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COP26 Initiative: Mobilising the finance for green transformation: EU State aid vs UK subsidy control regimes

Introduction and background

One of the main goals of the UN’s annual climate change conference, the 26th Conference of the Parties (COP26),is mobilising private finance to address the climate challenge. Achieving green transformation and meeting the relevant EU and UK sustainability goals is expected to require significant financial support from both public and private stakeholders. Indeed, some stakeholders have already announced public support for green initiatives as well as financial commitments (e.g. Scottish Power has committed GBP 6.5 billion for offshore wind development off the coast of East Anglia), with further investment and public support commitments likely to be announced in the course of COP26 and in due course. It is widely considered that unlocking private finance will require public support measures focussing, in particular, on:

  • allowing sufficient amounts of public support to cover the net extra cost (i.e. funding gap) required to achieve sustainability goals;
  • achieving an optimal outcome for each country, which may require cross-border funding in order to arrive at the set sustainability priorities on a holistic level; and
  • ensuring regulation plays its part, which may require new rules or revision of existing ones in order to achieve the various targets, particularly the net-zero by mid-century goal.

Flexibility of the EU State aid and UK subsidy control regimes in achieving COP26 sustainability goals will be very important for potential beneficiaries and stakeholders. There is potential for a new UK regime (i.e. principles-based, no standstill obligation – except in limited cases) to be more flexible for stakeholders compared with the EU regime (i.e. a rule-bound structure). However, the legal certainty of the EU system, in combination with the recently adopted revisions, may be more attractive for businesses (at least for now), and so gives confidence for investment. While it may take longer for stakeholders to get funding and aid approved under the new EU rules, the European Commission (Commission) has promised to be quick with notifications and new ‘green’ cases. This article compares the two regimes and what businesses can expect on both sides of the Channel.

EU State aid regime

a) Increased potential of EU State aid law to facilitate the objectives of the Green Deal

In its latest competition policy update, the Commission stated that the revised State aid rules will support, and in a more flexible manner, those aid measures that are consistent with the European Green Deal. One central element of the Green Deal is the proposal of the revised CEEAG (Guidelines on State aid for climate, environmental protection and energy) (you can read more in our recent blog post available here). The State aid Fitness Check has revealed the need for targeted adjustments of the previous EEAG guidelines. Consequently, the Commission proposes to extend their scope to new areas such as clean mobility, biodiversity, energy efficiency in buildings and new renewable energy sources.

In addition to creating new eligible areas, the draft CEEAG allows for higher aid amounts, potentially covering up to 100% of the funding gaps, implying that 100% of so-called “additional” or “exceptional” costs could be compensated. Also, by introducing a simplified assessment and eliminating the requirement for individual notifications of large green projects within aid schemes previously approved by the Commission, flexibility increases and aid spending becomes more streamlined.

That said, safeguards are proposed to ensure that the aid is effectively directed where necessary, e.g. in certain cases EU Member States setting up a support scheme will have to consult stakeholders on its main features. In addition, the draft ensures coherence with the relevant EU legislation by, for instance, phasing out subsidies for fossil fuels.

Moreover, the assessment of the funding gap becomes more flexible through a competitive bidding process. This will remove the burden on stakeholders, as a detailed assessment of the net extra costs will not be required if the aid amount is determined through an open, clear, transparent and non-discriminatory process.

Besides the CEEAG, the Commission has also indicated the scope for taking account of sustainability considerations in other State aid policy areas. For instance, the revised Regional Aid Guidelines (RAG) which were published in April 2021 touch upon sustainability aspects on numerous occasions and, inter alia, provide for higher aid intensities in areas that are identified under the Just Transition Fund (i.e. areas where economic activities might have to be closed because of their environmental impact). While this is not primarily directed at funding environmentally sustainable projects, this illustrates that the Commission aims to focus its different policy areas on enforcing and complementing the policy objectives of the Green Deal.

The provisions of the CEEAG are complemented by the General Block Exemption Regulation (GBER) which is currently undergoing a partial revision and is expected to further facilitate the granting of State aid without prior approval by the Commission – in those areas important for the green transition.

b) Focus on large-scale green project funding in the EU: revision of the IPCEI instrument

In the EU, Important Projects of Common European Interest (IPCEIs) can be initiated and supported depending on political priorities. The Commission’s IPCEI Communication is currently undergoing a revision, with the aim to, inter alia, adapt the rules to the objectives of the Green Deal. In an IPCEI, several Member States come together and coordinate on funding for certain industry sectors and / or technologies. What will be new is the requirement for a minimum number of four EU Member States participating in an IPCEI, unless the nature of the project justifies having a smaller number. This means that, for instance, Germany and France could not simply agree bilaterally and move ahead with an IPCEI without involving other (e.g. smaller) Member States too.

IPCEIs will assumably incentivise, in particular, large-scale sustainability projects. These are likely to be R&D projects, e.g. the existing IPCEI on the battery value chain and an upcoming IPCEI on hydrogen technology.

However, IPCEIs are not limited to the area of R&D if a common European interest exists.

c) “Fit for 55” package: delivering the EU’s 2030 Climate Target on the way to climate neutrality

In July 2021, the Commission adopted a package of new proposals under the “Fit for 55” plan to ensure that the European Green Deal – the blueprint on the way to climate neutrality – will become a reality.

The “Fit for 55” proposes a transformation of the EU economy and society and contains a variety of legislative tools to deliver on the targets agreed in the European Climate Law. In this context and to ensure a socially fair transition, it is intended to establish a new Social Climate Fund, providing EUR 72.2 billion of funding to Member States for the period of 2025-2032.

UK subsidy control regime

UK support measures are likely to be more generous than under the EU regime as the UK Government pursues a levelling up agenda post-Brexit

A significant proportion of the State aid offered by the UK pre-Brexit was to promote environmental protection (44%) and R&D activities (22%). With the ‘levelling up’ agenda at the heart of the UK Government’s stated policy objectives post-Brexit, support measures offered by the UK Government for achieving sustainability goals are likely to be more generous than its EU counterparts. Indeed, the UK Government has clearly indicated in the Queen’s speech 2021 that the new subsidy control regime is aimed to be flexible in order to deliver UK Government priorities such as achieving net zero greenhouse gas emissions by 2050. The UK subsidy control regime as set out in the tabled draft Subsidy Control Bill, including an explanation of the energy and environment principles, is proposed to be more flexible than the EU State aid regime.

The EU will, however, be keeping under review the subsidies being offered by the UK to ensure that these balance generosity with compliance with the principles set out in the EU-UK Trade and Cooperation Agreement (TCA). Any measures in breach of the TCA principles, irrespective of the sustainability goals they are designed to achieve, could draw a challenge from the EU pursuant to the TCA to the extent it believes the UK is employing its subsidy control regime to generate an unfair advantage.

That said, provided the beneficial effects of a measure outweigh any negative effects, including on international trade or investment, the risk of challenge would be expected to be low as similar policy objectives are proposed in the CEEAG.

EU State aid vs. UK subsidies – a comparison

a) Established and detailed EU State aid rules on the permitted scope and terms of potential grants/programmes compared with principle-based UK subsidy control regime

EU State aid rules’ numerous notices, guidelines, block exemptions and extensive case law can be quite complex and time consuming to navigate for stakeholders. The strict judicial review under the regime also means that the Commission must always check compatibility of State aid measures with existing EU law, particularly the provisions of the treaties and regulations on the protection of the environment. Nevertheless, the rules provide clarity on measures which will be compatible with the internal market and give legal certainty to stakeholders. The judicial review means that State aid measures which are contrary to EU law cannot be implemented. This gives potential beneficiaries certainty that any block exempted, or approved, measure is less likely to be challenged.

In contrast, the UK subsidy control regime is new, with no precedent, and the regime is built around certain principles set out in the UK’s free trade agreements (including the TCA). These principles are largely consistent with the spirit of the EU State aid regime but are likely to be more flexible in their interpretation and application and so more readily adapted to the UK Government’s desired outcome. That said, the lack of guidance with respect to the UK subsidy control regime may ‘chill’ measures until there is more legal certainty on how the regime will be applied, the role of the Competition and Markets Authority (CMA) and the scope for legal challenge (see below).

b) Limited number of stakeholders in the UK compared with the EU

Fewer interests for the UK to consider when assessing lawfulness of a potential subsidy would likely see quicker implementation of sustainability measures and programmes.

The underlying policy goals for achieving sustainability will be easier to scope out in the UK in light of it having only 4 nations compared with the 27 Member States the EU has to contend with. The wider range of interests due to different economic structures, starting points towards achieving EU sustainability goals, energy mix and access to finance could delay the content and deployment of sustainability programmes within the EU.

Additionally, the CEEAG proposal requires complex public consultation and a competitive bidding process to determine the scope of certain measures and programmes as well as the eligible beneficiaries. This lesser degree of flexibility regarding the content and approval process for sustainability measures may lead to more measured grants and programmes in the EU. A complex approval process could stymie programmes which require support to cover the funding gap rather than the financial support to cover the aid intensity. Unless the EU focusses on achieving the optimal outcome in each Member State, and refrains from a cross-border view in assessing priorities, stakeholders can expect to face protracted consultation before sustainability measures can be implemented. A cross-border view while assessing priorities could also see the EU funding non-sustainable projects at the expense of sustainable ones (e.g. as part of the RRF, the EU could be financing the replacement of oil heating in rural Bulgaria instead of hydrogen ready smelters in Germany if cross-border views are the focus when assessing the priorities). Delays may however be avoided if Member States commit to prompt resolution of differences and focus on the ultimate aim of achieving the sustainability goals.

The UK, on the other hand, is designing its subsidy control regime to be more flexible and agile than the EU State aid regime. The UK Government has announced that its approach will empower public authorities within the UK’s internal market to design subsidies that are tailored and bespoke for local needs, without facing excessive bureaucracy or lengthy pre-approval processes. This approach would likely result in swifter deployment of funds and implementation of sustainability support measures in the UK.

c) Different notification processes and enforcement for both regimes potentially makes the UK regime more attractive to businesses

In contrast to the Commission’s role as a pre-approval authority, the Subsidy Advice Unit, which will be a new unit within the CMA, will only have a role as an informal advisor, with its advice having a non-binding effect. The CMA review for compliance is encouraged for “subsidies of interest” and public authorities are not obliged to seek CMA advice before implementing this category of subsidies while it is mandatory for “subsidies of particular interest” – concepts which are yet to be defined. In any case, the CMA would have no power to prevent the grant of a subsidy. By contrast, EU State aid rules, which are applied prospectively, require Member States to prove legality and obtain Commission approval for non-exempt support measures before awarding such measures. The absence of a standstill obligation under the UK subsidy control regime for subsidies (excluding “subsidies of particular interest”) will, in principle, allow support measures for sustainability objectives to be deployed promptly.

The enforcement regime envisaged in the UK Subsidy Control Bill provides for judicial review by the Competition and Appeal Tribunal (CAT) as the only route for legal challenge by third parties. Indeed, third parties may not have much (if any) of a right to intervene in a CMA review process or even be put on notice that such a review is ongoing. In contrast to the EU State aid regime, complainants will need to establish that a subsidy exists and is not compliant with the regime. There is also a relatively high bar for bringing a legal challenge, i.e. establishing a bona fide case as to why an (alleged) subsidy does not comply with the UK regime and, in turn, the principles set out in the TCA.

This informal advisory system has the potential to be more flexible though at the cost of legal certainty. The system could potentially ‘chill’ stakeholders’ willingness to obtain State support for sustainability objectives for fear of any legal challenge and, if successful, a recovery order – although this may be mitigated by the high bar and short timeframe required for a legal challenge before the CAT.

There is less clarity, at this stage, on the future relationship between the CAT and CMA to determine the extent to which the CMA’s review will be persuasive or de facto binding (in practice at least) and whether this would allow beneficiaries and their counterparties to quantify the risk of legal challenge. Nevertheless, the informal advisory system in the UK is expected to afford more flexibility to businesses provided the regime does not become a de facto pre-approval process in practice, as there is a risk that public authorities and beneficiaries alike seek to make the CMA’s review a pre-grant condition in order to provide some comfort on the lawfulness of the subsidy measure.