GREEN FUNDING
State subsidy and market forces vie for dominance post-COP26
The Finance & Leasing Association’s director of government affairs and stakeholder engagement, Edward Simpson, considers developments from across The Channel in the wake of the COP26 climate change talks in Glasgow
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russels finds itself at a bit of a crossroads post COP26 in Glasgow. This is an area where the EU could reasonably expect to use its combined power to drive ambitious global targets for lower emissions.
The EU did pledge €100m in finance for the Adaptation Fund – in addition to individual Member State contributions – which was established to support developing countries in reducing their greenhouse gas emissions and adapting to the impacts of climate change. However, it has come under criticism for allowing the US and China to set the pace.
Nevertheless, the EU appears to be steering greener behaviour at the national level by linking the State Aid rules to the use of cleaner energy sources, according to the Commission’s review of competition policy published last week.
The EU’s Climate, Environmental Protection and Energy Aid Guidelines (CEEAG), expected to come into force in 2022, have, in their former incarnation (Energy and Environmental State Aid Guidelines), helped generate public investment in renewable energy where private finance was insufficient. The Commission states that it is unlikely that projects involving “the most polluting ones [fuels] such as oil, coal and lignite”, will be subsidised. Nor will it promote financial support for polluting companies.
The CEEAG will also provide a carrot in the form of facilitating aid for the acquisition of zero/low carbon emission vehicles and for investments in the related recharging and refuelling infrastructures alongside enabling support for greener production processes.
Key takeaways from the EU's CEEAG guidelines
- The EC has considerably expanded the scope of the draft CEEAG to reflect the Green Deal. To reach the greenhouse gas emission reduction targets, annual EU-wide investments of €350bn will be required — such investments cannot be borne by private means alone, and so will require public support. The expanded CEEAG acknowledges this need, also in line with the green transition supported through EU funds and the COVID Recovery and Resilience Fund.
- To prevent competition distortions from the increased scope, new instruments, and the amount of aid allowed, the CEEAG adds safeguards such as market-based instruments, e.g. competitive bidding and stakeholder participation through public consultation on the main design of aid scheme.
- This increased ‘proceduralization’ for aid awards is combined with a detailed EC verification of eligible costs on the basis of business plans and of eligibility criteria including or excluding certain sectors, undertaking technologies etc. into the scope of beneficiaries. Accordingly, member states, beneficiaries, their competitors, and other stakeholders can expect active engagement with the EC.
Source: Latham & Watkins LLP
While the UK Government has recognised the need for some state intervention, this is twinned with their philosophical stance that the free market must also drive behaviour. It will be interesting to gauge which of these approaches will be more successful in the longer term.
This is an edited version of an article that originally appeared on the FLA website on 26 November 2021.