EU responds to US and Chinese green subsidies in leaked plan

The European Union (EU) is said to be preparing a comprehensive plan to respond to the US’s Inflation Reduction Act and loosen the continent’s dependence on Chinese technology, the Financial Times has reported. 

According to the leaked document, the European Commission would be planning to extend some of the simplified state aid rules that already apply to some renewable technologies, in order to include renewable hydrogen and biofuel storage.

In addition, EU member states will be able to offer help to EU companies that are being offered equivalent financial aid from foreign governments with measures such as tax benefits. 

Some of the €800bn (£707bn) included in the NextGenerationEU Covid-19 recovery fund could also be redirected towards tax credits, according to the draft.

This move has been considered a direct response to the fear that many EU-based companies would relocate to the US, in order to obtain access to the Biden administration’s $369bn (£302bn) scheme to subsidise green production.

The EU has joined South Korea in criticising this scheme, arguing it discriminates against foreign manufacturers and would break international trade rules. 

Last week, Ursula von der Leyen, president of the European Commission, announced the bloc’s intention to create a new “European sovereignty fund” to boost investment in green technologies. 

During this announcement, von der Leyen also stressed the importance of creating a regulatory environment in the bloc that fosters innovation and counters “relocation risks from foreign subsidies”. 

The International Energy Agency estimates the global market for mass-produced clean energy will triple to around $650bn (£527bn) a year by 2030, with related manufacturing jobs more than doubling.

Although the draft has mostly been perceived as a move against the US’s new green policies, it could also be seen as a step in reducing the bloc’s reliance on Chinese technology. In the past, the European Commission has accused China of using “unfair” and “market distort[ing]” subsidies to advance in the race to produce clean technologies.

However, the prospect of a relaxed state aid regime has alarmed southern and smaller European governments, as 53 per cent of the €672bn (£588bn) of state aid approved by the Commission last year came from Germany, while 24 per cent was provided by France and 7 per cent by Italy.

Italy’s government has warned that relaxed state aid rules should “not be a free-for-all” and called for a joint EU fund to help green tech in all member states.

Christian Lindner, Germany’s finance minister, has said Europe does not need an “excessive” overhaul of the rules but backed measures to streamline decision-making.

“State aid must become more agile, we have to make decisions more quickly,” he said. “But we don’t need any excessive extension of subsidies in the EU.”

The leaked paper, nonetheless, gives no details on the budget or precisely how the fund would be paid for. EU leaders are set to meet to discuss the proposal on Wednesday (1 February). 

The Commission is also expected to propose a Net-Zero Industry Act that could streamline permitting processes and harmonise standards and a Critical Raw Materials Act to promote local extracting, processing and recycling in the coming months.