Proposal for a COUNCIL REGULATION on State aid to the coal industry

(Presented by the Commission)

CONTENTS

Explanatory memorandum

1. Introduction

2. The Community coal industry

2.1 Development of the coal market

2.2 Outlook

3. Aid to the coal industry

3.1 Community frameworks

3.2 Achievement of the objectives of Decision No 3632/93/ECSC

4. The future of the Community coal industry

4.1 A European strategy for security of energy supply

4.2 The place of coal in the security of supply strategy

4.2.1 Minimum production capacity of subsidised coal

4.2.2 The creation of a primary energy base

4.3 Integration of coal in sustainable devilment

4.3.1 Sustainable development and security of supply

4.3.2 The contribution of a primary energy base

5. A new State aid scheme

5.1 Principles of the scheme

5.1.1 Scope

5.1.2 Typology of aid

5.1.3 Degression of aid

5.1.4 Transparency of aid

5.1.5 Monitoring by the Commission

5.2 Period of application

6. Compatibility of the scheme with other Community policies and objectives

7. Conclusion

Annexes

Annex 1: Development of the coal industry (1986-2000)

Annex 2: State aid schemes for the coal industry

Annex 3: Changes in primary energy sources as a share of energy consumption

Annex 4: Other Community policies

Proposal for a Council regulation

EXPLANATORY MEMORANDUM

1. INTRODUCTION

Coal and steel are the foundations on which Europe has been built. The six founder States «Resolved to substitute for age-old rivalries the merging of their essential interests; to create, by establishing an economic community, the basis for a broader and deeper community among peoples long divided by bloody conflicts; and to lay the foundations for institutions which will give direction to a destiny henceforth shared» decided on 18 April 1951 to create a European Coal and Steel Community (ECSC Treaty). This Community is based on a common market, common objectives and common institutions. It has ambitious objectives for coal, more particularly:

* to ensure an orderly supply to the common market;

* to ensure that all comparably placed consumers in the common market have equal access to the sources of production;

* to ensure the establishment of the lowest prices;

* to ensure the maintenance of conditions which will encourage undertakings to expand and improve their production potential;

* to promote improved working conditions and an improved standard of living for workers;

* to promote the growth of international trade;

* to promote the orderly expansion and modernisation of production.

The ECSC Treaty was concluded for a period of 50 years from its entry into force and is therefore due to expire on 23 July 2002. In the light of this expiry date, the Commission presented a communication to the Council and the European Parliament on the future of the Treaty on 15 March 1991 [1].

[1] Sec (1991) 407 final.

The «Industry» Council of 24 November 1992 accepted the Commission proposal to maintain the ECSC Treaty until 23 July 2002. It stressed that when the Treaty expired, coal and steel should be treated like any other industrial product, particularly in the framework of competition policy. Account also needed to be taken by then of the social problems associated with the restructuring of the coal industry, of the need to reduce the ECSC levy more quickly and the need to examine the possibility of transferring the financial activities to the European Investment Bank in particular.

Once the basic political options had been defined, the Commission's work focused on the future of the financial activities, in particular the fate of the «ECSC assets». It is worth mentioning in this context that the Nice Treaty signed on 26 February 2001 provides for the Council to take all the measures necessary to implement the Protocol annexed to the Treaty on the financial consequences of the expiry of the ECSC Treaty and the creation and management of the Research Fund for Coal and Steel [2].

[2] OJ C 80, 10.3.2001, p. 67.

More recently, the Commission has also examined the question of the future of the «structured dialogue» which has developed over the years in the framework of the ECSC Consultative Committee [3].

[3] COM(2000) 588 final.

Another fundamental issue addressed in the Commission communication of 15 March 1991 is the rules on State aid to the coal industry. Since 1964 there has been a succession of schemes, based on Article 95 of the ECSC Treaty, which have set out the conditions and criteria for the grant of State aid to the coal industry. The current scheme, applicable until 23 July 2002, was adopted by Commission Decision No 3632/93/ECSC of 28 December 1993 [4].

[4] OJ L 329, 30.12.1993, p. 12.

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 Community coal production cannot compete with imports from third countries, and this is unlikely to change. Although the prospects are less unfavourable in the United Kingdom, its coal industry will remain very fragile.

In this context, the Green Paper 'Towards a European strategy for the security of energy supply', adopted by the Commission on 29 November 2000 [5], states that "Difficult decisions will have to be taken regarding the future of the European coal industry on account of its lack of competitiveness". The Green Paper then goes on to say however that for security of supply reasons "One path to explore could be that of maintaining access to certain reserves. To this end, it might be possible to envisage maintaining minimal capacity of coal production in a framework of adequate social measures, which would ensure the maintenance of the equipment and thus guarantee the continuity and good operation of the selected pits, while at the same time allowing European technology to keeps its leading position in clean-coal mining and combustion".

[5] COM(2000) 769 final.

These deliberations must take account of the situation in the countries seeking to join the European Union. This particularly applies to Poland and the Czech Republic, the two main coal producers in Central and Eastern Europe. The issue is all the more urgent as Poland on its own currently has a production volume equivalent to that of the four Community producer countries.

Apart from coal, accession candidates are also major producers of other solid mineral fuels, notably lignite and oil shale (especially Estonia). These sources of energy are mostly used to generate electricity. These industrial sectors need to take the restructuring measures needed to become - or stay - competitive.

Development in the Member States of clean coal combustion technologies will also mean that the solid mineral fuels mined the in accession candidate countries can be used under optimum environmental conditions.

2. THE COMMUNITY COAL INDUSTRY

2.1. Development of the coal market

By 1958, scarcely seven years after the signature of the ECSC Treaty, Community coal undertakings were beginning to experience difficulties in marketing their production. Growing pressure from oil and gas was compounded by the increasing threat of coal imports from third countries. The coal industry therefore embarked on a massive restructuring process, involving major cutbacks in activity. This restructuring process was accompanied by substantial financial support to the industry.

Owing to geological constraints and mining-related production costs, coal produced in the Member States cannot compete with imports from third countries. In spite of a major restructuring, modernisation and rationalisation process designed to increase competitiveness, the bulk of Community coal production remains uncompetitive vis-à-vis imports from third countries even though there has been a significant improvement in productivity, the pits incurring the biggest losses have gradually been closed and the industry's workforce has been substantially cut.

Today, four Member States still produce coal: Germany, United Kingdom, Spain and France. Enlargement of the European Union towards the centre and east of Europe will, however, bring in two large new producers (Poland and the Czech Republic). Other candidate countries also produce solid fuels, mostly lignite and the and oil shales in Estonia.

With Community coal production having been gradually reduced, coal imports from third countries are assuming an increasingly important place in Member States' supplies. Coal is used mainly to generate electricity and, to a lesser extent, in the iron and steel industry. The proportion of coal used in other industrial sectors and for domestic heating purposes is dwindling.

The world coal market is a stable market characterised by abundant resources and a geopolitically very diverse supply. The main import flows to the Community stem from its partners in the International Energy Agency (IEA) or from countries with which the Community or its Member States have signed commercial agreements, which appreciably limits the risk of any breakdown in supply.

A detailed description of the structure and recent trends in the Community coal market, more particularly between 1986 and 2000, is given in Annex 1 to this explanatory memorandum. This period was above all characterised by very stable coal prices on the international markets (in sharp contrast to oil products).

2.2. Outlook

The bulk of Community coal production is likely to remain uncompetitive with imports from third countries. With the exception of the UK industry which has a certain potential, the objective of a Community coal industry that is commercially competitive on international markets is out of reach once and for all, despite substantial efforts by the mining companies on both the technology and organisational side to improve productivity.

This is due primarily to increasingly unfavourable geological conditions, gradual exhaustion of the most accessible deposits and the relatively low price of coal on the international markets. The impact of new extraction technologies on production costs is therefore likely to remain relatively limited.

Against this background, it is already clear that the idea of maintaining a base quantity of subsidised coal production for security of supply reasons, as set out in the Green Paper on a European strategy for the security of energy supply, cannot in any way imply a departure from the process of restructuring and reduction of activity which has characterised the Community coal industry over the last few decades. Maintaining production of a primary energy source has to be achievable at reasonable cost. Consequently, it will not be possible to keep mines which have no future open unless they contribute at acceptable cost to the security of supply objective. Measures will therefore have to be taken to buffer the social and regional consequences of restructuring.

3. AID TO THE COAL INDUSTRY

3.1. Community frameworks

According to Article 4(c) of the ECSC Treaty "subsidies or aids granted by States ... in any form whatsoever ... are recognised as incompatible with the common market for coal and steel and shall accordingly be abolished and prohibited within the Community, as provided in this Treaty".

As in the case of the steel industry, however, the Commission adopted general decisions setting out the arrangements and the criteria for the grant of public aid to the coal industry on the basis of Article 95 of the ECSC Treaty.

Despite substantial efforts to restructure, modernise and streamline the Community coal industry, it has depended to a large extent on State aid since the middle of the 1960s. Banning all forms of aid to current production would have forced a significant proportion of Community undertakings to cease operations in the short or medium term (see detailed history of State aid to the coal industry and the amounts of aid granted between 1994 and 2000 in Annex 2).

The most recent scheme adopted under the ECSC Treaty by Commission Decision No 3632/93/ECSC of 28 December 1993 [6] is set in the context of creating an internal energy market. Its main objectives are:

[6] OJ L 329, 30.12.1993, p. 12.

* Transparency of State aid, through the gradual transfer to public budgets of the burden of any direct or indirect aid mechanism. Specifically in order to terminate indirect intervention mechanisms, which are non-transparent by definition, the Decision provides that the selling price of coal must be freely agreed between the contracting parties in the light of the conditions prevailing on the world market.

* Continuation of the efforts to modernise, rationalise, restructure and reduce activity. In this context, the scheme creates two categories of aid intended to cover the difference between production costs and the selling price of coal: operating aid and aid for the reduction of activity. Operating aid is reserved to production capacities capable of making further progress towards economic viability through the reduction of production costs. The objective in this case is to achieve degression of aid. Aid for the reduction of activity, for its part, is aimed at production capacities which will be unable to attain the objectives set for the grant of operating aid; the production capacities eligible for this second category of aid must be the subject of a closure plan.

3.2. Achievement of the objectives of Decision No 3632/93/ECSC

The objective of increased transparency of State aid will be a major achievement of Decision No 3632/93/ECSC. After a transition period, all Member States have had to include aid to the coal industry in public budgets, which has not been without difficulty for some of them. In addition, with regard to the prices applied, the scheme has made vertical agreements between coal producers and consumers and the "reference price" systems inherent in such agreements a thing of the past. Community coal is consequently delivered to the electricity producers at prices equivalent to those applied to coal of a similar quality from third countries.

Decision No 3632/93/ECSC was based on a fundamental distinction, in the case of aid to current production, between operating aid (Article 3 of the Decision) and aid for the reduction of activity (Article 4 of the Decision). Some problems have been encountered in applying the condition relating to the reduction of production costs, which must be met in order for operating aid to be granted. Several actions for annulment have been brought before the Court of First Instance in Luxembourg against Commission decisions authorising State aid to the coal industry. The Court nonetheless confirmed the Commission's interpretation in its decisions of the concept of reducing production costs. [7]

[7] Case T-110/98, RJB Mining v. Commission, ECR 1999, p. II - 2585. Joined cases T-12/99 and T- 63/99, UK Coal Plc v. Commission (not yet published).

Thanks to the implementation of plans to restructure and reduce activity as required by Decision No 3632/93/ECSC, it can be concluded that the objectives of the Decision have been achieved to a satisfactory extent. Both 1999 and 2000 saw significant transfers from operating aid to aid for the reduction of activity.

4. THE FUTURE OF THE COMMUNITY COAL INDUSTRY

4.1. A European strategy for security of energy supply

The ECSC Treaty has contributed to the orderly supply to the Community energy market. However, the energy supply conditions of the European Union have undergone profound change since the Treaty entered into force, both as regards the nature of energy sources and their origin.

The European Union is highly dependent today on external supplies. Some 50% of its energy requirements are currently imported and this figure is set to increase to almost 70% by 2030 if current trends continue. The availability of the European Union's conventional fossil energy resources is limited. Moreover, the tiny share of renewables in energy supply currently limits the margins for manoeuvre with regard to the Community's primary energy supply.

The European Union is therefore facing strategic challenges in the energy sector which will have a direct impact on private individuals, industry and the economy. The increase in prices of oil and natural gas from the beginning of 1999 has once again highlighted the Union's weakness, i.e. its growing energy dependence, the predominant role of oil and the disappointing results of energy management and consumption policies.

In this context, the Commission adopted a Green Paper entitled 'Towards a European strategy for the security of energy supply' on 29 November 2000 [8]. The Green Paper hopes to initiate an intensive debate covering all energy sources. It constitutes an essential first step in drawing up an energy strategy for Europe, one which could serve as a framework for a long-term, sustainable approach to energy.

[8] COM (2000) 769 final.

Action on the demand side is essential. The European Union must help reverse the current trends in energy use. Action to control demand should also contribute to achieving environmental objectives, more specifically to combat climate change.

Furthermore, a responsible policy of dependence management must necessarily include the supply dimension, even if the competencies and margins for manoeuvre of the European Union are very limited in this area.

4.2. The place of coal in the security of supply strategy

4.2.1. Minimum production capacity of subsidised coal

In view of the growing dependence on external supplies of primary energy, it is necessary to promote a policy of diversification of energy sources both in terms of geographical area and products in order to create more stable supply conditions. Such a strategy implies developing indigenous primary energy sources at reasonable cost, more particularly energy sources needed to generate electricity.

A strategy to improve security of energy supply must consider the future of Community coal. In this context, the Green Paper states that one of its priorities is to "analyse whether to maintain access to Community coal reserves and whether to maintain a minimum production capacity for this purpose".

The world coal market is currently a stable and competitive market characterised by plentiful resources and considerable geopolitical diversity of supplies. Having said that, the demise of Community coal production in its entirety in the short term would be likely to have repercussions on the long-term security of energy supply of the European Union. Some factors characteristic of the current energy context, allied with total dependence on coal imported from third countries, might increase the risks and uncertainties as to the Union's long-term security of energy supply. This concerns more particularly the still important place of solid fuels (coal, lignite, peat) as energy sources, the recent development in the prices of oil products and natural gas together with the gradual depletion of these two energy sources, and the still marginal share of renewables in energy supply. In addition, some Member States have decided to phase out nuclear power stations or to freeze investments in this sector, which plays a significant role in electricity generation.

Against this background, the stockpiling of substantial coal reserves is an option that must be rejected. Apart from the considerable impact such a measure would have on the landscape and the environment, it is not technically feasible to the extent that the coal extracted and stockpiled is vulnerable to spontaneous combustion. Moreover, while stockpiling could possibly be an effective means of responding to a breakdown in supply, it would not fit in with a more general - long-term - objective of securing energy supplies.

It is therefore necessary, on the basis of the current parameters, to take action to guarantee the availability of certain Community coal production capacities in order to cover any contingencies that could affect the energy market in the long term.

Consequently, a minimum coal production capacity must be maintained in order to keep the equipment in an operational state, preserve the professional qualifications of a nucleus of miners and safeguard technological expertise. The maintenance of a minimum coal production capacity would thus keep the equipment of the selected mines in working order and so maintain the potential availability of Community coal.

Without financial support from Member States, the bulk of the Community coal industry would be doomed in the very short term (see point 2). Improving the European Union's long-term security of energy supply, in keeping with the general precautionary principle, therefore justifies maintaining minimum coal production capacities supported by State aid.

A base quantity of subsidised coal will also contribute to maintaining the leading role of European coal mining and clean combustion technology, which can then be transferred to major coal-producing regions outside the European Union. This will help reduce significantly emissions of pollutants and greenhouse gases at international level. The Commission will give priority in this context to technological cooperation agreements in the framework of international cooperation programmes with Russia, China and India in particular.

4.2.2. The creation of a primary energy base

Together with the measures to promote renewable energy sources, a minimum capacity of subsidised coal production will contribute to the creation of an "indigenous primary energy base", which will significantly enhance the security of energy supply in the European Union. It is therefore not an isolated initiative focusing on a single primary energy source, but part of a package of measures - including action to promote the share of renewables in electricity production - designed to create an indigenous primary energy base.

In this context the Green Paper on the security of energy supply stresses the potential of renewables, which are under-developed at present. Given also their environmental advantages, the Commission on 10 May 2000 adopted a proposal for a European Parliament and Council directive on the promotion of electricity from renewable energy sources in the internal electricity market [9]. (RES electricity). The proposal, which aims to boost the share of electricity generated from renewables to 22% in 2010, should lead to a doubling - from 6 to 12% - of the share of these energy sources in global energy consumption.

[9] COM (2000) 279, OJ C 311 E, 31.10.2000, p. 320

That said, having an indigenous primary energy base does not affect the Member States' freedom to choose what energy sources will make up their supply. Aid, and the amount of it, will be granted in accordance with the rules applying to each category of energy source and on the merits of each of the sources.

This concept of a primary energy base including Community coal dovetails with the objectives set out in Directive 96/92/EC of 19 December 1996 concerning common rules for the internal market in electricity [10]. This Directive provides that Member States may give priority to the dispatch of generating installations using indigenous primary energy sources to an extent not exceeding 15% of the overall primary energy necessary to produce electricity. It also allows the possibility of giving (unlimited) priority to installations using renewable energy sources.

[10] OJ L 27, 30.1.1997, p. 20.

As regards implementing the objective of security of energy supply, which justifies maintaining a base quantity of subsidised coal, account must nevertheless be taken of the economic conditions in the coal sector. These require the efforts to restructure and reduce the level of activity in the coal industry, which have characterised the State aid schemes implemented under the ECSC Treaty, to be continued beyond 23 July 2002. A primary energy base cannot be maintained at any cost. Consequently, the future aid scheme for coal must include the degression principle.

The tables in Annex 3 - which take account, firstly, of the objectives set in the directive on the promotion of electricity from renewable energy sources and, secondly, of a scheme for the production of a minimum quantity of coal with a decreasing level of aid - show the development of these energy sources in relation to primary energy consumption and, more particularly, to electricity generation. It is clear that measures promoting renewables and measures to maintain a minimum coal production capacity will contribute to creating a base quantity of indigenous primary energy sources of around 15%. With regard more particularly to Germany and Spain, these measures should result in a supply base of some 12% for Germany and 13% for Spain (see table below). When the contribution of renewables other than those destined to electricity generation is added, this figure of 15% of the primary energy that could be considered necessary to make a real contribution to the security of energy supply is reached and even exceeded.

>TABLE POSITION>

Mtoe: million tonnes of oil equivalent.

4.3. Integration of coal in sustainable development.

4.3.1. Sustainable development and security of supply

On 15 May 2001 the Commission adopted a communication on a European strategy for sustainable development [11], which identified limiting the effects of climate change and using a higher proportion of clean energy among its priorities. In this context, the European Union must live up to its Kyoto commitments. It must also try to reduce annually its greenhouse emissions by 1% on average compared with 1990 levels until 2020.

[11] COM (2001) 264 final.

The strategy proposed by the Commission envisages gradually phasing out subsidies for the production and consumption of fossil fuels until 2010. As it is aware of the possible implications of certain decisions on the Union's long-term security of energy supply, the Commission nevertheless stressed the importance of examining whether it was opportune to constitute coal reserves and necessary to maintain a minimum level of subsidised production. The communication also states the Commission's intention to present a proposal to the Council in 2001 with a view to adopting rules on State aid to the coal sector before the ECSC Treaty expires in July 2002.

Thus the Commission's sustainable development strategy, while giving priority to developing more environment-friendly energy sources, is consistent with the direction mapped out in the Green Paper, because it does not exclude possible measures in support of maintaining a production base for coal. It recognises the need to find a compromise between, on the one hand, protecting the environment and, on the other, improving the security of energy supply by developing and maintaining a variety of indigenous primary energy sources.

It is should also be noted 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 capacities in order to retain access to reserves.

The communication adopted by the Commission on 15 May 2001 also stresses the importance of flanking measures to develop new sources of employment in the coal-mining areas. The Community could use the instruments at its disposal in the framework of economic and social cohesion to supplement Member States' efforts to redevelop the coalfields.

4.3.2. The contribution of a primary energy base

The implementation of coordinated measures to promote renewable energy and of a scheme to maintain a coal production capacity in the context of creating a primary energy base will help achieve the security of supply objective on sustainable development terms.

The degressive nature of aid to the coal industry will enable Member States to change the allocation of aid to the energy sector, and gradually transfer the aid traditionally granted to conventional energy, more particularly the coal industry, to renewable energy sources. This would make it possible to achieve the objective of security of supply including a primary energy base as part of a sustainable development strategy.

The following table, which takes account both of the objectives set in the directive on the promotion of electricity from renewable energy sources and of a scheme based on a minimum coal production capacity subject to the principle of diminishing aid, shows that there is likely to be a shift (trade-off) in the period 1997 and 2010 between electricity produced from coal and from renewables respectively.

>TABLE POSITION>

(1) Excluding large hydroelectric plants Tw-H = Tera watts/hour

According to the estimates, aid to coal production should diminish between 2001 and 2007 by EUR 3 828 million to EUR 2 075 million, so releasing EUR 1 753 million. Furthermore, the objective in the proposal for a directive on the promotion of electricity from renewables is likely to involve an increase in expenditure of some EUR 3 900 million to EUR 6 800 million. The release of resources in connection with the reduction in aid to the coal sector could thus contribute about 60% of the effort needed to increase the share of electricity produced from renewable energy.

Member States would thus be able to promote more environment-friendly energy sources while retaining a certain amount of indigenous primary energy sources for security of supply purposes.

5. A NEW STATE AID SCHEME

The new aid scheme should take account of the experience and problems encountered in applying the current scheme governed by Decision No 3632/93/ECSC. This scheme, in force since 1 January 1994, has helped bring about real restructuring and rationalisation of the Community coal industry, as reflected in a substantial reduction in the volume of production. Another major achievement of the Decision has been to make the aid granted to the coal industry more transparent by including it in public budgets and through pricing practices equivalent to those on the international markets.

While a new State aid scheme must above all contain rigorous measures, it must also take account of the expectations of the Community coal-producing countries (see summary of main characteristics and prospects for the coal industry in each of the four Community coal-producing countries in Annex 1).

5.1. Principles of the scheme

5.1.1. Scope

The rules for the granting of aid apply only to the coal industry. Aid to renewable energy sources, which together with Community coal will make up a primary energy base, is covered by its own specific legislation, more particularly the Community guidelines on State aid for environmental protection which the Commission reviewed at the end of 2000 [12]. The proposal for a directive on the promotion of electricity from renewable energy sources provides that, pending a Community framework for support to electricity generated from renewables, aid measures will be assessed on the basis of the abovementioned guidelines.

[12] O C 37, 3.2.2001, p. 3.

The objective of the scheme is to create a primary energy base for the purposes of securing energy supplies. The rules it establishes must take account of the social and regional aspects of restructuring the coal industry.

The concept of "primary energy sources" has therefore been defined. This definition does not affect the Member States' freedom to choose what energy sources make up and their supply.

5.1.2. Typology of aid

In keeping with the general principle of proportionality, subsidised coal production must be limited to what is strictly necessary to achieve the objective of enhancing the security of energy supply. Aid to safeguard resources, covering losses relating to current production, will therefore be reserved to production capacities whose exploitation is part of a plan to safeguard resources involving measures to maintain access to reserves.

Furthermore, while security of supply issues are clearly a priority objective, this must not result in maintaining coal production that defies all economic logic. The restructuring and activity reduction measures initiated under the ECSC Treaty, particularly in Germany and Spain, will therefore have to continue after 23 July 2002. A policy of rational distribution of access to resources must concentrate on the production capacities that receive the least aid. This implies that only those production units which have made significant progress in the past towards improving their economic viability are eligible to be maintained for security of supply purposes. In other words, Member States will have to take account of the cost of maintaining a minimum coal production capacity and of the benefit of this arrangement in terms of security of energy supply when they select the production units eligible to receive aid to safeguard resources.

Production capacities that do not meet these conditions will be eligible for temporary aid, however, until 31 December 2007. Such aid, likewise granted to cover losses relating to current production, is aid for the reduction of activity. Closure of the production units that are not eligible to be kept open for security of supply reasons must be carried out under satisfactory social and regional conditions, which implies the option of phasing these closures out over several years if necessary.

If the mid-term review of the rules of the scheme (see point 5.2) were to indicate the need for additional reductions in production capacities, the latter could also benefit from aid for the reduction of activity (in principle until the scheme expires on 31 December 2010).

Alongside these two categories of aid to current production, the scheme also provides for aid to cover exceptional costs. The provisions relating to this aid, which is intended to cover the costs of rationalising and restructuring the coal industry not linked to current production (inherited liabilities), have to a large extent been modelled on the measures provided for in Decision No 3632/93/ECSC.

5.1.3. Degression of aid

The scheme provides for aid to coalmining to be reduced in continuous and significant manner. The gradual reduction in subsidised coalmining activity will help to achieve this target.

The new scheme thus ensures a seamless follow-on from Decision No 3632/93/ECSC which is due to expire on 23 July 2002; it clearly implies continuing the restructuring efforts in the coal industry, in particular through measures to reduce activity gradually.

The degression of aid to the coal industry will also enable Member States, subject to their budgetary constraints, to reallocate the aid granted to the energy sector, according to the principle of a gradual transfer of the aid traditionally granted to conventional energy sources, more particularly the coal industry, to renewable energy sources.

5.1.4. Transparency of aid

Any aid received by an undertaking will be entered in the profit and loss accounts as revenue distinct from turnover. Coal undertakings which also have activities other than coal production will have separate accounts for the latter. This will enable the Commission to monitor the use of aid more effectively. Appropriate accounting procedures will offer a better guarantee that aid to coal production is not diverted to other purposes that might distort competition in other sectors.

5.1.5. Monitoring by the Commission

Countries which envisage maintaining a coal production capacity for security of supply purposes have to notify a plan for securing access to resources. As to production capacities that will not be part of this plan, countries will present a closure plan to the Commission, which must be completed by 31 December 2007 at the latest.

Member States will adapt, where necessary, the plans notified to the Commission in order to take account of any changes proposed to the scheme for the period after 1 January 2008.

On the basis of these multiannual plans, that will have to be approved by a formal Commission decision, Member States will notify each year the quantities of aid they propose to grant for the following year.

5.2. Period of application

The new aid scheme is to apply from the date of expiry of the ECSC Treaty and of Decision No 3632/93/ECSC, i.e. from 24 July 2002. In order to avoid any problem that might arise from concurrent application of the two aid schemes during the same year, it is planned that the criteria and the conditions for granting aid laid down in Decision No 3632/93/ECSC will apply until 31 December 2002.

The scheme will expire on 31 December 2010. Community coal producers will thus have a sufficiently long period to apply the measures effectively. Such a period is justified given the objective of securing the energy supply, which is of a long-term nature.

In addition, one of the principles underpinning the scheme concerns redistributing the subsidies allocated to the energy sector, in order to transfer the aid traditionally granted to the coal industry to renewable energy sources. The proposal for a directive on promoting electricity from renewables also sets objectives for 2010.

However, it is provided that the Commission will present to the Council proposals for amending the provisions of the scheme for aid relating to the period after 1 January 2008. Several factors justify such a review:

- The proposed scheme takes account of the situation of the coal industry at a given moment, and of its prospects in the foreseeable future. The outlook takes account of a wide variety of factors, such as the probable development of productivity, social and regional trends, and the impact of new environmental measures. While it may be possible to construct a fairly reliable short-term model and plan appropriate State aid measures, any attempt to predict the development of the coal industry in the longer term is by contrast illusory. It would therefore be equally illusory to set out to determine once and for all the principles of an aid scheme for a period of more than five years, as they may prove to be completely out of step with reality or even give rise to undesirable effects.

- The proposed State aid scheme takes account of very diverse factors characterising not only the coal industry, but also the Community energy market as a whole (see point 4.2.1). It will be necessary to re-assess these factors during the term of the scheme, as they will be subject to more or less significant changes, some of which are unforeseeable. A review of the scheme will in particular be necessary to take account of developments in the renewable sector which, together with Community coal, contributes to the creation of a primary energy base.

In this context, it is worth pointing out that aid to renewables is subject to the Community guidelines on State aid for environmental protection [13], which also expire at the end of 2007. Furthermore, the proposal for a directive on the promotion of electricity from renewable energy sources [14] provides that the Commission will, if necessary, propose a Community framework for support schemes for electricity produced from these energy sources. To this end, the Commission has to present, no later than four years after the entry into force of the directive, a report on the application of the various support schemes in the Member States for electricity from renewable and conventional sources.

[13] OJ C 37, 3.2.2001, p. 3.

[14] COM(2000) 279 final, OJ C 311 E, 31.10.2000, p. 320.

The review of the aid scheme for the coal industry should therefore coincide with an overall reflection on the future of European Union energy policy, notably its policy on State aid.

- The electricity and gas markets are currently in the process of being liberalised. Consequently, there will be numerous changes in these sectors. The policy on State aid to primary energy will have to be reviewed in the light of the effects of liberalisation on the electricity and gas markets, which will take several years to pan out.

- The Community principles for aid to the coal industry will have to take account of developments in the field of environmental protection, in particular relating to the objectives of the Kyoto Protocol.

- More particularly, the review of the aid scheme for the coal industry will allow its basic principles to be re-examined in the light of the implementation of the new proposal for a European Parliament and Council directive on national emission ceilings for certain atmospheric pollutants [15] and the Council Directive on the limitation of emissions of certain pollutants into the air from large combustion plants [16]. Electricity producers will have to take strategic decisions to bring their installations into line with the new environmental requirements. These are likely to involve the closure of certain coal-burning installations; it would therefore be illogical to authorise aid enabling a mine to continue activity on the one hand while, on the other, an environmental directive results in the closure of a power station run on coal from that mine.

[15] OJ C 56E, 29.02.2000, p. 34

[16] OJ L 337, 24.12.1994, p. 83

- The scheme must take account of the forthcoming accession of new Member States to the European Union. There has to be scope in this context for reviewing certain rules of the scheme to take account of this process.

In order to ensure that the Commission has all the information it needs to propose changes in the rules to the Council, the aid scheme provides for the production of a detailed report in 2006. This report will review the development of all the factors that make up the Community energy market together with the social and regional aspects of restructuring the coal industry.

6. COMPATIBILITY OF THE SCHEME WITH OTHER COMMUNITY POLICIES AND OBJECTIVES

Achievement of the European Union's security of supply objective must be compatible with Community policy as a whole. With regard to an aid scheme for the coal industry, this question arises more particularly in relation to competition policy, environment policy and economic and social cohesion. Moreover, the future aid scheme must take account of the enlargement dimension and of two candidate countries in particular: Poland and the Czech Republic, which are currently making substantial efforts to adjust their coal industries to the current Community framework.

The grant of aid to coal production is likely to affect the energy market as a whole. In terms of competition policy, the new scheme must therefore have rules that preclude any distortion of the internal market in electricity (see details in Annex 4, point 1).

With regard to the environment, the coal industry has reduced and will continue to reduce its CO2 emissions (of the order of 75%) during the reference period for the purposes of the Kyoto Protocol (1990-2010). In addition, the increasing use of clean-coal technologies will substantially improve energy efficiency and reduce pollutant emission levels (the new power stations emit 25% less CO2 than the old plants). The European Union is also currently adopting increasingly complete, very strict rules on emissions of certain atmospheric pollutants (sulphur dioxide, nitrogen oxide) (see details in Annex 4, point 2). Finally, it is worth remembering that the maintenance of a base quantity of subsidised coal will facilitate the transfer of European coal extraction and clean combustion technology, which will contribute to a significant reduction in emissions of greenhouse gases internationally.

The further reductions in production required by the new aid scheme will imply cutbacks in the workforce. The social programmes implemented by the Member States, based on economic diversification to permit effective redeployment of mineworkers outside the coal industry, will have to produce new jobs with a future in the coal-mining areas. (See details in Annex 4, point 3).

The new aid scheme will send a clear signal to the accession candidates that subsidised coal must be limited to what is justified for security of supply reasons and that the subsidised surpluses will have to be the subject of restructuring measures. It is not possible at this stage, however, to prejudge how the competitiveness of the coal industry in these countries will evolve: their accession to the European Union will therefore have to be dealt with on a case-by-case basis.

7. CONCLUSION

Community coal production has a structural deficit; the geological conditions are such that there is no scope for reducing production costs to a level where it could eventually compete with coal imported from third countries. The industry is therefore doomed in the very short term if no action is taken to allow State aid after the ECSC Treaty expires.

A complete end to coal production in the Community would be bound to have effects on the security of the EU's energy supply. Certain factors characteristic of the current energy context, more particularly the continuing important role of solid fuels as an energy source and the recent trend in prices of oil products and natural gas, would, if combined with total dependence on coal imports from third countries, increase the risks and uncertainties as to the long-term security of supply.

It is therefore necessary against this background to take measures to guarantee the availability of certain subsidised coal production capacities in the Community, in order to cover eventual risks to the energy market in the long term.

A State aid scheme to maintain a minimum coal production capacity will be one element of a package of measures, including action to promote the share of renewables in electricity production. Taken together, these measures will contribute to the creation of a base quantity of indigenous primary energy sources that will enable Member States to improve significantly the security of energy supply.

Achievement of the security of supply objective, as justification for maintaining subsidised Community coal production, must comply with two fundamental principles. Firstly, the objective must be achieved under acceptable economic conditions; this implies that the efforts to restructure and reduce activity in the coal industry which have characterised the State aid schemes implemented under the ECSC Treaty must be continued after 23 July 2002. Secondly, this essential restructuring of the coal industry must take account of the social and regional implications of the reductions of activity it entails, drawing on the positive experience built up in the framework of the ECSC Treaty.

The implementation of these two principles is translated, in the proposed aid scheme, in the definition of the two broad categories of aid: aid to safeguard resources and aid for the reduction of activity. These two categories are supplemented by aid to cover exceptional costs to enable the coal undertakings to finance inherited liabilities.

Aid to the coal industry must be reduced steadily and gradually. The degressive nature of aid to the coal industry could enable Member States, in the context of a primary energy base, to reallocate aid to the energy sector according to the principle of gradually transferring the aid granted to the coal industry to renewable energy sources. Such a redistribution of aid would make it possible to achieve this objective along with that of reducing CO2 emissions to the air, while continuing to ensure the security of supply objective.

The scheme has a term of eight years; it is due to expire on 31 December 2010. Before 31 December 2006, however, the Commission will have to review the respective share of the different indigenous primary energy sources in each Member State. It will assess the effectiveness of the indigenous primary energy sources base, especially the actual contribution of indigenous coal to increasing be EU's long-term security of energy supply, as part of the strategy of sustainable development. In the light of the development of renewable sources of energy, this information will help to determine how much coal is needed in this indigenous primary energy sources base. The Commission will then present appropriate proposals to the Council for changes to the aid for the period after 1 January 2008.

On the basis of the above, the Commission proposes to the Council, after receiving the opinion of the European Parliament, the ECSC Consultative Committee, the Economic and Social Committee and the Committee of the Regions, that it adopt the proposal for a regulation on State aid to the coal industry.

ANNEX 1

DEVELOPMENT OF THE COAL INDUSTRY: 1986 - 2000

The Community coal industry is characterised by great diversity, both in terms of the size and structure of the undertakings in the various producer countries and of the level of productivity and profitability. The same diversity can also be found within any one Member State.

As the aid systems in force often have a national dimension, and given the large number of undertakings operating in the sector, the figures presented in the following points have been extrapolated to the level of each Member State. It should therefore be borne in mind that these national averages can conceal a broad spread of data at the level of undertakings or even of production units.

It is worth remembering that the Commission publishes a report on the market in solid fuels every year in order to ensure efficient monitoring of the coal market. [17]

[17] Last report: The market for solid fuels in the Community in 1999 and the outlook for 2000, SEC(2000) 2143 final.

1. Production

Over the last few decades, Community coal production has steadily diminished. It dropped from almost 500 000 million tonnes per annum at the end of the 1950s to less than 235 000 million tonnes by 1986. This trend continued during the period of application of the current aid scheme under Decision No 3632/93/ECSC: from 159 million tonnes in 1993, Community production had fallen to 85 million tonnes by 2000.

This development is the result of major restructuring in all producer countries, with the size of the fall in production in each country depending on the energy choices and pace of adaptation judged socially and regionally acceptable by the national authorities.

Given consumption of the order of 250 million tonnes per annum, the shortfall in Community production was partly made up by imports from third countries. These imports, which are constantly increasing, reached 150 million tonnes in 2000.

>REFERENCE TO A GRAPHIC>

>REFERENCE TO A GRAPHIC>

2. Employment

The decline in Community coal production over the last three decades has had major repercussions on the level of employment. In 1955 the workforce in the industry in the Community (EUR 12) totalled 1.86 million, a figure which had fallen to 152 000 by 1993 and 89 000 by 2000 (two thirds of which employed underground). All Member States have been affected by these significant reductions in the number of miners; the biggest reductions took place in the UK, particularly in the years 1986 to 1995.

>REFERENCE TO A GRAPHIC>

3. Productivity

The rationalisation process that has been under way for many years has been translated into sometimes spectacular gains in productivity; this was particularly true of the United Kingdom over the last few years. Having said that, the efforts to rationalise and modernise production equipment have generally been so intense over the last few years that it is difficult to imagine how such a performance can be repeated in future without resorting to new restructuring and closures.

>REFERENCE TO A GRAPHIC>

4. Production Costs and Profitability

It is no easy task to compare production costs in the Community, as it is clear they may be affected by the social, fiscal and accountancy legislation in force in the different Member States.

Production costs have been assessed on the basis of the information communicated quarterly to the Commission by the undertakings in the sector. The data are compiled using harmonised rules, equivalent to those applied in the context of the State aid rules [18].

[18] Commission Decision No 341/94/ECSC of 8 February 1994, OJ L 49, 19.2.1994, p. 1.

In spite of the restructuring, modernisation and streamlining process in the coal industry that has been going on since 1965, accompanied by very substantial aid granted by Member States, the bulk of Community coal production remains uncompetitive vis-à-vis imports from third countries. The various aid mechanisms put in place have not delivered an economic solution to the structural crisis affecting the European coal industry. The productivity gains have been insufficient in the light of the prices on the international markets, despite the progressive closure of the biggest loss-makers and despite a significant reduction in the industry's workforce.

>REFERENCE TO A GRAPHIC>

5. The Coal Industry in the Member States

5.1. France

As a result of the national coal pact concluded between the social partners in 1995, coal mining has gradually declined - 2 million tonnes in 2001 - and will finally end in 2005. All the mines are already included in a closure plan and receive only aid for the reduction of activity to cover their operating losses.

The cessation of production in 2005 does not, however, mean that aid will no longer be granted after that date. Aid will have to be granted to cover the costs that result or have resulted from the modernisation, rationalisation and restructuring of the coal industry and which are not linked to current production (inherited liabilities).

5.2. United Kingdom

The United Kingdom, which produced approximately 32 million tonnes of coal in 2000, has a policy of making its coal industry fully competitive with imported coal. Even though it grants short-term aid which in any event will remain modest - a total of about £170 million in operating aid for the period 2000-2002 - the UK has set its sights on a future without subsidies for the coal industry. The aid granted between 2000 and 2002, combined with the increase in coal prices on the international markets, should make British coal competitive again with imports. The competitive margin of the UK coal industry is likely to remain very small, however, which will make it very sensitive to fluctuations in coal prices on the international markets.

5.3. Germany

Germany is currently engaged in a restructuring plan, the broad lines of which were established in 1997. Coal production should drop to 26 million tonnes in 2005 compared with 35 million tonnes in 2000. It is estimated that the number of mine workers will decline in step with these reductions in activity to 36 000 by 2005.

The overall amount of aid authorised by the Commission amounted to EUR 4.6 billion in 2000. A sum of EUR 3.5 billion was allocated to cover losses relating to current production, 60% of which was in the form of operating aid. The total amount of aid should gradually be reduced to EUR 2.8 billion in 2005.

5.4. Spain

Spain has adopted a restructuring plan for the period 1998-2005 which provides for a gradual reduction in production to no more than 11 million tonnes in 2005, compared with 15 million tonnes in 2000. The number of workers, which stood at 23 000 at the end of 1997, is likely to decline to about 15 000 at the end of 2005.

The total amount of aid authorised by the Commission amounted to EUR 1.2 billion in 2000. A sum of EUR 700 million was granted to cover losses in current production. 42 undertakings, accounting for some 11 million tonnes in production (75% of the total) received operating aid of EUR 293 million (40% of aid to current production). The balance of aid to current production, i.e. EUR 405 million, is thus absorbed by only 25% of production in the form of aid for the reduction of activity. The restructuring plan provides for a gradual reduction in aid to current production of 4% per annum.

The situation of the coal industry in Spain, although less difficult than in Germany, does not hold out any hope of substantial improvement in competitiveness compared with coal imports.

ANNEX 2

STATE AID SCHEMES FOR THE COAL INDUSTRY

1. Background

At the beginning of the 1960s, cutbacks in the coal industry resulted in extensive mine closures and staff layoffs which posed a serious threat to industrial peace; policy measures have been needed ever since. [19]

[19] Protocol on energy issues of 21.4.1964, OJ No 69, 1964.

Against this background, on 17 February 1965 the Commission adopted the first Decision establishing Community rules for State aid to the coal industry. [20] It is stressed in the recitals to the Decision that "if there is not yet sufficient scope for the development of a region, the adjustment of undertakings to the new conditions prevailing on the coal market may seriously disturb a region's economic and social fabric" and that "to avoid any such risk, it may be necessary to regulate the pace at which rationalisation should be carried out and to grant aid to cover the resulting costs to undertakings".

[20] Decision No 3/65/ECSC ; OJ No 31, 25.2.1965, p. 480.

By 1970, when the Decision expired, the competitive and financial situation in the Community had barely improved. A further Decision to provide for aid to be granted to the coal industry up to 1975 was therefore adopted on 22 December 1970. [21]

[21] Decision No 3/71/ECSC ; OJ L 3, 5.1.1971, p. 7.

Following the serious deterioration in the security of the Community's energy supply due to the events on the world oil market in 1973/74, the Commission on 25 February 1976 adopted a Decision, effective as of 1 January 1976, allowing the granting of aid to the coal industry to be extended until 1985. [22] The principles underlying the third Decision were very different from those of the previous decisions. The aim was no longer simply to alleviate the social problems arising from the cutbacks in mining, but to put coal production on a satisfactory economic footing. Investment was therefore needed to try to make production profitable. Since investment decisions are taken for the long term, the scheme was introduced for a period of ten years, not five as before.

[22] Decision No 528/76/ECSC, OJ L 63, 11.3.1976, p. 1.

When the third scheme expired, the introduction of a fourth State aid scheme, applicable from 1986, became inevitable. This decision was taken against the background of major social upheaval in the United Kingdom. The scheme's aims were revised to bring them more closely into line with the aim of the first two Commission decisions, namely adjusting production to the scope for the restructuring of the mining industry in an acceptable social framework. The fourth scheme was adopted by a Commission Decision of 30 June 1986 to run until 31 December 1993. [23]

[23] Decision No 2064/86/ECSC, OJ L 177, 1.7.1986, p. 2.

The last scheme adopted in the framework of the ECSC Treaty by Commission Decision No 3632/93/ECSC of 28 December 1993 [24] formed part of the plan to create an internal market in energy. Its aims are: to make, in the light of coal prices on international markets, further progress towards economic viability with the aim of achieving degression of aid; to solve the social and regional problems created by total or partial reductions in the activity of production units; and to help the coal industry adjust to environmental protection standards.

[24] OJ L 329, 30.12.1993, p. 12.

Under the aid arrangements laid down by the above Decision, since 1 January 1997 aid can be authorised only if it is entered in Member States' national, regional or local public budgets or channelled through strictly equivalent mechanisms. This transparency requirement has made it possible to clarify certain indirect funding schemes which Member States were using.

Decision No 3632/93/ECSC was to have a major impact on the Community coal scene. The Community produced 159 million tonnes in 1993, but this figure fell to 85 million tonnes in 2000. The number of workers fell from 152 000 in 1993 to less than 90 000 in 2000. The Decision has enabled the amount of aid granted to be significantly reduced. All coal-producing Member States have signed national agreements with the producers and the unions which run until 2005, after which State aid should fall to half of the amounts granted in 1998.

2. State Aid Between 1994 and 2000 - Decision n° 3632/93/ECSC

The following summary table contains an analysis by type of the various categories of aid to the coal industry and the changes in the amounts authorised by the Commission between 1994 and 2000.

>TABLE POSITION>

*: Aid granted pursuant to Article 3 of Decision No 3632/93/ECSC. **: Aid granted pursuant to Article 4 of Decision No 3632/93/ECSC. ***: Inherited liabilities pursuant to Decision No 2064/86/ECSC and aid granted pursuant to Articles 5, 6 and 7 of Decision No 3632/93/ECSC.

The data show that aid increased between 1994 and 1996. This was due to the gradual implementation of rules first introduced by Decision No 3632/93/ECSC, which entered into force at the beginning of 1994. The Decision requires Member States to enter all aid to the coal industry in their public budgets in order to increase transparency. The new aid scheme also made it possible to abolish the "reference price" systems, which constituted indirect aid to the coal industry. These measures have led to an increase not in the number of schemes as such but in the amounts of aid notified, checked and authorised by the Commission.

ANNEX 3: CHANGES IN PRIMARY ENERGY SOURCES AS A SHARE OF ENERGY CONSUMPTION

>REFERENCE TO A GRAPHIC>

>REFERENCE TO A GRAPHIC>

ANNEX 4

OTHER COMMUNITY POLICIES

1. The effects of aid to the coal industry on competition

Aid only covers costs related to coal for the generation of electricity, combined heat and power production and the steel industry. On 29 July 1998 the Commission adopted a Decision according to which sales of coal to other sectors of industry and households must be at prices which cover production costs; coal intended for the latter would therefore be in a competitive market. [25]

[25] Decision 1999/184/ECSC, OJ L 60, 9.03.1999, p. 74.

The proposed scheme expressly provides that aid must not introduce discrimination between buyers or users in the Community. In addition, the structure of the Community coal market (see 1.1.) and special provisions introduced in the aid scheme (see 1.2.) will make it possible to prevent any undesired effects of aid on competition.

1.1. Competition in the coal sector

There is very little intra-Community trade in coal. Most coal produced is used to generate electricity and power plants are very often located close to a mine. The high cost of producing coal in the Community means that none of the four Community coal-producing States can envisage transporting coal long distances. All the coal-producing States are also net importers of coal. The effects of aid to the coal industry must therefore be considered in terms of competition between Community coal and imported coal.

1.2. Competition in the electricity sector

Firstly, the scheme provides that aid must cover the difference between the cost of producing coal and the "selling price freely agreed between the contracting parties in the light of the conditions prevailing on the world market". Secondly, the amount of aid "may not cause delivered prices for Community coal to be lower than those for coal of a similar quality from third countries".

These rules are intended to guarantee that no special advantage will accrue to electricity producers who buy Community coal rather than imported coal as a result of the subsidy paid for Community coal. Aid granted in the framework of the proposed scheme will therefore not distort competition between electricity producers.

2. The Environmental Impact

The proposed aid scheme will make it possible to prevent coalmining from disappearing in the Community in the short term. The impact of maintaining a minimum level of production needs to be analysed in terms of mining activities and the level of coal use.

2.1. The impact of mining activities

All industrial activities inevitably have an impact on the environment. Since this is the case, the Community coal industry must comply with very strict environmental standards to minimise the effects of this activity on water and air quality and the soil.

Substantial efforts have also been made to reduce greenhouse gas emissions, which cause climate change. Emissions of CH4 at 1990 levels, as shown in the table below, were cut by half by 2000, and should be reduced considerably further by 2010. [26]

[26] See "Emissions of GHG from Energy Supply " of the study Assessment of Abatement Cost of Emission Reduction Options of Greenhouse Gases" and "Final report of the WG2 on Energy Supply of the ECCP".

>TABLE POSITION>

Furthermore, Community coal producers have adopted voluntary agreements to use the methane extracted from mines. The Association of UK Coal Mine Methane Operators (ACMM), set up in 1999, has stated that it recovered 440 000 tonnes of CO2 equivalent from closed-down mines during its first year of activity. According to the Association, there is potential for the recovery of up to 53 millions of tonnes of CO2 equivalent per annum.

Lastly, it should be pointed out that the Community coal industry is exemplary in terms of the safety of miners, whether in underground pits or open-cast mines.

2.2. Impact of the use of coal

Power stations have made considerable efforts to reduce CO2 emissions by introducing technology for the "clean" use of coal. CO2 emissions from the use of coal mined in the Community have therefore fallen from 500 million tonnes in 1990 to 220 million tonnes in 2000.

In years to come, the penetration of new technologies for the clean use of coal will enable CO2 emissions to be reduced further still. New coal-fired power stations in fact emit between 20 and 30% less CO2 than old ones when producing the same amount of electricity.

With regard to emissions of the pollutants SO2 (sulphur dioxide) and NOx (nitrogen oxide), the Commission has adopted a proposal for a Directive to the European Parliament and the Council laying down national emission limits for certain atmospheric pollutants. [27] Coal-fired power stations are also subject to the provisions of the Council Directive on the limitation of certain pollutants from large combustion plants. [28]

[27] COM/99/125 final, OJ C 56E, 29.02.2000, p. 34

[28] Directive 94/66/EC, 15 December 1994 amending Directive 88/609/EEC, OJ L 337, 24.12.1994, p. 83

The stopping of all coalmining activity in the short term, which is inevitable if no aid is granted after 23 July 2002, would mean that Community coal would then have to be replaced by coal imported from third countries. If Community coal is replaced in this way, the imported coal will have to be carried long distances, often by road, between the ports in which it is unloaded and the places where power stations are situated. The aid scheme proposed therefore involves restructuring and gradual reductions in coalmining activity in the Community.

3. Social and Regional Cohesion

Cutbacks in coalmining in the Community due to the pressure of coal imported from third countries and the high cost of producing Community coal have necessarily led to substantial reductions in numbers of staff. Further cutbacks in production over the next few years will inevitably lead to further staff cuts. While the coal industry still employed a total of 89 000 workers in 2000, it is estimated, on the basis of the Member States' restructuring plans, that this number will fall to 60 000 by 2005.

The various aid schemes introduced in the framework of the ECSC Treaty have all tried to take account of the regional and social problems associated with the decline in coalmining. They have enabled the Member States to introduce programmes for laying off or reclassifying workers, backed up by financial measures. The ECSC operational budget has also contributed to the implementation of measures for the retraining of workers and regional development plans. Furthermore, coalmining areas have received financial assistance from the European Community Structural Funds.

The reduction in coalmining activity has also made it necessary for areas affected by restructuring to develop new activities in order to create new jobs for young people for whom a career in mining is no longer an option. Against this background, a large number of national agreements have been signed with unions and coal producers to provide for industrial development programmes for coalmining areas.

Lastly, a major development under the ECSC Treaty is social dialogue in the framework of the ECSC Consultative Committee. Measures have been taken to enable this dialogue to continue as effectively as possible in the framework of the EC Treaty after 23 July 2002.

The proposed aid scheme takes account of the social and regional repercussions of reductions in mining. Production units not eligible for aid to safeguard resources will in fact be able to receive aid for a reduction in activity. This aid will enable the productions units concerned to implement a closure plan which provides for reductions of activity and staff over a period of time. In addition, the Member States' programmes to cushion the social effects are based on economic diversification, which should enable staff to be redeployed in an effective manner outside of mining. These programmes should enable new jobs that offer prospects for the future to be created in coalmining areas.

4. Enlargement

Two of the candidate countries for accession to the European Union are major coal producers: Poland and the Czech Republic, which produced 112 and 14 million tonnes of coal respectively in 1999. This sector of industry therefore occupies a position of importance in the accession negotiations. Moreover, Protocol ECSC No 2 of the Europe Agreement already lays down "pre-accession" conditions at this stage of the negotiations. The restructuring plans put in place by Poland and the Czech Republic are therefore already in line with the Community principles on State aid, more precisely those in Decision No 3632/93/ECSC.

The geological conditions of deposits in these countries are relatively similar to those in Community countries. Most coal is mined at very great depths (between 700 and 1 000 metres). The coal is generally of good quality. However, the extensive presence of firedamp makes mining relatively difficult. Furthermore, the high ground pressure means that productivity cannot be increased to any great extent despite the use of very advanced technology.

Other Central and Eastern European countries also produce coal, though in very small quantities. These countries are Bulgaria, Hungary and Romania, each of which produces 2 to 3 million tonnes of coal a year.

4.1. Poland

Poland has implemented five plans for restructuring the coal industry since 1990. The most recent plan (1998-2002) is accompanied by privatisation and will result in the loss of 115 000 jobs and a fall in production of 37 million tonnes. Despite these reductions, Poland will remain a major coal exporter.

>TABLE POSITION>

The Polish coal industry is currently in a healthy state. However, the likely rise in the cost of labour will have a major impact on production costs and thus on the viability of the sector. The Polish authorities have clearly indicated that they are prepared to take the restructuring measures needed to maintain a competitive situation.

4.2. The Czech Republic

After initial restructuring in 1993 accompanied by large-scale privatisation, the Czech Republic is currently carrying out a second phase of restructuring its coalmining industry, with financial support, but only for the closure of production units.

>TABLE POSITION>

Mining is in the hands of two large companies: OKD (Ostravsko-Karvinske Doly), which is made up of 54.2% private capital and accounts for 79% of Czech production, and CMS (Ceskomoravske doly), which is made up of 80% private capital.

2001/0172 (CNS)

Proposal for a COUNCIL REGULATION on State aid to the coal industry

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, in particular Articles 87(3)(e) and 89 thereof,

Having regard to the proposal from the Commission, [29]

[29] OJ C [...] [...], p. [...].

Having regard to the opinion of the European Parliament, [30]

[30] OJ C [...] [...], p. [...].

Having regard to the opinion of the Consultative Committee set up in accordance with the Treaty establishing the European Coal and Steel Community, [31]

[31] OJ C [...] [...], p. [...].

Having regard to the opinion of the Economic and Social Committee, [32]

[32] OJ C [...] [...], p. [...].

Having regard to the opinion of the Committee of the Regions, [33]

[33] OJ C [...] [...], p. [...].

Whereas:

(1) The ECSC Treaty and the rules adopted for its application, in particular Decision No 3632/93/ECSC establishing Community rules for State aid to the coal industry, [34] expire on 23 July 2002.

[34] OJ L 329, 30.12.1993, p. 12.

(2) The European Community has become increasingly dependent on external supplies of primary energy sources. As stated in the Green Paper on a European strategy for the security of energy supply adopted by the Commission on 29 November 2000, [35] the diversification of energy sources, both by geographical areas and in products, will make it possible to create the conditions for greater security of supply. Such a strategy includes the development of indigenous sources of primary energy, more especially sources of energy used in the production of electricity.

[35] COM (2000) 769 final

(3) The disappearance of Community coal is likely to have an impact on the European Union's security of energy supply. The world market in coal is currently stable and competitive, characterised by an abundance of resources and great geopolitical diversity of supply. However, certain factors which characterise the present energy situation might, if associated with total dependence on coal imported from third countries, increase the risks and uncertainty as regards the European Union's long-term security of energy supply. This concerns more particularly the important position still held by solid fuels as energy sources, the recent trend in the prices of oil products and natural gas and the gradual exhaustion of these two energy resources, and the still marginal share of renewable energy sources in energy supply. In addition, several Member States have decided to close down their nuclear power plants gradually or to freeze investment in this sector, which makes a significant contribution to electricity generation.

(4) It is therefore necessary, on the basis of the current energy situation, to take measures to guarantee the availability of certain Community coal producing capacity, which will help to cover any possible risks that might affect the energy market in the long term. For that purpose, a minimum quantity of coal should be produced to keep the equipment in an operating condition and to retain the professional qualifications of a nucleus of miners and technological expertise. As indicated in the Green Paper on a European strategy for the security of energy supply, such measures would make it possible to guarantee the maintenance of access to reserves.

(5) In view of geological constraints and production costs, coal mined in the Member States is not able to compete with coal imported from third countries. The closure of coal mines might make it technically very difficult, if not impossible, to make any further use of these reserves. Strengthening the European Union's long-term security of energy supply, which underpins the general precautionary principle, therefore justifies the maintenance of a minimum coal-producing capability supported by State aid. This will ensure that equipment remains operational and that there is a potential availability of Community coal.

(6) Minimum coal production capacities, together with other measures, in particular to promote renewable energy sources, will help to create a platform of indigenous primary energy sources that receive various forms of public support, which will significantly boost the European Union's security of energy supply. Furthermore, the creation of a platform of indigenous primary energy sources will also serve to promote environmental objectives within the framework of sustainable development.

(7) The indigenous primary energy base referred to in this Regulation does not affect the Member States' freedom to choose what energy sources will make up their supply. Aid, and the amount of it, will be granted in accordance with the rules applying to each category of energy source and on the merits of each of the sources.

(8) A minimum amount of subsidised coal will also help to maintain the prominent position of European mining and clean coal technology, enabling it in particular to be transferred to the major coal-producing areas outside the European Union. Such a policy will contribute to a significant global reduction in pollutant and greenhouse gas emissions.

(9) In accordance with the principle of proportionality, the production of subsidised coal must be limited to what is strictly necessary to make an effective contribution to the objective of strengthening the security of energy supply. The aid given by Member States will therefore be limited to the production of coal where mining is part of a plan to safeguard resources in order to maintain access to reserves.

(10) Only production units which have made significant progress in the past to improve their economic viability will remain active. State aid to help maintain access to coal reserves to ensure security of energy supply should therefore be set aside for these units. The application of these principles will help to contribute to the degression of aid to the coal industry.

(11) The restructuring of the coal industry has major social and regional repercussions as a result of the reduction in activity. Production units which are not eligible for aid as part of the objective of ensuring security of energy supply must therefore be able to benefit, temporarily, from aid to alleviate the social and regional consequences of their closure. This aid will in particular enable the Member States to implement adequate measures for the social and economic development of the areas affected by the restructuring.

(12) Undertakings will also be eligible for aid to cover costs which, in accordance with normal accounting practice, do not affect the cost of production. This aid is intended to cover exceptional costs, inherited liabilities in particular.

(13) The degression of aid to the coal industry will enable the Member States, in accordance with their budgetary constraints, to reallocate the aid granted to the energy sector on the basis of the principle of a gradual transfer of aid normally given to conventional forms of energy, in particular the coal sector, to renewable energy sources. Aid for renewable energy sources will be granted in accordance with the rules and criteria set out in the Community guidelines on State aid for environmental protection. [36]

[36] OJ C 37, 3.2.2001, p.3

(14) In accomplishing its task, the Community must ensure that normal conditions of competition are established, maintained and complied with. With regard more especially to the electricity market, aid to the coal industry must not be such as to affect electricity producers' choice of sources of primary energy supply. Consequently, the prices and quantities of coal must be freely agreed between the contracting parties in the light of prevailing conditions on the world market.

(15) The Commission's authorising power must be exercised on the basis of precise and full knowledge of the measures which governments plan to take. Member States should therefore regularly provide the Commission with a consolidated report showing the full details of the direct or indirect aid which they plan to grant to the coal industry, specifying the reasons for and scope of the proposed aid, its relationship with a plan to safeguard coal resources and, where appropriate, any activity-reduction plan submitted.

(16) Provided that they are compatible with the present scheme, categories of aid other than those provided for may be granted, in particular the allocation to the coal industry of aid for research and development and aid for environmental protection and training. The aid must be granted in compliance with the requirements and criteria laid down by the Commission for these categories of aid.

(17) The implementation of the provisions of this Regulation on the expiry of the ECSC Treaty and Decision No 3632/93/ECSC may give rise to difficulties for undertakings due to the fact that two aid schemes will apply during the same calendar year. It is therefore necessary to provide for a transitional period up to 31 December 2002.

(18) The proposed State aid scheme takes account of very diverse factors which characterise the present mining industry and the Community energy market as a whole. These factors, which may change to a lesser or greater extent, some of them unexpectedly, particularly the ability of Community coal to help strengthen the European Union's security of energy supply, need to be re-evaluated during the course of the scheme in the context of sustainable development by way of a report. On the basis of this report, the Commission will present proposals to the Council which will take account of the development and long-term prospects of the scheme, in particular the social and regional aspects of the restructuring of the coal industry,

HAS ADOPTED THIS REGULATION:

Chapter 1

General provisions and definitions

Article 1

Aim

This Regulation lays down rules for the granting of State aid to the coal industry with the aim of contributing to the creation by the Member States of a base of indigenous primary energy sources to strengthen the security of energy supply. The rules laid down take account of the social and regional aspects of the restructuring of the coal industry.

Article 2

Definitions

For the purposes of this Regulation:

a) "coal" means high-grade, medium-grade and low-grade category A and B coal within the meaning of the International Codification System for coal laid down by the United Nations Economic Commission for Europe; [37]

[37] International system for the codification of medium-grade and high-grade coal (1998); International classification of coal in seam (1998) and International system of codification for low-grade coal (1999).

b) "indigenous base of primary energy sources" means a Member State's strategic supply of energy sources that contributes to the objective of security of energy supply within the framework of sustainable development;

c) "production costs" means costs related to current production, calculated in accordance with the three-monthly outline statements of costs sent to the Commission by the associations of coal undertakings. These cover, apart from mining operations, operations for the dressing of coal, in particular washing, sizing, and sorting, and the costs of transport to the place of use. Furthermore, the Commission includes normal depreciation and actual interest charges on borrowed capital in its calculation of production costs;

d) "current production losses" means the positive difference between the cost of producing coal and the delivered selling price freely agreed between the contracting parties in the light of the conditions prevailing on the world market;

e) "subsidised coal production" means the quantity of coal, expressed in tonnes coal equivalent, whose production-related costs are covered by aid.

Article 3

Aid

1. Aid to the coal industry may be considered compatible with the proper functioning of the common market only if it complies with the provisions of Chapter 2, without prejudice to State aid schemes, concerning research and technological development, the environment and training.

2. Aid covers only costs in connection with coal for the production of electricity, the combined production of heat and electricity, the production of coke and the fuelling of blast furnaces in the steel industry where such use takes place in the Community.

Chapter 2

Categories of aid

Article 4

Aid to safeguard resources

1. Aid to production units may be declared to be compatible with the common market where their operation forms part of a plan to safeguard coal resources which provides for measures to maintain access to these reserves.

2. Aid to safeguard resources is intended to cover current production losses. It may be considered compatible with the common market only if it satisfies the following conditions:

a. the aid notified per tonne coal equivalent shall not exceed, for each production unit, the difference between production costs and the foreseeable revenue for a coal year. The aid actually paid shall be subject to annual correction, based on the actual costs and revenue, at the latest by the end of the coal production year following the year for which the aid was granted;

b. the amount of operating aid per tonne coal equivalent may not cause delivered prices for Community coal to be lower than those for coal of a similar quality from third countries;

c. aid must not lead to any distortion of competition between coal buyers and users in the Community.

Article 5

Aid for the reduction of activity

Aid intended to cover the current production losses of production units whose operation does not form part of a plan to safeguard oil resources, as under Article 4(1), may be considered compatible with the common market provided that it satisfies the conditions laid down in Article 4(2) and that the production units concerned are the subject of a closure plan with a deadline of no later than 31 December 2007.

Article 6

Degression of aid

1. Aid to the coal industry granted in accordance with Article 4 shall be reduced in a continuous and significant manner.

2. Aid for the reduce of activity granted in accordance with Article 5 shall be reduced in a continuous and significant manner. No aid for the reduction of activity may be granted beyond 31 December 2007.

Article 7

Aid to cover exceptional costs

1. State aid granted to undertakings which carry out or have carried out an activity in connection with coal production to enable them to cover the costs arising from or having arisen from the rationalisation and restructuring of the coal industry that are not related to current production (inherited liabilities) may be considered compatible with the common market provided that the amount paid does not exceed such costs. Such aid may be used to cover:

a. the costs incurred only by undertakings which are carrying out or have carried out restructuring,

b. the costs incurred by several undertakings.

2. The categories of costs resulting from the rationalisation and restructuring of the coal industry are defined in the Annex.

Article 8

Common provisions

1. The authorised amount of aid granted in accordance with any provision of this Regulation shall be calculated taking account of the aid granted for the same purposes, in whatever form, by virtue of any other national resource.

2. All aid received by undertakings shall be shown in the profit-and-loss accounts as a separate item of revenue distinct from turnover. Where an undertaking receiving aid granted pursuant to this Regulation is engaged not only in mining but also in another economic activity, the funds granted shall be the subject of separate accounts and managed in such a way that there is no possibility of their being transferred to the other activity concerned.

Chapter 3

Notification, appraisal and authorisation procedures

Article 9

Notification

1. In addition to the provisions of Article 88 of the Treaty and Council Regulation (EC) No 659/1999, [38] aid as referred to in this Regulation shall be subject to the special rules laid down in paragraphs 2 to 9.

[38] OJ L 83, 27.3.1999, p. 1.

2. Member States shall provide the Commission with all the information needed, given the objective of creating an indigenous base of primary energy sources for the purposes of security of energy supply, to justify the estimated production capacity to which access will be maintained as part of the plan to safeguard coal resources as well as the minimum production level needed to guarantee this access. In order to determine which production units will make up this production capacity, Member States shall take account of the economic prospects of the production units in question, and in particular of the level and trend of production costs.

3. Member States which intend to grant the aid as referred to in Article 4 shall beforehand submit to the Commission a plan for the safeguarding of resources providing for measures to maintain access to coal reserves. This plan shall provide for the following minimum elements:

a. objective selection criteria to be met by the production units in order to be included in the plan to safeguard the Member State's oil resources,

b. identification of production units meeting such selection criteria,

c. the real or estimated production costs for each production unit per coal year,

d. the estimated production capacity to which access will be maintained,

e. the estimated amount of aid to safeguard resources for coal year,

f. the respective shares of indigenous coal and renewable energy sources, and their expected upward or downward trend is, in the indigenous base of primary energy sources.

4. Member States which intend to grant aid for the reduction of activity as referred to in Article 5 shall beforehand submit to the Commission a closure plan for the production units concerned. This plan shall provide for the following minimum elements:

a. identification of the production units,

b. the real or estimated production costs for each production unit per coal year,

c. the estimated amount of aid for the reduction of activity per coal year.

5. As part of the notification of the plans referred to in paragraphs 3 and 4, Member States shall provide the Commission with all the information regarding reductions in greenhouse gas emissions. They shall refer in particular to reductions in emissions resulting from efforts made to use clean coal combustion technologies.

6. Member States shall inform the Commission of any amendments to the plan initially submitted to in accordance with paragraph 3 and/or to the plan initially submitted in accordance with paragraph 4.

7. Member States shall send notification of all the financial support which they intend to grant to the coal industry during a coal year, specifying the nature of the support with reference to the forms of aid provided for in Articles 4, 5 and 7. They shall submit to the Commission all details relevant to the calculation of the foreseeable production costs and their relationship to the plans notified to the Commission in accordance with paragraphs 3 and/or 4.

8. Member States shall send notification of the amount and full information about the calculation of the aid actually paid during a coal year no later than six months after the end of that year. Before the end of the following coal year, they shall also declare any corrections made to the amounts originally paid.

9. When notifying aid as referred to in Articles 4, 5 and 7 and making the statement of aid actually paid, Member States shall supply all the information necessary for verification of the conditions and criteria set out in these provisions.

Article 10

Appraisal and authorisation

1. The Commission shall appraise the plan(s) notified in accordance with Article 9. The Commission shall take a decision on their conformity with the objectives and criteria set out in Articles 4 and 5 and on their compliance with the objectives of this Regulation, in accordance with the rules of procedure laid down in Regulation (EC) No 659/1999.

2. The Commission shall examine the measures notified in accordance with Article 9(7) in the light of the plans submitted in the framework of Article 9(3) and (4). It shall take a decision in accordance with the requirements of Regulation (EC) No 659/1999.

Chapter 4

Transitional and final provisions

Article 11

Commission reports

1. By 31 December 2006, the Commission shall report to Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, covering in particular its experience and any problems encountered in the application of this Regulation since its entry into force.

2. It shall present a balance of the respective share of the different indigenous sources of primary energy in each Member State. It shall evaluate the effectiveness of the indigenous base of primary energy sources, and in particular the actual contribution of indigenous coal to strengthening the European Community's long-term security of energy supply as part of a strategy of sustainable development.

3. In the light of the development of renewable sources of energy, this information will help to determine how much coal is needed in this indigenous primary energy sources base.

Article 12

Implementing measures

The Commission shall take all necessary measures for the implementation of this Regulation. It shall establish a joint framework for communication of the information which will enable it to evaluate compliance with the conditions and criteria laid down for the granting of aid.

Article 13

Review measures

1. On the basis of the report produced in accordance with Article 11, the Commission shall submit to the Council proposals for the amendment of this Regulation as regards its application to aid for the period from 1 January 2008. In keeping with the principle of a continuous and significant reduction in aid to the coal industry, as referred to in Article 6, the proposed amendments shall establish the criteria for calculating the amounts of aid which might be granted to cover current production losses during the abovementioned period.

2. The Commission shall evaluate the impact of proposals drawn up in accordance with paragraph 1 on the level of coal production likely to be subsidised. It shall put forward appropriate proposals providing, where necessary, for the measures necessary if further reductions in activity have to be considered. It shall also take account in this context of the social and regional consequences of such measures.

Article 13

Entry into force

1. This Regulation shall enter into force on 24 July 2002.

2. Aid covering costs for the period from 24 July 2002 to 31 December 2002 shall, however, be subject to the rules and principles laid down in Decision No 3632/93/ECSC.

2. It shall apply until 31 December 2010.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, [...]

For the Council

The President

[...]

ANNEX

Definition of costs referred to in Article 7

1. Costs incurred only by undertakings which are carrying out or have carried out restructuring and rationalisation

Exclusively:

a) the cost of paying social-welfare benefits resulting from the pensioning-off of workers before they reach statutory retirement age;

b) other exceptional expenditure on workers who lose their jobs as a result of restructuring and rationalisation;

c) the payment of pensions and allowances outside the statutory system to workers who lose their jobs as a result of restructuring and rationalisation and to workers entitled to such payments before the restructuring;

d) the cost covered by the undertakings for the retraining of workers in order to help them find new jobs outside the coal industry;

e) the supply of free coal to workers who lose their jobs as a result of restructuring and rationalisation and to workers entitled to such supply before the restructuring;

f) residual costs resulting from administrative, legal or tax provisions;

g) additional underground safety work resulting from the closure of production units;

h) mining damage provided that it has been caused by production units subject to closure due to restructuring;

i) residual costs resting from contributions to bodies responsible for water supplies and for the removal of waste water;

j) other residual costs resulting from water supplies and the removal of waste water;

k) residual costs to cover former miners' health insurance;

l) exceptional intrinsic depreciation provided that it results from the closure of production units (without taking account of any revaluation which has occurred since 1 January 1986 and which exceeds the rate of inflation);

2. Costs incurred by several undertakings

a) increase in the contributions, outside the statutory system, to cover social-security costs as a result of the drop, following restructuring, in the number of contributors;

b) expenditure, resulting from restructuring, on the supply of water and the removal of waste water;

c) increase in contributions to bodies responsible for supplying water and removing waste water, provided that this increase is the result of a reduction, following restructuring, in the coal production subject to levy.