Focus Areas:    Regulation | Tax

ICLE Comments Regarding European Commission Guidelines on Certain State Aid Measures in the Context of the System for Greenhouse Gas Emission Allowance Trading Post 2021

Emission trading programs have the potential dramatically to reduce the costs of abating pollution. When such programs are well designed, they can reduce abatement costs by as much as 50%.

Most emission trading programs address local ambient air pollution. As such, problems associated with the harmful redistribution of pollution from one place to another are relatively easy to address through the application of simple rules, such as an absolute cap on emissions in a certain location. Some greenhouse gases (GHGs), such as carbon dioxide (CO2), are not local pollutants and so do not justify such local restrictions. However, there is at present no global system in place that would cap GHG emissions. As a result, jurisdictions that impose local caps on GHG emissions may experience a shift in economic activity, as large emitters of GHGs choose to relocate their activities to jurisdictions with less onerous restrictions on GHG emissions. This is called “carbon leakage”. While carbon leakage may potentially lead to increased CO2 emissions, excessive measures to prevent its occurrence may be worse than the disease they are intended to cure

State aid rules are designed to promote competition within the EU. Historically, the EU has granted exemptions to state aid rules for certain measures that are intended to mitigate the potential for carbon leakage. Unfortunately, previous exemptions have contributed to a weakening of the functioning of the EU Emission Trading System (ETS) and likely contributed to its near-collapse on at least two occasions.

The current exemptions terminate at the end of December 2020. This comment evaluates the proposal to establish new exemptions to state aid rules after the current exemptions terminate. We find that, in their current form, the proposed new guidelines would permit Member States to grant state aid (in the form of free ETS allowances) that would ultimately be deleterious to its stated goals of reducing European CO2 emissions. Furthermore, the draft guidelines leave too much room for protectionist subsidies and the distortion of competition between electricity producers.

 

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