State aid — United Kingdom — State aid C 45/2005 (ex N 364/2005) — Waste and Resource Action Programmes: aid for Printings and Writings paper reprocessing capacity — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty   (Text with EEA relevance)
Date: 2006-01-14
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, investment aid, pulp and paper industry, waste recycling

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STATE AID — UNITED KINGDOM

State aid C 45/2005 (ex N 364/2005) — Waste and Resource Action Programmes: aid for Printings
and Writings paper reprocessing capacity

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2006/C 9/04)

(Text with EEA relevance)

By means of the letter dated 7 December 2005 reproduced in the authentic language on the pages
following this summary, the Commission notified the United Kingdom of its decision to initiate the proce-
dure laid down in Article 88(2) of the EC Treaty concerning the abovementioned aid

Interested parties may submit their comments within one month of the date of publication of this
summary and the following letter, to:

European Commission
Directorate-General for Competition
State Aid Greffe
SPA 3, 6/05
B-1049 Brussels
Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

In July 2005, the United Kingdom notified to the Commission
an investment aid scheme for increasing the manufacturing
capacity of printing and writings paper from recycled fibre.

that go beyond the state of the art. The expected budget of the
scheme is between GBP 6 million and GBP 20 million. Since
the tender process will determine the aid levels, the intensities
of aid are not known yet. The expected beneficiaries are less
than ten paper manufacturers. The UK authorities expect to
grant the aid before April 2006.

1. Description of the measure

2. Assessment of the measure

Waste paper from offices is not collected and recycled in the
United Kingdom. In order to deal with this deficit, the govern-
ment body responsible for the Waste & Resources Action Plan
(WRAP) intends to tender grants to paper mills. The grants will
stimulate the demand for collection of waste paper from offices
by co-funding an increase of printing and writing paper (P&W
paper) recycling capacity by the paper mills. In exchange for
the aid,
the paper companies have to agree on using an
increased amount new waste paper newly recovered from the
waste stream, with a minimum percentage or tonnage of recov-
ered P&W waste paper from offices. To make the best use of
the collected P&W waste paper, the increased papermaking
capacity will be used to manufacture new P&W paper.

As regards the Environmental aid guidelines (1), the Commis-
sion has doubts that the scheme falls under point 29 of the
guidelines, as the investments in new paper production capa-
city that use paper waste will not reduce pollution from own
firms. The beneficiaries will rather use paper waste that origi-
nates from any paper producer.

As regards other rules than the environmental guidelines, the
in
Commission has doubts that other exemptions set out
Article 87(2) and (3) of the EC-Treaty are applicable. However,
the beneficiaries have not been chosen yet, and therefore it is
impossible to assess if the investments will take place in areas
eligible for regional aid and that the Guidelines on national
regional aid (2) would apply wholly or in part.

The tender will take into account the inclusion of elements of
new technology, demonstration and innovation that will assist
the development of sustainable processes in waste recycling, i.e.

(1) OJ C 37, 3.2.2001, p. 3.
(2) OJ C 74, 10.3.1998, p. 9.

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Should the Environmental aid guidelines not be applicable, the
Commission has to assess directly on the basis of Article
87(3)(c). The Commission has done so in the past, notably for
a recycling scheme (3) and two other cases in the paper
industry. (4) The criteria applied by the Commission were based
on the incentive effect of the aid and whether the necessary
investments to obtain the environmental benefits were going
beyond the ‘state of the art’ at EU level.

In other cases where the Commission has assessed investment
aid to create capacity to reprocess paper, the criteria applied by
the Commission were based on the incentive effect of the aid
and whether the necessary investments to obtain the environ-
mental benefits were going beyond the ‘state of the art’ at EU
level. The Commission has doubts that the justification used by
the UK authorities that
the current very low utilisation of
recycled content in the production of P&W papers in the EU is
enough to state that manufacturing P&W paper using recycle
fibre goes beyond the current ‘state of the art’ in the EU.

The Commission has doubts about the incentive effect in the
collection of P&W waste paper of the scheme.

The Commission also has doubts about the increase environ-
mental benefits of manufacturing P&W papers from P&W
waste paper in relation to the more common approach of
using P&W waste paper to manufacture other types of paper.

The Commission furthermore doubts whether the eligible costs
will be confined to the extra investment costs necessary to
meet the environmental objectives, because the UK does not
intend to subtract from the eligible investment cost the invest-
ment cost of a comparable capacity that would not bring the
same environmental benefit. Therefore, it is not clear whether
when aid is given for an investment in new P&W paper capa-
city using P&W waste paper, that the cost of a conventional
P&W paper plant will be subtracted.

Finally, the Commission doubts whether the measure proposed
by the UK is the least distortive instrument to address the
problem at stake. Other instruments, e.g.
instruments that
focus on the collection, may less distort the markets of waste
paper and end products.

(3) OJ L 102, 7.4.2004, p. 59. The UK recently notified an extension
and prolongation of this scheme, which is currently under assess-
ment.

(4) OJ L 314, 28.11.2003, p. 26 and OJ L 53, 26.2.2005, p. 66 respec-
tively. The criteria used in these cases are also commented upon in
the Annual Competition report of 2004.

3. Conclusion

In the light of the foregoing considerations, the Commission
decided to initiate the proceedings according to Article 88(2) of
the EC Treaty. Interested parties are invited to submit their
comments, in particular as regards (1) what should be consid-
ered to be the ‘state of the art’ when using (P&W) waste paper
in the production of new P&W-paper, (2) the necessity of the
aid in the light of the expected increase of collection rates of
waste P&W paper, (3) the degree of distortion of competition
that can be expected, both in the markets for new paper as in
the markets for waste paper, and (4) the environmental benefits
that can be expected from the notified measure compared to
benefits that can be obtained by other instruments.

TEXT OF LETTER

‘The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
it has decided to initiate the
on the aid referred to above,
procedure laid down in Article 88(2) of the EC Treaty.

1. PROCEDURE

(1) Following informal discussions, by letter of 22 July 2005,
registered in the Commission on 26 July 2005 under
the United Kingdom notified to the
number A/6948,
Commission a scheme for increasing the manufacturing
capacity of printing and writings paper from recycled
fibre under the Waste and Resources Action Programme
(WRAP). The notification was registered under number
N 364/05. The Commission asked further information by
letter dated 9 September 2005, registered under number
D/56952. The United Kingdom replied by letter dated 28
October 2005, and registered on 7 November 2002
under number A/38954.

2. DESCRIPTION OF THE MEASURE

(2) WRAP is an entity established to promote sustainable
waste management, and more specifically to promote effi-
cient markets for recycled materials and products.
Its
central objective is to enable recycled markets to function
more effectively by stimulating demand for recycled mate-
rials and products, thereby improving the economics of
collection. Although WRAP functions as an adjunct to the
Government and implements government policies, it has
the form of a private company. WRAP's shareholders
comprise several representatives of
the industries with
some interests in waste management, among them the
Confederation of Paper Industries and the Chartered Insti-
tute of Waste Management, charities like Wastewatch, and
representatives of the devolved and British governments.

(3) In the present case, WRAP has chosen to give support for
the creation of printing and writing reprocessing capacity.
The definition of printing and writing paper used by the
UK authorities includes the following types of papers:
paper for printed publications, copier/printer paper and
magazine papers.

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(4) By increasing reprocessing capacity of printing and
writing paper (hereinafter “P&W paper”), WRAP wants to
address the problems of paper collection and recycling in
offices and business. According to the United Kingdom
most of the paper produced by businesses and offices is
not collected and sorted for recycling. The reasons for this
lie in a dual system of waste collection, where city coun-
cils are responsible for collecting domestic waste but have
no responsibility for collecting waste from businesses and
offices, and the low costs of landfill. Businesses and offices
pay private waste managers for the collection of their
waste. The low costs of landfill, the difficulties experienced
in sourcing waste paper in the last decade, and attendant
price fluctuations has led to a market failure consisting of
a shortage of reprocessing capacity and a preference by
waste managers to dump waste paper from offices and
businesses in the landfill and to a shortage of reprocessing
capacity. In order to correct this market failure, WRAP
intends to offer grants to paper manufacturers to increase
paper reprocessing capacity which utilises waste paper
from offices and businesses as its raw material input.

(5) WRAP is planning to issue a competitive tender process,
inspired by EC public procurement procedures, and grant
the aid to paper mills before April 2006. The specific aim
expressed in the tender procedure will be to provide a
subsidy towards the creation of new P&W paper reproces-
sing capacity and promote the development of recycled
paper
technology within this paper grade. Successful
bidders will be those whose collections are predominantly
from offices and business and are of P&W waste paper.
According to the UK authorities, it is highly probable that
a bid that included a high proportion of (low quality)
household waste, rather than P&W waste paper from
offices and/or businesses, will not succeed. According to
the order of priority given by WRAP in the tender invita-
tion document to raw material sources, the most impor-
tant source is offices or business. In return to the grant,
the successful paper manufacturers will commit to an
increased agreed tonnage of P&W waste paper newly
recovered from the waste stream as the raw material for
the new facilities, with a minimum percentage or tonnage
being recovered printing and writing paper from offices.
Tenderers will need to specify the level of support
required to bring forward their proposals, and to demon-
technological developments and environmental
strate
benefits.

(6) Among the criteria for the selection of the successful
tenderers is the inclusion in the facility of elements of
new technology or processes, whose trialling or demon-
stration will
sustainable
processes in waste recycling. In addition, the demonstra-
tion by the tenderer that the process used goes beyond
current “state of the art”.

the development of

assist

(7) According to the United Kingdom, the competitive tender
will ensure that the minimum necessary is paid to secure
the environmental benefits.

(8) The United Kingdom argues that the investment project
would bring about
environmental benefit
a major
consisting in the creation of an increasing demand for a
major proportion of office and businesses waste stream.
This will bring benefits for the environment, while this
will also allow less waste to be disposed in the landfills.

(9) The budget for this measure is between GBP 6 million
and GBP 20 millions. The budget will cover a period from
the date of clearance to 31 December 2008. The number
of beneficiaries is expected to be between two and ten
paper mill companies, depending on the quality of the
proposals. The aid is financed through the general budget
of
for Environment, Food and Rural
Affairs (DEFRA).

the Department

3. PRELIMINARY ASSESSMENT OF THE MEASURE

(10) According to Article 6 of Council Regulation (EC) No
659/1999 of 22 March 1999 laying down detailed rules
for the application of Article 93 of the EC Treaty (5), the
investigation procedure
decision to initiate the formal
shall summarise the relevant issues of fact and law, shall
include a preliminary assessment of the Commission as to
the aid character of the proposed measure, and shall set
out the doubts as to its compatibility with the common
market.

3.1. Existence of aid under Article 87(1) EC Treaty

(11) Under Article 87(1) EC Treaty,

“any aid granted by a
Member State or through State resources in any form whatso-
to distort
ever which distorts or
competition by
threatens
favouring certain undertakings or
the production of certain
goods shall, insofar as it affects trade between Member States,
be incompatible with the common market.”

(12) In this case, the measure will be funded by resources
granted by the State under the WRAP programme. The
aid will be granted to individual beneficiaries. The compe-
titive selection procedures may ensure that the amount of
the subsidy is limited to the minimum, but does not take
away the aid character of
the measure. The measure
distorts or threatens to distort competition, as it may
cover a significant part of investment costs, which would
allow the beneficiary to charge a lower price for the P&W
paper it produces. The measure will affect the market for
new paper, but also the market for waste paper, which is
valuable commodity in demand by the paper industry.
The measure is likely to affect trade between Member
States, since both new paper and waste paper are traded
internationally. In fact, a big amount of the UK paper
consumption is imported mainly from other Member
States and the United Kingdom was the biggest European
exporter of waste paper in 2004 (6).

(13) Therefore, the scheme qualifies as State aid under Article

87(1) of the EC Treaty.

(14) By notifying to the Commission the current scheme, the
United Kingdom has fulfilled with the obligation of
Article 88(3) of the EC Treaty.

(5) OJ L 83, 27.3.1999, p. 1.
(6) CEPI, Special Recycling 2004 Statistics. Page 5, available at http://

www.cepi.org/files/Sp %20Rec %202005-135002A.pdf

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3.2. Compatibility of

the aid under the environ-

mental aid guidelines

(15) The UK authorities claim that the scheme brings environ-
mental benefits. Therefore,
the Commission assessed
whether the scheme would be justified under the Com-
munity guidelines on State aid for environmental protec-
tion (hereinafter the environmental aid guidelines) (7).

(16) The Commission does not deny that the reuse of waste
paper is more environmentally friendly than putting it
into landfill. However, it has doubts that point 29 of the
environmental aid guidelines justify the scheme in as far
as it increases the recycling rate of P&W paper. Pursuant
to this point, the Commission may authorise (1) invest-
ment aid enabling firms to improve on the community
standards applicable and (2) investment aid where firms
undertake investment in the absence of mandatory Com-
munity standards or where they have to undertake invest-
ments in order to comply with national standards that are
more stringent than the applicable Community standards.

(17) First of all, the Commission recalls that according to the
general principles of law, an exception should be inter-
preted in a restrictive manner. The guidelines define the
conditions under which the Commission may consider
that aid is compatible with the common market
in
accordance with Article 87(3)(c)of the Treaty, and there-
fore form an exception to the general prohibition laid
down in Article 87(1) of the Treaty. It should also be
recalled that the environmental aid guidelines are based
on the general principle of “the polluter pays”, and that
should strictly
every interpretation of
comply with this underlying principle.

the guidelines

(18) The scheme may increase the capacity to produce P&W
paper, which would lead to increase quantities of waste
paper, which would only be partially recycled.
In any
case, only part of the waste paper used to manufacture
P&W paper will be paper sold by each beneficiary itself.
Consequently, the Commission has doubts that the invest-
ment will reduce the beneficiaries' own pollution. It is
more likely that the environmental benefits may derive
from indirect effects on supply and demand for waste
paper that affect all users and provide of waste paper
concerned, not only the beneficiary.

(19) The United Kingdom agrees that there are no Community
standards applicable to the beneficiaries. Therefore, first
situation referred to in point 29 of the environmental aid
guidelines, which allows aid to be granted in order to
enable firms to improve on Community standards does
not apply in this case.

(20) In relation to the second situation described in the envir-
onmental guidelines, concerning aid to firms to undertake
the
investments in absence of Community standards,
Commission also has doubts that it would apply in this

(7) OJ C 37, 3.2.2001, p. 3.

case. The Commission considers that point 29 of the
environmental aid guidelines concerns cases where an
undertaking invests to improve its own environmental
record, and to reduce its own pollution. In such cases, aid
can be allowed as an incentive to improve the environ-
mental performance of the company.

(21) This interpretation is confirmed by point 18(b) of the
environmental aid guidelines, which states that aid “may
act as an incentive to firms to improve on standards or to
undertake further investment designed to reduce pollution from
their plants”.

(22) Other interpretation of

the guidelines might result

in
Member States subsidising large investments, with high
intensities, in all those sectors where used products can be
used as materials for production or where such use is the
general practice in that sector. Such aid could be granted
in non-assisted areas or, in any event, without having to
comply with regional aid rules and might have serious
consequences
relevant markets. Moreover,
following such interpretation, the rules could be circum-
vented by granting aid not to the polluters, that under
Community law would not be obliged to take care of the
other company's pollution, but to the companies taking
care of the pollution.

on the

(23) It is not excluded that part(s) of the selected investment
projects will be eligible for environmental aid for other
reasons, but as the projects have not been selected yet and
as the United Kingdom has not guaranteed that aid would
be given only in situations foreseen by the environmental
guidelines, the Commission doubts whether the aid can be
justified under the environmental aid guidelines.

3.3. Compatibility of aid under the regional guide-

lines and other provisions of the Treaty

(24) The beneficiaries have not been chosen yet, and therefore
it is impossible to assess if the investments will take place
in areas eligible for regional aid and that the Guidelines
on national regional aid (8) would apply wholly or in part.
In fact,
it should be noted that similar projects have
already been approved by the Commission based on the
rules for regional aid, but not as environmental aid (9).

(8) OJ C 74, 10.3.1998, p. 9.
(9) E.g. Hamburger AG (C 72/01), Commission decision 9 April 2002,

OJ L 296, 20.10.2002, p. 50.
Kartogroup (N184/2000), Commission decision 18 July 2001 avail-
able at
http://europa.eu.int/comm/secretariat_general/sgb/state_aids/indus-
trie/n184-00.pdf

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(25) The Commission furthermore doubts that other rules
based on Article 87(3)(c) are applicable or that other
exemptions set out in Article 87(2) and (3) of the EC-
Treaty are applicable.

3.4. Compatibility of aid directly on the basis of

Article 87(3)(c)

(26) Should the Environmental aid guidelines not be applic-
able, the case has to be assessed directly on the basis of
Article 87(3)(c). In fact, the Commission has done so in
the past, notably for a recycling scheme administered by
WRAP (10) and two other cases in the paper industry (11).

(27) In past cases dealing with investment to increase recycling
capacity in the paper industry (12), the criteria applied by
the Commission was based on the incentive effect of the
aid and whether the necessary investments to obtain the
environmental benefits were going beyond the “state of
the art” at EU level. Since the use of recycled fibre to
manufacture paper is common practice in the EU, the
Commission has not accepted that the mere fact that the
aid aims to increase the amount of recycled paper fibre in
the manufacturing of paper is enough to qualify it as
environmental aid.

Investments going beyond the state of the art?

(28) The UK authorities argue that the fact that very small
amounts of P&W paper are made from recycled fibre in
the EU, qualifies the investments as going beyond the
current “state of the art”. The Commission is aware of
technological barriers to increased rates of recycled fibres
used in particular in P&W paper,
like the de-inking of
digital print, the removal of ashes with washers and the
increased amount of bleaching, flotation, dispersion and
sludge disposal.
It would, however, normally expect a
certain level of innovation from a market operator that
wants to compete and be in the vanguard of the product
market,
in particular in the paper market, where many
operators are large multinational producers. In past cases,
the Commission concluded that “any paper producer that
wishes to remain technologically and environmentally
competitive in the long run has to make such investments
in innovation from time to time” (13). The relatively small
amounts of P&W paper manufactured from waste paper
would seem to indicate that it is possible to implement
such processes and that the technology exists. According
to information available to the Commission the produc-
tion of P&W papers using recycled fibre has increased by
6,8 % in 2004 (14). The production of P&W paper using

this

(10) OJ L 102, 7.4.2004, p. 59. The waste products that are concerned
under
scheme are wood, glass, plastics, aggregates and
compost. The Commission noted that the objective of this measure
is to encourage the development of waste recycling, which is a
clear objective of
the Community environmental policy. The
Commission also noted that the aid does not subsidise “state of the
art” techniques in the industries concerned, which are economically
profitable and do not need State aid. Therefore, the Commission
considered that this scheme was compatible with Article 87(3)(c) of
the EC Treaty.

(11) OJ L 314, 28.11.2003, p. 26 and OJ L 53, 26.2.2005, p. 66
respectively. The criteria used in these cases are also commented
upon in the Annual Competition report of 2004.

(12) OJ L 314, 28.11.2003, p. 26 and OJ L 53, 26.2.2005, p.66 respec-
tively. The criteria used in these cases are also commented upon in
the Annual Competition report of 2004.

(13) OJ L 53, 26.2.2005, p. 76.
(14) CEPI, Special Recycling 2004 Statistics, p. 1.

recycled fibre is currently the fastest growing type of
recycled paper in Europe.

(29) Therefore, the Commission has doubts that the justifica-
tion used by the UK authorities that the current very low
utilisation of recycled content in the production of P&W
papers in the EU is enough to state that manufacturing
P&W paper using recycle fibre goes beyond the current
“state of the art” in the EU.

Increasing collection rates?

(30) According to information available to the Commission, it
seems that the current situation of the market of P&W
waste paper is changing fast and that paper companies
are becoming very interested on P&W waste paper due to
its high quality (15). In fact, in Sweden it is expected that
the recycling rate of office papers office will pass from
57 % in 2003 to 75 % in 2006. Given the situation on
reasonable to expect
it
the waste paper market,
increased interest in waste P&W paper from paper produ-
cers.

is

(31) Therefore, the Commission has doubts that an increase in
paper manufacturing capacity in the United Kingdom is
needed to increase the collection demand.
In the last
years, there has been a big demand for waste paper in
countries of East Asia. It would seem that such an increase
has converted the United Kingdom to a net exporter of
P&W waste paper.

(32) Therefore, the Commission has doubts about the necessity

of aid for increasing the collection of P&W waste paper.

Proper targeting to maximise environmental benefits?

(33) The Commission doubts whether the measure is properly
targeted, ensuring the highest environmental benefits. The
United Kingdom argues that the biggest environmental
gains are obtained if high quality waste paper is used for
high quality new paper, i.e. P&W paper. The Commission,
however, wonders whether a more common approach
like using P&W waste paper to manufacture other types
of paper might have the same impact in the collection of
paper
taking the broadest possible
perspective, bring the same environmental benefits.

from offices and,

Proper calculation of eligible investment cost?

(34) If it were appropriate to base the assessment directly on
Article 87(3)(c), the Commission would draw a parallel to
points 36 and 37 of the environmental aid guidelines to
calculate the eligible cost. In accordance with these points,
eligible cost must be confined to the extra investment
costs necessary to meet the environmental objectives.

(15) This is, e.g., signalled in a study on recycling waste “Support in the
drafting of an ExIA on the Thematic Strategy on the Prevention
and Recycling of Waste” by EPEC, Page 82, available at http://euro-
pa.eu.int/comm/environment/waste/pdf/epec_report_05.pdf,
published by DG ENV.

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(35) The method used by the UK authorities to calculate the
eligible costs will be based on the premise that where the
market would not give rise to the investment in question,
then the relevant eligible costs are all the costs of the
investment. Only those costs necessary to make the
required investment, and to achieve the environmental
objective, will be considered to be eligible and any net
benefits during the first five years of production will be
deducted. The cost of a reference investment which
creates the same capacity but which does not provide the
same environmental benefits, would not be subtracted.

(36) The Commission has doubts whether this interpretation is
acceptable. Substantial parts of the selected investment
projects might be essential as well for investment projects
in similar production capacity that is not based on using
waste P&W paper. In case of investment in new capacity,
the whole investment cost would be necessary to obtain
the environmental benefit, but it is not clear why the
investment of a conventional plant
should not be
subtracted. Without taking account of such a reference
investment,
the cost calculation would be dispropor-
tioned.

Choice for the least distortive instrument?

(37) The United Kingdom has chosen to grant aid directly to
to collection schemes,
the paper producers instead of
because it reduces it administrative costs and the amount
of support. The Commission, however, doubts whether
the measure proposed by the United Kingdom is the least
distortive instrument to address the problem at stake.

Other instruments, e.g.
focus on the
collection, are likely to less distort the markets of waste
paper and of end products.

instruments that

4. CONCLUSION

under

acting

the procedure

the EC Treaty,

(38) In the light of the foregoing considerations, the Commis-
sion,
down in
requests the United
Article 88(2) of
Kingdom to submit its comments and to provide all such
information as may help to assess the aid, within one
month of the date of receipt of this letter. It requests your
authorities to forward a copy of this letter to the potential
recipient of the aid immediately.

laid

(39) The Commission wishes to remind the United Kingdom
that Article 88(3) of the EC Treaty has suspensory effect,
attention to Article 14 of
and would draw your
Council Regulation (EC) No 659/1999, which provides
that all unlawful aid may be recovered from the recipient.

(40) The Commission warns the United Kingdom that it will
inform interested parties by publishing this letter and a
meaningful summary of it in the Official Journal of the
European Union. It will also inform interested parties in the
EFTA countries which are signatories to the EEA Agree-
ment, by publication of a notice in the EEA Supplement
to the Official Journal of the European Union and will inform
the EFTA Surveillance Authority by sending a copy of this
letter. All such interested parties will be invited to submit
their comments within one month of the date of such
publication.’