News: EU tackles hard coal mining industry problems. An end to subsidies at last?

Steinkohle aus dem Bergbau, Image Credit Stahlkocher, GNU FDL

[tweetmeme http://www.URL.com%5D Brussels, 20 July 2010.  The European Commission has approved a proposal for a Council Regulation on State aid to facilitate the closure of loss-making hard coal mines in the EU by 15 October 2014. Any further operating aid to the sector will be conditional on the presentation of a closure plan for the loss-making mines. The Member States concerned will be able to assist with the counselling and training of the affected workers and ensuring that the mining sites are properly cleaned up and safe.

The aim of the proposal is to ensure a definitive closure of uncompetitive mines by 15 October  2014. There should be no doubt about this. Companies need to be viable without subsidies. This is a question of fairness vis à vis competitors that operate without state aid. This is also in the interest of taxpayers and of government finances that are considerably constrained. The Commission will only allow operating aid to mining companies that have a closure plan and the subsidies should go increasingly towards supporting the social and environmental costs of doing so,” said Joaquín Almunia, Commission Vice President in charge of Competition policy. He added: “Renewable, clean energy is the way to go, but we cannot ignore the dire regional economic and social consequences that would follow a sudden closure of the loss-making mines at this time of low or no growth and high unemployment”.

The European Commission has adopted a proposal for a Council Regulation that would allow those Member States concerned to grant operating aid to coal mines only in the context of a definitive closure plan, the implementation of which would be strictly monitored.  Under the proposed Regulation, the operating subsidies would need to be clearly digressive over time, with a reduction of at least 33% per fifteen-month  period and, in case the loss-making mine would not have been closed by 15 October 2014, the beneficiary would have to pay them back to the State. Any closure aid would be conditional on the presentation by the Member State a plan of appropriate measures, for example in the field of energy efficiency, renewable energy or carbon capture and storage, to mitigate the negative environmental impact of aid to coal.

The proposed Regulation is addressed to the Council of EU Ministers.

The aim of the proposal is to end operating subsidies to uncompetitive mines, very much as has been done for the shipbuilding and steel sectors. Instead, any state subsidies should increasingly go towards the financing of the social and environmental consequences of the closure of those loss-making mines. The proposed Regulation concerns hard coal. Lignite is a different form of coal, which cannot receive operating subsidies

Hard coal production in the EU is small compared with demand and falling (147 million tonnes in 2008 or 2.5% of world production). In fact, the EU depends on imports for more than half of its use in coal fired power stations.

Total aid to the hard coal sector has been halved to €2.9 billion in 2008 from €6.4 billion in 2003.  The fall in production aid has fallen by 62% to 1,288 million of the total in the same period, as a higher and increasing proportion is being directed towards covering the social and environmental costs of mine closures (see table below).

The proposed Regulation would continue to give Member States a common and legal framework to address the costs of counselling and training the workers of loss-making mines for other jobs, the costs of early retirement for those that will leave the active population and the impact on related sectors such as mining technology, geology or environmental technologies. Besides the social costs, there are also the environmental costs involved in the cleaning up of the mining sites, the removal of waste water, underground safety work and other rehabilitation costs

Banning operating aid from the end of 2010, when the current Regulation ends, would have dire social and economic consequences for a number of regions where employment in coal mines remains important, at a time when countries are still mired in recession or only just emerging from it. It could also result in an increase of climate emissions as more coal would need to be transported from outside the EU to make up for the drop in European production.

The sector employs around 100.000 people in Europe:  42,000 in the coal sector itself and over 55.000 in related industries. The mines that rely on operating subsidies are located mostly, but not only, in the Ruhr region, in Germany, in north-west Spain and in the Jiu Valley in Romania. More than 40% of electricity in Germany is produced from coal burning, roughly half of which hard coal. Coal’s share of electricity production in Romania is also around 40%, most of which hard coal. In Spain the share is around 25%, also mostly hard coal.

The EU is moving rapidly towards cleaner and renewable energy, an objective in which it is leading the world, for both environmental and security of supply reasons. Renewable energy (hydro power followed by wind, biomass and solar) accounted for 62% of the new electricity generation capacity installed in the EU in 2009, up from 57% in 2008, the recent report published by the European Joint Research Centre showed (see IP/10/886 of 5 July). If the current rates are maintained, approximately 35-40% of the overall electricity consumed in the EU would come from renewable sources, well above the 20% target the EU has set itself. That percentage is 15.4 % and 20.6 % respectively and at present in Germany and Spain.

Background

Council Regulation (EC) N° 1407/2002 of 23 July 2002 on State aid to the coal industry expires on 31 December 2010.

Poland accounts for more than half of the EU hard coal production, while the other half is mainly produced by Germany, the UK, the Czech Republic and Spain. China, the US, India, Australia and Russia are the major producers worldwide, with China producing 2.761 Mt per year (47% of world production), the US 1006 Mt (17%) and Russia 247 Mt (4%). The EU imports 180 Mt of hard coal, mainly from Russia (30%), Colombia (17.8%), South Africa (15.9%) and the US (12.8%).

Frequently Asked Questions – Coal Regulation

Why does the Commission not simply propose a prolongation of the current Coal Regulation?

Such prolongation does not strike with the logic of the proposed Regulation that has been conceived to give Member States a transitory period for phasing out the aid.

The experience with Regulation 1407/2002 has shown that it does not exert sufficient pressure on Member States to restructure their hard coal industry. On the contrary, the Regulation could allow them to simply continue providing production aid to uncompetitive mines without a clear commitment for closure or restructuring. The underlying problem of non-competitiveness would not be solved, but just delayed.

The new proposal does not allow a simple prolongation of aid: the starting point is the aid given in 2010 (which is already less than half of the aid of 2002) and the proposal imposes a strong degressivity. Most importantly, the proposal allows operating aid only in the context of a closure plan (which was not the case of the previous Regulation).

Does the proposal contradict the Commission’s commitments to phase out coal subsidies?

The proposal does not contradict the Commission’s commitment to phase out coal subsidies. On the contrary, it encourages the closure of uncompetitive mines, by offering a politically and socially acceptable way to do so.

Doesn’t an immediate closure cost less than a gradual closure?

A gradual closure does not necessarily cost more than an immediate closure. The impact assessment has shown that financial resources would only be freed up in the longer term, when job losses are gradually absorbed by the labour market and when exceptional costs linked to mine closures are reduced. A great army of long-term unemployed following sudden closure could soak up all the resources in terms of unemployment benefits and labour market policies.

More importantly, while the closing of a mine stops any emissions from the mining activity, the overall impact on greenhouse gas emissions depends on the emissions from coal mining in third countries and from the transport of the coal to the EU. Only a gradual switch from coal to other energy sources for the electricity production, in parallel to the closure of domestic coal mines, would have a more certain impact on greenhouse gas emissions.

What is NEW in the proposal prepared by the Commission for a Council Regulation compared to regulation 1407/2002?

The Commission’s proposal represents a clear break with the previous Coal Regulation: from now on, operating aid will only be allowed in the context of a definite closure plan.

A target date is set on 15/10/2014  for the closure of the mines with a clear degressivity of at least 33 % per fifteen-month, and aid for any year cannot be higher than in 2010

If the mine was not closed at the planned target date, the aid would have to be recovered. In any case, such closure plan would not allow the concerned mines to remain open beyond 15 October 2014.[1]

The new proposal does include neither provisions on investment aid nor provisions on production aid for accessing coal reserves.  The provisions for aid to exceptional costs are identical in both texts.

What is the experience acquired with Regulation 1407/2002?

Indeed, the experience acquired with Regulation 1407/2002 has shown that the most successful closure plans are those that combine a gradual closure with the redeployment of the work force. The main purpose is cushioning the social impact, by building on the experience of those countries that have already closed their mines.

With the 1407/2002 Regulation in place, over €26 billion of State aid to the hard coal sector has been approved between 2003 and 2008. In addition, a number of forward plans for aid in the years to 2010 and after have already been made. However, the total amount of subsidies to EU hard coal follows a downward trend: the yearly amounts have been halved between 2003 and 2008, from €6.4 billion in 2003 to €3.2 billion in 2008.

A large part of the financing was directed to environmental clean-up measures or early retirement schemes – so called exceptional costs. When taking into account aid to cover production losses only, subsidised coal serves for only 1.4 % of the electricity production in the EU production aid.

The production and consumptions of hard coal in the EU has reduced steadily over the implementing period of Regulation 1407/2002. With the new regulation, this trend will continue gradually until no aid at all is given to any uncompetitive hard coal mine in 2014 .

Why not closing the mines on 31.12.2010?

The consequences of the closure of a mine are technical, social and environmental.

Technical reasons:

The closing of a mine necessitates a series of measures to rehabilitate the mining site, such as removing the mining equipment from the mine, cleaning-up the site, underground safety work, removal of waste water, etc. The security and health standards imposed in Member States for such an operation are very high.

In case of an immediate closure of mines at the end of 2010, there is a risk that necessary preparatory work for the close-down may not have been undertaken in time, thereby increasing the cost of rehabilitation measures following the closure. A specific spatial distribution of the underground coal extraction needs to be planned years in advance to avoid ground level damages (in extreme cases this can lead to earthquakes).

Social impact:

While the jobs lost usually have a limited impact on EU-wide and national unemployment figures, their impact on specific coal-mining regions may be very significant, especially in Germany, Spain and Romania. The immediate closure of the uncompetitive mines would overburden the regional labour markets with a flood of redundant mine workers, which cannot rapidly enough be re-employed in other industries and therefore risk becoming long-term unemployed.

Taking as simple rule of thumb that for each coal job a further 1.3 jobs would be lost in the regions concerned, the unemployment rate on the regional unemployment rates (at NUTS2 level) could increase by up to 2.5 percentage points. The most affected regions would be Münster and Saarland in Germany, Asturias in Spain and Vest in Romania.

As regards environmental protection, the situation would be worse without a phasing out.

The reduction of the production of indigenous coal will most likely be replaced by imported coal, mainly from third countries as most coal-producing Member States consume more coal than they produce. Only the Czech Republic and Poland export a part of their production, but it is uncertain whether they would be able to increase exports.

While the closing of a mine stops any emissions from the mining activity, the overall impact on greenhouse gas emissions depends on the emissions from coal mining in third countries and from the transport of the coal to the EU. The impact on the overall energy mix of the EU is negligible, at least in the short to medium term. Only a gradual switch from coal to other energy sources for the electricity production, in parallel to the closure of domestic coal mines, would have a more certain impact on greenhouse gas emissions.

In addition, in an immediate closure, it would be more difficult to retain the know-how needed for the rehabilitation and cleaning-up of the mining site, as the qualified workforce would have left.

What would ensure that the mines are definitely closed at the end of the target period?

A monitoring of the closure plans will be carried out by the Commission.

Member States which intend to grant closure aid shall notify a closure plan for the production units concerned to the Commission. The plan shall contain in particular for each production unit; the real or estimated production costs per coal year and the estimated amount of closure aid per coal year.

Member States shall notify every year all the aid which they intend to grant to the coal industry during a coal year. They shall submit to the Commission all details relevant to the calculation of the foreseeable production costs and their relationship to the closure plans notified to the Commission.

The 4-year period could only be fully used for closure plans notified in 2010. If, for example, the plans were notified in 2012, the concerned mines would still need to be closed by 15 October 2014 , reducing the maximum duration of the plan to 2  years (and increasing the pace of degressivity).

If the mine was not closed at the planned target date, the aid would have to be recovered. In any case, such closure plan would not allow the concerned mines to remain open beyond 15 October 2014 .

Citation:  Press Release of the European Commission IP/10/984 and Memorandum of the European Commission MEMO/10/348


[1] The 4 -year period could only be fully used for closure plans notified in 2010. If, for example, the plan were notified in 2012, the concerned mines would still need to be closed by 15 October 2014, reducing the maximum duration of the plan to 2 years (and increasing the pace of degressivity).

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