A Year Later, Europe Less Apprehensive About U.S. Green Subsidies Push, According to Reuters

By Jan Strupczewski

BRUSSELS – A year ago, when the United States introduced its significant green subsidies initiative, many in Europe expressed concerns that it would adversely impact their economies, which were already struggling with the ramifications of the Ukraine conflict and the ongoing effects of the COVID-19 pandemic.

Critics have noted that the European Union has yet to present a comprehensive response to President Biden’s Inflation Reduction Act (IRA). However, Brussels has taken steps to alleviate the immediate worry that European companies might relocate to take advantage of U.S. subsidies.

This week marks the first anniversary of the IRA, which allocates $369 billion in tax incentives over a decade for the manufacturing of electric vehicles, batteries, hydrogen, and solar panels in the United States.

Initially, the EU welcomed Biden’s climate-friendly initiatives but soon became concerned that this would entice the region’s top clean tech firms to migrate to the U.S., leading to a loss of expertise, investment, innovation, and jobs.

Thus far, there is little evidence indicating a significant exodus of firms. Niclas Poitiers, an economist at the Bruegel think tank in Brussels, mentioned, "There was general anxiety that after the pandemic and the start of the war in Ukraine, the IRA would serve as a final blow to the EU economy. However, the impact of the IRA on investment decisions may have been overstated, as there is no substantial evidence of a major investment shift from the EU to the U.S."

While there may have been some anecdotal instances of investment diversion, these are not seen as substantial.

A critical step taken by the EU to counterbalance the appeal of the IRA for European companies was the relaxation of state aid rules in March, allowing each national government to match subsidies available in the U.S. This has already begun to show results, as demonstrated by German conglomerate Thyssenkrupp, which is investing around 3 billion euros in a proposed green steel plant in Duisburg, supported by over 2 billion euros in EU-approved state subsidies.

EU officials emphasize that their support for green industries predates the U.S. initiative and highlights that 37% of the EU’s extensive post-pandemic recovery fund of 800 billion euros is allocated for climate-friendly investments. A policy brief for the European Parliament noted that much of the EU’s reaction to the IRA was already in place before Biden’s climate package was introduced.

To foster stable conditions for investment in electric vehicles, batteries, hydrogen, solar panels, heat pumps, and wind turbines, the EU is currently developing a Net Zero Industry Act and a Critical Raw Materials Act, building on the Chips Act initiated in 2022.

Disappointment arose among EU officials when the European Commission decided not to propose a European Sovereignty Fund in June, which was intended to finance the transition to a green economy. National governments were hesitant to add more funding to the EU budget given the pressures of rising energy costs, migration issues, and support for Ukraine amid the Russian invasion.

While the funding approach chosen, utilizing an already ratified pandemic recovery fund, is not considered optimal—as those funds are set to expire in 2026—it does provide a response to the uncertainties inherent in the U.S. model, where a change of administration could jeopardize IRA subsidies.

Nevertheless, EU responses face criticism. The complicated funding structure means that only larger companies can effectively access the recovery fund, leaving smaller businesses at a disadvantage. Moreover, the EU’s focus on investment for production and research contrasts with the U.S. approach, which aims to reduce operational costs over the next decade through tax incentives.

Adjusting the state aid framework solved the immediate concern of providing competitive support; however, it also means that wealthier EU members like Germany, France, and Italy can afford to subsidize investments, creating disparities within the EU’s single market—one of its foundational achievements.

Europe remains reliant on China for crucial clean technology components, from solar panels to the materials necessary for electric vehicle batteries.

The urgency now lies in advancing the Critical Raw Materials and Net Zero Industry acts through the EU’s complex legislative process before the European Parliament disbands in April 2024 for new elections. If not passed in time, these laws would have to be addressed by the incoming parliament, likely delaying consensus until 2025.