Using State Aid to Correct the Market Failure of Climate Change

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The Stern Review on the Economics of Climate Change makes clear that climate change is a cost. This article explores how some of this cost might be met through State Aid. In order to do this, however, the State Aid rules need to be amended. The State Aid rules were drafted with such elegance that they have required almost no amendment in 50 years. Article 87(1) sets out the general prohibition against awarding State Aid that is incompatible with the common market. This prohibition is subject to Article 87(3), which sets out when aid may be compatible with the common market. The State Aid rules in their present format cannot wholly facilitate the approval of aid which will be necessary to cut greenhouse gases through the four methods identified in the Stern Review. This is because Article 87(3) does not specifically permit aid which is designed to manage climate change. It is therefore proposed that a new sub-article should be inserted into Article 87(3) to create Article 87(3)(f) to deal specifically with climate change. It is further proposed that new guidelines dealing with the economic challenge of climate change should be created and employed by the European Commission in exercising its discretion in conjunction with Article 87(3).

Document Type: Research Article


Affiliations: City University, London

Publication date: November 1, 2009

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