Green Subsidies: A Need to Break EU Norms?

By Elena Sofia Massacesi, Core Writers’ Group

The Biden Administration’s Inflation Reduction Act (IRA) of 2022 provides state subsidies to green energy producers. The legislation, therefore, makes the United States a dramatically more attractive investment destination than the unpragmatic European Union. Owing to this, Brussels remains worrisome that its businesses will migrate across the pond, and has been responding to the situation with the Green Deal Industrial Plan (GDIP) — however, it is likely that transforming the European business environment may prove more efficient as means of supporting industries than embarking on a subsidy war that the EU cannot win.

The IRA

The IRA promises at least $400 billion worth of subsidies over twenty years to accelerate the roll-out of renewable energy and electric vehicles needed to reach America’s 2030 emissions reduction target. The subsidies require that production be local to the United States to transform the supply chain market, thus indicating a protectionist tinge to the policies. European energy giants such as Swedish Northvolt and Spanish Iberdrola have already responded to the attractive investment opportunity by consulting with American groups or increasing their share of investments in the nation.

European leaders worry that other leading renewable energy firms will follow a similar route to their counterparts, and not only take away the financial gains for Europe but also discourage the presence of the strong clean energy sector, something which the continent needs for its ambitious Green Transition continuity.

The GDIP

Though the IRA’s policies breach the World Trade Organisation’s free-trading principles, Europe knows that taking on the United States would be a long, costly, and likely unrewarding process, especially in time, given the WTO’s questionable processing capacity. The European Commission’s response to the IRA was with the Green Deal Industrial Plan (GDIP), which included its own set of incentives for the green energy sector including tax breaks, re-directed funding, and relaxed state rules. The European Commission plans to finance the GDIP through unspent funds from the pandemic recovery package, the REPowerEU alternative energy fund, and the EU’s private investment framework.

European Tensions

Deregulation of state aid has been a cause for contention within the Union. Germany and France, as the economically dominant powers of the bloc, are far better positioned to offer firms subsidies than smaller states. The EU first began relaxing its rules on state aid in response to the pandemic, and continued with the start of the Ukraine War, so member states are concerned that these temporary responses may become a pattern. The relaxed rules contradict the reason for the EU’s single market: a level playing field. A smaller European country cannot compete with the subsidies offered by either Berlin or New York. To level the playing field, European countries would have to create an EU-wide subsidy fund, which is geopolitically impossible given the north’s refusal to subsidise the south.

Even if the EU matched the American spending amount, the EU’s subsidies will always be at a disadvantage due to the complexity of the Union compared to the federal state scenario. This is because the EU cannot install continent-wide tax incentives like the US, and since the EU rules are tailored to member states which co-exist with national rules, subsidy schemes are difficult for firms to navigate — thus the American nation-wide scheme is much simpler, and thus more attractive to the public and private interest.

Proposed Solution

To avoid undermining smaller countries’ economic well-being, the EU should instead focus on improving the accessibility of its financial sector to businesses than trying to compete with American subsidies. Sweden, the current head of the rotating presidency, proposes using financing reforms to:

• Increase European competitiveness;
• Loosen regulatory constraints;
• Improve fundamental economic components (notably worker skills).

The GDIP has also come under scrutiny for its subsidising bias towards established industry giants rather than startups which require larger investments, and in turn, generate more innovation. The EU should thus reconsider its current assessment framework to ensure that the importance of innovation is not being overlooked.

Following in the US’s footsteps also jeopardises other states’ ability to gain access to the technology they need for their own green transition. Though larger powers such as India, Japan, South Korea, and the UK have already begun their own subsidy program, western powers should seek solutions with mechanisms to redistribute their revenue streams to climate vulnerable countries as promised in their 2022 loss-and-damage fund United Nations commitments.