EU loosens subsidy rules to prevent green tech companies from moving to the US

Adriana Lima
By Adriana Lima 5 Min Read
origin 1EU countries will have an easier time injecting subsidies into green technology areas such as wind turbines. ©Matthias Schrader/Copyright 2019 AP. All rights reserved

The European Commission has made good on its promise to further ease long-standing EU rules on national subsidies to prevent green tech companies from relocating to the US and maintain the bloc’s ability to compete on a global scale.

The rules were already in an extraordinary state of relaxation due to the Russian invasion of Ukraine and the energy crisis, an amendment that allowed member states to pump public money more easily into struggling companies and vulnerable households.

But last summer’s approval of the Inflation Reduction Act (IRA), a massive state aid program sponsored by US President Joe Biden, prompted the Commission to further prolong the crisis framework and even broaden its scope for protect local businesses needed to fight climate change.

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

Brussels regards this provision as discriminatory, unfair and illegal and fears that the allure of the generous US bill will trigger an industrial exodus across the Atlantic Ocean, dealing a fatal blow to the EU’s long-term competitiveness

With this in mind, the Commission has adapted state aid rules to simplify the approval of subsidies in six key areas – batteries, solar panels, wind turbines, heat pumps, electrolysers (a piece of equipment needed to obtain green hydrogen) and carbon capture technology – , as well as for the production of components and raw materials necessary for their manufacture.

The new procedures will allow Member States more room to inject public money and support the development of these green tech products, essential to reduce greenhouse gas emissions and achieve climate neutrality by 2050.

In cases where the risk of relocation is high, countries will be able to compensate for subsidies offered by a non-European government, such as the United States, and keep the company within the borders of the EU. Alternatively, countries will be able to compensate for the company’s estimated funding gap.

This option, known as “matching aid”, is considered the most innovative element of the relaxed rules and suggests a race for subsidies between EU and non-EU countries at the expense of taxpayers.

The Commission admits that this scenario is likely and has proposed several “safeguards” to ensure that “complementary aid” does not spiral out of control, such as forcing the aid to be granted in less developed areas or requiring that the project be located at least in three member states.

The company benefiting from the “matching aid” will do so on condition that it does not relocate outside the EU for the next five years, or three years for SMEs.

The new rules will apply until the end of 2025 but disbursements could continue thereafter.

While not mentioned by name, the safeguards appear to be designed to prevent Germany and France from accruing further subsidies for their domestic industries.

The two countries it accounted for 77% of the €672 billion of programs approved in 2022, a staggering statistic that has led other countries to urge the Commission to exercise more caution before easing state aid rules further.

Margrethe Vestager, the European commissioner in charge of overseeing competition policy, insisted that the amended rules will be “proportionate, targeted and temporary”.

But in early February, when he first saw the changesVestager warned that using taxpayer money to benefit select companies “only makes sense if society as a whole benefits.”

“Using state aid to establish mass production and to offset foreign subsidies is something new,” Vestager said at the time. “And he’s not innocent.”

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