Minimum pricing of alcohol receives set-back from EU

The cause of minimum unit pricing of alcohol pursued by the Scottish government has received a set-back by being rejected by the European Commission as incompatible with EU law on the free movement of goods, not the best means of the achieving the stated objectives and possibly even counter productive by encouraging retailers to increase sales of alcohol.

Since the Scottish government notified the Commission of its intention to introduce minimum unit pricing (MUP) several other member countries have lodged objections to the proposal, and the Commission’s ‘Detailed Opinion’ now delays the consultation process until late December 2012 and significantly reduces the chances of the Scottish proposal being approved by the European Court.

In its Detailed Opinion, the Commission expresses sympathy with the intentions behind the Scottish proposal, but states that, while EU legislation does not prohibit MUP as such, any policy to introduce it must be compatible with other provisions of EU law, including rules on the free movement of goods. It states that EU case law is unequivocal that MUP falls within the remit of Article 34 of the Treaty, and would count as having an effect equivalent to a quantitative restriction on trade, impeding imports of alcohol products.

The Opinion states that MUP might discriminate against imports by preventing foreign manufacturers from benefiting from lower production costs. MUP could also constitute a barrier to entry into the Scottish market of new products, by denying goods seeking to enter the market lower prices to encourage supermarket listing and consumer trial.

Moreover, in the Opinion of the Commission, MUP fails the required proportionality test: the same results could be obtained by measures less distorting of the market.

The Opinion states:

“The Commission is fully aware of the importance of reduction of alcohol consumption among the population as a whole and in particular among the harmful drinkers. The Commission further acknowledges that the measure proposed is within Member States’ competence and - from a public health point of view - within the scope of the goals and objectives of the EU strategy to support Member States in reducing alcohol related harm (COM(2006)625) ….. However, the measure at issue raises doubts as to its compatibility with the principle of proportionality …..

Keeping in mind that most of the studies prove and there is a general agreement that affordability does have effect of drinking patterns, the question is only about the best way to exploit this tendency. Hence, the Commission does not disagree with the proposition that increases in the prices of alcoholic drinks could, other things being equal, be expected to lead to reduced demand for those drinks. The focus in this opinion is rather on whether a MUP policy, which would lead to higher prices of many alcoholic drinks and hence to an expectation of reduced consumption, is likely to be the least market distorting policy that could be introduced to produce such an outcome. If the goal is, for health policy reasons, to reduce alcohol consumption via increasing the prices of alcoholic beverages, that goal can be achieved by raising alcohol taxation across the board.

The price of alcohol would thus increase without causing the market distortions that ….. can be expected to flow from MUP. It is the Commission’s view that there is at least one alternative, regulatory option to MUP that is less restrictive of trade and less distorting of competition in relevant drinks markets … (Furthermore, other economic distortions) might arise as a consequence of the MUP. These potential distortions arise because the MUP will create greater incentives for retailers and supermarkets in particular, to sell more alcoholic beverages as a result of the fact that they will make higher margins on products affected by the policy. This will give retailers incentives to allocate increased resources to the sale of products affected by the MUP compared with what could be expected to be the case if, for example, similar average retail price increases were caused by an across-theboard increase in duty, which is an alternative policy option for reducing consumption. In economic terms, this makes MUP a less effective means of reducing consumption than duty increases.

Indeed, Union legislation provides the Member States with the possibility to control the prices of alcohol and hence choose their level of health protection by setting the excise duties. The Scottish government provided explanations in the Regulatory Impact Assessment in page 46 of why the taxation alternative was not considered as the best option.

The Commission would like to address them accordingly at the same time stressing that raising of alcohol duties is probably the more suitable measure:

1) As regards the statements that the increase of duties will affect all alcohol on the market and not only cheap alcohol and will also affect the on-trade sales, the Commission would like to note issue is to reduce overall drinking that is shown by the chosen level of the minimum price that will affect 73%/66% of the off-trade market. Accordingly, the raising of duties option seems to be the most suitable to achieve that goal without providing any adverse effects on competition. Furthermore, the negative effects on the on-trade market can be reduced by adjusting the taxation system accordingly.

2) The Scottish authorities also claimed that increases in taxation of alcohol will not necessarily result in a proportionate or indeed any increase in the price of alcohol, as alcohol tax and duty increases are not always reflected in the price the consumer pays as some retailers engage in below cost selling to varying extents. To this effect, it could be mentioned that the second study of RAND 2012 carried out for the Commission examined to what extent changes in alcohol taxes are passed through to consumer prices. The findings indicate that changes in consumer prices depend to a large extent on reactions in the retail sector. Sufficient data for analysis was available from four countries. The pass-through is full when for example a €1.00 increase in excise duty for a product is associated with a €1.00 increase in the consumer price (or a duty reduction is similarly associated with a drop in the price). More than full pass-through means that the price increases more than that needed to cover the duty raise. Less-than full pass-through means the price increases less, as retailers cover the tax raise from other sources. In the countries studied, pass-through in the off-trade for changes in beer duties was less than full in two cases, and more than full in two cases. There was similar variation in the pass-through for changes in spirits duties. Comparison between off-trade and on-trade was possible for one country: there was no marked difference in between offtrade and on-trade was possible for one country: there was no marked difference in the pass-through for beer, but for spirits the pass-through was more than full in off-trade and less than full in on-trade. Hence, the Commission would like to note it is not definite that the rise in prices will not be passed through as showed by the examples.

Furthermore, in the case Commission v Hellenic Republic (C-216/98) the Court addressed that question stating that “The ability of manufacturers and importers not to pass on increases in excise duty on their products is in any event limited by the extent of their profit margin, with the result that excise duty increases are sooner or later incorporated in retail selling prices”…..

Moreover, there are other additional measures which the Scottish Government could adopt. For instance, according to information available health related harms are concentrated in particular areas of Scotland. Measures which are specifically targeted at these areas are likely to be more effective than measures aimed at the total population.

In conclusion, the Opinion states that:

“Following the above observations the Commission concludes that the draft at issue may create obstacles to the free movement of goods within the internal market contrary to article 34 TFEU and appears to be disproportionate under article 36 TFEU. The UK authorities are invited to abstain from adopting the draft legislation at issue.”