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The main issue to be addressed is the UKG’s decision to provide WTO levels of state aid that breach EU state aid rules.  Since 1996, the EU has banned most SEZs (which includes Free Zones) – although there are many exceptions such as “export processing zones” (there are currently more than 100) and “economic revitalisation projects” (more than 150 in France only).  However in general this state aid ban was made explicit by the 2007 Treaty on the Functioning of the EU[12].

Despite this position many eastern European countries such as Poland and Croatia were allowed to grandfather-in pre-existing SEZs when they joined the EU[13].  Since 2018, tax exemptions in Poland have been available for companies carrying out new investments across the entire country, not just within SEZs.

And most recently the EU passed an “amending regulation” in 2017[14] affecting aid for port and airport infrastructure, which once again allows regulatory exceptions to be granted on a geographical basis.  All the signs suggest that the EU is softening its position on Free Zones.

The UKG, as part of the negotiation of the EU/UK Trade and Cooperation Agreement (the Brexit agreement), agreed to subsidy control provisions and passed the Subsidy Control Act 2022 to implement a framework for tracking and managing subsidies provided by local and national governments[15].  This regime would assist Scotland in demonstrating subsidy controls to the EU as part of any pre-accession negotiation.  Indeed, the status of any Freeport-related public subsidy can be readily browsed via the UKG Subsidies Database[16].  The only relevant subsidy at the time of writing is the “Green Freeport Land and Buildings Transactions Tax (LBTT) Relief: Green Freeports in Scotland” valued at £25m[17].

So whether Scotland argues to “grandfather-in” its existing Green Freeports, or treats them as exceptions under the 2017 amending Regulation, it looks likely that they would not prevent Scotland’s entry into the EU.  And in any case, SG would have the power to adjust Green Freeport state aid to make sure they match EU acceptable levels.  These levels of state aid are defined in the EU’s General Block Exemption Regulation (GBER)[18].

Potential disputes arising from Freeport subsidy changes

Some argue that there still remains a risk that foreign private organisations involved in the Green Freeports will sue for negative impact, should state aid reduce.  If this were to happen it is most likely to be via international law arbitration using Investor–state dispute settlement (ISDS) rules.  These allow investors who feel they have been affected negatively by states to sue for compensation.  To be able to do this both the foreign organisation’s country of origin and the UK (Scotland after independence) must hold a bilateral agreement for international investment[19]. 

The UK’s strategic position on ISDS is unclear post-Brexit: it’s deals with Canada and New Zealand exclude ISDS, but its CPTPP does not.  Whilst the UKG has proposed to include ISDS in its UK-USA trade deal, this deal has not been agreed and its incorporation is considered controversial.  Labour’s current position is unclear, but many in its organisation have proposed that ISDS should not form part of UKG trade policy[20].  In an EU reform, such bilateral agreements between EU member states have been removed[21].  Scotland’s position on ISDS will clearly align with the EUs once it becomes a member state.  Currently the Scottish Government opposes them as a part of UKG free trade organisations[22].

Regarding foreign organisations and their involvement in Scotland’s Green Freeports, currently only one (Norwegian) company plays a role.  Norway is an EFTA member and as a matter of policy is removing bilateral ISDS agreements between other EFTA, and EU, member states[23].

Alignment of Green Freeports and the EU Green Deal

One key benefit of Scotland’s Green Freeports – and one not present in UKG’s Freeports for England – is the close match between SG’s additional objectives and those of the EU for its European Green Deal.  In particular, the EU has proposed that Free Zones modernise to support its Green Deal[24].  Green Freeports already go some way to achieving this and so are likely to be viewed by the EU as “modern” Free Zones.

For example, the Inverness and Cromarty Firth Green Freeport has already announced plans for a North of Scotland Hydrogen Programme to develop state-of-the-art green hydrogen hub[25].