110 T.F.E.U. because it failed to give
importers of electricity the opportunity to benefit from the same differentiated system
of taxation which applied to domestic production. The fact that it was difficult in
practice to know how electricity from elsewhere was produced could not justify the
difference in treatment imposed by the Finnish measure. The case is important for the
principle it lays down. While it is possible for Member States to impose a heavier tax on a
production method with a higher carbon footprint, Finland should at least have given
the importer the opportunity to prove how the imported product was produced.93 In this
manner, the Court relayed the message that environmental taxation should be treated as
any other form of taxation, and should not, in any case, be used as a tool to protect or
promote local production. Taking the environmental protection objective of the measure
as its point of reference, it came to the logical conclusion that imported electricity
having a lower carbon footprint is equally beneficial to the environment as domestic
electricity having the same qualities. The Finnish tax policy was therefore incoherent in
not allowing imported electricity to benefit from a lower tax rate.
             The Court has been called upon to assess several taxes of an environmental
nature in its judgments on the registration of cars. In principle, an excise duty imposed
on passenger cars and levied on the basis of various operative events having no
connection with the product crossing borders between Member States (such as the
registration or the intra-Community acquisition of the vehicle) falls within the scope of
Article 110 T.F.E.U.94 Furthermore, there is nothing under E.U. law to prevent the

93
     See id. ¶ 39.
94
     See Case C-313/05, Brzeziński, 2007 E.C.R. I-513, ¶¶ 22-24.


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adoption of an excise duty with a different rate depending on the pollution emitted by a
car. However, in accordance with the principle that an excise duty may not be imposed
on products originating in other Member States more heavily than on similar domestic
products,95 an excise duty system must be designed in such a way that it does not favour
the internal sale of vehicles that are already on the market of a Member State. Such a
principle has greatly irritated those Member States wishing to protect their own
second-hand markets in passenger vehicles.
          In Case C-290/05, a Hungarian registration tax on used cars from other Member
States based on their environmental classification, irrespective of their value and length
of time in circulation, was declared incompatible with Article 110 T.F.E.U.96 The Court
clarified that a registration tax can be calculated based on the type of engine, engine
capacity and environmental classification of the car. There is no requirement that the
amount of the tax be strictly related to the price of the vehicle. However, it held that
while a new vehicle on which registration tax was paid in Hungary could be resold at a
percentage of its original value, including the residual amount of registration tax, a
vehicle of the same model, age, mileage and other characteristics, purchased
second-hand in another Member State and registered in Hungary, was subject to
registration tax at the rate of 100%. Such a tax had discriminatory effects between
second-hand vehicles already registered in Hungary and others that were imported after
their initial sale in another Member State. The environmental objectives pursued by the
Hungarian tax were questionable at best.
          In Case C-402/09,97 the Court recalls that Article 110 T.F.E.U. obligates each
Member State to select and adapt taxes on motor vehicles in a way that does not have the
effect of favouring the sale of domestic second-hand vehicles and thus discouraging the
importation of similar second-hand vehicles. In this case, cars imported into Romania
were taxed at the time of registration, while cars already on the Romanian market were
exempt from such tax. Whether the registration tax pursued environmental objectives
was irrelevant, since the system of registration was outright discriminatory. But this did
not discourage Romania. In Case C-263/10,98 a Romanian emergency ordinance had
obliged a Romanian national to pay a new pollution tax when registering his vehicle in
Romania. This tax was higher than the other pollution tax that was previously in force.
The Court clarified that Article 110 T.F.E.U. does not prevent Member States from

95
   See id. ¶ 29.
96
   See Case C-290/05, Nádasdi and Németh, 2006 E.C.R. I-10115, ¶¶ 58-59: the Court accepts that Article 401 of
   the V.A.T. Directive confers on Member States the power to adopt indirect taxes like stamp duty and excise
   on the registration of vehicles within their territory.
97
   See Case C-402/09, Tatu v. Statul roman, 2011 E.C.R. I-02711.
98
   See Case C-263/10, Nisipeanu v. Direcţia Generală a Finanţelor Publice Gorj, 2011 E.C.R. I-00097.


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 changing the rate or the basis of assessment of existing taxes.                            Moreover, the
 introduction of a new tax rate cannot be regarded as having a discriminatory effect
 between situations previously constituted and those which arose after the entry into
 force of the new rate. In this case, the Romanian ordinance had the effect of taxing
 imported used cars, while similar vehicles offered for sale on the domestic market were
 not taxed at all.             According to the Court, Romania should have achieved its
 environmental protection objectives by taxing any similar vehicle that was put into
 circulation on its territory, regardless of its origin. Such a tax would be more effective,
 more consistent with the environmental objectives sought out to be achieved and would
 prevent all distortions within the national used car market.
              Following Cases C-402/09 and C-263/10, Romania had introduced a new
 environmental tax on motor vehicles, this time it was called the “environmental stamp
 duty”. A national entitled to a refund of the pollution tax he had previously paid when
 registering his vehicle in Romania was now obliged to pay this new environmental stamp
 duty (the refund was a direct result of the pollution taxes incompatibility with the
 Treaties). This obligation to pay subsisted even in the event that a Romanian court had
 ordered the restitution of the pollution tax previously paid. What Romania essentially
 did was create a new system which set-off the unduly paid “environmental” tax with a
 novel obligation to pay the environmental stamp duty. For the Grand Chamber,99 such a
 system rendered ineffective the obligation to refund the pollution tax collected in
 violation of Union law. This was likely to perpetuate the discrimination for which
 Romania had already been condemned by the Court. According to the Grand Chamber,
 the reimbursement of an unduly collected environmental tax through a system of set-off
 with a new environmental tax (introduced after the repeal of the old tax) was illegal.
 Certain selective exemptions were debated in Case C-221/06. An Austrian law imposed a
 tax (Altlastenbeitrag) on the deposit of waste in a landfill, but exempted it when the waste
 originated from the securing or rehabilitation of contaminated sites listed in the
 country’s official atlas. No foreign sites could be listed in the atlas, with the consequence
 that waste from abroad could not benefit from the exemption. According to Advocate
 General Sharpston, the differentiated tax treatment of the products concerned was
 based on an objective criterion, which was whether the waste was produced in the
 course of securing or cleaning up potentially contaminated sites listed in the Austrian
 contaminated sites register. However, the tax was structured in such a way as “to
 discourage the safeguarding and/or rehabilitation of sites in other Member States as
 compared with sites in Austria”.100 The Court recalled that Article 110(1) T.F.E.U. is

 99
      See Case C-331/13, Nicula v. Administraţia Finanţelor Publice, ECLI:EU:C:2014:2285 (Oct. 15, 2014).
100
      See Case C-221/06, Stadtgemeinde Frohnleiten v. Bundesminister für Land-und Forstwirtschaft, 2007 E.C.R.
      I-09643.
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 violated when the taxation of the imported product and the taxation of the like domestic
 product are calculated differently, resulting, even if only in certain cases, in higher
 taxation of the imported product.101 A tax such as the Altlastenbeitrag, which did not
 exempt the deposit of waste from rehabilitated sites outside Austria, was likely to hit an
 imported product harder than a domestic product.                           The Austrian Government’s
 argument that it was difficult to identify rehabilitated contaminated sites in other
 Member States found no favour with the Court.102
           At this stage of our analysis, we must therefore conclude that there is nothing to
 prevent Member States from adopting a system of environmental taxation that imposes
 a heavier burden on products that are harmful to the environment and that encourages
 consumers to change their habits towards more environmentally friendly purchases,103
 provided this system does not discriminate between local and imported similar products.



      2.1.1.1.2.2. NON‐SIMILAR PRODUCTS

 As for the second Paragraph of Article 110 T.F.E.U., this applies when the local product and
 the imported product are not similar, but “in competition”. In such a scenario, the Member
 State may apply different taxes so long as this difference in treatment does not constitute
 a form of indirect protection of local production. The stark contrast with Paragraph 1 is
 that differential taxation is a priori permitted in the case of competing products. It is the
 degree and overall effect of the differentiation which falls to be controlled by the Court.
 De Sadeleer notes that there is no single Court ruling applying Article 110(2) T.F.E.U. to an
 environmental tax.104



      2.1.1.1.2.3. ARTICLES 30 AND 110 T.F.E.U.: WHAT DISTINGUISHES THEM?

 Having examined the respective elements and scope of Articles 30 and 110 T.F.E.U., a
 question arises as to the difference in application between the charges prohibited by the
 two Articles.105 The Court addressed this issue in Case C-213/96.106 In Finland, a tax was
 applied to domestic electricity, the rate of which depended on the type of electricity

101
    See id. ¶ 49.
102
    See id. ¶ 70.
103
    See De Sadeleer, supra note 48, at 250-51.
104
    See id. at 254.
105
    See F. MARTUCCI, DROIT DU MARCHE INTERIEUR DE L’UNION EUROPEENNE (Presses Universitaires de France, 2021):
    while charges having an equivalent effect to customs tariffs are strictly prohibited even if neutral, internal
    taxes are, in principle, compatible with the internal market.
106
    See Case C-213/96, supra note 92.


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 production.       There were three rates in total: one for nuclear electricity, one for
 hydroelectricity, and one for electricity from other sources. Electricity produced by
 generators with a capacity of less than two megawatts was exempt. As for imported
 electricity, Finland applied a single tax rate, regardless of its mode of production. While
 the Finnish legislator had set the tax rate with environmental considerations in mind, he
 failed to square the circle. However, the logical problem which arose was whether to
 tackle this under Article 30 or Article 110 T.F.E.U.
            First, the Court noted that imported electricity and domestic electricity were
 taxed under the same tax regime. The tax was levied by the same authority, regardless of
 the origin of the electricity, and according to procedures governed by the general
 legislation on the taxation of products. The fact that the tax due by the importer was
 payable at the time of importation of the electricity did not mean that the tax was
 imposed on the product due to its crossing a border. Indeed, the Court clarified that the
 tax was levied at the moment of the product’s commercialization because the production
 and importation of electricity amounted to the same thing, i.e., the arrival of the
 electricity on the national distribution network.107 The Court declared the Finnish tax
 contrary to Article 110 T.F.E.U. stating that the fact that the origin of the goods was
 decisive for the amount of tax to be levied did not automatically lead to the application
 of Article 30 T.F.E.U.
            The distinction between Articles 30 and 110 T.F.E.U. was again discussed in the
 Court’s case law dealing with tax regimes that earmarked sums collected for use by
 environmental protection funds.108 In Cases C-78-C-83/90,109 sums collected through the
 imposition of a parafiscal charge on certain petroleum products were allocated to an
 Energy Savings Agency, which was to use them to finance measures to encourage energy
 savings or to encourage the rational use of insufficiently exploited energy resources. The
 question was whether the parafiscal charge was prohibited by Article 30 or Article 110
 T.F.E.U. The Court answered that if the sums collected by a tax on petroleum products
 are allocated in such a way as to offset, fully, the burden borne by a national product
 when it is placed on the market, the tax will be contrary to Article 30 T.F.E.U. If, on the
 other hand, the sums collected from a tax on petroleum products are allocated in such a
 way as to offset only part of the burden on the national product, the tax will be evaluated
 under Article 110 T.F.E.U.110

107
    See id. ¶ 25; see also Case C-305/17, FENS v. Slovak Rep., ECLI:EU:C:2018:986, ¶ 43 (Dec. 6, 2018), where
    the Court clarified that a tax on the use of the electricity network was caught by Article 30 T.F.E.U. when it
    consisted in two distinct charges which were levied upon importers and producers of electricity respectively.
108
    See Maitrot De La Motte, supra note 49, at 101.
109
    Joined Cases C-78-83/90, supra note 84, at ¶ 22.
110
    See Case C-517/04, Koornstra, 2006 E.C.R I-5015.


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      2.1.1.2. NON‐TARIFF BARRIERS
 Articles 34 to 36 T.F.E.U. deal with quantitative restrictions and measures having an
 equivalent effect to quantitative restrictions [hereinafter M.E.E.Q.R.s]. These provisions
 apply to physical, administrative and technical barriers that prevent the importation of
 products for other Member States. The case law in this area is voluminous, so a full
 description of it is beyond the scope of this work.
           This being the case, a distinction must, at least, be made between internal
 taxation and M.E.E.Q.R.s. In Case C-47/88, the Court clarified that in the complete
 absence of local production that can be considered “similar to” or “in competition” with
 an imported product, Article 110 T.F.E.U. does not apply to a tax charge.111 It completed
 its logical discourse by saying that, despite this absence, there was nothing to prevent
 such a tax burden from being assessed in the light of Article 34 T.F.E.U. So this begs the
 question: what does an environmental charge do that is not in the nature of an internal
 tax but in the nature of a M.E.E.Q.R. look like?
           It seems that the Court has in mind particularly intense tax burdens with a rate so
 high, or a mode of collection so burdensome, that it would compromise the free movement
 of goods within the internal market.112 While Article 110 T.F.E.U. does not impose any
 limit or sanction on the rate applied to an imported product, Article 34 T.F.E.U. could be
 invoked in the case of a rate that is so high that any marketing of the imported product
 on the market of a Member State is no longer possible in practice. This idea was initially
 taken up by Advocate General Jacobs in his opinion in Case C-383/01.113 He concludes that
 it appears to be incompatible in principle with the objectives of the internal market for
 a Member State to tax certain imported goods to such an extent that the flow of intra-
 Community trade is significantly affected.114 In this case, the Court concluded that a tax
 of 200% on the price of new cars registered in Denmark did not constitute a M.E.E.Q.R.
 since it did not affect the free movement of cars between Denmark and the other Member
 States.115
           Several observations must be made at this stage. The words used by the Court
 are well nuanced. It states very clearly that the rate of the (environmental) tax must be
 such to jeopardise the free movement of the imported product: is a mere restriction or
 reduction in the flow of imports of a product sufficient for Article 34 T.F.E.U. to apply? On
 the face of it, what is needed is a rate that has such a deterrent effect that any access of the

111
    Case C-47/88, Commission v. Denmark, 1990 E.C.R. I-04509.
112
    Id. ¶¶ 12-13.
113
    Case C-383/01, De Danske Bilimportører v. Skatteministeriet, 2006 E.C.R. I-04945.
114
    Opinion of Advocate General Jacobs in Case C-383/01, E.C.R. I-6065, ¶ 75 (Feb. 27, 2003).
115
    Case C-383/01, supra note 113, at ¶ 42.


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 product to the market of the importing member state will be rendered illusory. In other
 words, the tax rate must be such as to prohibit consumers from purchasing the product.
 Simply rendering its price less attractive will not suffice. De Sadeleer also notes that most
 eco-taxes act as incentives rather than disincentives; they encourage consumers to change
 their behaviour by lowering the costs of certain products considered less harmful to the
 environment.116 It is, therefore, difficult to see how Article 34 T.F.E.U. can apply to an
 ecotax that, instead of hindering the marketing of an environmentally harmful product,
 facilitates the sale of a less harmful product. However, a recent judgement by the Grand
 Chamber may throw fresh light on the question of charges and M.E.E.Q.R.s. Indeed, that
 Court condemned Germany for imposing an infrastructural charge that mainly affected
 owners of vehicles registered in other Member States, even though the charge amounted
 to about 100 euros per year. Such a fee was found to hinder market access for products
 from other Member States and was considered a M.E.E.Q.R.117
            We can close the debate on non-tariff barriers to trade created by certain ecotaxes
 by citing a very peculiar case which came before the Court. In Case C-13/96, the Belgian
 Federal Government introduced an ecotax on disposable articles. For purposes of better
 monitoring, all containers or products subject to the ecotax had to bear a distinctive
 mark indicating the amount of environmental tax payable on the product upon its
 release on the market. The Court considered that the national measure laying down the
 obligation to affix such a distinctive mark constituted a technical regulation.118 (This is
 within what is now Directive (EU) 2015/1535 on the notification of technical regulations
 to the Commission).119 It therefore had to be notified to the Commission prior to its
 adoption and failure to do so would oblige the national court to disapply it.




116
    De Sadeleer, supra note 48, at 250.
117
    See Case C-591/17, Austria v. Germany, ECLI:EU:C:2019:504, ¶ 127 (June 20, 2019).
118
    Case C-13/96, Bic Benelux SA v. Belgian State, 1997 E.C.R I-01753, ¶ 26.
119
    Directive 2015/1535, of the European Parliament and of the Council of 9 September 2015 laying down a
    procedure for the provision of information in the field of technical regulations and of rules on Information
    Society services, art. 5, 2015 O.J. (L241) 1.


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      2.1.2. FREE MOVEMENT OF SERVICES

 Article 110 T.F.E.U. only protects goods, and its scope does not extend to services.120 But
 Article 56 T.F.E.U. enshrines the freedom to provide services as a fundamental freedom
 and this article has had (albeit rarely) some impact on the design of environmental tax
 measures.
           In one case, the Court ruled that a Belgian municipal tax on antennas violated
 Article 56 T.F.E.U. This tax was intended to reduce the number of antennas within a
 municipality and preserve the quality of the environment in the area. However, the
 Court ruled that the tax constituted an obstacle to the reception of television broadcasts
 because it hit service providers (broadcasters) established in other Member States more
 heavily,121 and was also disproportionate, since it went beyond what was necessary to
 control the proliferation of antennas. The Court suggested that the municipality could
 have instead adopted regulatory requirements concerning the size of the antennas, and
 the location and manner of their placement.122
           This case demonstrates two things. First, an environmental tax which impacts
 the activities of local and foreign service providers in equal degree would have been
 accepted by the Court as a legitimate measure restricting the freedom to provide
 services.123 Secondly, the use of tax tools to regulate the provision of certain services
 could be considered a risky choice because of their cumbersome nature. Of course, much
 will depend on the base and rate of the tax, but the Court seems to have indicated a
 preference for “milder” regulatory tools.
           In a similar manner, the Court has ruled that a tax exclusively levied on natural
 and legal persons, having their domicile outside the territory of Sardinia, for each stopover
 made by their aircraft and pleasure boats, was an obstacle to the free provision of services.
 Such a tax could not be logically justified on the basis of environmental protection, since
 aeroplanes and boats pollute independently of the tax residency of their operators.124 A
 more coherent approach would have been to do away, entirely, with the tax residency
 criteria and simply tax the presence of aircraft and pleasure boats once they entered the
 particular locality.




120
    Maitrot De La Motte, supra note 49, at 110-11.
121
    See Case C-17/00, De Coster, 2001 E.C.R. I-9445, ¶ 31.
122
    Id. ¶ 38.
123
    See Joined Cases C-544-545/03, Mobistar et Belgacom Mobile, 2005 E.C.R. I-07723, ¶ 29, 31.
124
    See Case C-169/08, Presidente del Consiglio dei Ministri v. Regione Sardegna, 2009 E.C.R. I-10821, ¶ 44.


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        2.2. THE COMPATIBILITY OF ENVIRONMENTAL TAXES WITH SECONDARY
        LEGISLATION

 In the first Paragraph of this Section (Paragraph 2.1.), we saw how the fundamental
 freedoms of the internal market can affect the design of environmental taxes. In this
 second Paragraph, we deal with the principal acts of secondary legislation knowing that
 the principles contained in Articles 30, 34 and 110 T.F.E.U. apply only in the absence of a
 total harmonisation of internal market rules.125 It is therefore essential for the readers
 to familiarise themselves with the regulations and directives that govern certain aspects
 of indirect taxation within the Union. They should do so bearing in mind that a Member
 State wishing to introduce an environmental tax must also comply with the provisions of
 these legislative acts. In the realm of indirect taxation, the Union has adopted, among
 others, acts harmonising V.A.T. (Subparagraph 2.2.1.)               and excise duties on energy
 products and electricity (Subparagraph 2.2.2.). It is also in the process of adopting a
 proposal for a regulation on a carbon border adjustment mechanism (Subparagraph
 2.2.3.).



        2.2.1 V.A.T. DIRECTIVE

 The V.A.T. Directive establishes the common system of value added tax within the
 European Union.126 V.A.T. is a general consumption tax which is imposed, in principle,
 on supplies of goods and services made by a taxable person.127 It is always assessed
 strictly on the price of the goods and services sold (excise taxes being calculated
 according to the quantity/volume of goods and services sold).128 V.A.T. rates cannot be
 set unilaterally by Member States.
            The Commission had initially considered introducing a system of V.A.T. rates
 that integrate environmental considerations.129                The economic consulting firm,
 Copenhagen Economics, had published a report evaluating the effects of such a measure
 to reduce greenhouse gases.130 According to the report, a reduced V.A.T. rate is nothing
 more than a subsidy.131         Another report published by the Directorate General for


125
    See Case C-305/17, supra note 81, ¶ 22.
126
    Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, 2006 O.J.
    (L347) 1 [consolidated version as of 1 July 2022].
127
    Lamensch et al., supra note 73, at 58.
128
    Id.
129
    Id. at 268.
130
    Id. at 270.
131
    Id. at 271.


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 Taxation and Customs Union (DG TAXUD)132 shows that a reduced V.A.T. rate on green
 energy consumption could have an incentivising effect on consumers. Yet, such a rate,
 even if capable of helping consumers convert their energy consumption patterns, would
 probably have no effect on total energy consumption.133 Another problem created by a
 reduced V.A.T. rate is that the subsidy granted via the reduced rate is often offset by an
 excise tax imposed on the same energy product. These contradictions tend to occur
 when policy instruments are adopted or amended in a fragmented manner without
 proper evaluation of the already existing tax framework.
            The current V.A.T. Directive allows Member States to apply one or two reduced
 rates exclusively to supplies of goods and services falling within the categories listed in
 Annex III.134 Annex III does not contain any criterion authorising the application of a
 reduced rate on the basis of the intrinsic characteristics of goods and services sold, or of
 their mode of production or distribution. Member States are simply not permitted to
 derogate from the provisions of the Directive for environmental reasons.135 In fact,
 according to an Italian study, no country in the Union applies a V.A.T. rate regime that is
 based on the sole objective of fighting climate change and biodiversity loss.136
            In its special provisions on the application of reduced rates, the V.A.T. Directive
 allows Member States, after consulting the V.A.T. Committee, to apply a reduced rate to
 supplies of natural gas, electricity or district heating.137 But the application of such a
 reduced rate must nevertheless respect the principle of tax neutrality. This principle
 prevents similar goods, which are in competition with each other, from being treated
 differently from the point of view of V.A.T.138 It does not matter whether they are
 designed, produced, or distributed differently. Goods or services are similar when they
 have similar properties and meet the same consumer needs, based on a criterion of
 comparability of use, and when any existing differences do not significantly influence
 the decision of the average consumer to use one or another of the said goods or
 services.139 If the application of different V.A.T. rates on two similar products or services
 is likely to affect consumer choice, this would indicate a violation of the principle of
 fiscal neutrality.140 This principle of V.A.T. neutrality bears a close resemblance to the

132
    Final Report of the Center for Social and Economic Research on a study on the economic effects of the current VAT rates
    structure, TAXUD/2012/DE/323 (Oct. 17, 2013).
133
    Id. at 31-33.
134
    Council Directive 2006/112/EC, supra note 126, at art. 98.
135
    Case C-161/14, Commission v. United Kingdom, ECLI:EU:C:2015:355, ¶¶ 30-31 (June 4, 2015).
136
    Di Pietro, supra note 18, at 83-85.
137
    Council Directive 2006/112/EC, supra note 126, at art. 102.
138
    See Case C-515/20, B AG v. Finanzamt A, ECLI:EU:C:2022:73, ¶ 42 (Feb. 3, 2022).
139
    Id. ¶ 44.
140
    Id. ¶ 45.


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 idea, advocated by some, that laws should be technologically neutral and avoid having
 any bearing on the choice which consumers make when deciding whether to purchase
 similar goods fulfilling the same functions. In a radical proposal, authors Traversa and
 Timmermans advocate instead for a V.A.T. system based on the life cycle assessment of
 the product or service, thus accounting for the impacts (across the value chain) of an
 activity or good on matters such as the environment, global warming, soil erosion, ocean
 acidification, ecotoxicity, etc. . .141 It is not hard to see that such a system, if adopted,
 will require a complete revision of our current understanding of technological
 neutrality.
             Finally, some recent developments on V.A.T. rates are of note. In 2021, the
 Commission declared that an agreement was reached in Council to revise the V.A.T.
 Directive by inserting new products and services deemed less harmful to the
 environment into Annex III.142 This insertion converges with the Commission’s goal of
 achieving a European green transition. On 5 April 2022, the Council adopted Directive
 (EU) 2022/542 which brought about the following major changes:143

         • As of 1 January 2030, Member States shall no longer apply reduced rates or
           exemptions with deductibility of V.A.T. paid at the preceding stage on fossil fuels
           and other goods with a similar impact on greenhouse gas emissions, such as peat
           and firewood. Reduced rates or exemptions with deductibility of V.A.T. paid at the
           preceding stage on chemical pesticides and chemical fertilisers shall equally cease
           to apply, but this time from 1 January 2032;

         • Furthermore, the following changes have been made to Annex III:

        1. The supply and installation of solar panels on and adjacent to private dwellings,
           housing and public and other buildings used for activities in the public interest may
           benefit from a reduced rate of V.A.T.;

        2. The supply of bicycles, including electric bicycles, and their repair, as well as the
           supply of services relating to the transport of passengers may benefit from a reduced
           rate of V.A.T.;

        3. The supply of electricity, district heating and district cooling, and biogas produced
           from renewable materials listed in Directive (EU) 2018/2001 of the European
141
    Edoardo Traversa & Benoît Timmermans, Value-Added Tax (VAT) and Sustainability in the European Union: A
    Radical Proposal Design Issues, Legal Aspects, and Policy Alternatives, 49 INTERTAX 871, 876-78 (2021).
142
    European Commission Press Release QANDA/21/6609, Questions and Answers: Agreement on new rules
    governing VAT rates (Dec. 7, 2021).
143
    Council Directive 2022/542 of April 5, 2022, amending Directives 2006/112/EC and 2020/285 as regards rates
    of value added tax, 2022 O.J. (L 107).


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         Parliament and the Council on renewable energy sources may benefit from a
         reduced rate of V.A.T.;

      4. Natural gas and wood used as firewood may benefit from a reduced rate of V.A.T. up
         until 1 January 2030;

      5. The supply and installation of highly efficient low emissions heating systems that
         respect European regulations may benefit from a reduced rate of V.A.T.



      2.2.2. ENERGY TAX DIRECTIVE

 In 1992, the Commission presented a proposal to the Council for a directive obliging
 Member States to introduce a tax on carbon dioxide emissions and energy
 consumption.144          The proposal was not adopted due to a lack of consensus among
 Member States in the Council.145 In a 2001 paper,146 the Commission declared that a lack
 of harmonisation in this sector could lead to confusion, since it was still possible for
 Member States to create several taxes with different bases and rates. Such a situation
 could undermine the proper functioning of the internal market, creating distortions in
 competition and in the prices of energy products.
            Directive 2003/96/EC restructuring the Community framework for the taxation of
 energy products and electricity was adopted on 27 October 2003.147 In its second premise,
 the Directive states that the absence of Community provisions imposing a minimum level
 of taxation on electricity and energy products other than mineral oils could be detrimental
 to the proper functioning of the internal market. The aim of the Directive is therefore to
 set a minimum level of taxation at Community level for energy products such as electricity,
 natural gas, and coal.148 Having ratified the Kyoto Protocol, the Union wanted to use the
 taxation of energy products as an additional tool to achieve its objectives.149 However, the
 Directive does not bring about a total harmonisation of the field, leaving Member States
 free to define and implement policies adapted to their national contexts.150
            Article 1 of the Directive provides that Member States shall tax energy products
 and electricity in accordance with the Directive. The following are considered to be energy
 products among others: vegetable oils used as fuel or motor fuel, hydrocarbons, methanol
144
    Proposal for Council Directive introducing a tax on carbon dioxide and energy, COM (92) 226 final (June 2, 1992).
145
    Lamensch et al., supra note 73, at 267.
146
    Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee,
    Tax policy in the European Union - Priorities for the years ahead, at 8-9, COM (2001) 260 final (July 14, 2021).
147
    Council Directive 2003/96, supra note 55.
148
    Id. at preamble 4.
149
    Id. at preamble 7.
150
    Id. at preamble 9.


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 which is not of synthetic origin and where it is intended for use as fuel, and electricity
 falling within C.N. code 2716.
                When intended for use, offered for sale, or used as motor fuel or heating fuel,
 energy products other than those for which a level of taxation is specified in the
 Directive shall be taxed according to their use, at the rate applied to the equivalent fuel
 or heating fuel. The Directive does not apply to the taxation of certain activities, such as
 mineralogical processes or the dual use of energy products.151
                With respect to the levels of taxation of energy products, Article 4(1) of the
 Directive provides that Member States may not impose rates below the minimum levels
 envisaged by the Directive. “Level of taxation” means the total amount of indirect taxes
 (excluding V.A.T.) levied, calculated directly or indirectly on the quantity of energy
 products and electricity at the time of release for consumption. Member States are free,
 in principle, to adopt differentiated rates of taxation, but only in the following cases and
 provided they respect the minimum levels of taxation laid down in the Directive:

          • where the differentiated rates are directly related to the quality of the product

          • where the differential rates are dependent on quantitative levels of consumption of
             electricity and energy products for heating,

          • for the following uses: local public passenger transport (including cabs), waste
             collection, the armed forces and public administration, disabled persons,
             ambulances, between business and non-business consumption of fuels and
             electricity.

 The different rates are mainly found in Article 7 of the Directive and vary according to
 the nature of the energy product. A distinction is drawn between commercial and non-
 commercial use of electricity in Article 10(1), which refers directly to Table C of Annex
 I. Above the minimum levels applied to electricity, Member States are free to determine
 the applicable tax base, provided they respect Directive (EU) 2020/262 (which replaced
 Directive 92/12/EEC on excise duties).




151
      Id. at art. 2(4).


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 Article 14 of the Directive sets out the mandatory exemptions. The following are exempt
 from tax across the Union:

      • energy products and electricity used to generate electricity and electricity used to
         maintain the ability to generate electricity;152

      • energy products supplied for use as fuel for air navigation other than private
         pleasure craft;

      • energy products supplied for use as fuel for navigation in Community waters
         (including fishing), other than on board private pleasure craft, and electricity
         generated on board vessels.

 In the case of air and sea transport, Member States may limit the scope of the
 exemptions to international and intra-community transport, and may even conclude
 bilateral agreements between themselves suspending these exemptions. In both cases,
 Member States may apply a level of taxation lower than the minimum level set by the
 Directive. It is important to note that any conditions adopted by Member States to
 ensure the implementation of mandatory exemptions must be proportionate.153
           Articles 15 and 16 of the Directive contain a list of optional exemptions that
 Member States may adopt in their environmental policy. For example, Member States
 may apply total or partial exemptions or reductions in the level of taxation:

      • to taxable products used in pilot projects for the technological development of less
         polluting products, or in the case of fuels from renewable resources;

      • to electricity: of solar, wind, wave, tidal, or geothermal origin; of hydraulic origin
         produced in hydroelectric installations; produced from biomass or products derived
         from biomass; produced from methane emitted abandoned coal mines; or produced
         from fuel cells;

      • energy products and electricity used for the transportation of people and goods by
         rail, metro, tram and trolley bus;

           In Article 16, Member States may apply an exemption or a reduced rate to
 energy products that consist of or contain certain other specific products (such as
152
    Id. at art. 14(1)(a): to protect the environment, Member States may tax these products without having to
    respect the minimum rates of taxation.
153
    See Case C-355/14, Polihim-SS v. Nachalnik, ECLI:EU:C:2016:403, ¶ 59 (Jun. 2, 2016).


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                                 PROTECT THE ENVIRONMENT


 biofuel or biomass). Through these exemptions and reduced rates, Directive 2003/96/EC
 seeks to promote the use of energy products that are less polluting for the environment.
              As to the chargeable event, this is governed by Article 6(1) of Framework Directive
 (EU) 2020/262, which provides that energy products shall be subject to excise duty either
 at the time of their production, including, where appropriate, extraction, in the territory
 of the Union, or at the time of their importation into the territory of the Union. In parallel,
 Article 21 of Directive 2003/96/EC provides that the energy tax for products for which no
 minimum rate is set in Annex I will be due at the time they are intended to be used, offered
 for sale, or used as motor fuel or heating fuel.
              According to Article 6(2) of Framework Directive (EU) 2020/262, excise duty
 becomes chargeable at the time of release for consumption and in the Member State
 where the release for consumption takes place. For electricity and natural gas, there are
 specific chargeability rules contained in Article 21(5) of Directive 2003/96/EC, i.e., excise
 duty on these products becomes chargeable at the time of their supply by the distributor
 or redistributor. Where the release for consumption takes place in a Member State
 where the distributor or redistributor is not established, the tax applied in the Member
 State where the supply is made shall be chargeable to a consignee which must be
 registered in the Member State of supply. The tax is in any event levied and collected in
 accordance with the procedures laid down by each Member State.
              In the final provisions of Directive 2003/96/EC, Article 25 provides that Member
 States shall inform the Commission of the levels of taxation they apply to energy products
 and electricity on 1. January of each year, as well as following any changes to their national
 legislation. In addition, Member States shall also inform the Commission of the measures
 they take with regard to: (i) differentiated rates; (ii) limitations on the scope of exemptions
 applicable to air and sea transport; (iii) total or partial exemptions under Article 15; and
 (iv) reduced rates in favour of energy-intensive firms and firms pursuing environmental
 protection objectives. Naturally, any tax measure constituting state aid must be notified
 to the Commission under Article 108 T.F.E.U.
              The Directive’s overall appraisal has not been satisfactory, as the Commission
 notes that it contributes only to a very limited extent to the environmental objectives of
 the Union.154 In its current state, the Directive raises issues of incoherency with current
 climate and energy efficiency objectives since: (i) it taxes less carbon-intensive fuels in
 the same way as their fossil equivalent; (ii) it de facto favours fossil fuel use, allowing
 Member States to grant exemptions and reductions to these fuels, especially when used


154
      Proposal for a revised Energy Taxation Directive, supra note 43, at 8.


                                                          114
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 in energy intensive industries; and (iii) it is no longer creating a viable floor for taxation
 and the exemptions and reductions it permits have fragmented the internal market.155
            It simply does not go far enough as it sets minimum tax rates too low, does not
 distinguish between renewable and carbon-intensive electricity sources, and does not
 consider the environmental performance of biofuels which are being disadvantaged due
 to taxation based on rates expressed per litre.156 Moreover, the total exemption of
 aviation fuel (kerosene) has attracted the ire of environmental campaigners across
 Europe and it is doubtful whether such an exemption will survive the next round of
 environmental reforms.157 The directive must therefore be revised to accommodate the
 latest technological advances and the Union’s revised objectives since its adoption.



      2.2.3. C.B.A.M. PROPOSAL

 The current Commission proposal for a C.B.A.M. regulation merits brief mention in this
 paper.158 In its “Fit for 55” package, the Commission describes C.B.A.M. as a climate
 action instrument that protects the integrity of the E.U. and global climate policy by
 reducing global greenhouse gas emissions.159 It will be gradually introduced for a few
 selected products, ensuring that the same carbon price is paid by domestic and imported
 products, since non-discrimination is a requisite of W.T.O. rules.160 According to the
 current compromise text of the C.B.A.M. proposal, the mechanism will apply to cement,
 electricity, fertilizers, iron and steel, aluminium, and hydrogen.161                                 The C.B.A.M.
 Regulation is only effective if it is backed up by amendments to, among others, the
 Energy Taxation Directive, the Renewable Energy Directive and the European Union
 Emission Trading System [hereinafter E.U.-E.T.S.] Directive which all aim at steeper
 emission reductions to achieve the 2050 goal set by the Commission.162
            This Regulation is crucial to maintain the coherence of the Union’s
 environmental policy on the external plane, through the prevention of carbon leakage
 with a view of achieving the objectives of the Paris Agreement. The idea of a C.B.A.M. is

155
    Id. at 2-3.
156
    Id. at 8.
157
    See Thierry Vigoureux, Aviation : l’Europe peut-elle imposer une taxe sur le kérosène ? [Aviation: can Europe impose a
    tax on kerosene?] (Fr.), LE POINT (May 5, 2019, 8:58 AM), https://www.lepoint.fr/economie/aviation-l-europe-
    peut-elle-imposer-une-taxe-sur-le-kerosene-15-05-2019-2312633_28.php#1.
158
    CBAM Proposal, supra note 60.
159
    Commission Communication Fit for 55, supra note 42, at 12.
160
    Id.
161
    Regulation of the European Parliament and of the Council establishing a carbon border adjustment
    mechanism (CBAM) – Compromise text, Annex I, 2022 2021/0214(COD).
162
    Commission Communication Fit for 55, supra note 42, at 6, 9.


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 to internalise the greenhouse gas emissions that are linked to the consumption of
 products imported from third countries.                    The mechanism is based on a system of
 declarations made by “declarants” that import any of the goods listed in Annex I into the
 Union, and all declarants must seek authorization before importing those goods.163 Since
 the instrument used is a regulation, the C.B.A.M. will become immediately applicable in
 all Member States if and once adopted (even if a transitional period is envisaged that will
 run from 1 October 2023 and 31 December 2025 during which only a reporting obligation
 will apply).164
            In its proposal, the Commission has decided in favour of a C.B.A.M. that is
 intrinsically linked to the E.U.-E.T.S. and not to a general carbon tax.165 Indeed, the
 mechanism covers the same emissions as those regulated by the E.T.S.: carbon dioxide,
 nitrous oxide and perfluorocarbons.166 One of the biggest issues of the proposal will be
 the determination of the volume of emissions that will be taken into account to define
 the applicable carbon price: will the mechanism take into account the emissions
 produced only during the production of the product, or will it cover all the emissions
 produced during the life cycle of the product?167                     Unfortunately, it seems that the
 Commission had initially opted in favour of the first solution168 and the effect of this
 choice on international trade remains to be seen. However, the latest compromise text
 indicates that C.B.A.M. will also apply to indirect emissions, except in the case of
 products that benefit from financial measures to compensate for indirect emissions
 costs.169 According to Pirlot, the mechanism as envisaged will reduce carbon leakage,
 but not eliminate it.170
            Since the C.B.A.M. Regulation’s legal basis is Article 192(1) T.F.E.U. it is not
 perceived by the Commission as a fiscal measure requiring unanimity for its adoption.
 However, there is a tendency in public debate to see C.B.A.M. as a tax on imports from
 third countries.171 This does not change the fact that the text of the Regulation is
 intimately tied with the E.U.-E.T.S. regime. For instance, the price of C.B.A.M. certificates
 shall be the average of the closing prices of the E.U.-E.T.S. allowances on the common


163
    CBAM Proposal, supra note 60, at art. 4-6.
164
    Id. at art. 36.
165
    See Alice Pirlot, Carbon Border Adjustment Measures: A Straightforward Multi-Purpose Climate Change Instrument?,
    34 J. ENV’T L. 25, 38 (2022).
166
    CBAM Proposal, supra note 60, at Annex I.
167
    Pirlot, supra note 165, at 39.
168
    CBAM Proposal, supra note 60, at Preamble 17.
169
    CBAM – Compromise text, supra note 161, at Annex IA.
170
    Pirlot, supra note 165, at 47.
171
    See G. Budo, What’s in a name? The New European Commission Proposal for a Carbon Border Adjustment
    Mechanism 51-55 (2022) (M.A. thesis, College of Europe).


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 auction platform for each week.172 Also, C.B.A.M. certificates that are to be surrendered
 in such a manner as to reflect the extent to which E.U.-E.T.S. allowances are allocated
 free of charge to installations producing the goods listed in Annex I within the Union.173



      2.3. ENVIRONMENTAL TAX INCENTIVES UNDER THE UNION’S STATE AID
      REGIME

 As seen throughout Section 2 of the paper, a tension exists between the Member States’
 will to define their own tax systems and their obligation to respect the Treaty Articles.174
 To a certain extent, one of the aims of Union law is to strike down fiscal obstacles that
 can undermine the functioning of the internal market. In this context, one of the
 Articles which takes centre stage is Article 107 T.F.E.U., which prohibits all financial aid
 to undertakings which distorts competition on the market.175 In this sense, Member
 States have limited their tax sovereignty by allowing the Commission to control the
 financial aid they grant to undertakings on their territory.
           For the sake of brevity, this Paragraph of the paper will not delve into the special
 rules relating to “support schemes” which Member States may apply to promote the use
 of renewable energy on their territory. However, it is good to note that Directive (EU)
 2018/2001 on the promotion of renewable energy sources allows Member States to apply
 “tax exemptions or reductions or tax refunds” to reach the Union’s emission targets.176
 Such support schemes shall “shall provide incentives for the integration of electricity
 from renewable sources in the electricity market in a market-based and
 market-responsive way, while avoiding unnecessary distortions of electricity markets as
 well as taking into account possible system integration costs and grid stability”.177
           In a similar manner, and as we have seen in the previous Paragraph, the Energy
 Taxation Directive both allows and obliges Member States to grant a wide variety of
 reductions and exemptions on energy products and electricity. However, tax advantages
 granted in accordance with the Energy Taxation Directive (as it currently stands) do not
 necessarily need to pursue the Union’s emission targets.



172
    CBAM – Compromise text, supra note 161, at art. 21(1).
173
    Id. at art. 31.
174
    See J. MUNIER, LA FISCALITE ENVIRONNEMENTALE ET LES AIDES D’ETAT 7 (Editions universitaires europeennes ed.,
    2018).
175
    See I. PAPADAMAKI, LES AIDES D’ETAT DE NATURE FISCAL DE L’UNION EUROPEENNE 29 (Emile Bruylant ed., 2018).
176
    Directive 2018/2001, of the European Parliament and of the Council of 11 December 2018 on the Promotion
    of the use of Energy from Renewable Sources (recast), art 2(5), 2001 O.J. (L 328).
177
    Id. at art 4(2).


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 For the purposes of this Paragraph, however, it is worth noting that while Union
 secondary legislation (such as the Renewable Energy Directive and the Energy Taxation
 Directive) may specifically allow Member States to grant tax benefits to promote the use
 of cleaner energy (or to achieve different goals altogether), any such measures must
 conform with Article 107(1) T.F.E.U. This is a logical conclusion drawn from the
 constitutional principle that secondary legislation, and any measures adopted by
 Member States in virtue of it, must be compatible with provisions of primary legislation.
 The articulation between secondary legislation and primary legislation is evidenced, for
 instance, by the fact that aid in the form of reductions in environmental taxes granted
 under the Energy Taxation Directive must in principle fulfil the requirements of Article
 107(3)(c) T.F.E.U., but may qualify for an automatic exemption under the General Block
 Exemption Regulation, provided that the provisions of Article 44 of that Regulation are
 fulfilled.178
            In sum, should Member States grant tax benefits to fight climate change and
 environmental degradation by inducing a shift towards a circular economy,179 then they
 must notify their decision to the Commission. The Commission will then consider
 whether the tax advantage granted constitutes aid within the meaning of Article 107(1)
 T.F.E.U. (Subparagraph 2.2.1.).         If so, it must verify whether the tax advantage is
 compatible with the internal market, in accordance with paragraph 3(c) of the same
 Article (Subparagraph 2.2.2.).          In this final Paragraph, we will therefore see how
 environmental tax incentives are treated under the Treaty provisions on state aid.



        2.3.1.     MATERIAL SELECTIVITY OF TAX ADVANTAGES PURSUING
        ENVIRONMENTAL OBJECTIVES

 Article 107(1) T.F.E.U. prohibits “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”. As we shall see, aid
 which takes the form of a selective environmental tax incentive will be caught by the
 general wording of Article 107(1) T.F.E.U. According to established case law, four
 conditions must be met for a tax benefit to be prohibited by this Article180 :

        1. there must be an intervention by the State or through state resources;

        2. the intervention must be liable to affect trade between Member States;
178
    Council Directive 2003/96, supra note 55, at 6(5)(e).
179
    C.E.E.A.G., supra note 15, ¶¶ 1-4.
180
    Case C-431/07, Bouygues et Bouygues Télécom v Commission, 2009 E.C.R. I-2665, ¶ 102.


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      3. it must confer an advantage on the recipient;

      4. it must distort or threaten to distort competition.

 To guide our discussion, we would like to give a brief description of these conditions.
 With respect to the first condition, it should be noted that the Court has always adopted
 a broad notion of the criterion of imputability of aid to the State.181                    Thus, if an
 advantage causes a burden on the public finances, which may take the form of less
 revenue being generated, this advantage will be qualified as aid.182 All tax reductions
 and exemptions and tax deferrals are therefore likely to be considered as aid.183 Since
 tax advantages constitute a renunciation by a Member State of its own tax resources, this
 first condition is almost always met when a Member State offers tax advantages to firms
 on account of their less polluting activities.
           The second condition is presumed to be met when the selectivity criterion of the
 fourth condition is also met.184 The third condition, interpreted very broadly by the Court,
 is met when the recipient’s economic position has improved as a consequence of the tax
 break, or when the recipient’s economic position would have deteriorated had it not been
 for the tax advantage.185
           Our discussion of Article 107(1) T.F.E.U. will therefore focus solely on the fourth
 condition, called the selectivity test, because much of the debate centering on the legality
 of environmental tax incentives depend on whether they can be classified as selective or
 not. According to the Court’s case law, aid measures that are general in nature cannot be
 considered selective. For instance, under the latest Temporary Crisis Framework for
 State Aid following the Russian invasion of Ukraine, measures targeting commercial
 energy consumers do not constitute aid, provided they are of a general nature and take
 the form of general reductions in taxes or a reduced rate for the supply of natural gas.186
 Rather, a measure is selective when it favours “certain undertakings or the production of
 certain goods over others which are in a comparable factual situation with regard to the
 objective pursued by the given tax scheme”, except where “such differentiation results
 from the nature or general scheme of the system of charges.”187                        In the Court’s
 jurisprudence, a tax measure is qualified as selective when it departs from the general
181
    Papadamaki, supra note 175, at 19-21.
182
    Id. at 21.
183
    Id.
184
    Munier, supra note 174, at 9.
185
    Id.
186
    Communication from the Commission, Temporary Crisis Framework for State Aid measures to support the
    economy following the aggression against Ukraine by Russia, at ¶ 28, COM (2022) 426/01 final (Mar. 24,
    2022).
187
    Case C-T-399/11, Banco Santander v Commission, ECLI:EU:T:2014:938, 33, 36 (Nov. 7, 2014).


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 cadre de référence or reference tax system existing within a particular geographical
 setting. In other words, a tax break which has the effect of excluding a particular activity
 from general provisions which would, in the absence of that exclusion, have charged that
 activity to tax, would be considered selective.188 In this sense, aid in the fiscal sector
 possesses the characteristic of breaking with the principle recognized by all the tax
 systems of the Member States, namely, that of equality before taxes. As a consequence of
 this breach of equality, economic operators come to benefit from differentiated
 treatment in the eyes of the law.189
            According to Advocate General Tizzano, where a tax system provides an
 exemption in favour of certain taxpayers, there is a breach of formal equality.190 In such
 a scenario, it is the legislator itself who binds the discretionary power of the tax
 authorities to grant that relief.191 But the mere fact that a tax measure provides for
 differential treatment is not sufficient for that measure to be classified as selective. The
 departure from formal equality must also be accompanied by a departure from material
 equality among operators.192 This latter criterion requires us to find a comparator to see
 whether economic operators in a factually and legally similar situation are treated
 differently. If the situation between two operators is similar, Article 107(1) T.F.E.U.
 dictates that they must be treated identically.193
            During the Commission’s analysis of the selectivity of a tax measure, the
 definition of the fiscal frame of reference takes on a critical role. More particularly, in
 the case of environmental taxation, the question which arises is whether a tax scheme,
 specially conceived by the legislator to achieve a given environmental objective, should
 be considered as an autonomous reference tax system or simply a derogation from the
 pre-existing and generally applicable tax provisions of a Member State. On this point,
 the Court has stated that the environmental purpose of fiscal measures is not sufficient
 to prevent qualification of those measures as aid.194 However, it has admitted that a



188
    Papadamaki, supra note 175, at 105.
189
    Id.
190
    Opinion of Advocate General Tizzano in Opinion of Advocate General Tizzano in Case C-393/04, Air Liquide
    Industries Belgium, E.C.R. I-5293, ¶ 70-71 (June 15, 2006).
191
    Papadamaki, supra note 175, at 113-14.
192
    Id. at 119.
193
    Id. at 124.
194
    Case C-T-210/02, British Aggregates Association v. Commission, ECLI:EU:T:2012:110, ¶ 52 (July 19, 2012). In
    joint Cases C-106/09 P and C-107/09 P, Commission and Kingdom of Spain v. Government of Gibraltar and
    United Kingdom of Great Britain and Northern Ireland, 2011 E.C.R. I-11113, ¶ 87; the Court recalled that
    Consolidated Version of the Treaty on the Functioning of the European Union art. 107(1) , May 9, 2008, 2008
    O.J. (C 115) 47 does not distinguish between measures of State intervention by reference to their causes or
    their aims, but defines them solely in relation to their effects.


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 specific ecotax could act as a frame of reference when assessing whether certain
 exemptions from such a tax are selective.195
           When assessing selectivity, a Member State may justify a measure granting
 differential tax treatment to undertakings if that measure falls within “the nature or
 general scheme” of the tax system it has created.196 Differential treatment between
 operators may be particularly justified in light of the objectives and mechanisms serving
 as the founding principles of the system in question. For schemes involving ecotaxes, the
 environmental objectives of the system will be taken into account to determine whether
 derogations from the reference tax system pursue the stated objective in a coherent
 manner.197 If they are found to do so, then the criterion of selectivity will not be met.
 This is one of the exceptional instances in the Court’s analysis of the material selectivity
 of environmental taxes where the coherence of an incentive measure is assessed in light
 of the objective the Member State wishes to achieve by adopting the tax system being
 examined.198
           For example, a British law exempting from tax aggregates extracted from certain
 materials considered less polluting could have been justified by the nature or general
 scheme of an aggregates tax had the exemption been extended to cover other aggregates
 having the same environmental impact as the exempted ones. The incoherent policy of
 the British Government in exempting certain aggregates and not others undermined the
 objective of a general ecotax on aggregates.199 This case-law demonstrates that the Court
 is willing to consider as justified any exemptions or tax deductions inspired by the
 environmental impact of products or services, provided they extend to similar products
 and services whose mode of production has a similar impact on the environment. In
 similar fashion, the Court has held that granting tax rebates on natural gas and electric
 power taxes exclusively to businesses that produce tangible goods and not to business
 which provide services is an aid (selective advantage); the ecological considerations
195
    Case C-T-210/02, British Aggregates Association v. Commission, ECLI:EU:T:2012:110, ¶ 51 (July 19, 2012).
196
    Case C-75/97, Belgium v Commission (Maribel bis/ter), 1999 E.C.R. 3671, at ¶ 33-34.
197
    See Case C-T-210/02, British Aggregates Association v. Commission, ECLI:EU:T:2012:110, ¶ 84 (July 19, 2012),
    citing case C-88/03, Portugal v Commission, 2006 E.C.R. I-7115.
198
    See Case C-233/16, Asociación Nacional de Grandes Empresas de Distribución (ANGED) v. Generalitat de
    Catalunya, ECLI:EU:C:2018:280, (Apr. 26, 2018) – in this case a regional (proportional) tax on large commercial
    establishments (exceeding 2.500m2) was meant to compensate for the environmental harm caused by both
    their construction and their activities. The tax system exempted smaller commercial establishments but
    also establishments due to their category (notably, car showrooms, flower shops and shops selling furniture,
    sanitary ware, etc...). At Paragraphs 53-55, the Court held that although there was a difference in treatment
    between large and small establishments the treatment was justified in light of the tax’s goal of protecting the
    environment. As for the derogation by category of establishment; the Court was more cautious and held, at
    Paragraph 67, that the exemption will not be selective as long as the national court finds that the activities
    carried out in the exempted establishments did not cause the same degree of environmental damage and
    urban deterioration as the taxed ones.
199
    Case C-T-210/02, British Aggregates Association v. Commission, ECLI:EU:T:2012:110, ¶ 89 (July 19, 2012).


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 underlying the national legislation could not justify treating the consumption of natural
 gas or electricity by undertakings supplying services differently than the consumption
 of such energy by undertakings manufacturing goods, since energy consumption by each
 of those sectors is equally damaging to the environment.200 However, exempting public
 transport, rail freight and electricity generated from clean energy sources from a general
 tax on the non-domestic use of energy products can be justified on the basis of the
 objective of fighting climate change which such a tax system pursues.201



        2.3.2. THE COMPATIBILITY OF ENVIRONMENTAL TAX ADVANTAGES WITH
        THE INTERNAL MARKET

 Before moving on to discuss the detailed rules governing the compatibility of
 environmental tax advantages under Article 107(3) T.F.E.U. and the latest Commission
 guidelines for assessing compatibility under that provision, we must point out that these
 do not constitute the sole basis for assessing compatibility of such measures with the
 internal market. Very importantly, the Guidelines we are about to discuss must be read
 jointly with the revised General Block Exemption Regulation [hereinafter G.B.E.R.] since,
 according to the recent State aid scoreboards, some ninety-five percent of aid directed to
 the energy and environmental objectives of the E.U. falls within the scope of G.B.E.R.202
 G.B.E.R. is doubly important for our purposes since fiscal aid in the form of reductions
 and exemptions form part of the principal measures caught by G.B.E.R. Generally, fiscal
 aid shall be compatible with the internal market under G.B.E.R. (and exempted from the
 notification requirement under Article 108(3) T.F.E.U.) if it falls beneath the notification
 thresholds set out for each category of aid203 and the aid fulfils certain generic
 transparency requirements204 together with the more specific requirements applicable
 to each category of aid and set out in Chapter III. By contrast, with the method used for
 assessing environmental tax advantages under the relevant Commission Guidelines, aid
 which falls under G.B.E.R. is presumed to have an incentive effect.205



200
    Case C-143/99, Adria-Wien Pipeline v. Finanzlandesdirektion, 2001 E.C.R. I-8365, at ¶ 52.
201
    Commission Decision 2002/676, ¶ 37, 2002, O.J. (L 229) 15 (EC); mais au paragraph 47 l’exonération donnée
    aux produits énergétiques à double usage constituait une aide puisqu’elle entraînait des conséquences
    dommageables pour l’environnement [but in paragraph 47 the exemption given to dual-use energy products
    constituted an aid since it had harmful consequences for the environment].
202
    See Commission Regulation 651/2014, 2014 O.J. (L 187) (EU) ; L. HANCHER (ED), RESEARCH HANDBOOK ON EUROPEAN
    STATE AID LAW 83 (Edward Elgar ed., 2021) (UK).
203
    Commission Regulation 651/2014, supra note 202, at art. 4.
204
    Id. at art 5.
205
    Id. at art 6.


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 Once identified, fiscal aid of an environmental nature which does not benefit from the
 general block exemption described above could nevertheless be considered to comply
 with the internal market under Article 107(3)(c) T.F.E.U.,206 if it:                            facilitates the
 development of an economic activity (the positive condition), and does not adversely
 affect trading conditions to an extent contrary to the common interest (the negative
 condition).207 According to the latest Commission guidelines on State aid for climate,
 environmental protection and energy, the following criteria must be met for
 environmental aid more generally to be declared compatible with the internal market:208


      1. the measure must facilitate an economic activity by identifying the positive effects
         for society at large and its relevance for specific policies of the Union;

      2. the measure must have an incentive effect;

      3. the measure must not breach any other provisions of Union law;

      4. state intervention must be necessary;

      5. the measure must be appropriate;

      6. the measure must be proportionate (limited to the minimum necessary to attain its
         objective) including cumulation;

      7. the measure must be transparent;

      8. the undue negative effects of the aid on competition and trade have to be avoided;

      9. the positive and negative effects of the aid have to be weighed up.


 An explanation of each of these criteria is beyond the scope of this paper. However, the
 criteria of appropriateness of the aid should be noted because it means that aid can only
 be granted in the absence of another instrument less distorting of competition which is
 likely to achieve the desired results.209
 According to its new Guidelines, the Commission accepts that aid may take the form of
 a reduction in environmental taxes.210 In this scenario, the Member State introduces a
 general environmental tax to internalise the external costs of environmentally harmful
 behaviour, but offers reductions to companies whose economic activities are put at risk
206
    See Case C-143/99, Adria-Wien Pipeline v. Finanzlandesdirektion, 2001 E.C.R. I-8365, ¶ 31.
207
    C.E.E.A.G., supra note 15, ¶ 8.
208
    Id. ¶¶ 20-22.
209
    Id. ¶ 39.
210
    Id. § 4.7.1.


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 because of this tax. The Commission considers that aid in the form of environmental tax
 reductions will be compatible with the internal market if the Member State demonstrates
 that:

        1. the reductions are targeted at the undertakings most affected by the environmental
          tax or levy that would not be able to pursue their economic activities in a sustainable
          manner without the reduction; and

        2. the level of environmental protection actually achieved by implementing the
          reductions is higher than the one that would be achieved without the
          implementation of these reductions.211

 If the Member State grants tax aid in sectors where taxes are harmonised (e.g., under
 Directive 2003/96/EC), the Commission may adopt a simplified approach to assess the
 necessity and proportionality of the aid.212 However, to benefit from such an approach
 the Member State must ensure that the beneficiaries of the aid pay, at least, the
 minimum level of taxation set by the applicable directive and that the beneficiaries are
 selected according to objective and transparent criteria.
            Outside the realm of tax harmonisation, tax relief must, among other things,
 respect the two criteria of necessity and proportionality.213 A tax break is necessary
 when its beneficiaries are selected on the basis of objective and transparent criteria
 when the environmental tax, absent any reduction, would lead to a significant increase
 in production costs. Such production costs are calculated as a proportion of the gross
 value added for each sector or category of beneficiaries, and when the significant
 increase in production costs cannot be passed on to customers without causing a
 significant reduction in sales volumes.         In addition, the tax relief must meet the
 requirements set out in Section 3.2.1.1 of the Guidelines and deal with the necessity of
 the aid. According to this Section, the proposed aid measure must be “targeted towards a
 situation where it can bring about a material development that the market alone cannot
 deliver, for example by remedying market failures in relation to ‘the projects or activities
 for which the aid is awarded’”.




211
    Id. ¶ 295.
212
    Id. ¶¶ 297-300.
213
    Id. ¶¶ 301-309.


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 Tax relief is considered proportionate if, at least, one of the following conditions is met:214




      1. each aid beneficiary pays at least twenty percent of the nominal amount of the
           environmental tax or parafiscal levy that would otherwise be applicable to that
           beneficiary in the absence of the reduction;



      2. the tax or levy reduction does not exceed 100% of the national environmental tax
           or parafiscal levy, and is conditional on the conclusion of agreements between the
           Member State and the beneficiaries or associations of beneficiaries.            And
           therewith, the beneficiaries or associations of beneficiaries commit themselves to
           achieve environmental protection objectives which have the same effect as if
           beneficiaries or associations of beneficiaries paid, at least, twenty percent of the
           national tax or levy. Such agreements or commitments may relate, among other
           things, to a reduction in energy consumption, a reduction in emissions and other
           pollutants, or any other environmental protection measure.




 The second type of fiscal aid envisaged by the Commission Guidelines takes the form of
 more generic tax reductions.215 In this scenario, the Member State provides an incentive
 for companies to engage in projects or activities (listed in Sections 4.2 to 4.6 of the
 Guidelines) that increase the level of environmental protection - by according general
 reductions from taxes which do not necessarily have an environmental objective or
 character. For these tax reductions, the Commission’s assessment differs as the Member
 State must demonstrate the incentive effect of the aid measure; its proportionality; as
 well as the avoidance of undue effect on competition and trade. To prevent unintended
 negative effects on competition and trade, the Member State must grant the reduction
 under the same conditions to all eligible undertakings active in the same economic
 sector, and who are in the same or similar factual situation with regard to the aims and
 objectives of the aid measure. Finally, the Member State must ensure that aid remains
 necessary for the duration of schemes that run for more than three years and evaluate
 them, at least, every three years.216


214
    Id. ¶ 308.
215
    Id. § 4.7.2.
216
    Id. § 4.7.2.5.


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          CONCLUSIONS

 Member States retain considerable power in the use of fiscal instruments to protect the
 environment.              While a common understanding surrounding the functions of
 environmental taxes in Europe exists, we note that the treaties do not offer a very
 generous legal basis for the adoption of a European-wide environmental tax of general
 scope. This explains why the proposed C.B.A.M. Regulation’s legal basis is Article 192(2)
 T.F.E.U. Nevertheless, Member States’ power to tax will only be compatible with the
 fundamental freedoms set out in the treaties if it is used to achieve a legitimate
 environmental goal in a coherent manner. In this respect, the following conclusions can
 be drawn from this paper.
              First, in almost every case we have studied, the Court has made it clear that
 Member States may not design their fiscal system so as to favour domestic products and
 services, and it matters little that in doing so they set out to achieve laudable
 environmental goals.               To put it plainly, domestic products cannot be the main
 beneficiaries, or the “chosen winners”, of an environmental tax measure.217 That line of
 thought was crystallised in Outokumpu Oy. The Court has applied a similar idea in the
 State aid field, although arguably the criteria for discrimination are different. According
 to settled case law, the environmental purpose behind a fiscal measure will not prevent
 it from being classified as aid. Furthermore, since British Aggregates, the Court analyses
 the issue of selectivity of an environmental tax in relation to similar products having an
 equivalent or superior impact on the environment than the one actually benefiting from
 a tax advantage. In short, if the goal behind a fiscal measure is protection of the
 environment, then similar goods having similar impacts on the environment must be
 “penalised” in an identical manner. Therefore, there seems to be a universal theme
 running through the case law, namely that like products must be treated alike.
              Secondly, the main distinction to be drawn between free movement law and
 State aid law is that, although both set out general prohibitions on discriminatory fiscal
 measures, the latter admits justification of selective aid. This contrasts with Article 110
 T.F.E.U. which does not allow Member States to justify discriminatory environmental
 taxes between similar domestic and imported products. Indeed, State aid law in the
 environmental sphere is characterised by very complex guidelines, which have only very
 recently been updated, on the compatibility of environmental fiscal aid with the internal
 market. Those guidelines are a witness to the Commission’s will to allow as much aid as
 necessary to industries where failures in the market act as a hindrance to the
217
      Maitrot De La Motte, supra note 49, at 123; see also Céline Viessant, The Impact of European Union Law on French
      Environmental Taxation, GESTION & FIN. PUB. 20, 24-25 (May 13, 2021).


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achievement of the Union’s environmental and climate targets. Very importantly, fiscal
aid in the environmental domain must be limited to that which is strictly necessary to
both correct existing market failures and achieve the desired results.
        Finally, we have seen that initiatives on the part of the Union legislature have to
some extent further restricted the policy choices open to Member States in the
environmental tax field. A distinction can be drawn between the Energy Taxation
Directive and the V.A.T. Directive. While the first instrument (in its current state) allows
for sweeping reductions and exemptions to be adopted on energy products, the second
does not contain any criterion authorising the application of a reduced rate on the basis
of the intrinsic characteristics of goods and services sold, or of their mode of production
or distribution. Within this context, two of the most noteworthy restrictions that derive
from Union secondary law are the prohibition on the taxation of kerosene and the
stringent framework imposed on Member States when deciding whether to apply
reduced rates of V.A.T. to environmentally friendly activities. It is likely that changes
will be made to these instruments in the very near future to bring them in line with the
Union’s green and just transition targets.




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   ANNEX I: EUROSTAT GRAPH ON MEMBER STATE REVENUE FROM
   ENVIRONMENTAL TAXES




   Figure 1: Annex I: Eurostat Graph on Member State Revenue from Environmental Taxes




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