24th Mar 2023

EU leaders attempt to hash out response to US green subsidies

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EU leaders on Thursday (9 February) are set to discuss how to respond to the around €343bn worth of US subsidies under the Inflation Reduction Act (IRA).The EU worries these new measures will hurt European companies, but remains unclear how exactly.

At a special summit in Brussels, the 27 leaders are expected to give direction to the EU Commission on how to respond to the US green technology incentives.

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  • Germany and France accounted for just under 80 percent of state aid given since the pandemic when the rules were previously loosened (Photo: Ryan Tang)

But EU governments are divided over several issues, including throwing state aid at the problem, and joint funds to support European firms.

France and Germany, two of the bloc's economic heavyweights, see reacting to the IRA as an opportunity to loosen state aid rules for boosting green technologies and the European industry.

The commission last month drafted plans to simplify and speed up companies' access to tax credits in an effort to prevent companies from leaving the EU. It also proposed loosening state aid rules for investments in renewable energy and faster approvals of green projects.

The majority of member states are, however, worried that this plan will create an uneven economic playing field in the EU.

Before committing to more relaxed state aid rules, most member states want the commission to pinpoint exactly which sectors and companies might be left behind as a result of the US incentives.

"We want to put money only in companies that are relevant for the future," an EU diplomat said, on condition of anonymity as ongoing talks are sensitive, adding: "Why we should make state aid flexible in a sector where is not needed?"

We could only support measures that are "temporary, targeted, and limited in order to avoid a subsidy race, and to make sure EU response is proportionate" to US action, another EU diplomat argued.

Some member states argue for new joint funds to tackle the US challenge.

However, Germany, and other fiscally prudent member states, have opposed new joint funds to counter the US subsidies, and want member states to use existing EU funds.

EU leaders are expected to acknowledge the EU Commission's aim to propose a European Sovereignty Fund, but without committing to it.

The commission has so far made no legislative proposal, and has not put forward an assessment of the IRA's impact.

There is little time to agree on any new instrument, as next year the EU will go into election mode, with a new parliament and commission to be ushered in.

"I am not sure it [the sovereignty fund] will ever see the light of day," a third EU diplomat said.

The absorption of the Covid-19 recovery fund by countries' economies — using and accessing the actual money — has proven to be a problem for several member states. These countries would like to extend the deadline to commit the recovery funds beyond 2026, diplomats said on Wednesday. An extension could be one way of throwing a lifeline to troubled sectors or companies impacted by the IRA.

Bending rules

The EU amended its subsidy regime three times in the last three years, first in response to the Covid-19 pandemic, then the energy crisis, and now in response to the IRA.

EU Commission vice-president Margarethe Vestager last month said that the EU executive had approved €672bn state aid for EU governments under its latest crisis mechanism adopted after Russia's invasion of Ukraine.

More than two-thirds of that approved state subsidy had been used up by Germany (53 percent) and France (24 percent), followed by Italy with over 7 percent, according to a letter sent by Vestager to member states' governments.

"Mega investments are related to a couple of member states, it is crucial that all EU countries have access to funds," the third diplomat warned.

The economy ministers of France and Germany said on Monday that the US had agreed to address European concerns over the IRA but added that their talks with US officials in Washington did not yield any concrete proposals.

Bruno Le Maire, France's economy minister, said he and his German counterpart Robert Habeck had achieved "substantive progress" in their talks in Washington and won "assurances" that the US would seek to alleviate European concerns, Reuters reported.

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