EU should not match US green subsidies, study finds

But in a new policy brief published on Monday (12 June) by the independent think-thank Centre for European Reform (CER), senior economist Sander Tordoir and deputy director John Springfield urge restraint and warn that the EU should not overreact and unleash a subsidy race.

The US and China directly subsidise green manufacturing, but the authors warn copying such policies within Europe could lead to unfair competition between countries with richer countries able to afford more than smaller economies.

This, in turn, could threaten Europe's single market, which the paper argues is a "big reason for the EU's manufacturing prowess because it intensifies competition and innovation."

The analysis also reveals that the EU is already well-positioned compared to its main competitors, China and the US. While Chinese global exports of low-carbon technology goods take up the largest global market share at 34 percent, the EU is comfortably in second place at 23 percent. The EU has also increased its export share in recent years, while US exports remained stagnant at 13 percent between 2019-2022.

And as markets for clean technologies mature and manufacturers discover more efficient production methods, margins become tighter, making long-distance less attractive. For instance, in 2022, exports of electric vehicles fell by 1.3 percent for every one percent increase in distance between trading partners, compared to 0.9 percent in 2017.

Increase local supply

Protectionist measures could hinder the green transition by driving up input prices necessary for decarbonisation and could slow down the transition. Instead, the EU should focus on expanding local supply, the authors argue.

They point out that demand for clean technologies like heat pumps, electric vehicles or solar panels currently outstrips EU supply.

"Unsurprisingly, the EU's policies to cut emissions has led to skyrocketing demand for green tech that EU manufacturers cannot yet fulfil — but they will over time," said Springford.

EU imports of lithium batteries jumped from €900m in 2017 to a little under €60bn in 2022. But the authors point out that many battery factories are being developed in Europe, and total production is expected to meet domestic demand in 2030.

"This optimistic picture should make European policymakers think twice before lavishing even more subsidies on building plants," they argue.

Tordoir said the EU should focus subsidies on domestic production of fledgling technologies such as hydrogen and be used to "avoid dependencies" in markets where a global "oligopoly or duopoly might arise, such as wind turbines."