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On 21 December 2021, the European Commission endorsed new Guidelines on State aid for climate, environmental protection and energy (the ‘Guidelines’). These were formally adopted in January, with immediate effect. The Guidelines are intended to bring state aid rules in line with the objectives of the European Green Deal (‘EGD’), which will require very significant investment, public as well as private.

In principle, state aid is prohibited by Article 107(1) of the Treaty on the Functioning of the EU, where it threatens to distort competition in the internal market by favouring certain undertakings or the production of certain goods, and affects trade between Member States. State support, for example for renewable energy sources, pursuant to EGD objectives and Fit for 55 initiatives could fall within the scope of this provision. According to Article 107(3)(c), however, state aid may nevertheless be compatible with the internal market where it facilitates the development of certain economic activities or areas and does not adversely affect trading conditions to an extent contrary to the common interest.

The Guidelines identify categories of environmental protection and energy measures in respect of which state aid may be permitted under Article 103(c) in accordance with certain compatibility criteria.  These criteria include, among others, aid for the reduction and removal of greenhouse gas emissions, including through support for renewable energy; for the improvement of the energy and environmental performance of buildings; for clean mobility and recharging or refuelling infrastructure for clean vehicles; for the security of energy supply; or aid in the form of reductions in taxes. Aid may be available to SMEs and small-scale renewable energy producers. The Guidelines do not, however, apply to state aid for sustainable products as such. The listed criteria are, furthermore, misaligned to those set by the so-called green Taxonomy, which includes a broader range of environmentally sustainable activities.

Permitted state aids to include costs linked to the closure of power plants using coal, peat or oil shale and of related mining operations (see point 4.12 of the Guidelines). State support to mitigate the social (and environmental) implications of such closure is exceptionally allowed to cover, among the others, labour-related costs (see Annex II of the Guidelines), including the payment of social welfare benefits resulting from the pensioning-off of workers, as well as residual costs to cover former workers’ health insurance.  Another exceptional expenditure is allowed to support workers who have lost or who lose their jobs, along with the costs covered by the undertakings for the re-adaptation of workers in order to help them find new jobs, especially for training purposes. Peculiarly, the supply of free coal, peat and oil shale to workers who have lost their jobs and to those entitled to such supply before the closure are also eligible.

While these provisions are consistent with the principle of Just Transition, the Guidelines lack any ambition to link environmental state aids to social and labour sustainability, unlike recent EU normative measures that have pointed in this direction. Paragraph 35 of the Taxonomy regulation’s preamble, for example, sets a principle of integration between social and environmental sustainability, clarifying that compliance with minimum labour standards and safeguards – including those established by the European Pillar of Social Rights – “should be a condition for economic activities to qualify as environmentally sustainable.”

The Commission claims that the new rules will help Member States to meet their climate targets. Environmental NGOs such as ClientEarth have, however, been highly critical of the possibility of state subsidies for energy generation based on natural gas, despite this option being subject to stringent criteria. Subsidies may be permitted where Member States can show how such investment will contribute to achieving climate targets, which may include committing to implement decarbonisation technologies and explaining how lock-in of gas-fired generation will be avoided. Also, the Guidelines provide that state aids to cover investments in natural gas are restricted to Member States with very low income per capita, which involve, inter alia, a simultaneous closure of power plants using coal, peat or oil shale of at least the same capacity as the new generation covered by the investment and are part of a credible and ambitious decarbonisation strategy, including the prevention of stranded assets in view of the 2030 and 2050 targets.

Arguably, this provision on natural gas should be interpreted in the light of the EU institutions’ strategy on a Just (‘Fair’) Transition, as well as in the context of an energy crisis and soaring gas prices in Europe. While energy inflation is in large part due to deregulation in energy and gas markets, and to lack of significant investment in low carbon technologies that would reduce or eliminate dependency on fossil fuels (and on oil and gas exporting countries), the reality is that in the energy mix of many EU countries renewables are not available on mass scale and accessible to everybody yet. It is therefore reasonable that vulnerable Member States are allowed to subsidise energy generation based on natural gas temporarily, to bridge the transition away from more polluting fossil fuels in a way that guarantees social rights and cohesion.

In this respect, it cannot be excluded that state subsidies for nuclear generation will also be contemplated. Nuclear energy is currently excluded from the scope of the proposed Guidelines. But if the critical discussion on the green Taxonomy will eventually end up in recognising the viability of nuclear power, the Guidelines might need to be revised accordingly. As for natural gas, nevertheless, it is imperative that such controversial energy sources are indeed the bridge and not the final destination, and that compliance with the stated conditions is a rigorous and not a mere box-ticking exercise. While the Guidelines are in principle a welcome development, therefore, it remains to be seen how they will operate in practice and how they might evolve. From a just transition perspective, any future development of the Guidelines should reflect closer integration between social and environmental sustainability objectives.