On 9 February, EU prime ministers and presidents will converge on Brussels for a showdown over how to respond to the green subsidies in the US’s $369bn (€337bn) Inflation Reduction Act (IRA), which many of them say will unfairly disadvantage European companies. Some want a big bazooka of EU subsidies and a relaxation of state aid rules in response. Others say this is a betrayal of the EU’s free-market principles and risks starting a subsidies race that will pit EU countries against each other and benefit only the largest.

Last week, the European Commission published its proposal for how to respond – the Green Deal Industrial Plan. It would establish a joint-debt-funded “European Sovereignty Fund” to subsidise green businesses across the EU. In addition, a “Net-Zero Industry Act” would provide a simplified regulatory framework for the production of technologies considered important for meeting climate goals, such as solar, wind, batteries, heat pumps and carbon capture and storage.

US President Joe Biden poses with EU Commission President Ursula von der Leyen in New York. (Photo by Ludovic MARIN/AFP)

For months, the EU has been urging the Biden administration to change the IRA to make it less antagonistic towards Europe – particularly by removing any incentives for European businesses to relocate to the US to take advantage of the US subsidies. Biden has not budged. Commission President Ursula von der Leyen has been under significant pressure from national governments, particularly France, to respond aggressively to what they see as an opening salvo from the US.

The EU’s single market commissioner, Thierry Breton, who is French, last month called for a “European IRA”. A European Parliament report published last month identified severe competitiveness risks to Europe from the IRA, and warned that a lack of climate coordination between Brussels and Washington risks harming the goals of the Paris Agreement. The NGO Transport & Environment has identified a particular risk in the batteries sector.

European cleantech businesses are, naturally, enthusiastically welcoming the move to send more money their way, but some worry that the motivation for it – combatting perceived unfairness in the US IRA – is leading to a lack of focus on delivering a cohesive result for the climate and serving as a distraction from the risk of unfair competition within the EU itself, particularly if France and Germany overwhelmingly benefit.

Suzana Carp, deputy executive director of the business association Cleantech for Europe, says Europe should not have been surprised by the US green subsidies. “I wouldn’t label the IRA as unfair, and Cleantech for Europe doesn’t believe we need to see it as detrimental,” she told Energy Monitor. “A global cleantech race was always going to follow successful implementation of the Paris Agreement, which talks about deep tech deployment in Article 10. The technology race was built into the document.”

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Unfocused bazooka

However, the concern about Europe losing its cleantech edge to the US is real, she says. “We have been in touch with innovators who are indeed planning to go to the US to take advantage of the IRA over the next four to five years.” However, this global competition would have happened with or without the IRA. “The EU chose to respond to the IRA; it was not forced to respond.”

“If we are doing this because we want to, let’s do a fantastic job at it,” she adds.

On that front, cleantech businesses are worried. The plan’s definition of clean technologies is vague, and has left Europe’s industries in the dark about who exactly will be eligible for help. “Unfortunately, although we think this a very good starting point, it’s not giving that exclusive focus on scaling and commercialising cleantechs that we need – and when you look at the IRA, it is doing exactly that,” says Carp. There is precedent, she says, pointing to the EU’s Innovation Fund as an example of something where 80% of projects went to big corporates.

Dries Acke, policy director of business association SolarPower Europe, says it is also concerned about the lack of focus. “Not all net-zero technologies are in the same boat – not in terms of strategic importance, or even the impact they are feeling from the IRA,” he says. Jozefien Vanbecelaere, head of EU affairs at the European Heat Pump Association, agrees. “It is right to support green industries like heat pumps, but to end fossil fuels and reach net zero, more specifics are needed,” she says. While industry representatives often lobby for technology neutrality in EU legislation, in this instance the lack of specifics about what is and is not covered by the plan (and eligible for funding) is causing anxiety.

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From a climate perspective, there is a concern that the competition with the US is driving a focus on quantity rather than quality, and that the focus on cleantech subsidies is steering the EU’s policy focus away from emissions reductions. In that way, the IRA spat between Europe and America could actually end up harming the fight against climate change. It could also shift focus away from the EU’s Emissions Trading System (ETS), which up until now has been the EU’s main tool for fighting climate change. The US does not have a price on carbon or emissions trading at a national level, which could make the EU ETS take a backseat in world where climate policy is seen as a battle to one-up the US.

Energy efficiency is also given a backseat in the new plan. “Europe acknowledged the need to dramatically lower its energy consumption in painful circumstances last year,” says Adeline Rochet, a senior policy advisor with the climate think tank E3G. “This is not reflected in the communication. The absence of a structural focus on energy efficiency is a significant risk to the overall success of the plan.” What is currently on the table falls short of a comprehensive clean economy strategy, she warns, and it broadly leaves heavy industry decarbonisation to the side.

Sovereignty fund fight

The Commission is due to come out with investment and manufacturing targets for specific sectors in a follow-up act by March. In the meantime, the proposal will work its way through the EU legislative process in the European Parliament and Council. Thursday’s summit will set the direction for those talks. Lobbyists will be working hard to shore up the sectoral specifics in all three institutions over the next months, but there is concern that this quest for focus will be sidelined by a brewing fight over the plan’s controversial sovereignty fund.

As usual, the frugal Northern countries Austria, Denmark, Finland, Germany, the Netherlands and Sweden are opposed to the principle of joint EU borrowing for a new fund. Their long-standing opposition to the idea was overcome in an unprecedented development during the Covid-19 crisis, when the EU for the first time agreed to pool its credit rating to borrow for a Covid recovery fund. The 'Eurobonds' that were successfully resisted during the debt crisis a decade ago eventually became reality through these new 'Coronabonds'.

Berlin is insisting that those pandemic recovery funds can be used for this cleantech investment. Southern and eastern countries say those funds do not have the firepower or the focus to do this. They say they will not sign off on a relaxation of state aid rules, which will benefit the wealthier bigger countries at the expense of poorer smaller ones that have less money to give out, unless it is accompanied by a pan-EU sovereignty fund that can benefit all EU countries no matter their wealth or size.

Unveiling the plan last week, von der Leyen explained the need for the trade-off. “When we look at state aid, we must be careful and avoid any kind of fragmentation of the single market," she said. "So the level playing field internally is as important as the level playing field we want globally. If you have state aid, the other side of the coin has to be funding at the EU level.”

Germany, which makes up 18% of the EU’s population and 27% of its industrial production, has doled out more than half of the state subsidies distributed in Europe since EU screening of national state aid was relaxed for Covid in 2021. France accounts for a quarter. The other 25 countries make up the remaining quarter. Berlin would benefit disproportionately from the further relaxation of state aid rules now being considered, but it has so far been unwilling to acquiesce to the sovereignty fund designed to make sure everyone in the EU can benefit.

Cleantech for Europe has been calling for a sovereignty fund since the autumn to counterbalance possible fragmentation from state aid. “If we relax state aid rules, who is to guarantee it won't be again the big incumbents getting easier money, when innovators will have to wait in the queue?” asks Carp. “There is no guarantee. So we are not big fans of this approach, it seems to encourage member states to start competing with each other.”

However, she adds that the success of a sovereignty fund depends on how it is used. “It is only helpful if it is easily accessible for innovators, which has not been the case with the Innovation Fund. We already struggle to make EU funding easily accessible for SMEs because it is quite difficult to navigate. We are asked often by the press, is the amount of money enough? The question should be, how will it be used?”