State Aid for Environmental Protection in the EU

Katarina Godtbert Elkjær

Student thesis: Master thesis


The thesis starts out by analyzing, to what extent state aid is the most efficient way to internalize externalities. It is concluded that intervention from the state can be justified, through the existence of market failure. Because of high transaction costs and difficulties establishing property rights, the market is not able to regulate itself. The efficiency of state aid is compared to a pigouvian taxation and to tradable quotas. State aid does not directly internalize externalities, however it is shown that state aid will result in a lower demand on the polluting production, and therefore has the same effect. State aid is perceived to be the most efficient way, to provide incentives for companies to generate positive externalities or reduce negative externalities. However, when it comes to internalizing externalities, both quotas and taxes do this in a more explicit way. When the member state chooses among the two, it should choose the one which results in the lowest deadweight loss. The thesis continues by analyzing how the EU balances the two mail goals of the union, namely the goal of free competition on the internal marked, and the goal of environmental protection in the state aid legislation. The state aid regulation is based upon the general prohibition on state aid in article 107 (1). The analysis targets on the criteria of the proportionality of the aid, laid down in the Commissions guidelines on state aid for environmental protection and energy, in order for et to fall under the exception in article 107 (3)(c) TFEU. It is perceived to be in the proportionality criteria that the balancing of the two goals, in question takes place. The analysis concludes that the state aid must be proportionate, when it comes to the negative effects on the internal market, weighed against the positive effects on the environment. When analyzing state aid cases, it is seen that there is a tendency, towards a higher priority on the positive environmental effects than on the proportionality test. The final chapter considers the uniformity between the economics efficiency criteria and the state aid legislation. It is concluded that in general terms, the two complement each other well. The criteria on state aid being granted for projects which generate positive externalities or reduce negative externalities, is applied by the criteria in the Commission guidelines, through the requirement that there exists a market failure, for state aid to be justified. The economic theory complies with the criteria in the European legislation on proportionality, as it considers proportional state aid the most efficient.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2016
Number of pages83