Consistency between the Granting of State Aid and the Polluter-Pays Principle: Aid Aimed at Mitigating Climate Change

Since 2009, the EU ets Directive set up a general rule for the auctioning of emission allowances. It is subject to a number of exemptions. The transitional allocation of free allowances in the electricity sector, and in general the granting of free or below-market-price allowances, are caught by the tfeu prohibition on grants of state aid. However, the EU legislature and its executive—the European Commission—are empowered to grant the EU member states exemptions in order to correct market failures. At face value, such arrangements seem to run contrary to the polluter-pays principle on account that state aid subsidizes emissions of greenhouse gases instead of internalizing their costs into the price of goods and services delivered by the recipient installations. This article explores how such arrangements amount to state aid and analyses the manner in which the exemptions are consistent with the polluter-pays principle.