A Reassessment of Proportionality and Discrimination in Light of the Essent Case

Filippo Fontanelli, Lecturer in International Economic Law, University of Edinburgh

Introduction

The September 11, 2014, Essent case (Joined Cases C-204 to C-208/12) judgment by the Court of Justice of the EU presents a nuanced analysis of proportionality, weighing factors such as promoting free energy trade, safeguarding the environment and human health, adhering to international emission reduction agreements, bolstering local employment, and encouraging energy self-sufficiency.

Beyond this intricate web of values, the judgment carries significant doctrinal implications. It seemingly disregards the long-held distinctions between distinctly and indistinctly applicable measures, as well as justifications under Article 36 TFEU and other mandatory requirements. This might render the traditional legal debate around “Measures equivalent to a quantitative restriction (MEQRs)” and its evolution obsolete.

The Case

At its heart, this case revolves around a Flemish regional program mandating energy suppliers to prove a certain amount of renewable energy use or face penalties. This program’s crucial detail is its insistence on locally-sourced green energy, prohibiting suppliers from utilizing green energy produced elsewhere to satisfy this quota.

Essent, unable to use its renewable energy sourced from other European countries, faced penalties for not meeting the quota. They contested these sanctions, arguing that favoring local green energy violated EU treaty obligations regarding free movement of goods and non-discrimination based on nationality.

[The following section provides legal context and can be skipped if short on time.]

Directive 2001/77 (now replaced by Directive 2009/28) acknowledges the underutilization of renewable energy within the EU, despite its potential to reduce reliance on foreign energy, meet climate change commitments, and stimulate local employment. The EU encourages, but doesn’t standardize, national programs supporting renewable energy consumption.

This directive created a system for certifying renewable energy with guarantees of origin, ensuring consumers know their energy’s source. While these guarantees are mutually recognized within the EU, they don’t automatically qualify energy for benefits from national support programs in different member states.

For instance, the Flemish program requires “green certificates” granted to local green energy producers. Suppliers must surrender a certain number of these certificates, and foreign guarantees of origin are not accepted as substitutes, creating an advantage for locally produced green energy.

Though a provision allows for accepting non-Flemish certificates, it remained unused. Consequently, the Flemish program was challenged under the Directive, Article 34 TFEU prohibiting MEQRs, and Article 18 TFEU prohibiting nationality-based discrimination.

While the Directive doesn’t mandate linking support schemes to guarantees of origin, it requires their issuance and recognition for consumer transparency. The main challenge to the Flemish program arose from Article 34 TFEU, as it favors locally sourced green energy by making it more valuable due to its association with the required green certificates.

The Court acknowledged the scheme’s trade restrictiveness but focused on electricity trade over the complex issue of whether guarantees of origin qualify as “goods.”

The Court then assessed if the scheme was justifiable based on public interest grounds or overriding requirements, and whether it met the proportionality test.

The scheme’s objective was deemed to be the promotion of renewable energy use. This objective, not explicitly listed in Art. 36 TFEU, was accepted under the rule of reason. This principle justifies trade-restricting domestic measures if they serve a reasonable policy goal and their restrictive impact is proportionate to their contribution to that goal. Mandatory requirements aren’t limited to Article 36 TFEU values and often include consumer interests and environmental protection. However, they are traditionally used to justify non-discriminatory rules.

The Court’s assessment of the Flemish scheme’s proportionality wasn’t straightforward, relying on contextual elements and policy considerations to demonstrate why the scheme wasn’t overly restrictive.

To Essent’s claim that the scheme encouraged production over consumption of green energy, the Court argued that the greenness of energy lies in its production method. This argument ignores that the ultimate goal of renewable energy is to replace the consumption of non-renewable energy.

The Court also highlighted the Directive’s allowance for national green energy production targets, implying that these targets might necessitate the scheme’s discriminatory nature. However, a measure’s EU legality is independent of whether its motivation is permitted under EU law.

The Court addressed the apparent contradiction: if the scheme promotes green energy production for environmental reasons, why discourage purchasing green energy produced elsewhere by rejecting foreign guarantees of origin? The explanation provided was that the starting points, potential for renewable energy, and energy mix vary across Member States. This explanation is unclear, as the Directive’s mutual recognition of guarantees of origin should allow for these variations to be considered when certifying renewable energy.

Finally, the Court pointed out the importance of national support schemes in achieving the Directive’s goals, emphasizing the need for Member States to control their costs and maintain investor confidence. This implies that discrimination is justified to prevent local consumers from bearing the cost of subsidies benefiting all EU producers and to avoid potential investor claims if support schemes are altered.

Based on these arguments, the Flemish scheme was deemed proportionate and compliant with Article 34 TFEU.

The proportionality analysis was extended to other aspects, leaving it to the national court to assess the proportionality of penalties. It also suggested establishing mechanisms for trading green certificates “under fair terms”, a seemingly contradictory notion given the validation of a protectionist scheme.

Comments

By applying a mandatory requirement to a measure that is discriminatory on its face, the Court appears to disregard Cassis and the exhaustiveness of Article 36 TFEU. It merges overriding requirements and Article 36 TFEU values into a single category of justifications.

Although reduced emissions’ contribution to human health is mentioned, it’s not the central focus. Had it been the primary objective, it would have been central to the proportionality test.

Therefore, a clearly discriminatory measure was justified based on a public interest not listed in Article 36 TFEU. This approach was also evident in the Ålands Vindkraft case (C‑573/12), decided shortly before Essent. The Court seems to be moving away from emphasizing the distinction between de jure and de facto discrimination.

Advocate General Bot had suggested abandoning this distinction and overturning previous case-law. The Court adopted the former but not the latter, silently abandoning a long-standing legal test meant to accommodate justifiable policies not covered by Article 36 TFEU.

Treating direct and indirect discrimination equally makes sense. This approach, used in the GATT agreement, acknowledges that both can equally hinder trade. A harsher approach to direct discrimination only encourages disguised discrimination within seemingly neutral measures.

However, the distinction had value: direct discrimination was inherently suspect and harder to justify. The Test-Achats judgment, for instance, didn’t even consider justifying direct gender-based discrimination. Statistical data can support proportionality in cases of indirect discrimination but not direct discrimination.

AG Bot, recognizing this issue, proposed a stricter proportionality test for directly discriminatory measures. Justifications for such measures, especially those violating the fundamental principle of non-discrimination based on nationality, should hold greater weight.

The Court, however, didn’t adopt this stricter test. This potentially contributed to a questionable proportionality assessment that often overlooked the discriminatory nature and necessity of the measure.

By focusing on the environmental objective, the Court downplayed the discriminatory and trade-restricting aspects of the Flemish scheme. Once a minimal environmental benefit was established, the analysis was skewed. The proportionality assessment seemingly disregarded the question of necessity: could the Flemish authorities have achieved their goals through less restrictive means? Allowing interchangeability between green certificates and foreign guarantees of origin would have been less restrictive and even more environmentally beneficial.

The measure’s proportionality only holds up if the true objective is unstated and potentially discriminatory. One could argue that the real goal is developing a local green energy industry, justifying temporary protectionism. However, the Court didn’t rely on this argument, instead asserting that the environmental goal fully justifies the discriminatory aspect.

Adding to the irony, the Court mentions the need for fairness in the green certificate market. By effectively banning substitutable foreign certificates, the Flemish government grants absolute protection to potentially few local producers, enabling them to dictate higher prices. The scheme artificially inflates the value of local certificates, forcing energy suppliers to favor them and creating an unfairly distorted market. This exemplifies protectionism: demand is channeled towards local products, disadvantaging foreign competitors.

The Court, however, merely suggests “mechanisms” for “fair” certificate purchases, a puzzling statement given its validation of a protectionist scheme that embodies unfair trade practices.

This case is significant for seemingly overturning the established understanding of the rule of reason. The proportionality analysis is unclear due to downplaying the role of direct discrimination, leading to a confusing assessment that disregards the discriminatory impact and the necessity test.

Barnard & Peers: chapter 12, chapter 16, chapter 22