EU Narrows Carbon-Linked State Aid for Big Energy Users

(Bloomberg) -- The European Union’s executive toughened criteria for state aid linked to the bloc’s carbon market from next year, focusing support on companies that are at the biggest risk of relocating abroad amid increasingly strict climate policies.

The European Commission, the EU regulatory arm, listed 10 sectors and 20 sub-sectors qualifying for aid for costs relating to greenhouse gas emissions that are passed on in power prices, according to a statement on new guidelines for 2021-2030. They include aluminum production, paper manufacture and refined petroleum products. The current rules, which expire at the end of this year, allow state aid for so-called indirect emission costs in 14 industries and 7 sub-sectors, according to the commission.

The measure is designed to support companies prone to moving to regions with laxer emissions rules, a phenomenon known as “carbon leakage.” Heavy users of energy have warned EU policy makers that the risk is becoming bigger as the bloc tightens its emissions-reduction policies under the EU’s Green Deal while other major emitters fail to take comparable action.

‘Price Tag’

“To sustainably tackle climate change and achieve our Green Deal objectives, we have to put a price tag on carbon emissions while avoiding carbon leakage,” said commission Executive Vice President Margrethe Vestager said on Monday. “The revised EU Emission Trading System state aid guidelines adopted today are an important element of this project.”

The commission last week proposed that the EU raise its 2030 carbon-cut goal to at least 55% from 1990 levels compared with the current target of 40%. That would require faster pollution reductions in the bloc’s carbon market, which even under the existing rules is moving to a stricter phase as of next year.

Aid for indirect emissions must not exceed 75% of eligible costs, according to the EU. The industries eligible for government support include:

• manufacture of leather clothes
• aluminum production
• manufacture of other inorganic basic chemicals
• lead, zinc and tin production
• manufacture of pulp
• manufacture of paper and paperboard
• manufacture of basic iron and steel and ferro-alloys
• manufacture of refined petroleum products
• copper production
• other non-ferrous metal production
• polyethylene in primary forms
• all product categories in the casting of iron sector
• glass fiber mats and voiles
• hydrogen
• inorganic oxygen compounds of non-metals

The commission wants to ensure that these handouts have a climate benefit by including conditions for obtaining subsidies, such as investment in renewable energy purchasing or production, emissions reductions or energy efficiency, said Wijnand Stoefs, policy officer at the environmental lobby Carbon Market Watch.

‘Taxpayer Money’

However, he warned companies “should not be able to use taxpayer money for investments they should be doing anyway based on an economic rational.”

The EU Emissions Trading System, the world’s biggest cap-and-trade market, imposes decreasing carbon-dioxide limits on around 12,000 facilities owned by utilities and manufacturers, including Royal Dutch Shell Plc, ArcelorMittal and LafargeHolcim Ltd. The price of emission permits jumped to a 14-year high of 30.8 euros per metric ton in July and was at 27 euros on Monday. Analysts expect further gains in coming years.

As part of the Green Deal, the commission also wants to introduce a carbon border adjustment mechanism in order to shield European companies from cheaper competition from countries without stringent emission rules. Such a mechanism, which may take the form of extending the EU carbon market to cover imports of selected products, is to be unveiled in 2021.

©2020 Bloomberg L.P.