EC Authorises Italian State Aid to Promote Biodiesel

March 12, 2008 // Published as a news service by IHS

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The European Commission (EC) recently authorised an Italian tax reduction to stimulate the production and use of biodiesel.

The measure modifies and prolongs a previously approved scheme and introduces a supply obligation for biofuels.

Since the coexistence of a supply obligation and a tax reduction is a novelty, the EC stated it cannot currently predict how this will affect the market.

Despite these uncertainties, however, the EC felt there is no risk of overcompensation because the proposed tax reduction would apply to only part of the released biodiesel and would cover only part of the difference in production costs.

Therefore, the aid, which is allowable under EC Treaty state aid rules, was found compatible with the European Union (EU) Single Market concept.

Neelie Kroes, EC competition commissioner, said, "I am happy to approve aid that promotes biodiesel without overcompensating suppliers. Italy is now a step further on its way to implement the EU targets on the use of renewable energies for transport."

Under the notified scheme, an annual quota of 250,000 tonnes of biodiesel would benefit from an excise duty rate of 20% of the rate applicable to diesel oil used as automotive fuel.

Any producer of biodiesel in the EU would be able to enrol in the programme and be eligible for the excise duty reduction. The tax-reduced quota would be shared among producers in proportion to their actual production figures, so that only a fraction of each producer's total biodiesel output would benefit from the tax reduction.

The budget for the tax reduction over the scheme's total duration of four years (2007-2010) is estimated at €384 million.

The Italian authorities also introduced a supply obligation for biofuels: any supplier of petrol and diesel fuel to the Italian market would be obliged to release a minimum proportion of biofuels.

Starting Jan. 1, 2008, the proportion is 2% of the previous year's total supply volume; and non-compliance is subject to penalties. The excise reduction is a temporary measure to facilitate the transition into a pure supply obligation regime after 2010.

The EC has consistently authorized support schemes for biofuels where it could be demonstrated that the aid did not exceed the difference between the cost of producing the biofuel (including a normal profit margin) and the market price of the corresponding fossil fuel. This method is considered to be a way to ensure the absence of overcompensation.

However, in the notified measure, the tax reduction coexists with a supply obligation. It could be argued that, if fuel suppliers are obliged to put a certain amount of biodiesel on the market, biodiesel is no longer in direct competition with fossil diesel, and therefore the fossil fuel price is no longer the appropriate benchmark and could lead to overcompensation.

In the specific circumstances of this case, the EC concluded that the risk of overcompensation could be ruled out because the proposed tax reduction did not cover the full difference between the biodiesel production costs and the market price of ordinary diesel. Moreover, only a part of a given producer's biofuel output would benefit from the tax reduction.

The EC has also taken into account the scheme's limited duration to 2010 and the prospect of a transition to a system of pure supply obligation.

The non-confidential version of the decision will be made available under the case number N 326/2007 in the State Aid Register on the DG Competition web site once any confidentiality issues have been resolved. New publications of state aid decisions on the Internet and in the Official Journal are listed in the State Aid Weekly e-News.

Source: European Commission.