Commission approves €4 billion German State aid scheme partially funded under Recovery and Resilience Facility to help industries decarbonise production processes

The European Commission has approved, under EU State aid rules, a €4 billion German scheme made available in part through the Recovery and Resilience Facility (‘RRF’) to help companies, which are subject to the EU Emission Trading System (‘ETS’), decarbonise their industrial production processes. The measure contributes to achieving Germany’s climate and energy targets, as well as the EU’s strategic objectives of the European Green Deal.

The German measure

The scheme notified by Germany, with a budget of €4 billion, will be partially funded through the RRF, following the Commission’s positive assessment of the German Recovery and Resilience Plan and its adoption by the Council.

The scheme aims at helping the German industry reduce greenhouse gas emissions in their production processes. The projects supported under the scheme will range from the construction of melting tanks for glass production using electricity to the replacement of traditional steel production processes by direct reduction hydrogen-powered plants.

The beneficiaries of the measures will be companies active in sectors subject to the EU ETS, such as the chemistry, metal, glass or paper sectors. In order to be eligible, projects will need to achieve a 60% emission reduction in 3 years and a 90% emission reduction in 15 years compared to the best available conventional technologies based on the ETS benchmarks.

The projects that will benefit from the aid will be selected through an open competitive bidding process and will be ranked on the basis two criteria: (i) the lowest aid amount requested per ton of carbon dioxide (CO₂) emissions avoided (i.e. the primary criterion), and (ii) the speed at which the projects can achieve significant CO₂ emission reductions.

Under the scheme, the aid will take the form of variable annual grants under two-way contracts for difference, so-called ‘Climate Protection Contracts’, with a 15-year duration. Each year, beneficiaries will receive a payment or pay an amount to the State, based on the beneficiaries’ bids and the evolution of relevant market prices, such as carbon or energy inputs, compared to the conventional technology.

On this basis, the measure only covers the actual additional costs linked to the new production processes compared to conventional methods. If operating the supported projects becomes cheaper, beneficiaries will have to pay back the difference to the German authorities. As a result, the total aid disbursed under the scheme may be significantly lower than €4 billion, which is the maximum budget.

The Commission’s assessment

The Commission assessed the scheme under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union, which enables Member States to support the development of certain economic activities subject to certain conditions, and the Guidelines on State aid for climate, environmental protection and energy (‘CEEAG’), which allow Member States to support measures reducing or removing CO₂ emissions.

The Commission found that:

• The scheme is necessary and appropriate to support decarbonisation in sectors covered by the ETS, in line with the European and national environmental targets.
• The scheme has an “incentive effect” as the beneficiaries would not carry out the investments in decarbonisation to the same extent without the public support.
• The scheme has a limited impact on competition and trade within the EU. In particular, the aid is proportionate, and any negative effect on competition and trade will be limited in view of the design of the bidding process, which will ensure that the amount of aid is kept to the minimum.
• Finally, Germany committed to ensure that the aid delivers overall CO₂ reductions and that it does not merely displace the emissions from one sector to another, in particular when it comes to electrification projects, which can entail significant indirect CO₂ emissions. In this regard, Germany plans to increase the share of renewable and low carbon electricity in the national electricity mix.

On this basis, the Commission approved the German scheme under EU State aid rules.

Background

The Commission’s 2022 CEEAG provide guidance on how the Commission assesses the compatibility of environmental protection, including climate protection, and energy aid measures which are subject to the notification requirement under Article 107(3)(c) TFEU.

The Guidelines create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the European Green Deal objectives in a targeted and cost-effective manner. The rules involve an alignment with the important EU’s objectives and targets set out in the European Green Deal and with other recent regulatory changes in the energy and environmental areas and will cater for the increased importance of climate protection. The Commission assesses measures entailing State aid contained in the national recovery plans presented in the context of the RRF as a matter of priority and has provided guidance and support to Member States in the preparatory phases of the national plans, to facilitate the rapid deployment of the RRF.

With the European Green Deal Communication in 2019, the Commission set an objective of net zero emissions of greenhouse gases in 2050 that is enshrined in the European Climate Law. In force since July 2021, the law also introduced the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030. Through the adoption of the ‘Fit for 55′ legislative proposals, the EU has in place legally binding climate targets covering all key sectors in the economy.

The EU ETS is a key tool of EU policy for reducing greenhouse gas emissions cost-effectively in the Union and fighting against climate change. It is the world’s first major carbon market and remains the biggest one. The review of the EU ETS Directive, under the Fit for 55 legislation and now in force, has strengthened the existing system and extended carbon pricing to new sectors.