Competition and sustainability: Evolving industrial and State aid policies to fuel green initiatives

Industrial policy across major jurisdictions is shifting to make economies more sustainable. Part of this transition involves encouraging green investments – both in the public and private sectors – through subsidies and regulation. In the EU, ambitious plans to combat climate change confer a central role on the State aid rules, which have already made strides in supporting environmental projects.

A global shift

With its new Industrial Strategy, the European Commission is embarking on a twin transition towards climate neutrality and digital leadership. This includes adapting the State aid regime to achieve the ambitious environmental goals of the EC’s European Green Deal, a set of far-reaching policy initiatives to stimulate green investments from every corner of the bloc.

Whilst State aid restrictions are in many ways an EU-specific issue, the underlying idea of embedding environmental goals as part of industrial policy is also being pursued elsewhere.

In the US, debate on environmental policy continues at federal level, particularly on how best to address global warming. The Trump Administration has made statements about balancing environmental protection with economic growth, and has sought to decrease burdens on business by rolling back regulations. Meanwhile, others are seeking different solutions. New York State, for example, has established the Office of Renewable Energy Siting to improve siting of large-scale renewable energy projects.  Presumptive Democratic 2020 presidential candidate Joe Biden’s platform includes a Clean Energy Revolution that aims to turn the US into a 100% clean energy economy with net-zero emissions by 2050. The debate has spilled into recent legislation related to Covid-19. It remains to be seen how this will play out in all sectors, including competition policy.

The Chinese Government is no stranger to industrial policy. It has spent billions on sustainable industries over the past decade, making China the world leader in solar and wind energy and e-mobility. China aims to curb air-pollution and honour its pledge that CO2 emissions will peak by 2030.

But like other countries, China also needs variable, weather-independent energy sources and is the world’s largest builder of new coal plants, currently expanding its coal fleet by 148 GW – roughly the EU’s entire coal-fired capacity. Subsidies for renewable energy have also been decreasing since 2018, partly to reflect the improved cost-efficiency of wind and solar plants which has reduced their dependence on state support. All eyes will be on China’s five-year plan for 2021-25 – to be approved in 2021 – which will set out the country’s green stance both domestically and abroad via its Belt and Road Initiative.

All in all, whilst we anticipate much more to come, governments across the world are already sending clear signals to companies and investors to think ‘green’ when considering future investments.

EU State aid policy leading the way

As we have discussed in our earlier posts on industry-wide cooperation and merger control, there is still some way to go for sustainability to become a key driver of competition policy. But EU State aid rules have long been an important enabler of State measures to protect the environment and combat climate change.

The EC already has put in place specific Guidelines on State aid for environmental protection and energy (EEAG). We can measure the success of these guidelines by looking at the official EU statistics: excluding aid to agriculture, fisheries and railways, about 55% of total State aid expenditure in 2018 was aimed at environmental and energy savings. There are also significant initiatives beyond the EEAG, including the EC’s recent approval of Important Projects of Common European Interest (IPCEI) to support schemes like R&D in batteries in 2019.

As for the UK, EU State aid rules will cease to apply once the transition period expires in December 2020 (unless extended). The current UK Government has repeatedly rejected the “level playing field” conditions – including State aid – that Brussels insists must form the backbone of any future trade arrangement. Depending on the terms of the post-transition period agreement, it’s possible that the UK Government will be able to subsidise sustainability efforts to an even greater extent than its EU counterparts. But whether and to which extent this freedom will be used is of course mainly a political issue, as the example of the Trump administration in the US shows.

State aid at the core of the European Green Deal

As explained by EC Vice-President Vestager, State aid control aims to get the most out of public spending by using competition to drive down costs.

Public funding should preferably be used as a catalyst to overcome barriers that would otherwise hamper private investments, and only when this is not feasible as a source of investment in itself, and never in a way that crowds out private investments.

It therefore comes as no surprise that the EC President von der Leyen has put State aid firmly at the centre of her flagship European Green Deal. As we mentioned in previous posts, this set of policies aim to make the EU carbon-neutral by 2050 through the mobilisation of €1 trillion for green investments.

New EU State aid guidance

To make sure that State aid rules are fit-for-purpose for their new role, the EC brought forward its review of several guidelines, including the EEAG, the rules on IPCEI and the General Block Exemption Regulation (GBER). This review was expected to be wrapped up by the end of 2021, but at least parts of it will be delayed by the Covid-19 crisis.

We expect the revamped rules to further foster investment in green initiatives – supporting industries towards climate neutrality, while phasing out fossil fuels. This will impact businesses in all sectors of the economy, from aviation and railways, to construction and energy.

A green recovery from Covid-19?

While State aid’s enhanced role as a catalyst for green investment is a welcome development, and crucial in powering the European Green Deal, large amounts of aid are still being granted to activities that have a negative net impact on the environment.

For example, the transport sector receives generous support from Member States despite being responsible for 27% of the EU’s carbon footprint in 2017. Whilst support for this sector may make sense in the Covid-19 crisis and to guarantee basic transport needs (and in some cases to offer alternatives to even more polluting alternatives), we expect such funding to be benchmarked against increasingly demanding climate goal targets.

This is reflected in the discussions on how to stimulate the economy in the wake of the Covid-19 pandemic. The European Council has stressed that we must not lose sight of the climate crisis and has called on the EC to prepare “a comprehensive recovery plan and unprecedented investment” that integrates the green transition.

This sentiment was echoed by 17 EU ministers of environment, highlighting the need to “withstand the temptations of short-term solutions in response to the present crisis that risk locking the EU in a fossil fuel economy for decades to come”. As a further marker, the French Government has announced that its EUR 7 billion Covid-19 support package to Air France-KLM will be subject to “strong sustainable development commitments”.

What’s next?

Industrial policy globally is evolving as policy makers move to respond to the twin threats of Covid-19 and climate change. With its Green Deal and supporting State aid measures, the EU leads the way in reducing CO2 emissions, but other regions are catching up and China is ahead of Europe in some areas. It’s safe to say though that all countries still have (much) further to go.

As we have argued throughout this series, competition law needs to adapt to form part of the solution to the climate challenge. Competition law and policy, including State aid rules, must be put to use to support green industrial strategies and drive change. The aim of this blog series is to contribute to this discussion.

seedling plant in hand