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New EU Guidelines on State Aid for Climate, Environmental Protection and Energy to Support the Transition to a Carbon Neutral Economy

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The new Guidelines on State aid for climate, environmental protection and energy (‘CEEAG') that enter into force this month are intended to ensure that EU State aid rules are aligned with the Union’s ambitious decarbonization targets and provide a modern framework to assess the legality of Member States’ financial support measures with the EU Treaty as industry and society transition towards a carbon neutral EU economy by 2050.

Industry should enjoy more favourable conditions to access aid for environmental projects but must be aware of the detailed new requirements designed to guarantee the cost-effectiveness of national aid measures.

Under EU State aid rules, governments and national authorities must notify their planned support measures in advance for EC clearance. The legal assessment is largely based on the new CEEAG guidelines. Industry can only rely on the legality of national support measures if they have been properly notified and approved by the EC.

The CEEAG now addresses for the first-time state-backed financial support for “climate” related objectives and is intended to be aligned with the aims of the legislative proposals outlined in the EC’s ‘Fit for 55’ package (launched in July 2021). This package signposts a path to achieving the EU’s 2030 climate and energy ambitions; delivering a 55% reduction in greenhouse gas emissions by 2030, relative to 1990 levels – as per the EU Green Deal and EU Climate Law, and arriving at net-zero by 2050.

Revised Scope

The revision of the 2014 EEAG is based on two ‘building blocks’.

  • First, the enlargement of the scope of the guidelines to new areas such as clean mobility/transport (e.g., infrastructure for electric vehicles, clean vessels and aircraft).
  • Second, support to improve the energy performance of buildings, to improve biodiversity, to reduce noise pollution, to promote resource efficiency and the circular economy, and for the remediation of environmental damage.

The guidelines will extend to all technologies – except nuclear1 - that can deliver the EU Green Deal.  At the same time, the new guidelines are based on a ‘flexibilization’ of the rules for the assessment of the compatibility of national aid schemes and measures. Thus, aid can be allowed up to 100% of the additional costs of certain environmentally friendly investments.2 Member States will be free to support any technology delivering carbon reductions, using flexible tools like ‘contracts for difference’ (Cfds). Cfds allow a stable investment environment for ‘hard to abate‘ sectors in a cost-effective manner. The CEEAG also introduces more flexible rules on competitive tendering by allowing technology specific tenders for certain renewable applications.

New Safeguards

As the CEEAG is broader in scope and more permissive than previous guidelines, the EC has introduced a series of new safeguards to ensure that:

  • aid is effectively directed where it is needed to improve environmental protection;
  • aid is limited to what is needed to achieve the environmental goals;
  • aid does not distort competition or the integrity of the internal market; and
  • there is alignment and coherence with relevant EU legislation and policies in the environmental and energy fields

There is also enhanced stakeholder participation in the design of large aid measures requiring Member States to consult stakeholders on their main features.

The EC will approve aid measures under these guidelines for a maximum period of 10 years.

The Content of the New Guidelines:

General Rules

The CEEAG introduces a long list of definitions relating to climate, environmental protection and energy matters (ch.2) followed by a chapter setting out the general compatibility criteria for assessing climate aid measures. These rules detail the positive as well as the negative conditions to be applied to assess national state aid plans. Thus, if a fossil fuel-dependent project is not compatible with EU’s 2030 and 2050 climate targets, the balance is not likely to tip in favour of supporting it with aid.

The EU Treaty (Article 107(3)(c)) provides that the European Commission may consider compatible with the internal market ‘state aid to facilitate the development of certain economic activities within the Union’ (positive condition), where ‘such aid does not adversely affect trading conditions to an extent contrary to the common interest’ (negative condition). The EC has to conduct a balancing exercise weighing the positive effects of State aid to a project against the negative effects on competition and trade.

Specific Rules for Different Categories of Measures

More specific assessment criteria are developed in the extensive sections of its chapter 4.  Broadly, this chapter spans three categories of support which we have labelled ‘green’ ‘grey’ and ‘brown’ aid measures.

Green: ‘Green support’ measures include aid to support fuels such as biofuels, and that comply with the sustainability and greenhouse gases emissions saving criteria set out in EU directives, and renewable hydrogen, and all technologies that contribute to the reduction of greenhouse gas emissions (e.g. CCS),  as are dedicated infrastructure projects (including for hydrogen, other low-carbon gases and carbon dioxide for storage/use).

Grey: Obviously support for ‘green’ or renewable energy is to be preferred over aid to fossil fuels, or ‘brown’ measures but the transition away from a fossil fuel economy may require short term support to ‘grey’ fuels such as low carbon gases. Notably, the ‘grey’ category has been expanded in the final version of the CEEAG and includes ‘low carbon gases and ‘grey’ hydrogen albeit that the new rules will require the EC to closely scrutinise these ‘grey’ measures to avoid lock-in effect and stranded assets. For example, aid for hydrogen refuelling infrastructure that does not exclusively supply renewable hydrogen or low-carbon hydrogen may be regarded as not having long-term lock-in effects or not displacing investments into cleaner technologies if the Member State demonstrates a credible pathway towards the phasing out of hydrogen that is not renewable or low-carbon to supply the refuelling infrastructure by 2035.

This is important given the ongoing development of the EU Taxonomy for sustainable activities. Branding gas as a transitional fuel, or “transitional activity”, is the main argument for including gas as a green fuel in the Taxonomy. This branding will impact many investment decisions, public policies, and spending.

Finally, support for natural gas projects remains a special case, as the EC considers it to be a bridge on the path to a higher penetration of renewables. It follows that new investments in natural gas-based generation or infrastructure may be supported only exceptionally.

Brown aid measures – phase out or closure aid: Measures that do not deliver for the Green Deal – i.e., aid to ’the most polluting’ fossil fuels, i.e., coal, peat and or oil are unlikely to create positive environmental effects and therefore State aid is unlikely to be possible. ‘Closure Aid’, i.e., aid for the closure of power plants using coal, peat and or oil shale closure and the closure of related mining operations is permitted under certain conditions.

Concluding Remarks

State aid in the climate space is increasingly controversial not least because the EC has continually failed to ban support for fossil fuels.  More frequent legal challenges to the application of these guidelines in future EC decisions can be anticipated – not just from competitors and NGOs or other interested parties, but probably also from other Member states who are at odds with the climate policies - or lack thereof - of their neighbours.  Potential beneficiaries will be well advised to ensure that national aid plans have been subject to a robust legal and economic assessment to avoid risks of adverse legal challenge and eventual repayment of illegal state aid.

1State aid for nuclear will continue to be assessed directly on the basis of Article 107(3) TFEU and not the revised state aid guidelines. The latter could play an indirect role for nuclear when hydrogen is produced with nuclear power.

2The eligible costs are the extra investment costs determined by comparing the difference between the total investment costs of the aided investment project with those of a less environmentally-friendly project or activity.

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