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European emissions trading system: from state aid to public procurement law

The European emissions trading system is intended to provide an incentive to improve the energy efficiency of large industrial plants. The tried and tested instrument of state aid is used to compensate for the resulting costs. In order to create legal certainty, the European Commission has now published guidelines on the admissibility of certain state aid in connection with the emissions trading system. Procurement law aspects also play an important role.

The trading of emission certificates as an instrument for reducing emissions

The European emissions trading system serves to reduce CO2 emissions in the Union and thus to achieve the emissions and climate targets set by the EU. Companies which emit greenhouse gases have to submit certificates for these emissions. If a company has too few certificates or too high CO2 emissions, it has to buy additional certificates. If, on the other hand, it falls below the forecasted amount of emissions, certificates can be sold at a profit. This creates an incentive for energy-efficient production.

However, certain economic and climate policy risks are associated with European emissions trading: This is particularly due to the so-called “carbon leakage”, i.e. the migration of certain industries from the Union because of strict emission targets.

Against this background and in view of the fourth period of the emissions trading system starting in 2021, the European Commission published guidelines on certain state aid measures in the context of the system for trading GHG emission allowances in October 2020. From 2021, these guidelines are to replace the previous guidelines. The draft is currently in the assessment process (see here).

The Commission’s initiative is also related to the EU goal of climate neutrality and the therewith associated restructuring of the energy sector (“Green Deal”), to which competition law should also contribute. Naturally, this alteration is also linked to the promotion of renewable energies – we have reported on the draft of the Renewable Expansion Law (EAG) recently.

It should be mentioned that the prices for emission certificates have risen sharply in recent months. In addition, the emission certificates are to be awarded almost exclusively via auctions in the next trading period – the previous system of free allocation is to be the exception. Against this background, the guidelines are of increased importance.

“Carbon leakage” and the modernization of the European energy infrastructure

The granting of state aid to private companies is generally prohibited within the EU. There are exceptions to this, including the granting of social aid or aid to repair damage caused by natural disasters.

The present guidelines lay down the conditions under which certain aid can be regarded as compatible with the internal market under Article 107 (3) (c) TFEU. Two types of aid are covered by the guidelines:

  • Aid granted to certain sectors to compensate for indirect carbon costs. These are increased energy costs caused by the emissions trading system.
  • Aid granted by economically weaker Member States for the modernization of the energy sector.

In connection with the modernization aid, the Commission makes clear that the free allocation of CO2 certificates constitutes a state aid that is prohibited under Article 107 TFEU.

Admissibility of compensation and modernization aid under state aid law

Initially, the Commission gives a brief insight into the examination of state aid under Article 107 (3) (c) TFEU. The Commission emphasizes that the aid must correct market failures and be in the “common interest”. According to these guidelines, state aid in order to offset indirect CO2 costs is to be regarded as compatible with the internal market and therefore admissible if the companies – which are listed according to sectors in Annex 1  (including the production of wood or pulp) –  are unable to pass on increased energy prices to customers without a loss of market shares. The amount of aid must not exceed 75 % of the annual cost increase.

Aid for the renewal of the energy infrastructure is, however, to be regarded as admissible if its aim is to modernize, diversify and sustainably redevelop the energy sector and if it creates an incentive for a change in behavior on the part of the beneficiary. It is noteworthy that the admissibility of such aid is linked to the implementation of a tendering procedure – provided that the total amount of investment exceeds EUR 12.5 million. This tendering process, which has to meet the requirements of the EU public procurement law, must take the sustainability of the funded projects and an actual CO2 reduction into account. In addition, max. 70 % of the total costs of the investment will be granted as aid.

Further steps

The Member States not only have to carry out a regular evaluation of the effectiveness of the aid granted, but also report to the Commission accordingly. The guidelines should apply to the entire fourth trading period of the emissions trading system. In 2025, an evaluation of the guidelines will take place in order to adapt them if necessary, particularly to any new international framework conditions.

If you have any further questions on this topic, please contact our experts from the Competition Law, the Procurement Law, and the Environmental Law teams.


17. November 2020

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