MEMO/08/31

Brussels, 23 January 2008

State aid: guidelines on state aid for the environment – frequently asked questions

(See also IP/08/80)

Why issue state aid guidelines for environmental protection?

State aid must fulfil certain criteria and be authorised by the European Commission. The Commission issues guidelines and frameworks to help Member States by announcing in advance which measures it will consider compatible with the common market, thus speeding up their authorisation.

Environmental protection is an important objective of the European Union. The level of environmental protection is not considered to be sufficiently high and there is a need to do more. This is due notably to the fact that companies do not fully account for the costs of pollution for societies. To address this market failure and promote a higher level of environmental protection, governments may use regulation to ensure that companies pay for their pollution (e.g. through taxes or emission trading systems) or meet certain environmental standards.

In some cases, state aid may also be justified to give private firms an incentive to invest more in environmental protection or to relieve some firms from a relatively high financial burden in order to enforce a stricter environmental policy overall.

At the same time, the guidelines serve as a safeguard that it will not be possible to grant badly targeted or excessive state aid which not only distorts competition but also frustrates the very objective of meeting environmental targets.

What is the link between the State aid guidelines for environmental protection and the Energy and Climate Change package?

The European Council decided in March 2007 to set a target of 20% reduction of greenhouse gases emissions and a binding target of a 20% share of renewable energy in the total EU Energy consumption by 2020.

In the context of the Energy and Climate Change Package the Commission is putting forward ambitious policy measures with regard to, among others, renewable energy and emission trading. To reach these targets, the package is introducing market mechanisms, which should secure that polluters pay for their pollution and that more environmentally friendly technologies are supported. The new Environmental Aid Guidelines are an important part of the package to provide the right incentives for Member States and for industry to increase their efforts for the environment.

First of all, by preserving effective competition, the EAG support the market-based instruments introduced by the package. Without effective competition, it should be clear that the targets will not be delivered. If polluters don’t pay enough and can avoid making sufficient environmental investments because they receive State aid, it will not only distort competition but also frustrate the very objective of meeting the Union's ambitious targets for the environment.

Secondly, the EAG provide a series of measures that complement and support the achievement of greater environmental protection. There may be situations where the polluter pays principle (PPP) can not be properly implemented by Member States. In such situations, state aid can be an option to respond to the market failure linked with environmental negative externalities. State aid may enable individual undertakings to change their behaviour and adopt more environmentally friendly processes or invest in greener technologies. State aid may also enable Member States to adopt regulation or standards that go beyond Community standards by reducing unbearable constraints on some companies. This can support the move towards the Community’s environmental targets.

If the aid is well targeted, the Guidelines are very generous. For instance, for the production of renewable energy, Member States have the possibility to cover 100% of extra-costs supported by the companies.

What are the main changes in the new environmental guidelines as compared to the previous guidelines?

The main changes in the new environmental guidelines compared to guidelines from 2001 are:

1. There are a number of new provisions in the guidelines, e.g. for aid for early adaptation to standards, aid for environmental studies, aid for district heating, aid for waste management and aid involved in tradable permit schemes.
2. The aid intensities have increased considerably. The intensities for large enterprises have gone from a range of 30%-40% to 50%-60%. For small enterprises the intensities have gone from 50%-60% to 70%-80%. Furthermore, where an investment to improve on Community Standards or improve the level of environmental protection in the absence of standards involves eco-innovation, a further 10% aid bonus may be granted. In addition, a possibility to grant 100% following a competitive procedure has been introduced. Contrary to the 2001 guidelines there is no longer a bonus for aid to assisted regions or for renewable energy installations serving all needs in an entire community.
3. As far as tax reductions are concerned, the guidelines maintain the possibility of long term derogations from environmental taxes without conditions as long as after reduction, the companies concerned pay at least the Community minimum. Where the companies do not pay at least the Community minimum, long term derogations remain possible but Member State must demonstrate that these derogations are necessary and proportionate. The beneficiaries of very important reductions of even full exemptions are sometimes big polluters. The Commission considers that under certain conditions, such derogations may be justified, but Member States should justify their necessity.
4. The guidelines are split in a standard assessment and a detailed assessment. A detailed assessment method for large aid amounts to individual enterprises has been introduced in order to allow for a deeper scrutiny of the individual cases which have the greatest potential to distort competition and trade. Schemes involving tax exemptions and reductions will only be assessed at the level of the scheme, i.e. individual enterprises will not be subject to a detailed assessment.
5. There is an important link between the new guidelines and the future general block exemption to be adopted by the Commission before the summer break. The block exemption will relieve the Member States from the obligation to notify certain aid measures to the Commission, and thus reduce the administrative burden. It is foreseen that certain types of environmental aid under a certain amount will not have be notified to the Commission in the future. In addition, it is foreseen that under the block exemption a simplified method can be used to calculate the aid amount.

Why is the aid amount based on the extra environmental investment costs and not the full investment costs?

The aid amount is based on the extra investment costs necessary to achieve the level of environmental protection compared to e.g. an installation fulfilling the mandatory standard or a method of production which is less environmentally friendly in the absence of standards. If this was not the case, any investment that increases the level of environmental protection would be eligible for environmental aid, even if the investment is not more costly than the alternative. In addition aid would be granted to increase capacity or productivity. Only State aid which has an additional effect on the environment should be authorised and the likelihood that the aid is necessary to increase the level of environmental protection is higher if the aid is granted on the basis of the extra cost approach.

Why are the investment aid intensities not 100% when the aid only covers extra environmental costs?

The aid intensities for investments are normally not 100% of the extra investment costs because, first the calculation of extra cost is not accurate, e.g. operating benefits are not taken into account over the whole life time of the installation. Second, a more environmentally friendly image may have a commercial value for the enterprise or may even be indispensable for the future survival of the company. Thus, it will not be necessary to cover all the calculated extra environmental costs in order to trigger the investment.

However, if the State aid is linked to a bidding process, the aid intensity can go up to 100%. Furthermore, for the production of renewable energy and cogeneration operating aid may be granted in addition to investment aid to cover the full difference between the cost of producing the energy and the market price for the energy concerned. The aid may even cover a normal return on capital. Thus, 100% of extra-costs are covered.

What is the reference investment?

The reference investment is the investment which would have been made without the State aid. It is a technically comparable investment that provide a lower degree of environmental protection (corresponding to the mandatory Community standard, if they exist) and would credibly be realised without the aid. For renewable energy, the reference investment is often considered to be a gas fired plant with the same production capacity and for co-generation a plant with separate production of the most dominant production in the co-generation plant is often used. However, the choice of reference investment depends on the type of production and the market and the relevant reference investment may also change over time. Thus, it is not be useful specify the reference investment in more detail in the guidelines.

Aid can be granted if an enterprise goes beyond a Community standard but what is a Community standard?

In EU legislation there are a number of standards setting the level to be attained in environmental terms. The obligation to under Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control to use best available techniques as set out in the most recent relevant information published by the Commission, is also considered to be a Community Standard.

Only the standards that are imposed directly on individual undertakings by Community legislation are considered as standards. Obligations imposed on Member States are not considered as standards in the context of these guidelines.

When will a case be subject to a detailed assessment?

High aid amounts have a greater risk of distorting competition and trade, and will therefore be subject to a detailed assessment. Thus, high aid amounts to individual beneficiaries must be notified individually to the Commission, even if they are granted under a scheme already approved by the Commission. For operating aid for energy production capacity thresholds are used as an indication of high aid amounts. The following aid awards must be notified individually to the Commission:

1. investment aid: where the aid amount exceeds € 7.5 million for one undertaking
2. operating aid for energy saving: where the aid amount exceeds € 5 million per undertaking for five years
3. operating aid for the production of renewable electricity and/or combined production of renewable heat: when the aid is granted to renewable electricity installations in sites where the resulting renewable electricity generation capacity exceeds 125 MW
4. operating aid for the production of biofuel: when the aid is granted to a biofuel production installation in sites where the resulting production exceeds 150,000 t per year
5. operating aid for cogeneration: where aid is granted to a cogeneration installation with the resulting cogeneration electricity capacity exceeding 200 MW. Aid for the production of heat from cogeneration will be assessed in the context of notification based on electricity capacity.

The detailed assessment does not mean of course, that the envisaged State aid will be prohibited. It only means that the Commission will carefully check whether the aid is necessary and actually contribute to environmental protection without creating undue distortions of competition.

How can my enterprise get environmental aid?

The guidelines set out rules on the conditions Member States must respect when granting state aid. Thus, an enterprise should contact the authority in its own Member State responsible for granting environmental aid if it wants to improve the level of environmental protection and needs aid to do so.

The full text of the Framework is available at:

http://ec.europa.eu/comm/competition/state_aid/reform/reform.cfm