New Industry Electricity Price Reductions in Germany

Handelsblatt reports on plans to help energy intensive industry like aluminum makers deal with the extra electricity cost expected from January on because of the new phase of the European Emission Trading System. Under the new rules, German utilities will need to buy all of their CO2 emissions permits, while until now they got a part of them for free.

The German government plans to pay out a compensation in the amount of 85% of the electricity cost increase caused by the new emission trade system rules.

This is interesting as a test case when discussing the relation of international subsidy law in the WTO and EU frameworks to energy policy. Is the German government allowed under these rules to pay out these compensations? Are they at least obliged to notify the EU Commission about this program under Article 108 Paragraph 3 of the Treaty on the functioning of the European Union?

As far as EU law is concerned, there is a special rule in Article 10a Paragraph 6 of Directive 2003/87, as amended by Directive 2009/29, which reads:

6. Member States may also adopt financial measures in favour of sectors or subsectors determined to be exposed to a significant risk of carbon leakage due to costs relating to greenhouse gas emissions passed on in electricity prices, in order to compensate for those costs and where such financial measures are in accordance with state aid rules applicable and to be adopted in this area.

Those measures shall be based on ex-ante benchmarks of the indirect emissions of CO2 per unit of production. The ex-ante benchmarks shall be calculated for a given sector or subsector as the product of the electricity consumption per unit of production corresponding to the most efficient available technologies and of the CO2 emissions of the relevant European electricity production mix.

The basic idea is to avoid damaging the international competitiveness of European industry compared to China or other nations that don’t put a price on carbon yet (carbon leakage). The Commission has published guidelines in June of this year on how to proceed if a Member State wishes to compensate industry for indirect emission costs. These are rather complex; it is impossible to explain and discuss them in a blog post.

One thing is clear, however.

If indirect carbon leakage is a principle that justifies this kind of compensation scheme for energy intensive industry, the case of the Commission against exactly the same policy for reducing feed-in tariff surcharge costs looks even weaker. The Commission reportedly recently said that these reductions are illegal subsidies under EU law, as I blogged here.

That assertion didn’t have much merit to begin with. It is in contradiction to the opinion of the European Court of Justice.

But I don’t see how you can allow a compensation scheme for indirect carbon leakage, as the Directive and the Commission obviously does, but argue against exactly the same policy when discussing surcharges.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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