The Elephant in the Boat: EU State Aid Law and the Low-Carbon Transition

The world is hungry for green investments, but in the EU investments in renewable energy have decreased since the beginning of the current decade. Why? The drop had many causes, including lack of cross-border cooperation among Member States and inadequate market design. To increase investments, another factor might be the most important one: the legal regime for EU State aid law.

This branch of EU competition law moved from a marginal role in the sixties to a central place in the 2000s. The current framework for the energy sector reflects this trend. Both the General Block Exemption Regulation 651/2014 and the 2014 Environmental and Energy Aid Guidelines broadened the scope and intensity of State aid control. The overall purpose is to strike a balance between allowing the subsidies which are needed for the low-carbon transition and avoiding serious distortions of competition in the internal market. For renewable energy, this means that only market-based support schemes can be authorized.

Is this balance a satisfactory one? No. Several commentators argue that restricting Member States’ choices on support schemes prevents them from developing a wide portfolio of renewable technologies. Moreover, the current State aid framework does not address the problem of insufficient cross-border cooperation. The proposal for a recast renewable Directive, submitted by the Commission at the end of 2016, only makes limited progress on this point.

But there is a more general problem. State aid law was not able to reduce subsidies to fossil fuels. According to data supplied by the Commission itself, the amount of subsidies for renewables and fossil fuels is roughly equal and stays around €41 billion per year. If environmental externalities are factored in, fossil fuels subsidies jump to €300 billion. Thus, on the one hand State aid law constrains (some types of) investments in renewables, but, on the other hand, it contributes too little to phasing out environmentally harmful subsidies.

The roots of this problem can be traced back to the persistent reliance on the concept of market failure to justify State intervention. As economist Mariana Mazzucato has been arguing for several years, the low-carbon transition does not only require fixing markets, but an entrepreneurial State which is able to create and shape markets. However, this paradigm change faces an institutional barrier: State aid law has established hierarchical relationships with other legal regimes affecting low-carbon investments, most importantly EU climate law and international investment law. This means that State aid law prioritizes the avoidance of market distortions and is usually oblivious to the goals pursued by other legal regimes. 

How can the current legal framework become aligned with the goals of the low-carbon transition? What is required is a shift to polycentric governance, in which each legal regime affecting investments in renewables shares the goals of the other ones and allows to experiment with initiatives at different decision-making levels. More specifically, two general principles could apply.

First, the redundancy principle ensures that each legal regime pays attention and contributes to the goals pursued by the other ones. Here are some proposals to implement it:

1. The distinction between green subsidies and fossil fuels subsidies should be included in the compatibility assessment of State aid carried out by the Commission.
2. The compatibility of State aid should take into account obligations towards investors stemming from EU bilateral or multilateral trade and investment agreements.

Secondly, the safety net principle ensures that each regime is able to replace other regimes when the latter are not effective in achieving their goals. Here are some proposals to implement it:

1. Give Member States wider freedom to tailor support schemes, but counter-balance it with stricter obligations on cross-border cooperation.
2. Give investors compensatory damages when Member States do not fulfil their obligations under State aid law.

More details on these proposals, as well as other proposals on how to implement polycentric governance in EU climate law and international investment law, can be found in my paper.

Polycentric governance will not solve all problems. But it can help transform inadequate paradigms. Do not let the elephant of State aid law sink the boat of the low-carbon transition.

Giuseppe Bellantuono is Associate Professor of Comparative Private Law at the University of Trento – Italy.