This presentation has been delivered at the University of Coimbra, Faculty of Economics, meeting on April 12th 2023. The event was held to celebrate Professor Rick Krever (apparent) retirement.

1. Energy and Taxation
The European ETS Case

2. Summary of the Presentation
• Introduction to the ETS (Emission Trading System) and its logic;
• The Greenhouse gasses emission and the securitization (?) via certificates /
allowances;
• Taxing the Certificates;
• Their use;
• Their trade;
• Certificates production as a business activity ?
• … tax consequences.
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3. The European Green Strategy
• Coherent with the decision taken in the International forums and in the framework of International
treaties;
• The Kyoto Protocol (December 11th 1997, signed);
• Paris Agreement (December 12th 2015, signed);
• Inter alia, limitation to qualified gasses emission emission via:
• State-controlled issue of certificates allowing emission of gasses for specific amounts (decreasing);
• Certificates are attributed to the businesses / purchased on the market and allow the emission of specific quotas.
• The higher the emissions the bigger the number of certificates needed (and to be spent) to offset it;
• The overall amount of certificates (Cap) implicitly limit the emissions;
• The market rules can price the certificates making green business (eco-friendly) more profitable (Trade).
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4. Some Questions for the Tax Lawyer
• What is a certificate ?
• What tax consequences arise from its circulation (and its issuance);
• Income Tax / VAT;
• Is it possible to conceive an activity aimed at producing “green”
certificates beyond the quotas decided?
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5. The Nature of the Certificate
• A matter of perspectives;
• Under the MiFID II directive they are full fledged financial instruments and
have to be treated accordingly for contractual purposes (and investors
protection); see n° 11, Section C; Annex I to the 2014/65/EU Directive;
• Emission allowances consisting of any units recognised for compliance with the
requirements of Directive 2003/87/EC (Emissions Trading Scheme);
• Under the CJEU case law, they are intangibles and have to be treated
accordingly (C-453/15 A and B) December 8th 2016.
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6. Tax Regime of the Certificates
• Income / Corporate Tax:
• Depending on the domestic legislation on the case (in my country, the sale originates
taxable capital gains for the business);
• Value Added Tax:
• Their intangible nature would make them services, taxed accordingly (Article 24 and
sub., 2006/112/EC Directive);
• Case for VAT exemption (under the MiFID II qualification as Financial instruments) ?
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7. VAT Regime
• Trade of certificates (delivery of service);
• VAT Committee interpretation of Articles 4(5) and 9, 1977/388/EEC directive
(Taxud/1625/04 – Working Paper n.443);
• Transfer of greenhouse gas emissions certificates (Article 12, 2003/87/EC) when made
for consideration by a taxable person is a taxable supply of services falling within the
scope of Article 9(2)(e) of the 77/388/EEC directive;
• None of the exemptions provided for by Article 13 can be applied to this transfer of
allowances.
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8. Key Findings
• European Union introduces a special VAT regime for the certificates but with
a different understanding of certificate as under the MiFID system;
• Reasons of this inconsistency:
• Neutrality of the Tax;
• Better compliance in term of invoicing with the exclusion of possible pro rata
mechanism;
• Sectional purpose of the MiFID system.
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9. The case of Bundled Supplies
• Circulation of certificates in connection with the energy produced and
traded on the market;
• Cases in the business:
• Trade of certificates as such (stand alone assets);
• Trade of certificates together with the energy purchased (very often by the same
supplier);
• In this case a test for the autonomy of the certificate (or its absorption under the VAT regime of
the energy source (a good!) ?
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10. Domestic Conclusions
• Certificates are traded independently from the energy source they’re
connected to;
• The ancillarity (link) relationship between the good and the service does not
exist;
• VAT rate on natural gas is 10% (my country) and can not be extended
to the trade of certificates (territoriality is relevant as well).
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11. Certificates, VAT and Fraud:
the European View
• ETS targeted by VAT-frauds (carousel and carousel alike);
• CJEU Case C-641/22 “Climate Corporation Emission Trading” (October 27th
2022);
• Cross border sale of certificates is a delivery of a service, thus in case
of fraud the state of the seller is not entitled to claw back the VAT as
the transaction would be taxable anyway in the state of the purchaser;
• The rule is different in case of sale of goods.
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12. Latest Development
• Current scenario: Certificates assigned via auction-based mechanisms and
market negotiation;
• Perspective: certificates creation by the businesses via proactive strategies /
positive externality for the environment;
• Strategy pursued in Italy by farms and business with equipment capable of capturing
CO2 emissions and calculate them (Ruling 3465/E September 16th 2020);
• Preliminary findings: business not yet allowed and unrelated to farming.
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13. Concluding remarks: Towards a
“Common Goods” Theory in Taxation
• Academic perspective developed in the ‘70 by prominent authors;
• (Rodotà, S.) The role of common goods in fostering shared responsibility, linking sustainable social
cohesion to the reduction of inequalities (2004);
• Environment is perhaps the most significant of the common (not private, not public)
good;
• Via certificates the Legislator has introduced (formalized under the law) the notion of scarcity:
quantifying the usage of the environment;
• Any scarcity-induced asset (under the law) determines wealth ... and the need to shape an
appropriate tax system to deal with that.
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14. Thanks for your Attention
… and thanks, Rick!
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