EC seeks to tighten EU carbon market state aid rules

London — The European Commission is proposing to tighten up state aid rules relating to the EU Emissions Trading System after 2020, according to a consultation document released Tuesday.

The EC plans to almost halve the number of sectors eligible for compensation as well as cut the rate of compensation, encouraging companies to demonstrate decarbonization efforts in order to qualify for financial support.

"The revision of the EU Emissions Trading System state aid guidelines is an important element of the European Green Deal, aiming at limiting global greenhouse gas emissions," said Margrethe Vestager, EC Executive Vice-President in charge of competition policy.

"Today, we invite comments on our draft Guidelines which fully reflect the objectives of the Green Deal and focus state support to sectors most at risk of carbon leakage," Vestager said in a statement.

The current guidelines for carbon leakage -– the risk that European companies move operations to avoid carbon costs -– are set to expire December 31, 2020.

The proposed tougher rules suggest additional CO2 reductions could be achieved from Europe-based companies due to potentially stronger incentives as the EC scales back financial protection.

The EU ETS Directive provides compensation for two types of carbon costs: direct costs due to companies needing to buy carbon allowances to match their annual CO2 emissions; and indirect costs as companies pay more for electricity as power generators pass on the carbon price to consumers through higher electricity prices.

Under certain conditions, companies can receive free carbon allowances to reduce their direct costs. Indirect costs can also be compensated for, so long as this is in accordance with the EU ETS State Aid Guidelines, the EC said.

Under the proposed new guidelines, the conditions for compensation would be stricter than before.

The draft new guidelines aim to cut the number of sectors eligible for compensation from 14 to eight, to focus on those most at risk of carbon leakage.

The eight sectors deemed to be exposed to a genuine risk of carbon leakage due to indirect emissions costs are: basic iron, steel and ferro-alloys; aluminum production; lead, zinc and tin producers; makers of refined petroleum products; manufacture of pulp; manufacture of paper and paperboard; manufacture of inorganic basic chemicals; and manufacture of leather goods, according to EC documents.

The new guidelines also aim to lower the compensation rate from 85% at the beginning of the third trading phase (2013-2020) to 75% in the fourth phase (2021-2030), and exclude compensation for non-efficient technologies.

Moreover, the draft guidelines make compensation conditional upon decarbonization efforts by the companies concerned – effectively making them need to demonstrate emissions reductions in order to continue qualifying for financial support.

The EC invited stakeholders to submit their views under the consultation by March 10.