The European Commission adopts revised State aid Guidelines in relation to its Emissions Trading System

On 16 September 2020, Ursula von der Leyen, the President of the European Commission (the Commission), delivered her first State of the Union address. Focusing on climate change, she made clear that “carbon must have its price” and promised that the EU would enhance its emission trading system.

On 21 September 2020, the Commission followed suit and adopted revised EU Emission Trading System State aid Guidelines in the context of the system for greenhouse gas emission allowance trading post-2021 (the ETS Guidelines). The revised ETS Guidelines have been adopted following a public consultation on the revision of the ETS Guidelines earlier this year. The ETS Guidelines allow EU Member States to financially compensate companies with heavy energy-using installations (such as power stations and industrial plants in certain sectors) for the higher electricity costs incurred by these companies as a result of the EU’s carbon market policies.

The ETS Guidelines will enter into force on 1 January 2021 with the start of the new ETS trading period (covering the years 2021-2030) and replace the previous Guidelines adopted in 2012. The EU Emission Trading System (ETS) is currently in its third trading period, which will come to an end in December 2020.

Background

As part of its policy to address climate change by reducing greenhouse gas emissions, the EU has set up the ETS in 2005. The ETS works on the ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by heavy energy-using installations (such as steelmaking furnaces and the production of pulp and paper) and airlines. Within the cap, companies receive or buy emission allowances, which they can trade with one another as required. Member States granting ETS indirect cost compensation have to notify this as state aid to the Commission.

The ETS Guidelines aim at reducing ‘carbon leakage’. Carbon leakage refers to the risk that EU-based companies may seek to transfer their energy heavy production outside the EU to third countries with less ambitious climate policies or that EU products are replaced by cheaper but less environmentally friendly produced products originated from outside the EU.

What will change as of 2021?

The revised ETS Guidelines:

• target aid only for sectors at risk of carbon leakage due to high indirect emission costs and their strong exposure to international trade. Based on an objective methodology, 10 sectors and 20 sub-sectors are eligible (see Annex I of the ETS Guidelines with reference to the relevant NACE codes, e.g. the production of aluminium, lead, zin and tin, copper, refined petroleum products, the plastics sector and others);
• set a stable compensation rate of 75% in the new period (reduced from 85% at the beginning of the previous ETS trading period), and exclude compensation for non-efficient technologies, to maintain the companies' incentives for energy efficiency. Aid to inefficient production processes is intended to be limited by applying a so-called ‘electricity consumption efficiency benchmark‘. This benchmark takes into account the most electricity-efficient production methods for a given product; therewith maximising aid for those companies that invest in the most energy-efficient technologies; and
• make compensation conditional upon additional decarbonisation efforts by the companies concerned, such as complying with the recommendations of their energy efficiency audits.

EU iron-ore miners, seamless-steel pipe makers and certain chemical companies (e.g. the mining of chemical and fertiliser minerals, the manufacture of fertilisers and nitrogen compounds and the manufacture of other organic basic chemicals) will no longer be able to claim compensation as of next year, presumably due to the low average level of electrification in some of these industries.

The most notable new addition to the list of eligible (sub-)sectors is that of hydrogen producers, which will be able to claim financial support for their electricity costs as of next year. This is line with the EU’s overarching Hydrogen Strategy published in July 2020 and the preparations for a new Important Project of Common European Interest (IPCEI) for hydrogen.

The ETS Guidelines and the EU Green Deal

The revised ETS Guidelines mark the first climate-related update to the EU’s state aid rulebook since the publication of the EU Green Deal in December 2019.

With the objective for the EU to become climate neutral by 2050, the EU has set itself an ambitious target and the revised ETS Guidelines are a first sign that EU state aid rules are likely to be revamped over the upcoming months and years to ensure that industries which are key to tackle climate change will receive adequate financial support. This is further supplemented by the on-going state aid rules fitness check that the Commission is carrying out and which includes an evaluation of the Guidelines on state aid for Environmental protection and Energy.