The European Union eases restrictions on tax breaks in response to US green subsidies

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The European Union plans to respond to the $369 billion US Inflation Act with relaxed state aid rules on green investment tax credits.

Under the draft plan seen by the Financial Times, the European Commission will further relax rules to support investment in new production facilities in green sectors, including through the creation of tax benefits. Some of the €800 billion in NextGenerationEU’s Covid-19 recovery fund could also be redirected towards tax breaks, according to the draft.

The proposed measures, which have not yet been finalized and could be changed, are part of Brussels’ sweeping plan to hit back at US legislation, which has sparked a torrent of warnings that companies will move from the European Union to the United States to take advantage of the subsidies.

By easing restrictions on tax breaks, the commission is trying to emulate one of the IRA’s most vaunted benefits, the simplicity of corporations getting federal tax credits. But in doing so, it is moving away from a contentious area within the European Union, because it would be much easier for countries with deep pockets like Germany to provide financial incentives for a green transition than for their fiscally-strained counterparts to the south.

A spokesman for the commission said the commission does not comment on leaked documents.

Member states are divided over whether and for how long to allow relaxed rules. Some countries in the south warn that they risk tilting the playing field by helping disproportionately rich countries pour money into their companies.

The draft proposal said a temporary crisis-and-transition framework would allow more assistance for more mature technologies and renewable energies, beyond those already set out by current EU renewable energy laws to include green hydrogen and biofuels.

“The provisions on tax benefits will enable member states to align their national fiscal incentives on a common scheme, thus providing greater transparency and predictability to businesses across the EU,” she added.

Brussels also intends to streamline and speed up approvals for projects of common European interest involving several countries and will set comprehensive targets for green industrial capacity by 2030.

In addition, it would increase the threshold if the commission exceeds it to scrutinize deals under the state aid “collective exemption” system. This would make it easier for governments to subsidize hydrogen, carbon capture, zero-emission vehicles and energy efficiency measures.

Brussels estimates that the industry needs to invest €170 billion by 2030 in solar and wind power plants, batteries, heat pumps and green hydrogen production.

The proposal is due to be published on Wednesday after discussion in the committee, and is still being discussed internally on Monday.

Cleantech Industries has criticized the European Union’s financing system for being too complex to access the financing needed to expand its business, saying that tax breaks in the United States were simpler and more attractive.

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The document brings together several major legislative reforms that have already been planned, such as reforming the EU electricity market and working to boost domestic production of raw materials such as cobalt and lithium that are key components of clean energy technologies.

The draft followed a letter from Margrethe Vestager, the EU’s executive vice-president overseeing the debate, in which she acknowledged that not all countries have the same capacity to provide state aid. Germany and France, she wrote, accounted for 77 percent of the aid provided under the looser competition rules introduced during the pandemic.

The draft proposal said Brussels would aim to create a European Sovereignty Fund by the middle of this year to allow all 27 governments to fund state aid.

“To avoid fragmentation of the single market due to different levels of national support – and varying capacities to grant such support – there is also a need for adequate funding at the EU level to facilitate a green transition across the Union as a whole,” the report reads.

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