EU State Aid Programs to Improve the EnvironmentVADEMECUM [MANUAL] COMMUNITY RULES ON STATE AID
This version of the Vademecum was updated on 15/02/2007.
“The European Commission has launched in June 2005 a comprehensive reform of state aid rules and procedures under the title of State Aid Action Plan (hereinafter only the “Plan”). [See: COM(2005) 107 final June 7, 2005) at: http://ec.europa.eu/comm/competition/state_aid/reform/saap_en.pdf ]. The Commission announced that it would aim in particular to ensure that EC Treaty’s state aid rules are better suited to encourage Member States to contribute to the Lisbon Strategy by focussing aid on improving the competitiveness of EU industry and creating sustainable jobs (for example aid for R & D, innovation and risk capital for small firms), on ensuring social and regional cohesion and improving public services. Since the adoption of the Plan, a number of new regulatory texts have been adopted (such as the new regional aid guidelines) and others are currently under revision. The process should largely be completed by 2009.
...Article 87(1) of the Treaty establishing the European Community Treaty provides that State aid is, in principle, incompatible with the common market. Under Article 88 of the Treaty, the Commission is given the task to control State aid. This article also requires Member States to inform the Commission in advance of any plan to grant State aid (“notification requirement”).
State aid rules apply only to measures that satisfy all of the criteria listed in Article 87(1) of the Treaty, and more in particular:
(a) Transfer of State resources:
State aid rules cover only measures involving a transfer of State resources (including national, regional or local authorities, public banks and foundations, etc.). Furthermore, the aid does not necessarily need to be granted by the State itself. It may also be granted by a private or public intermediate body appointed by the State. The latter could apply in cases where a private bank is given the responsibility to manage a state funded SME aid scheme. Financial transfers that constitute aid can take many forms: not just grants or interest rate rebates, but also loan guarantees, accelerated depreciation allowances, capital injections etc.
(b) Economic advantage:
The aid should constitute an economic advantage that the undertaking would not have received in the normal course of business. Less obvious examples of transactions satisfying this condition are given below:
• A firm buys/rents publicly owned land at less than the market price;
• A company sells land to the State at higher than market price;
• A company enjoys privileged access to infrastructure without paying a fee;
• An enterprise obtains risk capital from the State on terms, which are more favourable
than it would obtain from a private investor.
(c) Selectivity:
State aid must be selective and thus affect the balance between certain firms and their competitors. “Selectivity” is what differentiates State aid from so-called “general measures"
(namely measures which apply without distinction across the board to all firms in all economic sectors in a Member State (e.g. most nation-wide fiscal measures)). A scheme is considered “selective”, if the authorities administering the scheme enjoy a degree of discretionary power. The selectivity criterion is also satisfied if the scheme applies to only part of the territory of a Member State (this is the case for all regional and sectoral aid schemes).
(d) Effect on competition and trade:
Aid must have a potential effect on competition and trade between Member States. It is sufficient if it can be shown that the beneficiary is involved in an) economic activity and that he operates in a market in which there is trade between Member States. The nature of the beneficiary is not relevant in this context (even a non-profit organisation can engage in economic activities).
...According to Article 87(1) of the Treaty, aid measures that satisfy all the criteria outlined above are, in principle, incompatible with the common market. However, the principle of incompatibility does not amount to a full-scale prohibition. Articles 87(2) and 87(3) of the Treaty specify a number of cases in which State aid could be considered acceptable (the so called “exemptions”).
In the context of Structural Funds operations, the most relevant exemption clauses are those of Article 87(3)(a) and 87(3)(c) of the Treaty:
• Article 87(3)(a) covers “aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment”;
• Article 87(3)(c) refers to “aid to facilitate the development of certain economic activities or certain economic areas, where such aid does not adversely affect trading conditions contrary to the common interest”.
...(b) Other Horizontal rules:
Cross-industry or “horizontal” rules set out the Commission’s position on particular categories of aid which are aimed at tackling problems which may arise in any industry and region. To date, the Commission has adopted “frameworks”, “guidelines” or “block exemption regulations” setting out the criteria that are to be applied to the following categories of aid:
• Aid for small and medium-sized enterprises;
• Aid for research and development and innovation;
• Aid for environmental protection;
• Aid for risk capital;
• Aid for services of general economic interest;
• Aid for the rescue and restructuring of firms in difficulty;
• Aid to employment; and
• Training aid.
...[T] the “Community Guidelines on State aid for Environmental Protection” (Official Journal No C 37, 3.2.2001, p.3) cover aid for actions designed to remedy or prevent damage to our physical surroundings or natural resources or to encourage the efficient use of these resources.
...INVESTMENT AID & AID FOR ADVISORY SERVICES
Eligible activities & costs
Aid for investment to adapt to new compulsory EU environmental standards or to improve on such standards
- Eligible costs: Strictly limited to the extra costs of the investments in land, buildings, equipment and intangible assets necessary to achieve the compulsory standards and/or to meet the environmental objectives. In all cases, the eligible costs must be calculated net of the benefits accruing from any increase in capacity, cost savings engendered during the first five years of the life of the investment and additional ancillary production during that five-year period.
- Aid for investment to adapt to new compulsory EU standards can be granted to SMEs only and can be made available only during a period of three years from the adoption of these new standards.
Aid for investment in energy saving, in renewable sources of energy and in combined heat and power installations (CHP)
- Eligible costs: Strictly limited to the extra costs of the investments in land, buildings, equipment and intangible assets necessary to achieve the environmental objectives. In all cases, the eligible costs must be calculated net of the benefits accruing from any increase in capacity, cost savings engendered during the first five years of the life of the investment and additional ancillary production during that five-year period.
- In the case of renewables or CHP, the extra costs are defined as the extra cost compared to the cost of a comparable conventional power plant.
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http://ec.europa.eu/comm/competition/state_aid/studies_reports/2008_spring_en.pdf
COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, 21.5.2008
COM(2008) 304 final
REPORT FROM THE COMMISSION
State Aid Scoreboard
- Spring 2008 Update –
(at pp. 3-5)
... EXECUTIVE SUMMARY
Environmental and energy aid 1) Environmental aid measures need to be examined by the Commission to ensure that the benefits they bring about outweigh any distortion of competition.
The EU is at the forefront of international efforts to combat climate change - one of the greatest environmental, social and economic threats facing the planet. The EU has played a key role in the development of the two major treaties addressing the issue, the 1992 UN Framework Convention on Climate Change and its Kyoto Protocol, agreed in 1997.
Moreover, the EU has been taking serious steps to address its own greenhouse gas emissions since the early 1990s. An integrated EU energy policy that gives substantial weight to energy efficiency and renewable energy is the EU's response to volatile oil and gas prices, the fear of energy supply disruption and the impact on climate change of the high use of fossil energies.
Within this broad context, the Commission has recently revised the role that State aid plays in supporting the EU environmental and energy policy objectives, by adopting a new set of guidelines as part of the climate change package that the European Commission adopted in January 2008.
Member States resort to a wide range of national environmental policy measures to protect their environment: to limit pollution of air, water and soil, to protect natural resources, to promote renewable energy sources and energy savings, to manage waste, etc. Many of these objectives are targeted through general measures, i.e. applied throughout a particular country without regional or sectoral selectivity, or are addressed through market-based instruments, such as the Emission Trading Scheme and the Energy Taxation Directive, which don't entail State aid.
[SINCE WHEN ARE REGULATIONS MARKET-BASED INSTRUMENTS??]
However, there are also environmental measures or exemptions from general measures (e.g. environmental tax relief) which favour certain companies or the production of certain goods. Such measures may distort competition between companies and it is therefore important that the benefits they bring about are carefully balanced against the distortion of competition they cause. The adoption of the new Guidelines on State aid for environmental protection, in the context of the energy and climate change package, opens up new opportunities for Member States in this field that are worth exploring.
2) Over the last 7 years, 98 % of the 350 environmental aid measures examined by the Commission were found to be compatible with the internal market.
[THIS LEVEL OF COMPATIBILITY WITH THE EU TREATY IS UNLIKELY TO BE THE SAME FOR PURPOSES OF THE WTO 'SUBSIDY' RULES]
In the seven years that these guidelines have been in force, the Commission has taken around 350 decisions. Drawing on these decisions, the Scoreboard provides clear examples of when environmental targeted measures constitute State aid and when this aid can be considered as compatible with the common market. The majority of examples are chosen among cases recently approved by the Commission and constitute either typical or innovative cases in the different sub-areas where environmental aid can be granted (i.e. renewable energy, energy saving, waste management, etc.). In the vast majority of environmental aid cases (98 %), the Commission found them to be compatible. It is however worth noting that this high figure includes cases in which the Commission may have identified certain issues related to the compatibility. Such issues can often be resolved within the scope of the notification procedure through a change in the measure.
3) Increasing use of environmental aid guidelines but considerable variations from one Member State to another.
As the case studies in section 1.6 show, environmental aid encompasses a wide range of objectives, including support measures for renewable energy, energy-saving, waste management, rehabilitation of polluted industrial sites and improvement of production processes. For these types of measures, aid granted by Member States pursues a direct benefit to the environment. State aid expenditure data for such cases can therefore be taken as a proxy measure for the intended environmental benefit, regardless of the form in which the aid may be awarded (grant, tax exemption, guarantee, etc.). This represented approximately 47 % of total environmental aid expenditure in 2006 (around €6.7 billion).
A second category of State aid measures assessed under the environmental aid guidelines are reductions or exemptions from environmental taxes. Here, the environmental objective of the measure is pursued by the tax itself. Any reduction or exemption from environmental taxes, i.e., the part of the measure constituting aid, has an indirect environmental objective by facilitating the introduction or modification of such taxes (going beyond the minima imposed by European Directives for example). Expenditure data currently available for this category of aid schemes indicate the amount of tax revenue foregone and can therefore not serve as a proxy measure for the environmental benefit the taxes themselves have brought. In 2006, some 53 % of total expenditure (around €7.5 billion) fell under this category.
Any analysis of State aid expenditure for environmental purposes must therefore take account of the fact that a large proportion of aid comprises tax exemptions from environmental taxes, usually benefiting energy intensive industries including sometimes big polluters, that had to be accepted in order to allow for certain types of environmental taxes to be introduced.
Although the tax exemptions from environmental taxes do not by themselves aim directly at reaching higher environmental standards, such exemptions are only allowed where the taxes themselves are intended to make a significant contribution to protecting the environment and where the exemptions do not undermine the general objectives pursued.
For this reason, the new State aid guidelines for environmental protection require that where companies do not pay at least the Community minimum or where the tax in question is not subject to Community-wide harmonisation,, long term derogations from environmental taxes remain only possible when Member States can demonstrate that they are necessary and proportionate. Although the number of new environmental aid measures has remained relatively stable for the majority of Member States since 2001, total expenditure for environmental purposes doubled between 2001 and 2006 from € 7 to € 14 billion. In relative terms, environmental aid amounted to 0,12 %.of EU-27 GDP in the period 2004 - 2006 compared with 0.08 % in the period 2001 – 2003.
This average hides significant disparities between Member States. The largest aid grantors in 2004 - 2006 were Sweden (0.77 % of GDP), Denmark (0.35 %), Germany (0,32 %.) followed by Austria, the Netherlands and Finland each of which granted aid above the EU average. Environmental aid expenditure in the United Kingdom stood at half the EU-27 average, while all other Member States, including Spain, France and Italy, granted aid amounting to less than one quarter of the EU-27 average in terms of GDP.
The overall level of expenditure in environmental aid measures in the EU is strongly influenced by the largest aid grantors, Germany and Sweden, in which tax exemptions account for over 90 % of total environmental aid in each country. A CO2 tax reduction for industry and a tax exemption from the energy tax on electricity led to a remarkable rise in aid expenditure for Sweden from 2003 onwards. In Germany, expenditure has risen steadily following the approval in 2002 of a measure that prolonged several tax exemptions from the German energy taxation on electricity and mineral oils. Data show that, leaving aside aid in the form of tax exemptions, the trend in the level of environmental aid remains stable.
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pp. 8-23
... Sustainable development, security of supply and competitiveness are precisely the objectives of the Green Paper on a European Energy Strategy which was adopted by the Commission early 2006. By October the same year, the Commission proposed an Action Plan to reduce energy use, followed in early 2007 by a Commission proposal for an integrated energy and climate change package with significant reduction targets in greenhouse gas emissions by 2020. Most of these proposals were endorsed by the 2007 Spring European Council. Agreement was reached on an integrated climate and energy policy, including a number of headline political targets and a detailed action plan on how to realise them...
...In response to the above-mentioned Council conclusions the Commission presented, on 23 January 2008, its proposal for an energy and climate change package which included...
... New guidelines on State aid for environmental protection (hereinafter Environmental Aid Guidelines). The revised Environmental aid Guidelines are an important part of the Energy and Climate Change package aiming to provide the right incentives for Member States and for industry to increase their efforts for the environment. They aim to strike the right balance between generous support mechanisms for well targeted environmental aid and the preservation of competition which is necessary for the well-functioning of the market based instruments introduced by the package. The guidelines are the only part of the package that will immediately enter into force.
... 1.7. State aid expenditure on environmental protection
...[E]nvironmental aid encompasses a wide range of objectives, including support measures for renewable energy, energy-saving, waste management, rehabilitation of polluted industrial sites and improvement of production processes. For these types of measures, aid granted by Member States pursues a direct benefit to the environment.
State aid expenditure data for such cases can therefore be taken as a proxy measure for the intended environmental benefit, regardless of the form in which the aid may be awarded (grant, tax exemption, guarantee, etc.). This represented approximately 47 % of total environmental aid expenditure in 2006 (around €6.7 billion).
A second category of State aid measures assessed under the environmental aid guidelines are reductions or exemptions from environmental taxes. Here, the environmental objective of the measure is pursued by the tax itself. Any reduction or exemption from environmental taxes, i.e., the part of the measure constituting aid, has an indirect environmental objective by facilitating the introduction or modification of such taxes. Expenditure data currently available for this category of aid schemes indicate the amount of tax revenue foregone and can therefore not serve as a proxy measure of the environmental benefit the taxes themselves have brought. In 2006, some 53 % of total expenditure (around €7.5 billion) fell under this category.
Any analysis of State aid expenditure for environmental purposes must therefore take account of the fact that a large proportion of aid comprises tax exemptions from environmental taxes, usually benefiting energy intensive industries including sometimes big polluters, that had to be accepted in order to allow for certain types of environmental taxes (going beyond the minima imposed by European Directives for example) to be introduced. That share of tax exemptions is strongly influenced by the largest environmental aid grantors, Germany and Sweden.
Such exemptions are only allowed where the taxes themselves are intended to make a significant contribution to protecting the environment and where the exemptions do not undermine the general objectives pursued. For this reason, the new State aid guidelines for environmental protection require that where companies do not pay at least the Community minimum or where the tax in question is not subject to Community-wide harmonisation, long-term derogations from environmental taxes remain only possible when Member States can demonstrate that they are necessary and proportionate.
EU-wide, aid in the form of grants represents around 17 % of total environmental aid although the proportion is higher, for example, in the Netherlands which awards a significant proportion of its aid in the form of subsidies for the production of energy from renewable energy sources and combined heat and power production (CHP).
Looking at the share of each aid instrument in terms of number of measures paints a rather different picture: aid in the form of grants account for 70 % of the total number of environmental aid measures while tax exemptions make up less than 20 % of the total (Figure 2).
The amount of environmental aid doubled between 2001 and 2006
In 2006, the EU-27 Member States awarded 14 billion of State aid under the environmental aid guidelines compared with € 7 billion in 2001. The largest environmental aid grantors in absolute terms, which together granted more than 90 % of total environmental aid, were Germany (€ 8 billion), Sweden (€ 2.5 billion), the United Kingdom (€ 1 billion), the Netherlands (€ 860 million) and Denmark (€ 600 million). In more than half the Member States, expenditure did not exceed € 20 million in 2006.
Large disparities between Member States in the share of environmental aid as a percentage of GDP
In relative terms, environmental aid amounted to 0.12 % of EU-27 Gross Domestic Product (GDP) in the period 2004-2006. This average hides significant disparities between Member States. The largest aid grantors in relative terms were Sweden (0.77 % of GDP), Denmark (0.35 %) and Germany (0.32 %), followed by Austria, the Netherlands and Finland each of which granted aid above the EU average. Environmental aid expenditure in the United Kingdom stood at half the EU-27 average, while all other Member States, including Spain, France and Italy, granted aid amounting to less than one quarter of the EU-27 average in terms of GDP (see Table 1). It is worth noting that even if tax exemptions are excluded from the figures, the ranking of Member States is broadly similar.
Leaving aside aid in the form of tax exemptions, the trend in the level of environmental aid is stable.
EU-wide, total environmental aid as a percentage of GDP has increased from 0.08 % in the period 2002 - 2004 to 0.12 % in the period 2004 - 2006. However, this upward trend is largely the result of significant increases in the use of tax exemptions: their share in total environmental aid has increased from 69 % in 2001 to 83 % in 2006. As regards aid in the form of grants or other State aid instruments with a direct impact on the environment, there has been no significant increase in the overall expenditure.
Box: Environmental taxation
... Data on the share of environmental taxes to total taxation indicate that roughly one Euro out of every fifteen in revenue derives from environmental taxes. Environmental tax revenues in the last five years have been on the decline, at least in the EU-15. In contrast, in the EU-12 Member States, which originally levied low environmental taxes, revenues from this kind of taxes have shown a strong progression over time, so that by now there is practically no difference vis-à-vis the EU-15 in this respect.
Looking at the ratio of environmental tax-to-GDP most Member States tend to fall in a band ranging from 2 % to 3 % of GDP, or slightly higher. At 5.8 % in 2005, Denmark displayed by far the highest level of "green" taxes followed by the Netherlands (4 %).
A high share of environmental tax revenue as such does not necessarily represent an indication of a high priority being attributed to environmental protection. Energy taxes were originally used purely as revenue raising instruments, without environmental purposes. Furthermore, the level of this indicator also says nothing about the achievement of environmental policy goals, as revenue increases could conceivably result from changes in the economy towards production and consumption patterns that are resource intensive and lead to even higher pollution...
Vast majority of environmental aid awarded through schemes
Over the period 2001-2007, around 12 % of environmental aid decisions involved individual awards of aid to companies as opposed to aid schemes. However, in terms of expenditure, individual aid amounted to only 2 % of total environmental aid.
...1.8. The new guidelines on State aid for environmental protection
...The main idea behind the revised guidelines is that Member States should not use State aid as the main tool to address environmental concerns. As shown in section 1.2 above, Member States have several other means at hand (such as regulatory measures, market-based mechanism, etc.) that should be used for this purpose in the first place. State aid should remain a fallback option to be used only when it can be proved that the targeted objective cannot be reached by other means.
But, in certain cases, granting State aid may 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. However, it should not be possible to grant badly targeted or excessive State aid which not only distorts competition but is also counterproductive for meeting environmental objectives. The new Environmental aid Guidelines make sure that competition is not unduly distorted by support mechanisms – e.g. subsidies, tax exemptions – that Member States develop for the environment. They ensure that State aid measures are better targeted and that the positive effects outweigh the negative effects in terms of distortions of competition. Furthermore, they guarantee that, at the same time, businesses receive sufficient – but not more – incentive to make more environmentally friendly investments or to use, for example, more renewable energy. These new rules introduce more economic analysis, focus on the most distortive measures and define clear rules for tax exemptions and ETS.
Compared to the previous guidelines, the revised version brings about improvements in the following areas.
– Introduction of a clearer and more user-friendly definition of eligible costs based on the concept of "extra investment costs" (see box below). Indeed, the allowable aid amount is calculated in relation to the extra investment cost that is necessary to achieve the level of environmental protection compared to either an installation fulfilling the mandatory standard or, in the absence of standards, a method of production which is less environmentally friendly. This is so because only State aid which has an additional effect
on the environment should be authorised.
– Increased aid intensities which, in certain cases, can go up to 100 % of the eligible costs. This is allowed, for example, when State aid is linked to a bidding (thus, competitive) process or to support the production of renewable energy and cogeneration where operating aid maybe granted in addition to investment aid in order to cover the full difference between the cost of producing the energy and the market price for the energy concerned.
– Clarification of the treatment of tax reductions/exemptions. The possibility for long term derogations from environmental taxes is maintained by the new guidelines provided that, after the reduction, the companies concerned still have to pay, at least, the Community minimum. In all other cases, including non-harmonised taxes, Member States must demonstrate that such derogations are both necessary and proportionate.
– New provisions on aid for early adaptation to standards, aid for environmental studies, aid for district heating, aid for waste management, including recycling, and aid involved in tradable permit schemes.
– Introduction of a detailed assessment method for cases involving large aid amounts to individual beneficiaries, which have greater potential to distort competition and trade. All other cases will be subject to a standard assessment and, most likely, some of them will be even block-exempted once the Commission adopts the future General Block Exemption Regulation (hereinafter, GBER). As a consequence, Member States would be relieved from the notification obligation and would be able to use a simplified method to calculate the aid amount involved in measures falling under the scope of the GBER. The result would be a considerable reduction of the administrative burden in the field of environmental aid.
...[I]n cases where the PPP [Polluters Pay Principle] cannot be properly implemented and the production costs are not properly accounted for by industry...[i.e.,] [i]n such market failure situations, State aid can be an appropriate tool. It may also enable individual undertakings to change their behaviour and adopt more environmentally friendly processes or invest in greener technologies. Finally, it may encourage Member States to move beyond Community standards and to efficiently support the production of renewable energy and energy cogeneration.
...Concept of Extra Costs
When it comes to investment aid, extra costs are calculated either by clearly identifying the part of the investment improving the environmental protection...or by comparing the total investment costs with a reference investment that does not achieve the same higher level of environmental protection. The appropriate reference investment has to be decided on a case by case basis and must be an investment which would be a credible alternative without the aid. For example, for an investment in renewable energy, the reference investment is normally a conventional power plant, while for an investment in co-generation of heat and power, the reference investment is normally an investment in separate production of heat or power.
For operating aid, extra costs are defined as the difference between production costs (including investment costs and a normal return on capital) and the market price. Only investment costs which have actually been borne by the undertaking can be included in the extra costs.
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http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/31&format=HTML&aged=0&language=EN&guiLanguage=en
State aid: guidelines on state aid for the environment – frequently asked questions
MEMO/08/31
Brussels, 23 January 2008
"...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.
...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.
...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.
...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.
...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...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.
...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...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.
...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."
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http://www.umweltdaten.de/publikationen/fpdf-k/k2549.pdf
The Polluter Pays Principle under WTO Law: The Case of National Energy Policy Instruments
By Frank Biermann, Frédéric Böhm, Rainer Brohm, Susanne Dröge and Harald Trabold
ENVIRONMENTAL RESEARCH OF THE FEDERAL MINISTRY OF THE ENVIRONMENT, NATURE CONSERVATION AND NUCLEAR SAFETY
Research Report 201 19 107
UBA-FB 000555/e
TEXTE 76/2003
"[I]nstruments of German domestic and international energy policy...[include] The Polluter Pays Principle. The PPP is an environmental policy guideline stipulating that the costs of pollution prevention and control should be borne by the polluter. The OECD has included the PPP in its environmental policy guidelines and it can also be found in European Law and in the UNCED Rio Declaration (1992). The PPP is applied to differing degrees by various countries around the world.
...The PPP is not part of the WTO rules, which are concerned with facilitating international trade. This does, however, not hinder PPP-application per se, but has some implications for national policy instruments which require that polluters should bear the environmental costs of their activities.
... Only the application of non-product related standards on imports, i.e. standards prescribing production methods which do not determine the physical characteristics of a product, are not compatible with current interpretation of WTO law. Electricity from different sources (e.g. nuclear and solar power) is regarded as a “like product” and imported electricity must not be discriminated against based on its production method. Currently, such discrimination is not part of any German command and control policy.
... Environmental taxes are levied in order to charge a polluter for the damages caused by his activities. In theory, they help to fully internalise the environmental costs of consumption and production. However, national taxation of energy consumption – like the German Ecological Tax Reform - faces difficulties in open economies, as non-taxed imports are available as substitutes for domestic products. As long as international tax harmonisation is not possible, border tax adjustments could help to offset competitive disadvantages without watering down the environmental objectives of taxation, e.g. the reduction of carbon dioxide emissions.
Whether or not border tax adjustments for energy taxes are permitted under world trade law is not entirely clear given the lack of precise legal provisions and case law.
... A subsidy can be defined in a broad sense as an economic benefit received by a private agent from public funds. Subsidies are in general not compatible with the PPP. They are, however, often applied as a temporary measure to enable producers to avoid emissions in the long run. The WTO definition of a subsidy is regulated in the GATT and in the Agreement on Subsidies and Countervailing Measures (ASCM). It comprises direct subsidisation (financial contribution) and income or price support by a government. Prohibited are all subsidies that are based on export performance or contingent upon the use of domestic over imported goods.
We have shown that the German price guarantees for renewable energy in the EEG and KWK cannot be considered as subsidies under WTO law. Even if this were the case, they would be regarded as non-actionable, unless a WTO member could prove serious adverse effects to the domestic industry which are difficult to repair. Furthermore, it is also unlikely that the direct German price supports for electricity from renewable energy sources will be challenged in a WTO dispute, because currently, trade in this electricity is low and such subsidies were considered to be non-actionable under Article VIII (2) ASCM up until 1999."
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Are the EU Subsidies for Renewable Energy Legal for WTO Purposes??
There is a need to distinguish between ‘legitimate’ government activities and trade-distorting subsidies.
- Domestic subsidy –
o Granted to an industry on all of its production of a product, regardless of whether that production is exported. It can have effects similar to a protectionist tariff.
§ It can enable domestic industry to reduce its price to a level below that of foreign imports, and effectively drive out import competition.
§ It is favorable to consumers b/c it lowers the overall price of products.
WTO rules - impose significant constraints upon the ability of WTO Member governments to use domestic subsidies.
o Unbridled and competing national subsidies can undermine world prosperity, and quickly spread from nation to nation.
o A major purpose of the GATT is to discipline protective import policies.
o Subsidies can undermine market access commitments by importing nations. Promises to reduce or eliminate the use of traditional instruments of protection like tariffs and quotas can prove worthless if other instruments of import protection are substituted for them, and new subsidy programs are one such instrument.
o Subsidies are said by many observers to "tilt the playing field" in a way that is unfair or otherwise objectionable, quite independently of whether they frustrate the market access expectations associated with WTO/GATT commitments on particular products or services.
§ Subsidies can distort resource allocation by diverting resources from higher valued to lower valued uses. Put slightly differently, they can distort comparative advantage and produce a less efficient global division of labor, leading to lower economic welfare. In the view of some observers, additional disciplines are required to thwart the use of subsidies that result in unfair or economically inefficient distortions of international trade.
· See: Alan O. Sykes, THE ECONOMICS OF WTO RULES ON SUBSIDIES AND COUNTERVAILING MEASURES at: http://www.law.uchicago.edu/Lawecon/workshop-papers/sykes.pdf
The GATT – treats subsidies as a ‘distortion’ of international trade that creates a disparity between the actual costs incurred in producing a particular good and those which must be borne by the firm undertaking its production.
- It is often said that much government support is more of a ‘correction’ of ‘market failure’ (i.e., enhancement of economic welfare) than a ‘distortion’ of market dynamics (and thus a reduction of economic welfare).
o The issue then becomes one of identifying whether a particular measure on balance ‘corrects’ or ‘distorts’ the market process.
§ i.e., whether it increases or decreases the efficiency with which resources are allocated.
§ This depends on theoretical and empirical judgments about how well the domestic political system performs the tasks of deciding what intervention should be undertaken and implementing the program adopted.
- GATT Article XVI – contains original obligations on subidies.
o Introduction of a new domestic subsidy on a product which is bound in a country’s GATT schedule has been termed a ‘prima facie nullification or impairment’ on GATT Article XXIII.
WTO Subsidies Agreement –
- Defines ‘subsidy’
o SPECIFIC SUBSIDY – a subsidy available only to an enterprise or industry or group of enterprises or industries within the jurisdiction of the authority granting the subsidy.
§ ONLY specific subsidies are subject to discipline under this agreement.
§ Although the agreement set out THREE categories of subsidies, only two remain, with the third having been phased out:
· SCM Article 3.1 - Prohibited – ‘Red’ –
o Those contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods. Subject to expedited timetable for action by DSB. If found prohibited, it must be immediately withdrawn, or be subject to COUNTERMEASURES.
· SCM Article 5 – Actionable – ‘Amber’ –
o No member should cause through the use of subsidies, adverse effects to the interests of other signatories – injury to domestic industry of another signatory, nullification or impairment of benefits accruing directly or indirectly to other signatories, and ‘serious prejudice’ to the interests of another member
o Must rely on SCM Articles 6.2 and 6.3: requiring DEMONSTRATION OF ‘SERIOUS PREJUDICE’
· Burden of proof on complaining member.
· SCM Article 8 – Non-Actionable – ‘Green’ – PHASED-OUT ** (See SCM Article 31)
o This window for non-actionable subsidies existed for five years, ending on December 31, 1999, and was not extended;
o Non-specific subsidies;
o Specific subsidies involving assistance to:
§ industrial research & pre-competitive development activity -
· Research and Development: “assistance for research activities conducted by firms or by higher education or research establishments on a contract basis with firms.” These subsidies were limited to the cost of personnel, equipment and overhead activity employed exclusively for a research activity. Moreover, government subsidy for research was only permitted up to the point of development of the first non-commercial prototype;
§ adapting existing facilities to new environmental requirements imposed by law and/or regulations ****
· Environmental Protection: “assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms.” These subsides were allowed only if they promoted the adaptation of facilities in operation for at least two years to new environmental requirements that were imposed by laws or regulations. In addition, they were limited to 20 per cent of the cost of adaptation, and could not cover the cost of replacing and operating the assisted investment, which had to be fully borne by the firm.
o Developing countries refused to sign the Doha Declaration unless the use of these subsidies was revisited. Thus, Article 8 revisitation is specifically mentioned in the Implementation-Related Issues and Concerns decision of November 14, 2001. The text is as follows: Proposal to allow certain subsidies for development: Some countries have proposed that some subsidies in developing countries should not have to face countervailing measures or other actions from other governments. These are described as subsidies with “legitimate development goals,” and include support for regional growth, technology research and development, production diversification, and development and implementation of environmentally sound methods of production.
§ The ministers agree that this is an implementation issue to be handled under section 13, which in turn simply refers to Paragraph 12 of the main Doha Declaration. The ministers also agree that during the negotiations their governments will exercise due restraint in challenging these subsidies. See: Francisco Aguayo, Ayala “Preserving Policy Space for Sustainable Development: The Subsidies Agreement at the WTO”, International Institute for Sustainable Development (Dec. 2005) at: http://www.tradeknowledgenetwork.net/pdf/tkn_policy_space_commentary.pdf
§ See DOHA WTO MINISTERIAL 2001: MINISTERIAL DECLARATION WT/MIN(01)/DEC/1 (Nov. 20, 2001) at: http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm
o SCM Article 1.1(a):
§ A “subsidy” shall be deemed to exist if:
· There is a financial contribution by a government or public body, involving:
o A direct transfer of funds (grants, loans, equity infusion, etc.)
o Foregone government revenue otherwise due; OR
o Government payment to a funding mechanism or entrusts or directs a private body to carry out certain specified functions; AND
· Thereby a ‘benefit’ is conferred.
o SCM Article 1.1(b):
§ ‘Benefit’ clearly encompasses some form of ‘advantage’ -
· Need to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution
o Need to look at the ‘market’ – a financial contribution will only confer a ‘benefit’ if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market.
o ‘Cost’ to government is NOT relevant for purposes of making this determination.
o Panel found contextual support for its ‘reading’ of the term ‘benefit’ in SCM Article 14 (a)-(d).
· focus on the recipient of the benefit rather than the granting authority
o Therefore the cost to government is inconsistent with the ordinary meaning of the term ‘benefit’.
· SCM Article 14 sets forth guidelines for calculating the amount of a subsidy in terms of “the benefit to the recipient”. ****
o These guidelines apply to the calculation of the “benefit to the recipient conferred pursuant to par. 1 of Article 1”.
· SCM Article 1.1, itself, confirms the view that the focus is on the benefit to the recipient and NOT the cost to gov’t.
· The term ‘benefit’ implies some kind of comparison:
o The marketplace provides an appropriate basis for comparison in determining whether a ‘benefit’ has been ‘conferred’.
§ The trade distorting potential of a ‘financial contribution’ can be identified by determining whether the recipient has received a ‘financial contribution’ on terms more favorable than those available to the recipient in the market.
§ SCM Article 14 Guidelines – relate to: equity investments; loans, loan guarantees; the provision of goods by gov’t.
· See: Canada-Measures Affecting the Export of Civilian Aircraft (AB 1999 – Adopted)
§ A ‘benefit’ must be received and enjoyed by a beneficiary or a recipient – a person, natural or legal, or a group of persons.
· See: United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the UK (WT AB adopted 2000)
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