Executive Summary:
- State aid that incentivises the cessation of economic activities can be compatible with the internal market.
- State aid that compensates for the loss of income and cancellation of pollution rights can be compatible with the internal market.
- Eligible costs may also include the expenses incurred in applying for state aid
Table of Contents:
- Introduction
- Budget
- Beneficiaries
- Form and conditions of the aid
- Eligible costs and aid intensity
- Compatibility with the internal market
- Conclusions
Introduction
Normally, state aid aims to incentive investments to expand economic activity. Operating aid that merely supports the continuation of existing activities is only allowed in special situations and under strict conditions. State aid to induce undertakings to cease operations is even rarer. Yet, recently, the Commission approved, in decision SA.119885, a measure notified by Netherlands, whose objective was to incentivise farmers to reduce the number of their cows and, therefore, shrink their farming activities.[1]
The ultimate objective of the measure was to contribute to the reduction of greenhouse gases, nitrates and phosphates. The latter have a significant harmful effect on the quality of drinking water. Cows generate large quantities of methane and manure. The Netherlands has a particular problem with the management of manure. For these reasons, the measure targets 1) “structural reduction” in the number of dairy cows and calf cows by about 64,000 animals [close to 4% of the total cow population in the country] and 2) cancellation of the corresponding phosphate rights [i.e. polluting rights] corresponding to an amount of about 3 million kgs.
It should perhaps be pointed out that the reference to “structural reduction” appears to be a bit of exaggeration. This is because the measure will last for three years. Afterwards farmers will be allowed to increase their herds again. In order to increase their herds they will have to reacquire the phosphate rights that correspond to the additional number of animals. This immediately raises the question whether the environmental benefits claimed by the Dutch authorities would be temporary or permanent. No clear answer is provided by the information included in the Commission decision.
However, to be fair, there are hints in the Commission decision that if farmers try to reacquire phosphate rights they are likely to pay higher prices [see paragraph 25 of the decision]. There is no mention whether such a possible increase will be dissuasive enough.
At any rate, the Commission noted that “(6) the Dutch authorities consider the scheme to pursue the following general and specific objectives set out in Article 5 and 6 of Regulation (EU) 2021/2115*:
- Article 5(b): to support and strengthen environmental protection, including biodiversity, and climate action and to contribute to achieving the environmental and climate-related objectives of the Union, including its commitments under the Paris Agreement;
- Article 6(1), point (d): to contribute to climate change mitigation and adaptation, including by reducing greenhouse gas emissions;
- Article 6(1), point (f): to contribute to halting and reversing biodiversity loss, enhance ecosystem services and preserve habitats and landscapes.”
* Regulation establishing rules on support for strategic plans to be drawn up by Member States under the common agricultural policy (CAP Strategic Plans) and financed by the European Agricultural Guarantee Fund (EAGF) and by the European Agricultural Fund for Rural Development (EAFRD).
Budget
The estimated budget for this measure is about EUR 616 million, with an annual budget of about EUR 185 million.
Since the annual amount is large and exceeds the threshold of EUR 150 million, the Dutch authorities also notified an ex post evaluation plan.
Beneficiaries
The beneficiaries under the measure are dairy farmers who in 2025 kept dairy cows and calf cows for the production of milk and who undertake, on a voluntary basis, to carry out operations consisting of agri-environment-climate commitments. The number of beneficiaries is estimated to be over 1,000. However, only SMEs are eligible for aid.
Form and conditions of the aid
The aid provides compensation in the form of direct grants for the reduction of the number of dairy cows on a farm for a period of three years. The reduction must be at least 10% and not more than 20% in relation to the average number of dairy cows in the reference year 2025.
In addition, aid recipients have to cancel the part of the farmer’s phosphate rights corresponding to the rights for the number of dairy cows on the farm.
Eligible costs and aid intensity
The measure consists of an annual compensation for three years, for the following eligible costs:
- loss of income (losses due to reduced milk output) in comparison to the reference number;
- transaction costs;
- loss of revenue due to the cancellation of the corresponding part of the phosphate rights.
According to the Commission decision “(29) the loss of income due to reduced milk yields was determined at EUR 1 534 per reduced cow per year.”
The moment farmers sell their cows they will have no need for the corresponding phosphate rights. Hence they would sell them. But under the measure, such rights will have to be cancelled. Therefore, with respect to the compensation for the cancelled phosphate rights, the amount “(29) is determined on the basis of the average selling price of a phosphate right over the last three years (2023, 2024 and 2025). … compensation is determined [on the basis] of EUR 110 per kg phosphate for a phosphate right. The amount of phosphate rights per cow varies between dairy farms and calculations will be based on milk yield-specific phosphate excretion coefficients. The amount of corresponding phosphate rights multiplied by the price of EUR 110 per kg phosphate is the compensation for losses due to missed sales proceeds of phosphate rights, which will be paid in annual advances.”
A rather unusual feature of the measure was that it include transactions costs in eligible costs. These transactions costs refer to the expenses resulting from the application for aid and compliance with the aid requirements. Normally such expenses are not compensated by state aid measures because it is rather difficult to quantify them. Nonetheless, “(31) the transaction costs include the following costs: gathering information on the scheme, exploring the integration possibilities in the company of joining the scheme, including considerations on the operation of the company after the duration of the scheme, oral and written consultation with the public authorities and filling in forms. The Dutch authorities indicated that they calculated the transaction costs per undertaking participating in the scheme, on the basis of experience with other similar schemes. The transaction costs are calculated on the basis of an average Dutch dairy farm with 118 cows. The annual amount of compensation for transaction costs per reduced cow is determined by the Dutch authorities at EUR 72. Together with the compensation for the loss of income due to foregone milk yields …, this results in an annual compensation per reduced cow of EUR 1 606.”
The maximum aid intensity is set at 100% of the eligible costs. The compensation will be granted annually through advances with EUR 400,000 fixed as the maximum total amount of compensation that an individual dairy farmer can receive under the measure. In addition, aid under this measure cannot be cumulated with any other state aid.
Compatibility with the internal market
Since there was hardly any doubt about the presence of state aid, the Commission quickly moved on to assessment of the compatibility of the measure with the internal market on the basis of the 2022 Guidelines for state aid in the agricultural and forestry sectors and in rural areas.
The Commission considered that “(76-77) the scheme falls under Part I, Part II, Chapter 1, Section 1.1.4 ‘Aid for agri environment-climate commitments’ and Part III of the Guidelines. In line with point 197 of the Guidelines, the Commission will consider aid for agri-environment-climate commitments compatible with the internal market under Article 107(3), point (c), TFEU if it complies with Part I, Chapter 3 of the Guidelines, and with the conditions set out in Section 1.1.4.”
With respect to the incentive effect of the aid, “(80) the Commission considers that the Dutch authorities have shown that as participation in the scheme is voluntary, it has to be (and is) attractive for dairy farmers in order for them to engage in a commitment which they would normally not undertake or only in a restricted manner”.
“(81) In line with points (50) and (51) of the Guidelines, the Commission considers that a scheme presents an incentive for the beneficiary wherever work on the relevant project or activity has not started prior to the aid application by the beneficiary to the national authorities. The aid application must include at least the applicant’s name and the size of the undertaking, a description of the project or activity, including its location and start and end dates, the amount of aid needed to carry it out and the eligible costs. The Commission considers that, as described in recitals (37) and (38), the scheme fulfils these conditions.
With respect to the necessity of state intervention and the appropriateness of the aid, the Commission found in paragraphs 88-91 of its decision that it was both necessary and appropriate. But it must be said that the analysis of the Commission was short and formalistic without providing any details.
With respect to the proportionality of the aid, the Commission assessment was a bit longer and more detailed. “(92) In line with point (86) of the Guidelines, the Commission notes that, …, the eligible costs are correctly calculated … and the maximum aid intensity set out in Part II, Chapter 1, Section 1.1.4 (set at 100% of the eligible costs) is respected”.
“(93) In particular, based on the information provided by the Dutch authorities …, the Commission considers that the requirements of points (87) and (88) of the Guidelines are met.”
“(94) The Commission notes that under the scheme …, in line with point (90) of the Guidelines, when aid is paid in several instalments, it is discounted to its value at the moment of granting the aid.”
“(95) In line with point (93) of the Guidelines, the calculations submitted by the Dutch authorities are based on standard assumptions of additional costs and income foregone …, and (a) contain only elements that are verifiable; (b) are based on figures established by appropriate expertise; (c) indicate clearly the source of the figures used; (d) are differentiated to take account of regional or local site conditions and actual land use and (e) do not contain elements linked to investment costs.”
“(96) The Commission notes that the aid is granted on the basis of a fixed rate per unit established with a fair, equitable and verifiable calculation method …, which is in line with points (94) and (95) of the Guidelines.”
“(97) Concerning cumulation of aid, the Commission notes that the Dutch authorities indicated that aid under the scheme cannot be cumulated with any other State aid or ad hoc aid and confirmed that the scheme will not be cumulated with payments referred to in Articles 31, 145 and 146 of Regulation (EU) 2021/2115 in respect of the same eligible costs … Therefore, the Commission considers the scheme in line with points (103), (104), (106), (107) and (109) of the Guidelines.”
With respect to agri-environment-climate commitments, the Commission also found that the measure was compliant with the requirements of Part II, Chapter 1, Section 1.1.4 of the Guidelines.
More broadly, it concluded that the measure would not cause any undue distortion of trade and competition because the aim of the measure was to encourage the cessation of economic activities.
With respect to the proposed methodology of the ex post evaluation, the Commission found that it too conformed with the requirements of the Guidelines in points 640-645.
Conclusions
On the basis of the above findings, the Commission approved the measure. However, given the very large budgetary cost of the measure, one wonders whether it provides value for money or any permanent environmental benefits, given that it will last only for three years.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202621/SA_119985_48.pdf
