Select Committee on European Scrutiny Tenth Report




COM(01) 327



COM(01) 423

Commission report on the application of the Community rules for state aid to the coal industry in 2000.

Draft Council Regulation on state aid to the coal industry.

Legal base: (a) —

(b) Article 87(3)(e) and 89 EC; consultation; qualified majority voting  

Documents originated: (a) 15 June 2001

(b) 25 July 2001

Forwarded to the Council: (a) 18 June 2001

(b) 30 July 2001

Deposited in Parliament: (a) 18 July 2001

(b) 27 September 2001

Department: Trade and Industry
Basis of consideration: (a) EM of 4 September 2001

(b) EM of 8 October 2001

Previous Committee Report: None
To be discussed in Council: None planned
Committee's assessment: Politically important
Committee's decision: (Both) Cleared


  11.1  Subsidies are generally incompatible with the common market for coal and steel established under the European Coal and Steel Community (ECSC) Treaty. However, the ECSC Treaty does allow some financial aid to be granted for particular purposes and the Commission has adopted a series of general decisions (on the basis of Article 95 of the ECSC Treaty) setting out the criteria for granting aid to the industry. Commission Decision 3632/93/ECSC of 28 December 1993, which establishes the current rules on state aid to the coal industry, allows aid if at least one of the following objectives is met: to make further progress towards economic viability with the aim of achieving reduction of aid; to solve social and regional problems created by total or partial reductions in output; and to help the coal industry adjust to environmental protection standards. Under the rules, the Commission also provides an annual report on the application of Community rules for state aid to the coal industry.

The documents

  11.2  Document (a) is the 2000 annual report on the application of the Community rules for state aid to the coal industry. It provides an overview of the EU's coal industry in terms of production, employment, demand and trade, and analyses in more detail coal demand, trade and imports in coal-producing Member States (France, Germany, Spain, and the UK).

  11.3  As regards the UK, the report notes the "drastic restructuring process, particularly with the privatisation of the British Coal Corporation in 1994" and the more recent changes in world coal prices which led to the introduction of the UK Coal Operating Aid Scheme, covering the period from 17 April 2000 to 23 July 2002. It records the aid allocated to each colliery under the scheme and the payments that other EU countries have made to support their coal industries. It lists relevant legal disputes, together with appeals against Commission Decisions which have been considered by the Court of First Instance.

  11.4  The report describes the continuing downward trend in coal production and employment since 1992. EU production has declined from 184.8 million tonnes in 1992 to 86.6 million tonnes in 2000. The figures for the UK were 83 million tonnes in 1992 and 31.2 million tonnes in 2000, and for Germany 72.2 million tonnes in 1992 and 37.3 million tonnes in 2000. Total EU coal production in 2000 is only 3 million tonnes higher than the 1992 figure for the UK alone.

  11.5  Demand for coal within the EU in 1992 was 288.4 million tonnes compared with an estimated 257 million tonnes in 2000. Imported coal is gradually replacing Community coal for environmental as well as economic reasons. This has been particularly so in Germany, where imports are up 93% since 1992, compared with 17.4% in the UK. Employment in the EU coal industry fell by 12,000 to 92,500 in 2000, with the biggest falls being recorded in Germany (11,000) and Spain (more than 2,000). Further job losses are expected to be recorded when the figures for 2001 are presented.

  11.6  Document (b) is the European Commission's proposal for a Council Regulation on state aid to the coal industry, to replace the current rules which expire on 23 July 2002. When the Industry Council accepted in 1992 a Commission proposal to maintain the ECSC Treaty until that date, it stressed that coal and steel should thereafter be treated like any other industrial product, particularly in respect of competition.

  11.7  The document consists of a lengthy explanatory memorandum, four annexes providing information on current Community aid and other background information, and a proposal for a Council Regulation.

  11.8  The Commission notes that, owing to geological constraints, coal produced in Member States cannot compete with imports from third countries. According to the Commission, the

"bulk of the European coal industry is probably doomed in the very short term when the ECSC Treaty expires on 23 July 2002 unless financial support measures are put in place. Most of the Community coal production cannot compete with imports from third countries, and this is unlikely to change. Although the prospects are less unfavourable in the UK, its coal industry will remain very fragile."

  11.9  According to the Commission, it will not be possible to keep non-viable mines open unless their contribution to security of supply is provided at an acceptable cost. The Commission notes that the Community's coal industry has depended to a large extent on state aid since the mid 1960s, although there have been substantial efforts to restructure, modernise and streamline the industry. The Commission's view is that a minimum coal production capacity must be maintained in order to keep equipment and expertise operational. A quantity of subsidised coal production would also contribute to maintaining the leading role of European coal-mining and clean combustion technology, which could then be transferred to major coal-producing regions outside the Union.

  11.10  In her Explanatory Memorandum of 8 October 2001, the Parliamentary Under-Secretary of State for Competition, Consumers and Markets at the Department of Trade and Industry (Miss Melanie Johnson) sets out the Commission's approach to state aid for coal:

"[It] foresees the creation of an 'indigenous primary energy base' combining fossil fuels and renewables — with subsidies gradually transferred from the former to the latter. However, a primary energy base cannot be maintained at any cost. Consequently the future aid scheme for coal must include the degression principle. The strategy proposed by the Commission envisages gradually phasing out subsidies for the production and consumption of fossil fuels until 2010. It notes that the comments sent to the Commission in reaction to the Green Paper on the security of energy supply are generally very much in favour of maintaining minimum coal production capacity.

"The memorandum establishes the scope and criteria of the new aid scheme. It states that the objective of the scheme is to create a primary energy base for the purpose of securing energy supplies, and the rules it establishes must also take account of the social and regional aspects of restructuring the industry."

  11.11  The main features of the proposal are as follows:

  • Member States will be free to choose whatever energy sources they wish to make up their supply;

  • subsidised production will be limited to increasing the security of energy supply and production units that do not satisfy this condition will be eligible for closure aid until 31 December 2007, with the option of phasing closures over several years;

  • three categories of aid can be considered compatible with the common market: aid to safeguard resources, which is intended to cover current production losses, provided (a) there is a cap on such aid payments and it does not cover all losses, (b) it does not cause domestic coal prices to fall below prices for third countries' coal, and (c) it does not distort domestic competition; aid for the reduction of activity, which in addition to meeting the above conditions also has an expiry date of 2007; and aid to cover exceptional costs relating to inherited liabilities;

  • amounts of aid will be entered into the profit and loss accounts of the undertaking as revenue to distinguish them from turnover, and coal undertakings engaged in other activities will have to show separate accounts for the latter;

  • Member States will be obliged to notify the Commission of any plans to maintain capacity for security of supply purposes, and any closure plans;

  • present rules, as laid down in the Decision, will apply until 31 December 2002, but subsidies for production and consumption of fossel fuels are to be phased out in a "continuous and significant manner" until the new scheme expires on 31 December 2010; and

  • the Commission will review the workings of the Scheme in 2006 and present to the Council proposals for amending the provisions of the scheme from 1 January 2008.

The Government's view

  11.12  In her Explanatory Memorandum of 8 October 2001, the Minister told us:

"As the proposal currently stands it will potentially permit Member States to pay significant sums to their domestic coal industries. Germany, and probably Spain, are likely to wish to make use of this opportunity. Although the precise level of aid to be permitted is as yet unclear, if it is set at the levels of aid approved for each member state for 2001 this would equate to approximately £55m per annum for the UK. Future UK policy will be informed by the PIU [Performance Innovation Unit] Energy Policy Review, but HMG currently has no plans to subsidise the UK coal industry beyond 2002.

"HMG's wider State aid policy requires that state aid should be geared towards underpinning economic reform. Therefore it would be inappropriate for HMG to actively support continued, open-ended coal aid. However the payment of aid by other Member States to their coal industries need not in itself be detrimental to our interests. Almost all domestic production of coal is consumed locally, with very little intra-EU trade, and the Commission proposals do not permit subsidy to reduce domestic prices of delivered coal below international prices. Therefore some limited coal state aid may be paid without materially distorting the single market.

"HMG has therefore indicated to the Commission and Member States that it is prepared to accept reluctantly that continued State aid to the coal industry be permitted, provided that this is in the context of appropriate limiting conditions. These include: a cap on aid payments; a requirement for degressivity in aid payments; a clear end date of 2007; and rules to prevent subsidies reducing domestic coal prices below international ones.

"HMG has reservations about the use of security of supply as the rationale for a future coal aid regime, as the geopolitical diversity of coal sources is such that the risks of disruption to supply are minimal. The government is also concerned that references to an 'indigenous base of primary energy sources' in the Commission's proposal, could be a precursor to a reservation of primary energy fuels which would be free of any restrictions on State aid. This would be strongly opposed as it could fundamentally undermine energy liberalisation."


  11.13  We note that the annual report on state aid to the coal industry provides a useful overview of the industry and is a valuable source of information. The document is descriptive and will have no effect on UK interests.

  11.14  As regards the proposal for new state aid rules for the coal industry, we note that the Government accepts, albeit reluctantly, that the coal industry in the EU should continue to receive state aid, provided it meets "appropriate limiting conditions." We also note the Government's view that coal subsidies given by other Member States such as Germany and Spain are unlikely to have much effect on the single market and on UK interests generally.

  11.15  In view of the limited effect the proposed new state aid rules for coal are likely to have on the UK, we have decided that the proposal does not warrant a debate. We clear both documents.

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