From this month (January 2022), it will be easier for EU Member States to provide government subsidies (also known as “State aid”) for climate and renewable energy projects. At the same time, the EU is cracking down on public funding for fossil fuels.
In the EU, State aid is “prohibited unless it is specifically allowed”, meaning that governments may not subsidise businesses unless this aid is approved by the European Commission or qualifies for an “automatic exemption” under one of the Commission’s block exemption regulations.
The new Guidelines on State aid for Climate, Environmental Protection and Energy (the “CEEAG”) detail how the Commission will assess and approve aid that pursues environmental and climate objectives. The Guidelines are designed to support the European Green Deal and the EU’s 2050 zero net emissions target, and establish a more comprehensive regime for environmental aid compared to the previous guidelines. They follow the direction set out in the Commission’s brief on “Competition Policy in Support of Europe’s Green Ambition”.
Wide range of environmental objectives
As suggested by the addition of “climate” to the title, the CEEAG enable support for investments to support the reduction of greenhouse gas emissions. Whereas the previous guidelines allowed aid for renewable energy and carbon capture, the CEEAG broadly recognise any aid that could support the decarbonisation of our economy without discriminating between technologies. This includes aid for low-carbon energy production (such as from hydrogen or synthetic fuels), high-efficiency cogeneration, carbon capture, demand response, energy storage, emissions and energy performance improvements in industrial processes, and electrification.
More generally, the CEEAG expand the range of environmental objectives that are potentially eligible for aid, to mirror the wide-ranging ambitions of the EU Green Deal. In addition to decarbonisation, these now cover clean mobility, the circular economy, pollution reduction, energy efficiency in buildings and the protection of biodiversity.
The CEEAG also cover aid for the energy sector, including aid for energy infrastructure, measures to improve the security of energy supply, and aid to close fossil fuel mines and power plants. It also includes a new type of aid: reductions from electricity levies for energy-intensive users, to allow industries such as steel and aluminium to remain competitive with rivals in countries with lower levels of environmental protection as they seek to electrify their operations.
Tailored criteria for aid compatibility
While the Commission has traditionally limited the maximum level of aid for a project (measured as a proportion of the costs, or the “aid intensity”), the CEEAG now allow aid to cover up to 100% of the eligible costs if it is granted pursuant to a competitive bidding process. This reflects the view that competitive procedures have a disciplining effect, to ensure the aid does not exceed the minimum required to carry out the activity (i.e., it is “proportionate”).
In determining whether to approve the aid, the Commission applies these other general criteria to verify that it will be effective and targeted, including:
- Whether the aid will change the beneficiary’s behaviour (that it has an “incentive effect”)
- Whether the aid compensates for market failures that prevent an optimal level of environmental protection (that it is “necessary”)
- Whether aid is the least distortive instrument for the objectives (that the aid is “appropriate”)
The CEEAG provide tailored and detailed guidance on how the Commission will apply these general criteria in assessing the various categories of environmental aid. This guidance is technical and refers to existing regulations in this area. For example, when assessing aid to support decarbonisation investments, the Commission will examine how the costs and revenues linked to the EU’s Emissions Trading Scheme affect the business case for the investment. When assessing subsidies for clean vehicles, the Commission will look at whether other policy instruments, such as low-emission zones or bonus and scrappage schemes might be equally effective. Aid instruments that support the reduction of greenhouse gas emissions are presumed to be “appropriate” to this objective, regardless of the specific instrument used. These include “contracts for difference”[1] and aid for operational costs.
Phasing out of aid for fossil fuels
The CEEAG essentially prohibit aid for projects involving coal, diesel, lignite, oil, peat and oil shale, which are not viewed as contributing to the EU’s climate targets, but rather potentially aggravating market failures.
Reflecting the logic that natural gas is “a bridge not a destination”,[2] the CEEAG permit aid for investments in natural gas if it does not create a “lock-in” effect that delays the transition to renewable or lower-carbon technologies. This may be shown, for example, by having the aid recipient commit to switching to renewable energy and to closing the natural gas plant within an agreed timeframe.
Competitive bidding and consultation procedures
To ensure value for money, the CEEAG encourage governments to award aid through a competitive bidding process. Competitive bidding is prescribed as the default mechanism for various aid measures, such as decarbonisation, clean mobility, and fossil fuel plant closure measures. It will also be easier to demonstrate that the aid amount is proportionate if it is granted following a competitive bidding process.
Governments must also carry out a public consultation on proposed aid measures for decarbonisation and the security of electricity supply, except for smaller subsidy schemes where a competitive bidding process is used. This requirement seeks to improve transparency and allow stakeholders to participate in designing the largest aid measures.
Conclusion
The new CEEAG aim to unlock public funding to help achieve the EU’s ambitious climate goals. Companies now have increased opportunities to access aid for environmental projects, although it will still be necessary to comply with detailed requirements ensuring the appropriateness and cost-effectiveness of the aid measure.
[1] Contracts for difference compensate the beneficiary for any difference between a fixed “strike” price and the market price (e.g., the price of carbon emissions), and help ensure a predictable revenue stream.
[2] Remarks by Executive Vice-President Vestager on the new Guidelines on State aid for Climate, Environmental protection and Energy, December 21, 2021, Brussels.