EU countries fork out billions to hang on to electricity guzzling industry

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To prevent steel plants and chemical companies from leaving Europe, EU countries plan to support their large-scale industrial electricity consumers with no less than 65 billion euros. Especially Germany is doling out money, forcing other countries to do the same. Remarkably, the Netherlands seems to have opted out from this subsidy race.

This article in 1 minute
  • Between 2021 and 2030, fifteen European countries are planning to provide nearly 65 billion euros in subsidies to companies that use a lot of electricity, such as chemical companies and metal producers. This is a tremendous increase compared to the eight preceding years, in which only 7.5 billion euros in public funds were earmarked for industry for this purpose.
  • A single specific scheme is involved, referred to as the indirect costs compensation for the EU Emission Trading System (EU ETS). This subsidy is intended to prevent companies from leaving the EU and moving to a country where they do not have to pay for their carbon emissions.
  • European countries are dismayed by Germany, where the government has the financial means to provide companies with ample support. Other EU Member States, that have less money to spend, fear that this will lead to growing inequality within the European Union and undermine the level playing field.
  • In the Netherlands, 630 million euros in subsidies have been provided to date, to companies like Tata Steel IJmuiden and the chemical company Nouryon. However, this funding was quietly ended last year.
  • This article is part of the Bureau Brussels’ series Made in Europe, in which Follow the Money investigates how European countries are trying to survive the economic race with the United States, China and other countries outside Europe.
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Hans van den Berg is the chairman of the board of Tata Steel IJmuiden and has no idea why the Dutch government ever decided to give his company a 25 million euro subsidy on an annual basis. In the radio programme Geld of je leven, he speculated that it might have to do with a change in rules in the past. ‘But I don’t know why it (the subsidy, eds) ever began,’ he said not once but twice.

The programme makers were hosted by Van den Berg at his office on 30 August 2022. The subsidy worth millions was brought up thanks to a decision taken ten days earlier in Brussels. The European Commission gave the Netherlands permission to continue disbursing hundreds of millions of euros in subsidies in the coming years to industries that use massive amounts of electricity. Despite not knowing why his company is receiving millions of euros every year, the Tata CEO is happy with the decision made in Brussels. Never look a gift horse in the mouth.

The German drawing board

The subsidy is constructed as follows. Since 2013, electric power plants are required to purchase emission rights to be allowed to emit CO2. They pass on these extra costs to their customers. But a large part of these higher electricity bills that major electricity consumers incur – like metal producers, the chemical sector and paper manufacturers – is compensated by some national governments.

Not every company is eligible for this subsidy, only those that compete with companies outside the European Union are. The subsidy is intended to ensure, for example, that a Dutch zinc manufacturer stays in the Netherlands and does not move somewhere outside the EU, where the electricity price might be lower because greenhouse gas emissions are not taxed.

Carbon leakage

The EU is attempting to decrease carbon emissions by selling emission rights and reducing the amount of rights gradually. But if companies move their factories outside the EU and continue to emit greenhouse gases, the ultimate goal – mitigating climate change – will never be achieved. This principle is referred to as carbon leakage.

In order to prevent ‘leakage’ to other parts of the world, free emission rights are given to European companies competing with companies outside the EU. Airlines, among others, receive these free rights.

Electricity producers that emit CO2 – such as coal and gas-powered plants – do not receive free rights; they pass on the extra costs for purchasing emission rights to their customers. Major electricity consumers that compete at the global level – such as metal producers and the chemical sector – are, to a large extent, compensated for these indirect extra costs.

Late last year, an agreement was reached in Brussels on a CO2 border levy: the Carbon Border Adjustment Mechanism. Manufacturers from countries without a CO2 levy will be taxed in a few years’ time when they export goods to the EU. This is intended to prevent carbon leakage. Ultimately, this CO2 border levy could lead to the end of the indirect costs compensation scheme.

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The state aid scheme, officially known as the indirect costs compensation for the EU Emissions Trading System, was conceived in Berlin. ‘This comes from the German drawing board,’ says Sander de Bruyn. When the EU negotiations on the subsidy scheme were taking place, he was an advisor to the Dutch government. He currently works for the Netherlands Environmental Assessment Agency.

The German government had financially supported its industry for years, but the 2013 reforms to the emissions trading system threatened to end this. This led German officials to come up with a new way to transfer money to energy-intensive sectors.

Not all Member States were initially eager to give hundreds of millions of euros in subsidies to energy-intensive industries. ‘The Netherlands was not in favour of the scheme,’ De Bruyn recalls. It is at odds with what the emission rights system intends to achieve: having the polluter pay for CO2 emissions. ‘But with Germany pushing it through, the Netherlands changed tack. Otherwise Dutch industry would be at a disadvantage, competing with German industry.’

From day one, the scheme sparked a subsidy race between EU Member States

This line of reasoning was confirmed in an evaluation of the subsidy, conducted by the economic research agency SEO Economisch Onderzoek in 2017. An important reason for the scheme’s introduction was that Dutch companies ‘would fall behind if other European Member States were to introduce this compensation while the Netherlands did not’.

This argument carried a lot of weight in other European countries too. After Germany, the United Kingdom and the Netherlands had opened the financial floodgates, the Flemish government decided that it would have to support the chemical industry based around Antwerp, as well as the metal industry elsewhere in the region.

European Commission documents also show that French officials indicated that they introduced the scheme due to concerns about the level playing field within Europe. From day one, the scheme sparked a subsidy race between EU Member States.

Germany, Netherlands and three other countries have been there from the start

In the five years that followed, six other countries also decided to pay out the subsidy

Poland, Italy, the Czech Republic and Romania - countries with a lot of heavy industry - will only embrace the subsidy in 2020 and 2021

While the number of European countries providing state aid rose year after year, so did the amounts disbursed, and very quickly. The main reason for this is that the subsidy is linked to the price of emission rights. The higher the price of emitting CO2, the higher the cost compensation. In the past two years, the price has quadrupled.

Early on, the subsidy scheme cost Germany a few hundred millions of euros each year, but in 2020 the bill amounted to over a billion euros. In the Netherlands the costs rose from 53 million euros in 2014 to 172 million in 2021. 

In the Netherlands, the chemical sector profits the most, receiving over half of the total amount. Tata Steel IJmuiden and other metal producers received a third of the subsidies, according to the annual records published by the Netherlands Enterprise Agency.

No country comes near the industrial heavyweight Germany, in terms of sheer amounts: between 2014 and 2021, German chemical companies and metal producers received 3.6 billion euros. France provided nearly 1.2 billion euros in subsidies. The sixth largest economy in the EU, the Netherlands, came in third place with 543 million euros.

These billions pale in comparison to the amounts unleashed in the subsidy race that began in 2022. That year, countries had to once again request approval from the European Commission to provide financial support to industries until 2030. It soon became clear that this time tens of billions of euros would be involved.

Rat race

Brussels is a ghost town in August. All of the Europeans employed by the institutions are off to the beach, hiking in the mountains or visiting relatives back home. Well, nearly everyone: there are still people at work at the European Commission’s Competition department, which has to approve state aid for the energy-intensive industries.

On 19 August, the Commission issued a press release stating that it had agreed to Berlin’s request to reserve 27.5 billion euros for German industry. The same day, Finland had 678 million euros approved. A day later, the Netherlands request was also approved: 834 million euros.

Blessings from Brussels continue to rain down throughout the autumn and the first months of 2023. On 8 September: 10 billion euros in Poland. On 25 October: 13.5 billion in France. On 19 December: 2.1 billion in Flanders. The grand total currently stands at nearly 65 billion euros, divided across fifteen countries, payable in the period leading up to 2030.

Nearly two thirds of the subsidies are for German and French industries (2021-2030)

Climate change and the level playing field

As ideological opponents of state aid, Scandinavian countries still refuse to join in the rat race. In southern and eastern parts of Europe however, more and more countries are providing the subsidy. But many of those countries have limited financial resources. Calculations made by Follow the Money show that the average amount of support received by companies in Italy and Spain is much lower than in Germany or France. Counterintuitively, Poland, the Czech Republic and Romania are handing out more support to individual companies compared to many other EU-member states. 

This is one of the main reasons the scheme is criticised. ‘I find it bizarre that a scheme was made possible at the national level,’ says Sander de Bruyn. ‘This is completely at odds with the principles of the common internal market. It is really strange that Brussels agreed to this and even extended the scheme.’

‘While professing to want companies to include CO2 costs in their product prices, you design a subsidy that counteracts that’

There have been major concerns in Brussels about the internal market this past year. Since the Covid-19 pandemic and Russia’s invasion of Ukraine and the subsequent energy crisis, the European rules for providing state aid have been relaxed. Much to the annoyance of other countries, time after time, Germany and France have profited from this.

In addition to concerns about the level playing field within the EU, there is a second worry. Can the subsidy be justified in light of Europe’s climate ambitions? De Bruyn is adamant: ‘This is a perverse subsidy. While professing to want companies to include CO2 costs in their product prices, you design a subsidy that counteracts that. [...] This is an environmentally damaging subsidy.’

He is not the only one to point this out. Various studies conducted by the European Commission itself acknowledged as early as 2015 and in 2020 that the subsidy is not in line with European climate policy.

The Netherlands withdraws

Back to the radio interview with Tata’s chair Hans van den Berg. In August 2022, he argued that the compensation scheme should be retained. ‘It is important for Dutch industry that this scheme remains in place’ since ‘competitors in France and Germany’ would also continue to receive the subsidies.

At the time, Van den Berg seemed convinced that his company would continue to receive millions in state aid. But just nine months earlier, politicians in The Hague had decided to quietly pull the plug on the scheme, ending the annual payments to the energy-intensive industry.

The subsidy ‘is costly, and undermines the required sustainability incentive’

The cabinet decision went against the grain and was remarkably timed. At the time, governments in Germany, France and other European countries were all deciding to spend tens of billions of euros to financially support Tata Steel IJmuiden’s European competitors.

The Dutch government originally decided to support metal producers and chemical companies in the Netherlands for just this very reason. But when the costs involved in the subsidy scheme continued to rise as years went by, concerns arose in The Hague.

In 2020, Hans Vijlbrief, the Dutch State Secretary of Finance at the time, warned that extending the subsidy scheme would have ‘major budgetary consequences which would require a well-considered decision from the cabinet’. And in Brussels, Dutch diplomats wondered whether the subsidy scheme would remain affordable in the future.

In 2021, the government decided to disburse the subsidy one last time. Whether the scheme would be extended would be up to the next cabinet, which would be installed a few months later.

This placed the matter in the hands of the negotiators who were cobbling together the next Dutch cabinet. However, several people directly involved told Follow the Money that the subsidy scheme was never discussed during the coalition negotiations. The consequence: the subsidy scheme quietly came to an end.

When the Dutch state budget for the coming year was published on 20 September 2022, not a single euro was earmarked for the indirect costs compensation.

Documents which were made public that same day revealed how ministries viewed state aid for electricity guzzling industries. The subsidy ‘is costly, only leads to support for major electricity consumers and undermines the required sustainability incentive’.

In a letter to parliament in December, the Dutch minister of Economic Affairs, Micky Adriaansens, even wrote that the money was going to companies ‘that do not necessarily need it’. It also leads to higher energy bills for everyone: the support ‘has a stimulative effect on the energy consumption of the energy-intensive industries and on energy prices’. Doubts were even raised whether companies in the Netherlands would be worse off than competitors in the surrounding countries as a result. ‘The support is temporary and probably does not have any influence on competitiveness in the long term.’

‘If a company can pocket ten million from somewhere, it will always say, yes please, hand it over’

This opinion is not shared by everyone. ‘We should simply not be competing with one another in Europe, but that is exactly what’s happening,’ says Henri Bontenbal, the energy and industry expert of the Christian Democrat faction in the Dutch House of Representatives. ‘If Germany puts up substantial amounts of money, it becomes nearly impossible to explain to the business community that the Netherlands will not be doing the same.’

The Dutch government is not planning on freezing out industry though. The current buzzword in The Hague is ‘tailored agreements’, which involves investigating how the government can help increase an individual company’s environmental sustainability. Three billion euros are available to help 20 companies, but things are not moving along very quickly.

Dumping emissions across the border

It remains to be seen whether the billions that EU countries are spending in subsidies will keep the energy-intensive companies in Europe. Will they be able to prevent the dreaded deindustrialisation of Europe?

In an evaluation report published in 2020, the European Commission admitted that it had no idea whether carbon leakage has been prevented, whether the subsidies have disturbed the internal market, or whether companies have increased their energy efficiency (one of the subsidy’s requirements). In brief: no one knows whether the billions in state aid have had any benefits.

Politicians in The Hague are also in the dark. Bontenbal: ‘It’s difficult for MPs – and for other policymakers too, I think – to judge whether companies actually need that money. Companies will always ask for more money. So if a company can pocket ten million from somewhere, it will always say, yes please, hand it over.’

‘But then again, I would kick myself if Dutch companies were to collapse and we ended up having to import zinc and other metals from China. That would just mean dumping the emissions across the border, which I hardly feel is an ambitious climate policy. That’s climate policy with national blinkers on.’

Bontenbal’s doubts are shared within the Dutch cabinet. On 8 February, Rob Jetten, the climate minister, said in parliament: ‘There is currently a lot of discussion about the level playing field within the EU and between the EU and the United States. So I think it’s still too early to definitely end it [the indirect costs compensation subsidy, eds].’

This means it will be uncertain what the Dutch government’s future plans are.

A decade ago, the subsidies given to German industries and the need to protect the level playing field – both within and outside the EU – were still considered convincing arguments for financially supporting the Dutch industries. A year ago the winds shifted: the consensus seems to be that the subsidy is too expensive and contributes too little towards making industries more sustainable. The Dutch government, however, refuses to take a definitive decision about participating in the subsidy race.

Translation: David Raats