EU presents new industrial plan to counter American green subsidies

Fearing a devastating business exodus across the Atlantic Ocean, the European Commission on Wednesday unveiled new plans to boost the European Union’s homegrown green industry and counter the generous tax credits and rebates of Joe Biden’s $369-billion Inflation Reduction Act.

The plans are an intricate combination of simpler rules for subsidies, re-purposed EU funds, faster permitting for renewable projects, common production targets, trade deals and upskilling which, put together, are meant to strengthen the bloc’s attractiveness for investment and manufacturing.

The ultimate goal is to keep European companies in Europe and prevent the continent’s leading green innovators from fleeing abroad in search of greater commercial prospects.

“In the fight against climate change, what is most important is the net-zero industry. We want to seize this moment,” said European Commission President Ursula von der Leyen, while presenting the strategy on Wednesday afternoon.

“We are competitive. We need competition.”

‘Stay here and prosper here’

Dubbed the “Green Deal Industrial Plan,” the strategy is an initial pitch that will be discussed by EU leaders at next week’s summit, where it is poised to face strong resistance from a wide range of countries that worry the loosening of state aid will spark an unchecked and costly subsidies race across the bloc and undermine fair competition.

Such fears increased last month after the European Commission revealed that, since tweaking the state aid rules in March 2022 to help member states cope with the fallout from the Ukraine war, Germany and France have amassed almost 80% of the €672 billion in approved support.

Germany alone accounted for 53% of all extraordinary aid approved by the Commission – or about €356 billion.

The new amendment to state aid rules – the third in three years – will last until the end of 2025 and encompass six main areas in the renewable energy sector: batteries, solar panels, wind turbines, heat pumps, electrolysers to produce hydrogen, carbon capture technology and critical raw materials.

The six areas are almost copy-pasted from the Inflation Reduction Act.

“We want this industry to stay here and to prosper here,” von der Leyen said, noting member states that cannot afford subsidies can offer tax breaks as an alternative.

Despite growing speculation, Brussels did not propose new sources of funding, something that would require a unanimous agreement between the 27 member states to issue fresh EU debt.

Instead, the executive intends to re-purpose funds already earmarked to other portfolios, including the €225 billion of low-interest loans left unused in the €750-billion coronavirus recovery package.

“We need this first step of funding now, so we cannot wait too long,” von der Leyen said. “We need a bridging solution to future other financing instruments.”

In the longer term, the European Commission will explore the possibility of establishing a so-called “European Sovereignty Fund” to collectively finance projects on critical and emerging technologies.

Von der Leyen said the sovereignty fund, which for the time being remains vague in scope and size, will provide a “structural answer” to the expensive undertaking of paying for the green transition.

Her plans, however, admit public cash will not be enough to “close the investment-gap needs” and the great part of the responsibility will fall onto the private sector.

State aid is ‘not innocent’

Although von der Leyen was careful enough to name-check other international competitors like Japan, India, the UK and Canada, a dark shadow loomed over Wednesday’s presentation: the Inflation Reduction Act (IRA) promoted by US President Joe Biden.

Over the next ten years, the IRA will dole out up to $369 billion in tax credits and direct rebates to help companies scale up the production of green, cutting-edge technology – but only if these products are predominantly manufactured in North America.

The EU considers this provision as discriminatory, unfair and illegal, and has asked Washington to broaden the law’s interpretation in order to make European companies eligible for the benefits.

But the concessions have been very limited, pushing policymakers into a rushed effort to design a forceful response to compete against the IRA before the talent drain kicks in.

The bloc’s ongoing energy crisis, which has put factories under immense financial stress, has further fuelled fears of an irreparable loss of competitiveness.

This ominous environment explains why the threat of relocation is at the very centre of the European Commission’s industrial plan.

In what is arguably the most notable change, the executive proposes a provision to allow governments to match the state aid offered by bidders from non-EU countries.

For example, if a German company is offered $1 billion to build a battery plant in New York, Germany will be allowed to match this offer with public money to keep the investment inside the bloc.

Although this “matching aid” provision will come with strings attached, it nevertheless represents a “far-reaching” tweak that poses a “serious risk” to the integrity of the single market, said Margrethe Vestager, the European Commission’s Executive Vice President in charge of competition policy.

“Those risks are not temporary. Because not all countries have the same capacity to match aid,” Vestager said, referring to the Franco-German dominance of state aid.

“Using state aid to establish mass production and to match foreign subsidies is something new. And it is not innocent.”

“At the end of the day,” she went on, “state aid is a transfer of money from taxpayers to shareholders. And it only makes sense if the society as a whole benefits from the aid granted.”

The plans are still not final: the European Commission will use the feedback it receives from member states to build a final version of the industrial strategy, including the new state aid framework.

Countries like Italy, Finland, Denmark, Sweden, the Netherlands, Austria, the Czech Republic and Poland have already cautioned against further relaxing the rules that govern subsidies, which are the exclusive competence of the European Commission.

Both von der Leyen and Vestager insisted the changes will be “targeted” and “time-limited,” concluding in December 2025, even if previous state aid frameworks were extended several times in the past.

But fears of a subsidy race remain in place, said Niclas Poitiers, a research fellow at the Bruegel think tank, because the European Commission failed to propose new sources of common funding that smaller and poorer member states could use to offset the state aid injections from bigger competitors.

“Larger and richer EU countries will be much more able to use such new leeway, to the disadvantage of the poorer ones,” Poitiers said in a statement.

“By building its strategy on national subsidy schemes, this proposal fails to create a more coordinated European industrial strategy and risk pitching national governments against each other.”