The Community guidelines on State aid and EUETS after 2013 – changes urgently needed

The Community guidelines on State aid for environmental protection, which were adopted in 2008 (OJ C 82, 1.4.2008, p.1. – hereafter the Environmental State Aid Guidelines) are not yet adapted to a climate-energy legislative package, in particular to the Directive 2003/87/EC (as amended by the Directive 2009/29/EC).

Some of the State aid measures foreseen by the Directive 2009/29/EC are not covered by the existing Guidelines and thus the interpretation of these measures on the basis of State aid rules can raise several questions.

EU ETS is mentioned in the Environmental State Aid Guidelines in several places, in particular in sections 1.5.11 and 3.1.12 (Aid involved in tradable permit schemes).

Section 1.5.11 points 55 and 56 of the Environmental State Aid Guidelines state that,

“(55) Tradable permit schemes may involve State aid in various ways, for example, when Member States grant permits and allowances below their market value and this is imputable to Member States. This type of aid may be used to target negative externalities by allowing market-based instruments targeting environmental objectives to be introduced. If the global amount of permits granted by the Member State is lower than the global expected needs of undertakings, the overall effect on the level of environmental protection will be positive. At the individual level of each undertaking, if the allowances granted do not cover the totality of expected needs of the undertaking, the undertaking must either reduce its pollution, thus contributing to the improvement of the level of environmental protection, or buy supplementary allowances on the market, thus paying a compensation for its pollution. To limit the distortion of competition, no over-allocation of allowances can be justified and provision must be made to avoid undue barriers to entry.

(56) The criteria set out in point 55 form the basis for the Commission’s assessment of situations arising during the trading period ending on 31 December 2012. With respect to situations arising during the trading period after that date, the Commission will assess the measures according to whether they are both necessary and proportional. Finally, this will inform the revision of these Guidelines taking into account, in particular, the new Directive on the EU CO2  Emission Trading System, for the trading period after 31 December 2012.”

In the light of the above considerations, a conclusion can be drawn that, in the Commissions’ view, in the trading period ending on 31 December 2012, the lack of over-allocations is the crucial factor for the assessment whether the said allocations of EUAs are consistent with the Common Market - at a Member States level as well as at an installation level.

Some more detailed requirements for the said assessments (as regards the second trading period) are addressed in section 3.1.12 point 139 of the Guidelines. For the mentioned compatibility of the tradable permit scheme with the Common Market the following conditions should also be fulfilled:

“a) the tradable permit schemes must be set up in such a way as to achieve environmental objectives beyond those intended to be achieved on the basis of Community standards that are mandatory for the undertakings concerned;

b) the allocation must be carried out in a transparent way, based on objective criteria and on data sources of the highest quality available, and the total amount of tradable permits or allowances granted to each undertaking for a price below their market value must not be higher than its expected needs as estimated for the situation in absence of the trading scheme;

c) the allocation methodology must not favour certain undertakings or certain sectors, unless this is justified by the environmental logic of the scheme itself or where such rules are necessary for consistency with other environmental policies;

d) in particular, new entrants shall not in principle receive permits or allowances on more favourable conditions than existing undertakings operating on the same markets. Granting higher allocations to existing installations compared to new entrants should not result in creating undue barriers to entry.”

The parameter cited in point b) above “data sources of the highest quality available” (and, of course, the topicality of the data) were the pivotal elements in the reasons for the current Commission’s decision on the Polish NAP.

Environmental State Aid Guidelines also perceive the EU ETS in section 2.2. point 20 in the definition of “operating benefits”, where the “proceeds flowing from the sale by the undertaking of tradable permits issued under the European Trading System” are excluded.

Such a simplified approach raised some doubts (see for instance Judgment of the Court of the First Instance of 10 April 2008 in Case T-233/04). But in the second trading period the situation in this matter was not generally very complicated, as compared to the phase 3 starting on 1 January 2013.

It is obvious that in the third trading period the more sophisticated approach in the matters of public aid assessments will be required. The reasons for such a view are, among others, the general absence of free allocations in some sectors, such as power generation and  exceptions to the said rule, provided for in the Article 10c of the Directive 2003/87/EC.

Taking into account the instruments envisioned by the Directive 2003/87/EC, the matters which have to be regulated in the future new environmental State aid guidelines inter alia include:

1) State aid involved in investments covered by the national plan, which has to be prepared in accordance with Article l0c of the Directive,

2) aid for undertakings exposed to a significant risk of carbon leakage for costs related

to EUETS allowance passed on in electricity prices,

3) aid involved in exclusion from EU ETS of small installations and hospitals,

4) investment aid to CCS ready high efficient power plants.

As regards the third trading period the Environmental State Aid Guidelines in section 3.1.12 point 141 envision that necessity and the proportionality of State aid involved in a tradable permit scheme should be assessed according to the following criteria:

“a) the choice of beneficiaries must be based on objective and transparent criteria, and the aid must be granted in principle in the same way for all competitors in the same sector/relevant market if they are in a similar factual situation;

b) full auctioning must lead to a substantial increase in production costs for each sector or category of individual beneficiaries;

c) the substantial increase in production costs cannot be passed on to customers without leading to important sales reductions. This analysis may be conducted on the basis of estimations of inter alia the product price elasticity of the sector concerned. These estimations will be made in the relevant geographic market. To evaluate whether the cost increase from the tradable permit scheme cannot be passed on to customers, estimates of lost sales as well as their impact on the profitability of the company may be used;

d) it is not possible for individual undertakings in the sector to reduce emission levels in order to make the price of the certificates bearable. Irreducible consumption may be demonstrated by providing the emission levels derived from best performing technique in the European Economic Area (hereafter ‘EEA’) and using it as a benchmark. Any undertaking reaching the best performing technique can benefit at most from an allowance corresponding to the increase in production cost from the tradable permit scheme using the best performing technique, and which cannot be passed on to customers. Any undertaking having a worse environmental performance shall benefit from a lower allowance, proportionate to its environmental performance.”

But clues addressed in the section 3.1.12 point 141 of the Environmental State Aid Guidelines are of very general nature and they are obviously not sufficient for managing problems that can arise at all ends of regulatory spectrum created by multiple interactions of State aid legal regime and the new instruments foreseen by the Directive 2009/29/EC.

Some of the potential points of interest in this area follow from the very Directive. In the Commission statement ad Article 10, paragraph 3 of the Directive 2009/29/EC on the use of revenues generated from the auctioning of allowances, it is envisaged that between 2013 and 2016, Member States may also use revenues generated from the auctioning of allowances to support the construction of highly efficient power plants, including new energy power plants that are CCS-ready. For new installations exceeding the degree of efficiency of a power plant according to Annex 1 to the Commission Decision of 21 December 2006 establishing harmonised efficiency reference values for separate production of electricity and heat in application of Directive 2004/8/EC of the European Parliament and of the Council (2007/74/EC) the Member States may support up to 15% of the total costs of the investment for a new installation that is CCS-ready.

In the Commission statement ad Article 10a, paragraph 4a of the said Directive on the Community guidelines for state aid for environmental protection and the EU emissions trading system it is furthermore envisioned that Member States may deem it necessary to compensate temporarily certain installations from CO2 costs passed on in electricity prices if the CO2 costs might otherwise expose them to the risk of carbon leakage.

In the absence of an international agreement, the Commission undertook to modify after consulting Member States the Community guidelines on state aid for environmental protection by the end of 2010 to establish detailed provision under which Member States may grant state aid for such support.

To conclude, for reasons of legal certainty and predictability the new Guidance in this matter should be adopted as quickly as possible.