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EU unveils green industry plan to counter US spending spree

Ella Joyner Brussels
February 1, 2023

The EU Commission has laid out plans to offset the Biden administration's Inflation Reduction Act. Brussels wants businesses to cash in on the green transition, but does not look set to put new money on the table.

A picture of Ursula von der Leyen
Von der Leyen wants the EU' "Green Deal Industrial Plan" to ensure the bloc plays a leading role in clean-tech productionImage: Yves Herman/REUTERS

The European Union's top official laid out plans on Wednesday to offset a US domestic green-tech spending spree, and ensure the bloc gets its slice of a globally burgeoning industry, expected by the International Energy Agency to more than triple in worth by 2030 to $650 billion (€596 billion).

In her "Green Industrial Plan," European Commission President Ursula von der Leyen set out a four-pronged approach focused on streamlined regulation, relaxed state aid rules, worker skills, and using trade agreements to ensure critical raw material supply.

"We are living now in a decisive time, basically the decade that will decide on whether we are going to be successful in fighting climate change or not," von der Leyen told reporters in Brussels. Industries that supported EU goals of net-zero carbon emissions by 2050 were key to this fight, she stressed.

A notable absence — at least in the short term — is the prospect of a fresh cash. Von der Leyen said existing EU money, mainly from the bloc's pandemic recovery fund, could be redirected to serve green industry, but stayed clear of the touchy question of new joint EU borrowing.

Answer to US spending spree

The EU industrial plan comes in response to the United States' Inflation Reduction Act (IRA) — a spending package that includes $369 billion to be spend on energy security and climate change programs and which raised hackles in Europe when unveiled by President Joe Biden last year.

EU officials and leaders warned at the time of unfair subsidization, particularly for US-made electric vehicles, that could see EU businesses disadvantaged, or even encourage firms to base themselves stateside to benefit from planned tax credits, for example.

On Wednesday, von der Leyen struck a conciliatory tone concerning other countries' investment plans. "We welcome this. This is good news," she said, pointing also to initiatives in Japan, India, the United Kingdom and Canada. "The fight against climate change is a must. However, it is important to ensure balanced competition, both globally and within the EU," von der Leyen added.

The plan, which is not yet a formal legal proposal, will be debated by EU leaders at a summit next week. The 27 national governments must give the initiative their seal of approval.

Though still only a broad outline, Wednesday's announcement was hotly anticipated by observers fearing an international subsidy race, but also within the EU because of a brewing showdown over skewed state aid and the prospect of shared EU debt.

A picture of big Northvolt battery factory in Sweden
Will Sweden's Northvolt now rethink its decision to built a sprawling cell factory in the US rather than in EuropeImage: Northvolt

Germany, France are EU's big spenders

A key tenet of the industrial plan is to extend the application of relaxed state aid rules to aid climate-friendly projects not currently covered — renewable technologies, renewable hydrogen and biofuel storage, for example, according to press material from the Commission.

The EU already relaxed its state aid rules in response to the COVID-19 pandemic starting 2020, and then again last year after Russia's invasion of Ukraine. But loosening up state aid rules is controversial because more prosperous states, particularly Germany and France, can afford to help their companies the most. Of €672 billion ($733 billion) granted under the temporary crisis framework in 2022, 77% went to Berlin and Paris combined.

In the interest of fairness to smaller member states, the European Commission previously seemed poised to propose a fund derived from fresh joint EU borrowing. But seven fiscally conservative member states, led by the Netherlands, made their opposition clear in recent weeks.

No new funds? No disaster, expert says

Jacob Kirkegaard, a senior fellow at the German Marshall Fund in Brussels believes it would be very difficult to get new money on the table given the political sensitivity.

"But that may not be such a big problem because quite frankly, we still have quite a lot of firepower in the pandemic recovery fund,” Kirkegaard told DW.

This €872 billion pot already includes €250 billion for green measures, including investments supporting the decarbonization of industry, the Commission press material from Wednesday stated.

A picture of Jacob Funk Kirkegaard
Kirkegaard says criticism of the US verges on the hypocritical as the EU has also thrown green subsidies at its industryImage: PIIE

To keep the EU's edge in the long term, Brussels said it would propose by mid-2023  a new European Sovereignty Fund targeting critical and emerging technologies for green industry.

It will also set out a so-called Net-Zero Industry Act, with a "simplified regulatory framework for production capacity of products that are key to meet our climate neutrality goals," including batteries, windmills, heat pumps, solar, electrolyzsers, carbon capture and storage technologies. 

In addition, a Critical Raw Materials Act due to be published next month should support diversified supply of strategically important materials like lithium, used for batteries. This should give EU companies clarity about future supply.

Within the EU, there is a real risk of market distortion if state aid relaxation is not matched by funding for smaller states to invest too, Kirkegaard warned. This can be repurposed EU money, as von der Leyen proposed, but it needs to be on the table, he said.

When it comes to deciding which companies benefit from funds, Kirkegaard believes the European Commission should be firm in not letting Germany and France get away with too much. "It needs to be a firmly narrow list of companies that is agreed among all member states," he told DW.

Who's afraid of the IRA?

In terms of the risk of an international subsidy race, Kirkegaard cautions Europeans not to be too drawn into the narrative that Biden's Inflation Reduction Act (IRA) will trigger job relocation. "There's nothing that Joe Biden and the US government, in my opinion, has done that's going to see European jobs shifted to the United States," he said.

Less sanguine about the IRA is Bernd Lange, the head of European Parliament's Trade Committee. The IRA breaks World Trade Organization rules and is deliberately tempting over European industry, the German conservative poltician told DW.

"I know that some states in the United States are advertising quite actively in this field of green technology," he said, adding: "So saying, we have now the IRA, we have low bureaucratic burden and we have low energy prices, come to us."

While the US bill is protectionist, in Kirkegaard's view,  he said the key was for Brussels to "remain calm."

"We want the United States to embrace also the green transition. And we should be less concerned, quite frankly, that our own green transition is put at risk," he said.

Edited by. Uwe Hessler