REVISION OF THE ENVIRONMENTAL STATE AID GUIDELINES:

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1 REVISION OF THE ENVIRONMENTAL STATE AID GUIDELINES: UK PROPOSAL FOR NEW PROVISIONS ALLOWING FOR SPECIFIC AID MEASURES FOR SUPPORTING THE COMPETITIVENESS OF ENERGY INTENSIVE INDUSTRIES MOST AT RISK OF CARBON LEAKAGE Introduction 1. The energy policy for Europe (EPE) is aimed at increasing security supply, ensuring the competitiveness of European economies and the availability of affordable energy, and promoting environmental sustainability and combating climate change. The current Environmental Aid Guidelines provide for ten specific aid measures for achieving these objectives of common interest. However, none of the specific measures enables Member States to protect the competitiveness of energy intensive industries that are facing significant risks of carbon leakage due to the increasing indirect costs of EU energy and climate change policies. 2. The UK believes that the Environmental Aid Guidelines should give a proper recognition to the role of EU-based energy intensive industries (EIIs) in achieving EU energy and climate policy objectives and provide for measures to protect the competitiveness of those that are most at risk of carbon leakage. This will provide a harmonised framework and legal certainty for Member States to support their energy-intensive industries when the need arises. 3. As shown below, EU energy-intensive industries are likely to be exposed a significant risk of carbon leakage as the cumulative impact of EU and national energy and climate change policies result in rising electricity prices, which then affect their competitive conditions. The economic value of energy-intensive industries in the EU 4. A strong industrial base is an essential building block for prosperity and economic growth in Europe and energy intensive industries are crucial in moving to a low carbon economy. They produce the products needed to achieve a low carbon economy. For example, new power plants, low-emission cars, higher-efficiency home appliances, energyefficient plant and machinery, and energy-efficient homes all require a myriad of energy-intensive materials, such as steel, cement, rubber, numerous chemicals, glass, ceramics and other products. The transition to a low-carbon economy is impossible without the materials produced by energy-intensive industries. 5. The graph below shows the gross value added (GVA) of energy intensive industries in the EU from [ ] as a proportion of EU GVA. It shows that energy intensive industries are significant contributors to the EU economy, albeit falling over the past decade. 1

2 This could partly be explained by a structural shift in the EU economy, but energy intensive industries continue to add to the EU prosperity and economic growth. EII GVA as a proportion of EU GVA 18% 16% 14% 12% 10% 8% EU 15 EU 25 EU 27 6% 4% 2% 0% Additionally, in many EU Member States, particularly the UK, many energy-intensive industries are based in regions of relative high unemployment. So, they also play an important role in the economies of those deprived regions, particularly with respect to direct and indirect employment from their supply chain. Impact of EU energy and climate policies on electricity costs for Energy Intensive Industries in the EU 7. Europe and particularly the UK have adopted ambitious energy and climate change targets requiring significant investment in new low carbon generation. These investments are incentivised primarily through two mechanisms: Direct subsidy for renewable generation capacity (such as the quota obligation or a feed-in-tariff) the introduction of carbon pricing via the EU ETS incorporating the negative externality of greenhouse gas emissions and making fossil fuel generation more expensive relative to low carbon generation 8. These mechanisms have a direct impact on electricity prices. Wholesale electricity prices reflect trends in global fossil fuel prices. As the prices of fossil fuels rise as a result of carbon pricing, the increase in wholesale electricity will push up industrial retail prices. Equally, the funding of subsidies for renewable generation through quota obligation 2

3 or feed-in tariffs impacts on industrial electricity prices as energy suppliers pass on the costs of the subsidies to end electricity users. Renewable Electricity Support Mechanism in Europe 9. All Member States have renewable electricity support mechanism in place in the form of a feed-in tariff, quota obligation or a hybrid (see figure below). 10. In most Member States, energy consumers fund these renewable electricity support mechanisms, leading to an increase in electricity prices. The graph below, based on a study 1 done for the European Commission, shows the net support expenditures for renewable electricity in total in 2009, expressed as support per unit of overall 1 Ecofys (2011), Financing Renewable Energy in the European Energy Market, Utrecht, the Netherlands: Ecofys. 3

4 gross final electricity consumed. The graph provides a reasonable approximate for the average absolute increase in electricity prices in the Member States. 11. However, some Member States have special arrangements in place to protect the competitiveness of their energy intensive industries. Therefore, the graph does not directly correspond with the price impact for energy intensive industries. The graph shows the net support expenditure for 2009 only, but these expenditures are likely to increase in order the meet the EU s 2020 renewable energy target of 15%. 12. The Department of Business Innovation & Skills (BIS) commissioned independent research to compile information on the energy cost impact of climate change policies in the UK, other Member States and third countries. This study has not identified In the UK, there is unlikely to be significant impacts on gas prices as a result of climate change policies and hence our focus is on the direct and indirect impacts of these policies on electricity prices. However, this may be different in other Member States. 13. The study also shows that all Member States have substantially higher incremental electricity costs caused by climate change and energy policies than most of the non-eu countries, with the exception of France which has relatively low EU ETS costs due to a smaller proportion of fossil fuel power generation capacity. Indirect emission costs due to the EU ETS contribute significantly to this difference between EU and non-eu electricity costs.. Renewable energy costs are also shown to be higher in EU Member States (especially the UK, Italy and Denmark) compared to countries outside the EU. 14. The graph below shows the indicative incremental impacts in 2011, 2015 and 2020 on electricity price ( /MWh, 2010 prices) of energy and climate change policies, with the impact or renewable electricity deployment in purple. 4

5 Environmental Impact Risk of Carbon Leakage 15. A decrease in the competitiveness of energy intensive industries due to increased electricity prices as a result of EU policies and targets risks causing net global CO2 emissions to increase. These industries may shift their production to outside the EU because they cannot pass on the cost increases induced by renewable support mechanisms to their customers without significant loss of market share. This increases the risk of carbon leakage. Addressing the risk of carbon leakage serves an environmental objective as it would avoid an increase in global greenhouse gas emissions due to shifts of production to outside the EU, in the absence of globally binding renewable targets. Rationale for State Aid 16. The risk of carbon leakage, leading to a potential increase in net CO2 emissions, and the economic value of internationally competitive energy intensive industries to EU prosperity and economic growth, justifies the need for appropriate measures to mitigate the cost impact of renewable support mechanisms on energy intensive industries. Current approaches to carbon leakage in EU law and policy 17. There is a broad recognition in EU law and policy of the risks of carbon leakage and the need to tackle them. For instance, in its carbon roadmap, the Commission states that as the EU develops its climate 5

6 policy framework, there will be a need to continue to monitor and analyse the impacts of these measures on the competitiveness of energy-intensive industries and to develop options for addressing carbon leakage so as to maintain a strong industrial base in the EU The Emissions Trading System Directive (Council Directive 2009/29/EC) states that, in the absence of a global agreement to reduce greenhouse gas emissions, climate change measures in the EU could put certain energy-intensive sectors and sub-sectors in the Community at an economic disadvantage 3 potentially undermining the environmental integrity and benefit of actions by the Community. To address the risk of carbon leakage, the Community allocates 100 % of EU ETS allowances free of charge to energy intensive sectors or subsectors that meet certain criteria. 19. Further, the Directive also allows Member States to adopt financial measures in favour of sectors or subsectors determined to be exposed to a significant risk of carbon leakage due to costs relating to the EU ETS passed on in electricity prices. In its guidelines on aid for indirect emission costs as a result of the EU ETS, the Commission states that addressing the risk of carbon leakage serves an environmental objective, since the aid aims to avoid an increase in global greenhouse gas emissions due to shifts of production outside the Union, in the absence of a binding international agreement on reduction of greenhouse gas emissions The Community framework for the taxation of energy products and electricity also takes account of the competitiveness of energy intensive businesses by providing for measures to alleviate the tax burden that undertake to achieve environmental protection objectives or to improvements in energy efficiency. 21. Gunther Oettinger, EU Energy Commissioner, recently warned that more expensive energy would lead to Europe s de-industrialisation. He noted that the share of the economic value industry adds to GDP had reduced from around 22% in 2000 to around 18% in 2010, and called for a strategy for the re-industrialisation of Europe. He argued that a central element of such a strategy had to be energy policy, because for businesses, energy prices and security of supply are of central importance to their decision where to locate Therefore, the EU recognises the impact that climate change policies have on the competitiveness of energy intensive businesses and the risk of carbon leakage and it has taken steps to reduce the negative impact that these policies might have. However, apart from the EU ETS 2 See page 9 of the Low-Carbon Roadmap, Com (2011) 112 final 3 Directive 2009/29/Ec amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community. 4 See Article 8 of the Guidelines. 5 For reference, see note 2 above. 6

7 context, where the Council and the Commission have created a legal framework for compensating energy-intensive industries for the indirect emission costs incurred as a result of the EU ETS, there is no legal certainty about how Member States can protect the competitiveness of energy-intensive industries most at risk of carbon leakage due to the indirect costs of energy and climate change more generally and renewable electricity support mechanisms in particular. Specific proposal for the revision of the Environmental Aid Guidelines 23. The UK Government believes that the Environmental Aid Guidelines, which provide the framework for specific state aid measures for achieving objectives of common interest, should explicitly recognise that addressing the risk of carbon leakage serves an environmental objective and should allow for specific state aid measures for protecting the competitiveness of energy-intensive industries facing a significant risk of carbon leakage where there is unlikely to be undue distortion of competition. 24. Specifically, we believe that the new environmental aid guidelines should: (i) (ii) Recognise that addressing the risk of carbon leakage serves an environmental objective, replicating similar provision in the Commission guidelines on aid for indirect EU ETS costs Provide for a category of aid measure for supporting energyintensive industries where this is necessary and duly justified by a significant risk of carbon leakage due to increases in electricity prices resulting from the costs of energy and climate change policies and in particular the indirect cost of the low carbon electricity support mechanism. 25. It will be important to ensure that aid is only provided where strictly necessary and in a proportionate manner which minimises competitive distortions. The UK considers that the rules in the current environmental aid guidelines for tax exemptions and in the guidelines for compensation for indirect EU ETS costs provide a reasonable starting point for designing these measures and would be happy to work more closely with the Commission on the detail of this. 26. EU Member States have different renewable support mechanisms according to national circumstances and considerations. Differences in these national measures will need to be reflected in any provisions in future revisions of the rules. 7