State aid in the coal sector

By Nerea Peris

INTRODUCTION: THE COAL SECTOR IN EUROPE PRE-ECSC

The importance of the coal and steel sectors in Europe goes back to the 20th  century, as they were an essential part of most countries’ economy.1 Besides, their importance for military’s expansion was crucial, being Germany the greatest example, as its strong coal and steel industry

–resulting from its control over the Ruhr region, which permitted a large and steady supply of coal,2 was considered a key factor in helping Adolf Hitler rise to power.3 After the World War II, the main challenges in this matter were to rebuild the damaged economies of the European countries as well as to prevent a resurgence of German power. The latter was specifically a French concern, to the extent that the condition established by the French government to allow the creation of the Federal Republic of Germany was to control West German coal production.4 However, as US pressured France to relax its policies on Germany, in 1950 French foreign minister Robert Schuman came up with the so-called Plan Schuman, whose aim was to create a supranational authority to control the production of coal in France and Germany.5 Even though the original members were only those two, soon four other countries joined the negotiations (the Benelux and Italy). In total, these six countries accounted for 16% of the world’s production in coal.6

The Treaty constituting the European Coal and Steel Community was signed in Paris on 18 April 1951 and entered into force on 23 July 1952, with a term of expiry of 50 years.7 The main goal was to coordinate the coal and steel industries of the six member states through the supranational institutions established in the Treaty. Besides, a common market for coal and steel was opened on 1953.8 The expectations were high and some of the supporters had an even further aim: to achieve a deeper integration within Europe that expanded beyond coal and steel.9 However, there was not real interest by the member states in enforcing the ECSC policies. Instead, they focused in their national markets. It was commonly accepted that there was no need to facilitate market adjustments through the ECSC as long as national policies did not create negative externalities that may affect other member states.10 Besides, some countries were suspicious about supranationalism and even when the sector faced a severe crisis in 1959, some countries appeared reluctant to let the High Authority deal with it.11 Furthermore, the creation of the European Economic Community in 1958 led to a decreasing interest on the coal and steel industries, as the integration of European economies became the main goal.12 Thus, agriculture took the predominant role over coal and steel.13

The increasing production costs on the coal industry alongside the availability of cheaper foreign coal and more efficient energy sources, as well as the increasing global overproduction of coal led to a cyclic crisis in the sector, as the coal industries of the original six members became old and obsolete.14 By 1970, the quantity of coal mined by the founding countries of the ECSC had decreased by 28%.15 This worsening economic situation justified the granting of state aid to the coal sector,16 first under the ECSC’s Treaty rules and later on under the two transitory provisions adopted by the Council.

In this paper, the special legal framework for state aid in the coal sector will be analysed as well as the criticism that it generates. This will be followed by the analysis of the coal sector in a specific country, Germany and finally, some conclusions will be provided. The main question we will address is whether state aid in the coal sector will be necessary once the special legal framework expires.

STATE AID IN THE COAL SECTOR: LEGAL FRAMEWORK

The ECSCS Treaty

State aid was not allowed under the ECSC’s Treaty rules. Indeed, article 4(c) established a clear prohibition to “subsidies or state assistance, or special charges imposed by the state, in any form whatsoever”17 as they were considered “incompatible with the common market for coal and steel”.18 However, this prohibition was not absolute, as the Commission and also the Court considered that state aid could be not only allowed, but even desirable, when it contributed to attain the objectives of the Treaty.19 Therefore, the Commission had the power to authorize state aid when it would enforce the objectives laid down in the Treaty. In doing so, the Commission had to rely on the general provision established in Article 95 ECSC Treaty. Indeed, the ECSC Treaty did not confer on the Commission or the Council specific power to authorize State aid. However, under Article 95 the Commission was empowered to take all measures necessary to attain the objectives of the Treaty and, therefore, to authorize such aid when it may be necessary to attain those objectives.20 Thus, the Commission could authorize, by way of derogation, aid envisaged by the Member States and compatible with the objectives of the Treaty.21

Since 1964, the Commission adopted the so-called “Aid Codes”, allowing a general derogation from the prohibition of state aid: Decision 3/65/ECSC (OJ 1965 L 31), Decision No 3/71/ECSC (OJ 1971 L 3), Decision 528/76/ECSC (OJ 1976 L 63), Decision No 2064/86/ECSC (OJ 1986 L 177/1),

and Decision No 3632/93/ECSC (OJ 1993 L 329/12).22 The last one established the objectives and the five types of State aid allowed under those rules, namely operating aid, aid to limit the scope of activity, aid to cover the additional costs, aid for research and development, and aid for environmental protection.23 Thus, this generous legal framework allowed for many kinds of state aid to the coal sector.

The Council Regulation

The expiry of the Treaty in 2002 entailed some challenges. With the expiry, the special regime for the coal sector would have come to an end and the general rules established in the TFEU would have applied. This would have entailed a big harm in the industry, as article 107(1) TFEU prohibits operating aid, which is the kind of aid the coalmines are more dependent on, as it allows them to keep running. Therefore, there was a need for new regulation that made the transition easier. Council Regulation (EC) Nº1407/2002 was based on Article 107(3)(e) and 109 TFEU (87 and 89 EC) and was supposed to apply only until 31 December 2010.24 The justification for the granting of the aid was established in the Preamble: the competitive imbalance between domestic and imported coal, the Community’s dependency on third countries supplies and the security risks in the energy sector.25 In this Regulation, three types of aid were allowed: closure aid to cover production losses, investment and operating aid for accessing coal reserves and aid for inherited liabilities, which should be granted to cover exceptional costs that were not related to current production.26  Regarding the operating and investment aid, four groups of Member States could be distinguished: first, those countries that stopped granting operating aid for coal mines (Czech Republic, Bulgaria, France and Italy); second, those that only provided operational aid (Romania); third, countries that tried to keep the coal mining profitable without operating aid, thus providing only investment aid (Poland, Slovenia, the United Kingdom) and finally, those countries that provided both operating and investment aid (Germany, Hungary, Slovakia and Spain).27

This general authorization did not come without conditions, though. Indeed, the amount of aid granted should follow a downward trend, and besides, it could not be higher than the amount authorised by the Commission for the year 2001.28

In the following table, this general downward trend is shown:

The decreasing intensity of the aid granted to the mining sector had as a goal the closure of the least profitable mines.29 Thus, during the period covered by the Council Regulation, the state aid granted to the coal sector went from 16.6bn€ in 2003 to approximately 2.9bn€ for the period of 2008-2010. This reduction reflected the situation on the coal market, as not only the production but also the consumption had been constantly decreasing since 1990, especially in the hard coal sector, as its production costs are higher and therefore, the need for state aid is also higher.

Consumption of hard coal 1990-2015 EU

Gross inland consumption of hard coal in the EU-28 decreased steadily in the 1990s. Then, from 1999 it remained relatively stable until 2008, when further large decreases occurred. In 2015, gross inland consumption of hard coal in the EU-28 reached its lowest level at 269 Mt, 47% less than in 1990.

Production of hard coal 1990-2015 EU

As it can be seen in the graph, production of hard coal in the EU-28 has decreased almost continuously from 1990 to 2015, and the decrease has been more severe than for consumption: in 2015 domestic production was only about 26% of that for 1990. In 2015, about 36% of gross inland consumption could be covered by production in the EU-28, compared with 74% in 1990.31

The main reasons that explain these two similar trends were the easier and cheaper access to third countries materials, the increasing costs of production and also the emergence of new sources of energy, especially the renewables as their use has been continuously encouraged by the EU in an attempt to shift from the old sources of energy to a more eco-friendly ones.32

The Council Decision

The uncompetitiveness of the coal sector made it completely dependent on state aid. Therefore, the expiry of the Coal Regulation on 31 December 2010 would have led to the closure of many European mines, which would have overburdened regional labour markets and might have endangered Europe’s security of energy supply.33 Thus, even though it was not a competitive sector, the authorization of state aid was justified by the “too big to fail” principle, as the coal mining sector is a very important employer in some regions.34 Indeed, according to EURACOAL, in 2010 around 280.000 people were direct employees of the coal mining industry, and the livelihoods of around 700.000 people depended on this sector.35 Besides, the closure of mines would have provoked a short term dependency of imported coal needed for electricity generation. This is incompatible with EU’s aim to improve energy supply security.36 Finally, the great impact of the financial crisis in this sector, with the decreasing consumption and demand for coal and the limited opportunities for investment by enterprises led to a great reduction of coal prices.37

Thus, the Commission presented a proposal to extend the state aid in the sector until 1 October 2014 for those mines that had been in activity on 31 December 2009.38 However, this timeframe was harshly criticized by the European Economic and Social Committee as being too short as well as by the European Parliament and some Member States and social partners of the coal industry.39 The Commission reacted to the protests and extended the deadline to grant closure aid until 31 December 2018, under certain conditions. The proposal was adopted by Council Decision (787/2010/EU) and only contained two types of aid: closure aid for uncompetitive mines, granted until 31 December 2018 and aid to cover exceptional costs related to the closure of mines, granted until December 2027. In line with the 2020 Energy Strategy, the Council Decision does not contain operating aid, as the aim is to reduce EU greenhouse gas emissions by at least 20%, increase the share of renewable energy to at least 20% of consumption, and achieve energy savings of 20% or more.

The procedure to grant the aid is similar to the one in the Coal Regulation: Member States should notify the Commission, which after assessing the compatibility of the aid with the goals and conditions established, will approve or refuse it.41 The conditions established in the Council Decision are more rigid than the previous ones. Indeed, regarding the closure aid, it can only be granted to mines that were operating on 31 December 2009 and incur losses during their current activity. Besides, they must present a plan of liquidation that does not extend beyond 31 December 2018 and also a plan to mitigate the environmental impact of the use of coal. Moreover, the total amount of closure aid for the coal industry cannot be higher than the amount authorized by the Commission for the year 2010 and the subsidies should follow a downward trend: the reduction had to be at least 25% by the end of 2013, 40% by the end of 2015, 60% by the end of 2016 and 75% by the end of 2017 compared to aid granted in 2011.42 This aid is aimed to help the uncompetitive mines to prepare for its closure. Regarding the exceptional costs’ aid, it should be granted for covering costs not related to current production but arising from the closure of coal production units. These costs are exhaustively listed in the Annex to the Decision (e.g. social welfare benefits and rehabilitation of sites).

In the following figure, the downward trend on the granting of State aid can be observed. Besides, three countries (the Czech Republic, Hungary and Slovakia) have already ceased granting the aid and only five countries continue to do so under the Council Decision (Germany, Poland, Romania, Slovenia and Spain).

Once the Council Decision expires, the coal sector will fall completely under the TFEU’s rules, therefore the state aid for this sector will be prohibited. However, the exceptions established in the Treaty may also apply for this sector. Specifically, the regional aid is theoretically and legally possible to be granted to coalmines, as they are a very specific feature of some regions. Nevertheless, the requirements of the common assessment principles established in the Guidelines 2014-2020 are difficult to achieve, so it’s unlikely that state aid for the coal sector based in this exception will be granted.44

CRITICISM TO STATE AID IN THE COAL SECTOR AND ITS IMPORTANCE IN SOME COUNTRIES: THE CASE OF GERMANY

The granting of state aid to the coal sector has been object to criticism. It is argued that granting aid to the coal sector undermines the global efforts to mitigate climate change, as it helps to increase the consumption and therefore, it aggravates the local pollution problems.45 It also poses difficulties for the transition of renewables as prices in the coal sector are artificially kept cheap, which damages the competitiveness of low-carbon technologies.46 Besides, state aid poses and undesired burden on citizens, as their taxes are being used to subsidize an industry that, at the end, is damaging their health and the environment.47

Despite the criticism, we cannot disregard the importance that the coal industry still has in many countries, such as Germany, which is the biggest supporter of coal among all the EU Member States (see Table 1).48  Even though state aid for the coal sector has been decreasing, it is still very prominent. However, the goal established in the Coal Financing Act 2007 is to cut all the state aid for this sector by the end of 2018.49 This is a very challenging goal, as coal is still very important for electricity generation.  Indeed, brown coal is the main source of energy for electricity generation, while hard coal, which receives the highest amount of aid due to its higher production costs, is second with 18%.50

Nevertheless, as it can be seen in the following graph,51 both the employment and the turnover of coal have been decreasing since 1990, but due to the great importance of the sector in the German economy and labour market, the decrease in the level of employment has been less drastic than the reduction in the turnover. This reflects the social importance than the coal industry has in the coal-producer’s countries, and the difficulties they face in reducing the employment in this sector.

CONCLUSIONS: TOWARDS THE END OF STATE AID IN THE COAL SECTOR?

State aid in the coal sector faces many challenges. Despite the downward trend on its use, it still generates a quarter of Europe’s power.52 The closure of uncompetitive mines and the shift towards renewables will provoke a dependency in imported coal to generate electricity, as it is doubtful that renewable energies alone can fill the gap in the short-term future.53 Besides, without European coal the steel producers will need to import foreign coal, as it is a main component in steel production. This will increase the costs and may cause a crisis in this sector as well.54 Finally, the last challenge is directly related to the welfare state and the labour markets, as not all former employees from the coal industry may be qualified to work in the renewable energy sector.55

Nevertheless, it should be taken into account that the EU is part of the Paris Agreement, which entered into force in November 2016 and aims to strengthen the global efforts to reduce climate change by limiting the temperature increase to 1.5 degrees Celsius.56 In order to achieve this, the EU will have to stop using coal for electricity generation by 2030, and therefore, the remaining 300 power stations will have to be closed.57 This may seem difficult but with the time provided by the Council Decision and the increasing importance of renewable energy sources, it is possible for Member States to develop alternatives to coal and in this case, there won’t be any need to establish a special legal regime for State aid in the coal sector after the expiry of the Decision in 2028.

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