Leaked EU plan reveals US and China’s response to support green business

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The EU executive will relax state aid rules and propose a new “European Sovereignty Fund” later this year, in response to controversial US inflation-lowering law and China’s “unfair” support for environmental protection.

A leaked European Commission plan confirms that a global race for green support is underway, though EU member states remain divided on how to respond.

European Union leaders are due to meet next week in Brussels to discuss the bloc’s response to Joe Biden’s $369bn (£300bn) Inflation Reduction Bill, which aims to support the massive expansion of green technology, from renewable energy to electric cars. European leaders say the IRA discriminates against companies exporting to the US and fear it will lure their companies across the Atlantic, costing jobs and closing factories in the vital green technology sector.

While European anger has been most clearly against the United States, the EU plan is also a response to China, which the Commission accuses of “unfair” use and “market distortion”.[ing]Subsidies to advance the race to produce clean technologies.

Chinese subsidies “have long been twice as high as those in the European Union, relative to GDP,” says a leaked copy of the Commission’s “industrial green deal plan” seen by the Guardian. “Europe and its partners must do more to combat the impact of these unfair subsidies and prolonged market distortion.”

Earlier this month, European Commission President Ursula von der Leyen said the EU was working with Washington to reduce the IRA’s “negative side effects” on Europe, but added: “More importantly, we face unfair competition in the sector.” technology from China.

The leaked document, first reported by the Financial Times, provides new details of the Commission’s plans to loosen the EU’s state aid system, strict rules that limit state support to industry. Since Russia’s invasion of Ukraine, the Commission has twice relaxed state aid rules to help governments struggling to protect businesses from rising energy costs and a weakening economy. The Commission wants to extend this flexibility to help the EU manage the green transition.

Simplified government aid rules that already apply to some renewable technologies will be expanded to include hydrogen storage and renewable biofuels. EU member states will largely be able to provide assistance to EU companies for which equivalent financial aid is provided by foreign governments. This is a direct response to concerns that Washington is actively luring European companies out of Europe and making clean-tech products in the United States.

But the prospect of a lax system of state aid – without any other support – has alarmed southern and small European governments that lack the financial muscle of the largest EU member state. These concerns have been exacerbated by the commission’s recent figures revealing that France and Germany together account for 77% of all state aid provided to businesses during the coronavirus pandemic. The Italian government has warned that lax government aid rules must “not be free-for-all” and called for the creation of a common EU fund for green technology aid in all member states.

Meanwhile, financial hawks such as Germany and the Netherlands argue that the EU has billions unspent for a green transition in its Covid recovery plans, an €800bn (£703bn) fund financed by joint borrowing. With not much money being spent, they argue it’s too early to talk about more mutual funds.

The leaked paper reveals that the European Commission will propose a European sovereign fund by summer, but details are still scarce. The European Sovereignty Fund aims to maintain a “European edge in critical and emerging technologies,” such as quantum computing, artificial intelligence, biotechnology, and clean technology, according to the paper. However, it does not provide any details of the budget or exactly how the fund will be paid.

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Elsewhere, the paper notes that the EU’s current Covid recovery plans have made €250 billion available for green measures, including decarbonization of industry.

But it shows the scale of the task in removing fossil fuels from the EU economy, noting that until 2030 an additional €477 billion of investment in energy and transport will be needed in addition to the historical average spending.

The EU employers’ association, Business Europe, said in a statement that the Commission “finally recognized” the urgent need to act on the “deterioration” of competitiveness in Europe.

The group, which warned of a subsidy race, added: “The answer needs to simultaneously address the push factors from higher capacity and regulatory costs as well as lengthy permitting procedures, and counter the financial pull factor created by the IRA. If the EU fails to achieve all these aspects, we will lose more ground to global competition.”

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