Mobilising the finance for green transformation: EU State aid vs. UK subsidy control regimes

One of the main goals of the UN’s annual climate change conference, the 26th Conference of the Parties (COP26), is mobilising private finance to address the climate challenge. Achieving green transformation and meeting the relevant EU and UK sustainability goals is expected to require significant financial support from both public and private stakeholders. The legal framework for unlocking public financial support is considered to be key in encouraging and allowing institutional investors and the private sector to mobilise investment with a sustainable impact (including supporting their need to achieve financial returns).

It is widely considered that unlocking private finance will require public support measures focussing, in particular, on:

• allowing sufficient amounts of public support to cover the net extra cost (i.e. funding gap) required to achieve sustainability goals;
• achieving an optimal outcome for each country, which may require cross-border funding in order to arrive at the set sustainability priorities on a holistic level; and
• ensuring regulation plays its part, which may require new rules or revision of existing ones in order to achieve the various targets, particularly the net-zero by mid-century goal.

This blog post will focus on evaluating the flexibility offered by the EU State aid and UK subsidy control regimes and what businesses can expect on both sides of the Channel. This flexibility will be very important for potential beneficiaries and stakeholders seeking public and private financing to achieve COP26 sustainability goals. For further details on the latest developments to State aid and subsidy control measures in relation to financing sustainability projects, please see our briefing for our COP26 Hub. You can also read more about our report on the role the law plays in mobilising private investment for sustainability impact and institutional investors’ powers and duties in this regard (A Legal Framework for Impact, commissioned by the UN Environment Programme Finance Initiative, the UN-supported Principles for Responsible Investment, and the Generation Foundation) in our recent blog post, available here.   

EU State aid vs. UK subsidies – a comparison 

(a) Established and detailed EU State aid rules compared with principle-based UK subsidy control regime

EU State aid rules’ numerous notices, guidelines, block exemptions and extensive case law can be quite complex and time consuming to navigate for stakeholders. The strict judicial review under the regime also means that the European Commission (Commission) must always check compatibility of State aid measures with existing EU law, particularly the provisions of the treaties and regulations on the protection of the environment. Nevertheless, the rules provide clarity on measures which will be compatible with the internal market and give legal certainty to stakeholders. The judicial review means that State aid measures which are contrary to EU law cannot be implemented. This gives potential beneficiaries certainty that any block exempted, or approved, measure is less likely to be challenged.

In contrast, the UK subsidy control regime is new, with no precedent, and the regime is built around certain principles set out in the UK’s free trade agreements (including the EU-UK Trade and Cooperation Agreement (TCA)). These principles are largely consistent with the spirit of the EU State aid regime but are likely to be more flexible in their interpretation and application and so more readily adapted to the UK Government’s desired outcome. That said, the lack of guidance with respect to the UK subsidy control regime may ‘chill’ measures until there is more legal certainty on how the regime will be applied, the role of the Competition and Markets Authority (CMA) and the scope for legal challenge (see below).

(b) Limited number of stakeholders in the UK compared with the EU 

Fewer interests for the UK to consider when assessing lawfulness of a potential subsidy would likely see quicker implementation of sustainability measures and programmes. The underlying policy goals for achieving sustainability will be easier to scope out in the UK in light of it having only 4 nations compared with the 27 Member States the EU has to contend with. The wider range of interests due to different economic structures, starting points towards achieving EU sustainability goals, energy mix and access to finance could delay the content and deployment of sustainability programmes within the EU.

Additionally, complex public consultation and a competitive bidding process to determine the scope of certain measures and programmes as well as the eligible beneficiaries are proposed in the revised CEEAG (Guidelines on State aid for climate, environmental protection and energy) (you can read more in our recent blog post available here). This lesser degree of flexibility regarding the content and approval process for sustainability measures may lead to more measured grants and programmes in the EU. A complex approval process could stymie programmes which require support to cover the funding gap rather than the financial support to cover the aid intensity. Unless the EU focusses on achieving the optimal outcome in each Member State, and refrains from a cross-border view in assessing priorities, stakeholders can expect to face protracted consultation before sustainability measures can be implemented. A cross-border view, while assessing priorities, could also see the EU funding non-sustainable projects at the expense of sustainable ones (e.g. as part of the Recovery and Resilience Facility, the EU could be financing the replacement of oil heating in rural Bulgaria instead of hydrogen ready smelters in Germany if cross-border views are the focus when assessing the priorities). Delays may however be avoided if Member States commit to prompt resolution of differences and focus on the ultimate aim of achieving the sustainability goals.

The UK, on the other hand, is designing its subsidy control regime to be more flexible and agile than the EU State aid regime. The UK Government has announced that its approach will empower public authorities within the UK’s internal market to design subsidies that are tailored and bespoke for local needs, without facing excessive bureaucracy or lengthy pre-approval processes. This approach would likely result in swifter deployment of funds and implementation of sustainability support measures in the UK.

(c) Different notification processes and enforcement for both regimes potentially makes the UK regime more attractive to businesses

In contrast to the Commission’s role as a pre-approval authority, the Subsidy Advice Unit, which will be a new unit within the CMA, will only have a role as an informal advisor, with its advice having a non-binding effect. The CMA review for compliance is encouraged for “subsidies of interest” and public authorities are not obliged to seek CMA advice before implementing this category of subsidies while it is mandatory for “subsidies of particular interest” – concepts which are yet to be defined. In any case, the CMA would have no power to prevent the grant of a subsidy. By contrast, EU State aid rules, which are applied prospectively, require Member States to prove legality and obtain Commission approval for non-exempt support measures before awarding such measures.  The absence of a standstill obligation under the UK subsidy control regime for subsidies (excluding “subsidies of particular interest”) will, in principle, allow support measures for sustainability objectives to be deployed promptly.

The enforcement regime envisaged in the UK Subsidy Control Bill provides for judicial review by the Competition and Appeal Tribunal (CAT) as the only route for legal challenge by third parties. Indeed, third parties may not have much (if any) of a right to intervene in a CMA review process or even be put on notice that such a review is ongoing. In contrast to the EU State aid regime, complainants will need to establish that a subsidy exists and is not compliant with the regime. There is also a relatively high bar for bringing a legal challenge, i.e. establishing a bona fide case as to why an (alleged) subsidy does not comply with the UK regime and, in turn, the principles set out in the TCA.

This informal advisory system has the potential to be more flexible though at the cost of legal certainty. The system could potentially ‘chill’ stakeholders’ willingness to obtain State support for sustainability objectives for fear of any legal challenge and, if successful, a recovery order – although this may be mitigated by the high bar and short timeframe required for a legal challenge before the CAT.

There is less clarity, at this stage, on the future relationship between the CAT and CMA to determine the extent to which the CMA’s review will be persuasive or de facto binding (in practice at least) and whether this would allow beneficiaries and their counterparties to quantify the risk of legal challenge. Nevertheless, the informal advisory system in the UK is expected to afford more flexibility to businesses provided the regime does not become a de facto pre-approval process in practice, as there is a risk that public authorities and beneficiaries alike seek to make the CMA’s review a pre-grant condition in order to provide some comfort on the lawfulness of the subsidy measure.

Conclusion

There is potential for a new UK regime (i.e. principles-based, no standstill obligation – except in limited cases) to be more flexible for stakeholders compared with the EU regime (i.e. a rule-bound structure). However, the legal certainty of the EU system, in combination with the recently adopted revisions, may be more attractive for businesses (at least for now), and so gives confidence for investment. While it may take longer for stakeholders to get funding and aid approved under the new EU rules, the Commission has promised to be quick with notifications and new ‘green’ cases.