EU ETS – State Aid Guidelines

State Aid Guidelines relating to EU ETS in Phase IV – Will UK businesses benefit after Brexit?

The EU Commission have recently published their revised State Aid Guidelines relating to EU ETS. The guidelines have been revised for Phase IV, beginning January 2021, in line with the Green Deal objectives. The aim of these guidelines is to continue to protect the industries most at risk of carbon leakage whilst at the same time maintaining the incentive to decarbonise.

Covered in these guidelines are aid to compensate for increases in electricity prices resulting from EU ETS and aid involved in the optional transitional free allocation for modernisation of the energy sector.

Indirect cost compensation 

The indirect cost compensation scheme was put in place at the start of Phase III. It was recognised that carbon pricing through EU ETS would increase the wholesale electricity price as electricity producers compensate for the cost of EU Allowances.

The increased electricity costs risk the competitiveness of electricity intensive businesses; particularly those already at risk of carbon leakage. Carbon leakage occurs when businesses relocate production to other parts of the world with less stringent carbon policies, leading to no reduction in global emissions. State aid is one method of reducing the risk of carbon leakage and helping businesses to remain competitive.

Under the indirect cost compensation scheme affected businesses can claim compensation for the indirect electricity cost of EU ETS. The compensation is only able to be claimed on the electricity consumed proportional to the tonnage of eligible products produced. For a product to be eligible it must fall under one of the specified NACE codes. Other products or heat produced by the site are not entitled to compensation.

Changes in Phase IV of the EU ETS:

– The sectors deemed to be at risk of carbon leakage due to indirect emission costs have changed from Phase IV, see the full list of changes below.

– The compensation rate has been set at 75% for Phase IV, reduced from 85% in Phase III. However, if this is insufficient to cover the risk of carbon leakage the indirect costs can be limited to 1.5% of gross value added (GVA) of the given year.

– Annual data will be used (for both product and electricity consumption) in the compensation calculation rather than an average of the baseline value. The CO2 emissions factor will be updated annually.

Additional Requirements in Phase IV of the EU ETS:

– Compensation is conditional for installations that are obligated by ESOS. They must implement their recommendations from the energy audit, reduce the carbon footprint of their electricity consumption (30% of electricity consumption should be from carbon-free sources), or invest at least 50% of the compensation in emission reduction projects.

– To ensure transparency, information such as name and identifier of the beneficiary and amount of aid must be published in the Commission’s transparency award module or on a comprehensive State aid website.

The guidelines will be adapted following a review in 2025 to update the efficiency benchmarks, areas, and emission factors. The commission will also check if any revisions are necessary following a review of other climate related policies, such as the Carbon Border Adjustment Mechanism. This aims to ensure the objective of carbon neutrality is realised whilst maintaining a level playing field.

Relevance to the UK

It will be interesting to see whether the UK will continue to offer state aid relating to EU ETS post Brexit and extend the indirect cost compensation scheme into the next Phase. It appears, regardless of whether there is a carbon tax or UK ETS, that the UK are aiming to stay in line as much as possible with the terms of EU ETS.

The conditions of the scheme and the compensation come from each state. In the UK Phase III scheme, the eligibility criteria contained a 5% filter test to ensure that only installations most exposed to the electricity price increases received the compensation. The indirect carbon cost from EU ETS was required to be equivalent to an average of at least 5% of a business’ GVA over the baseline period. If the scheme is to be continued in the UK post Brexit then similar restrictions may apply.

There is a possibility that the UK will not continue with the scheme as the UK grid becomes increasingly decarbonised. Renewable electricity provision hit an all-time high in 2019, providing 36.9% of electricity to the grid and that percentage is set to increase. The Prime Ministers latest pledge is to invest in offshore wind and increase the capacity by 10 gigawatts by 2030, as part of a commitment to a “green industrial revolution”. This means that although electricity prices in the UK have risen, they may have been less impacted by the price of carbon than in other parts of Europe so the government may not deem this scheme applicable.

State aid has been a major disagreement during the Brexit negotiations; the EU believes the UK should align with their policies, whilst the UK seeks autonomy. The UK government have not yet revealed their plans for state aid post Brexit and have stated they will be finalised after a public consultation in 2021.

REFERENCES

1 https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1712

2 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/855926/eiis-compensation-for-indirect-costs-of-euets-and-carbon-price-support-mechanism-guidance.pdf

3 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/877047/Press_Notice_March_2020.pdf

4 https://www.instituteforgovernment.org.uk/explainers/state-aid

5 htps://www.bbc.co.uk/news/uk-politics-54421489

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