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New EU state aid rules keep energy transition on the back burner

Renewables and community energy get support, but so do fossil fuels, while energy efficiency – among our most crucial tools right now – is undervalued. The European Commission can turn the intentionally vague rules around fossil fuel subsidies into a powerful tool for climate action – if it chooses to do so.

By Juliette Delarue and Stéphanie Nieuwbourg

The EU is on a mission to transform its energy systems and slash its carbon emissions – its very own climate law commits to it. This transformation is needed now more than ever. The war in Ukraine has made the need to increase energy efficiency and ramp up renewables even more urgent as the EU seeks to become less dependent on gas imports.

There is no way to do this without colossal investment – €390bn ($431.21bn) will be needed every year to reach climate neutrality by 2050 and meet the interim target of a 55% cut in greenhouse gas (GHG) emissions by 2030.

Without making some robust changes to the rules for public spending, that is going to be hard to do. This is why the EU’s new state aid rules, and how they are enforced, are so important. Badly judged subsidies, tax breaks, interest-free loans and other financial advantages could derail our efforts to head off climate change. It is the EU’s responsibility to make sure these are not slipping through at national level.

European Commission headquarters
The Berlaymont, headquarters of the European Commission, in Brussels, Belgium. (Photo by Thierry Monasse/Getty Images)

As of 27 January 2022, a new set of state aid rules is in place. State aid – financial advantages a national or regional government confers on a company – must in principle be approved by the European Commission. Using so-called state aid guidelines, the Commission assesses whether the aid supports the development of any lawful economic activity, without harming competition and trade in the internal market to an extent that would go against the common interest. In theory, if the aid does not meet the rules in the guidelines, it is unlikely to be authorised.

The new EU Guidelines on State aid for climate, environmental protection and energy (the ‘CEEAG’) are a much-needed update as they streamline how EU countries can subsidise the energy transition and increase the level of climate and environmental protection.

They enable governments to support the deployment of renewables, energy efficiency, low-carbon and renewable hydrogen, clean mobility, coal phase-outs and nature restoration.

Unfortunately, they also leave the door wide open for taxpayers’ money to go to climate-harming energy projects.

To accelerate the energy transition, the CEEAG should have been built around three focus areas: stimulating the deployment of sustainable green energy, phasing out fossil fuels and reducing energy consumption. Although the guidelines cover these issues, they do not fully commit to them – and risk fatally holding back the energy transition.

Renewables and community energy support

The CEEAG finally recognise the important role citizens can play in decarbonising the EU’s energy systems by allowing renewable energy communities to receive dedicated financial support.

To meet national and EU-level climate targets, we also need to rapidly deploy renewables at a much larger scale. The guidelines continue to support them through technology-specific schemes. This ensures that renewables are ramped up irrespective of other decarbonisation technologies promoted by a new ‘technology-neutral’ approach. The latter means that from now on, in principle, all technologies that can reduce or remove GHG emissions should compete to receive financial aid based on the amount of GHGs reduced per euro of subsidy spent. In the past, aid was awarded based on the cost per unit of energy produced.

Promoting renewables and empowering energy communities is key for the EU to reach energy independence, but will it be enough when the guidelines still allow public money to go to fossil fuel activities?

Fossil fuels still get access to the public purse

For the first time, the guidelines contain rules on how EU countries can support an exit from coal, oil, shale and peat activities. The guidelines do not go so far as to force countries to phase out coal by a certain date, but they do set clear limits: any aid granted must incentivise an earlier closure than originally planned and be proportionate to the expected profits or additional costs to the operator.

However, the guidelines stop short of ending subsidies to all fossil fuels by continuing to allow aid to gas – although under vague conditions. Like the recently issued delegated act on gas under the EU Taxonomy for green investment, the CEEAG classify gas as a ‘transition fuel’. They even call it ‘environmentally friendly’, but this is not supported by science – gas is not a ‘light’ fossil fuel.

The guidelines try to caveat this controversial call by requiring EU countries to show how gas subsidies will help achieve the EU’s 2030 and 2050 climate targets, and avoid fossil fuel lock-in. The vague conditions mean national governments can keep supporting highly polluting gas infrastructure, security of supply measures aimed at increasing gas backup capacity, or the production of gas-based ‘low-carbon’ hydrogen. It means phasing out fossil fuels will largely depend on national willpower.

Threadbare incentives for reducing energy use

The CEEAG also fail to fully support more moderated and flexible energy use – an essential part of decarbonising the EU’s energy systems and an essential part in helping manage the EU's energy consumption in the short term. The guidelines take timid steps to encourage less energy use by promoting aid for renovating buildings – a much needed modernisation – but energy efficiency means more than just insulating windows.

The Commission should have better embedded the Energy Efficiency First principle into the CEEAG. This principle obliges national governments to consider whether there is a real need for more energy, or if efficiency or flexibility solutions could be implemented instead. The Commission recommends using this principle as a first step to decide whether state aid for more energy production or infrastructure is needed. However, the CEEAG fail to make this principle a priority and the starting point for all subsequent decision-making. Instead, the guidelines put compliance with the principle on an equal footing with other regulatory measures.

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Reducing energy consumption is further blocked by maintaining a highly controversial regime of support to energy-intensive users. These consumers – 116 industrial sectors ranging from steel and cement to macaroni and explosives production – are largely exempt from paying energy and social levies or taxes. Allegedly, these industries need this exception as they are at risk of ‘carbon leakage’ – relocating outside the EU due to unbearable energy costs – despite the Commission admitting this risk is unproven.

However, this preferential treatment shifts the financial burden of the energy transition onto smaller businesses and households. In exchange for these exemptions, energy-intensive industries are meant to implement energy efficiency or decarbonisation measures – but in reality these are far from ambitious. The measures do not require them to go beyond mandatory energy audit recommendations or reduce the carbon footprint of their electricity consumption so that at least 30% of their electricity use comes from carbon-free sources.

Implementation is everything – but time is short

The CEEAG are intentionally vague about subsidies to fossil fuels – both in the criteria they set out and their lack of an expiry date. This gives the Commission the flexibility to interpret the rules as markets, climate and environmental protection objectives and sectoral legislation evolve.

This approach means the outcome could go either way, however. The CEEAG promise that the closer the EU gets to its climate deadlines, the stricter the assessment of aid to not-so-clean technologies will be.

However, the starting point of that trajectory looks far from ambitious. The Commission is proposing, against technical and legal experts' opinion, to label gas projects as 'sustainable’ in the new EU Taxonomy. This will undeniably rub off on state aid decisions.

To relieve economic strains driven by the war in Ukraine, the Commission has published a Temporary Crisis Framework for State Aid. This aims to support and stabilise the economy over the next year, while working in tandem with the existing state aid toolbox. Most importantly, the framework allows member states to support companies that are facing additional costs caused by the rise of fossil gas and electricity prices.

Given the current energy crisis, the introduction of these temporary measures is understandable. However, unlike the CEEAG, the framework does not oblige EU countries to set any sustainability requirements when granting crisis aid. Not doing so could be damaging for the EU's energy transition, as it could undermine and even contradict the CEEAG's objectives.

The way the Commission interprets the CEEAG will therefore be key in whether or not state aid helps the EU reach its climate objectives, as well as wean the bloc off of foreign oil and gas. Only time will tell whether the Commission chooses to use the guidelines’ ambiguity to push for a rapid and fair energy transition that gives the EU a chance of reaching its climate targets and energy independence.

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