EU's goal to become the world's first climate-neutral continent by 2050

It is difficult to make a direct comparison between the green subsidies of the EU and the US as the policies and priorities of each region are unique. However, both the EU and the US have shown a commitment to increasing investment in renewable energy and reducing carbon emissions. The EU has set a goal to become the world’s first climate-neutral continent by 2050 and has implemented various initiatives and policies to support this goal. The US has also taken steps to boost the growth of the renewable energy sector and transition to a cleaner energy future. Ultimately, the success of these efforts will depend on various factors including the political will, investment, and technological advancements.

The Inflation Reduction Act in the US is attracting Irish low-carbon cement producer Ecocem to double its planned investment in California due to the prospect of government funding. Ecocem’s founder says the company was surprised by the personal contact from a Department of Energy official helping them secure loans and will now prioritize investment in the US over Europe. The EU is in panic mode because the massive subsidies and buy-America provisions of the IRA are threatening the EU’s economic model based on a level playing field and limits on state aid. The rules on state aid were already being relaxed due to the pandemic and the impact of war in Ukraine, but France and its allies are pushing to further loosen them as part of an industrial policy.

The EU is facing a debate over how to respond to America’s recently agreed-upon Investment Tax Credit (ITC) which provides companies with billions of dollars in tax credits to support investment in clean energy technologies. Some EU leaders are concerned that this could lead to fragmentation of the single market if big member states such as Germany and France are given greater latitude to support top companies. The ITC has been seen as a threat to fair-trade norms and has sparked a race to the bottom in terms of state aid. Dutch Prime Minister Mark Rutte warns that the EU must not “throw the baby out with the bathwater” as it tries to respond to the ITC, as it could have a long-term impact on the success of the EU’s internal market.

The EU has raised concerns that the IRA’s local-content requirements violate WTO rules and discriminate against products based on their country of origin. The EU has attempted to negotiate with the US but has made limited progress. Ecocem is the type of company that the EU wants to retain for its efforts to reduce greenhouse gas emissions and address the energy crisis. The EU is competing in a global market where both the US and China are investing heavily in green industries through state funding. Ecocem received no public subsidies in France but believes state assistance would help the company expand faster.

Yes, the EU has faced pressure regarding its approach to the single market and competition from China in certain industries, particularly in photovoltaic solar panel manufacturing. Some EU officials believe that the EU has been too lenient towards China, allowing them to dominate key sectors, instead of supporting European-based companies. In 2013, the EU imposed anti-dumping duties on China, claiming that Chinese producers were receiving unfair subsidies.

The EU is divided over the issue of state aid, with France pushing for a “made in Europe” strategy to increase industrial resilience and sovereignty, while commissioners from free-market countries, such as Denmark, Latvia, and the Netherlands, advocate for a business-friendly environment and open global trade. EU Competition Commissioner, Margrethe Vestager, is due to present state aid proposals to streamline permitting for green projects, but the prospect of further loosening state aid controls has raised concerns among some senior competition officials in Brussels who fear public subsidies in Europe will increase. The current relaxations of state aid rules have resulted in imbalanced approvals of €672bn subsidies, with 53% notified by Germany.

This passage is discussing the differences in the amount of capital (money) available for investment in different regions of Europe. France has 24% of the total capital, which is equivalent to 6% of its GDP. Italy has less capital, with only 7% of the total, equivalent to 3% of its GDP. This difference in capital availability contributes to fragmentation between European countries and regions. For example, according to Craig Douglas of World Fund, it is easier to find capital for building a manufacturing facility in Aachen or Bavaria than in Paris.

European countries are divided over the funding of subsidies for state aid. Some countries with strained public finances are pushing for a new EU-wide pot of cash or greater flexibility in the use of existing EU funding. However, fiscally conservative states like Germany and the Netherlands are resistant to additional common EU borrowing and argue that the EU already has enough funding for its green transition initiatives. This has led to a disagreement over the funding of subsidies for state aid.

The EU is facing criticism for the complexity of its funding and support schemes for green initiatives compared to the simplicity of the US’s Inflation Reduction Act (IRA). The average subsidies for electric vehicles in the EU is $6,500, close to the $7,500 offered by the IRA. However, executives complain about the difficulty of navigating the different funding programs from the EU, national, and regional levels. Companies need a significant amount of resources to understand the funding options and access support, making it difficult for small companies to access funding. Some executives believe the EU needs to simplify its support schemes and reduce bureaucratic processes to compete with the IRA.

The EU’s Innovation Fund has faced criticism for favoring established companies over start-ups in its funding allocation. The first call-up for large-scale projects in 2020 received 311 applications, of which only 7 grants were awarded, all to projects led by large companies. Cleantech for Europe, an industry group for green technology start-ups, pointed out that this represents a low success rate for applicants. Most of the selected projects focused on carbon capture and storage, rather than preventing the emission of carbon dioxide. EU officials acknowledge that the permitting processes for new installations take too long and there is a risk of clean tech industries leaving Europe. The question is whether the EU can respond in time to scale up these industries or risk losing them.

European economic liberals believe that the debate over public subsidies is missing the larger picture. They believe the EU should focus on improving competitiveness by reducing regulatory constraints and enhancing worker skills, rather than seeking more public funding. To achieve the EU’s carbon reduction goals, the commission estimates that €520bn per year will be needed in 2021-2030, with most of the funding expected to come from the private sector. However, Europe remains heavily dependent on bank financing and progress towards stronger capital markets is slow.

The former EU Trade Commissioner, Cecilia Malmström, believes that any changes to the state aid regime or creation of new EU resources must be accompanied by reforms to the internal market and a push to conclude more trade deals. She argues that a tit-for-tat response to the Industrial Reconstruction Aid (IRA) would be a dangerous path. However, free-market supporters in the EU feel threatened, especially after the departure of the UK, a vocal member. They are out of touch with the world economy driven by great power competition and the “decoupling” from China. A senior EU official says that even the more liberal members of the EU realize that the world has changed and the message from Washington regarding the IRA is to “just do the same as us because we are not going to change anything.”

Reference: Financial Times, Data visualisation by Chris Campbell

EU’s goal to become the world’s first climate-neutral continent by 2050