State aid: Commission approves €6.5 billion German scheme to address carbon leakage risk for energy-intensive companies resulting from national fuel emission trading system

The European Commission has approved, under EU State aid rules, a €6.5 billion German scheme to partially compensate energy-intensive companies to address the risk of carbon leakage from higher fuel prices resulting from the German fuel emission trading system (‘German fuel ETS’).

The German measure

Germany notified the Commission of its plan to support energy-intensive companies exposed to international competition by covering part of the higher fuel prices resulting from the German fuel ETS. The scheme will cover costs incurred between 2021 and 2030. The support measure is aimed at reducing the risk of ‘carbon leakage’, where companies relocate their production to countries with less stringent emission rules, resulting in increased greenhouse gas emissions globally.

The measure will benefit companies active in sectors and sub-sectors listed the EU ETS Carbon Leakage List. Those sectors face significant emission costs and are particularly exposed to international competition.

The compensation will be granted to eligible companies through a partial refund of the additional costs incurred in the previous year, with the final payment to be made in 2031. The level of compensation is between 65% and 95% of the costs, depending on the emission intensity of the beneficiaries.

In order to maintain incentives for beneficiaries to switch to less polluting fuels, the aid amount is calculated based on fuel and heat benchmarks. The beneficiaries bear a certain share of the additional costs resulting from the German fuel ETS, corresponding to 150 tCO2 per year, for which no aid will be granted.

In order to qualify for compensation, beneficiaries will have to invest at least 50% (as of 2025 at least 80%) of the aid amount in (i) measures identified in their ‘energy management system’, setting out energy efficiency objectives and a strategy to achieve them; or (ii) the decarbonisation of their production processes.

The Commission’s assessment

The Commission assessed the measure under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union (‘TFEU’) which enables Member States to support the development of certain economic activities subject to certain conditions.

The Commission found that the scheme is necessary and appropriate to support energy-intensive companies to cope with higher fuel costs resulting from the German fuel ETS in order to reduce the risk of carbon leakage.

Moreover, the Commission considers that by making the aid conditional upon energy efficiency and decarbonisation efforts, the measure contributes to the objective of maximising the incentives for a cost-effective decarbonisation of the economy. It therefore supports the EU’s climate and environmental objectives and the goals set in the European Green Deal. Furthermore, the Commission concluded that the aid granted is limited to the minimum necessary and will not have undue negative effects on competition and trade in the EU.

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

Background

The European Green Deal, presented by the Commission on 11 December 2019, sets the goal of making Europe the first climate-neutral continent by 2050. The EU ETS is a cornerstone of the EU’s policy to combat climate change and a key tool for curbing greenhouse gas emissions cost-effectively. On 30 June 2021, the European Parliament and the Council adopted the European Climate Law endorsing the binding target to cut emissions by at least 55% by 2030, compared to 1990 levels.

On 10 May 2023, the European Parliament and the Council adopted the revised EU ETS Directive which introduced an emissions trading system for buildings, road transport and additional sectors not covered by the current ETS. The ETS2 will be a separate, but complementary, trading system and the auctioning of allowances under it will start in 2027.

Germany introduced the “German fuel ETS” to cover emissions from the combustion of fossil fuels that are not covered by the EU ETS. It applies since 1 January 2021 and targets emissions from the transport and building sectors, as well as energy and industrial installations falling outside the scope of the EU ETS, helping Germany reach its climate goals.

Each year, reporting fuel suppliers must purchase German fuel emission allowances based on the quantity of fuels they placed on the German market and surrender the corresponding amount of German fuel emission allowances. Fuel suppliers then pass on the additional cost of the German fuel ETS to consumers.

Germany committed to adapting its national fuel ETS and the notified measure (i) following the revision of the EU ETS Directive and the adoption of the related implementing acts or (ii) if the Commission issues new or amended State aid guidelines applicable to the measure, in order to bring them in line with the provisions and timelines of the applicable EU ETS rules.

The non-confidential version of today’s decision will be made available under the case number SA.63191 in the State Aid Register on the Commission’s competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are