The guidelines are claimed to be an effective tool for promoting measures to protect the environment whilst preventing unjustified state aid to firms, a problem the EC has had to act against with increasing regularity.

“Competition policy and environmental policy are not at variance with one another,” said Mario Monti, the Competition Commissioner. “However, taking environmental requirements into account does not mean that all forms of aid must be authorised. Consideration has to be given to the effects of aid in terms of sustainable development and full application of the ‘polluter pays’ principle.”

“The current rules, which date from 1994, have proved effective, but member states now intervene more frequently, for example in the energy sector, providing aid in forms that were rather uncommon until recently, notably tax reductions or exemptions,” Monti added. “Similarly, new forms of operating aid are proliferating. New guidelines were needed, therefore, in order to familiarise member states and firms with the criteria that the Commission will apply in deciding whether or not planned aid is compatible with the common market.”

The Commission is firmly committed to enforcing the ‘polluter pays’ principle that underpins its environmental protection policy. In its view, state aid can act counter to environmental interests by cushioning companies against the costs of their polluting activities. But the situation is far from simple – the Commission knows that aid can sometimes be justified where it serves as an incentive or provides a temporary solution. The prime example is renewable energy, where production costs are higher than the market price.

For investment and operating aid, member states will be able to choose from a number of options. For investment aid, the basic rate has been increased from 30%, as set out in the 1994 guidelines, to 40% for investments that further renewable energy, energy saving, and combined energy and heat production (CHP).

A bonus of 10% is available for small to medium-sized enterprises (SMEs), firms in assisted regions, and investments in renewable energy that serve the needs of an entire community such as an island. This means that, depending on the circumstances, the rate of aid can reach 50%.

For renewable energy, member states will also be able to choose between four options for granting operating aid. Firstly, they will be able to grant aid to compensate for the difference between the production costs of renewable energy and the market price of electricity until the plant has been fully depreciated. The length of the depreciation period is left to member states to decide. To attract investment into this sector, aid may also cover a ‘fair return’ on capital.

Member States will also be able to use market mechanisms such as green certificates, although they will have to ensure that this does not result in overcompensation. Aid can also be granted to a formula that takes account of the costs to society of traditional fuels. Until these external costs are borne by those that create them, the EC feels the cause of renewables can be furthered by granting aid in proportion to the costs avoided, to compensate for the handicap renewable producers face. Again, conditions will be laid down to avoid the possibility of overcompensation.

One option is to ensure that aid will still be granted as set out in the general rules governing operating aid – for not more than five years and, in principle, and would be wound down over time. This is only an option, but it would enable countries to fund projects that do not need long-term aid.

The Commission also says it is keen to dampen members’ fears over tax reductions, but in a move likely to cause concern to anti-federalists, it has taken the view that harmonisation of eco-taxes in the Community should be a priority.

In favour of the move, the EC points out that without harmonisation, states that have advanced green tax systems find they have to grant tax reductions to some firms to create a level playing field when competing with firms in countries that do not apply green taxes.

To help member states apply such taxes, the EC is providing derogations for up to ten years provided that companies undertake to make improvements in environmental protection, or continue to pay a ‘significant proportion’ of the taxes after the reduction.

The new guidelines also contain provisions aimed specifically at SMEs, which may be eligible for investment aid when adapting to the new standards. The Commission is allowing them to be excused from the principle that complying with the law cannot normally be used as a justification for granting aid.

Specific provisions have also been included for aid granted for rehabilitating polluted sites and relocating firms. Relocation aid is mainly for firms in urban areas whose presence gives rise to major problems for local inhabitants. In the Commission’s view, firms in these circumstances should be helped to relocate to avoid any risk to the local population.

The guidelines will enter into force once they have been published in the Official Journal and will be valid until the end of 2007.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie