EU to ease tax credit restrictions in response to US green subsidies

The EU plans to counter the US’ $369 billion anti-inflation bill with looser rules on state aid on green investment tax credits.

According to a draft plan presented to the Financial Times, the European Commission will further relax rules to support investment in new production facilities in green sectors, including by creating tax breaks. According to the draft, part of the 800 billion euros in its NextGenerationEU Covid-19 recovery fund could also be diverted to tax credits.

The proposed measures, which are ongoing and subject to change, are part of a broader Brussels plan to respond to US legislation, which has sparked a spate of warnings that EU companies will migrate to the US to to benefit from subsidies.

By relaxing restrictions on tax credits, the commission is trying to emulate one of the IRA’s most touted benefits, which is easy corporate access to federal tax credits. But it is entering contentious territory within the EU, because it will be much easier for financially strong countries like Germany to distribute tax incentives for the green transition than their fiscally strained counterparts in the south.

A spokesman said the commission is not commenting on the leaked documents.

Member states disagree on whether and for how long easing should be allowed. Some countries in the South warn that disproportionately helping rich countries put money into their businesses risks upsetting the level playing field.

A temporary crisis and transition framework would allow greater aid for more mature technologies and renewable energy, beyond those already defined by current EU renewable energy laws, to include green hydrogen and biofuels, the draft proposal says.

“Tax benefit provisions would allow Member States to align their national tax incentives towards a common system, thereby offering greater transparency and predictability to businesses across the EU,” she added.

Brussels also intends to simplify and speed up approvals for projects of common European interest involving multiple countries and will set overall targets for green industrial capacities by 2030.

In addition, it would raise the threshold above which the Commission would assess deals under its state aid “block exemption regime”. That would make it easier for governments to subsidize hydrogen, carbon capture, zero-emission vehicles and energy efficiency measures.

Brussels estimates that industry will need to invest 170 billion euros in production facilities for solar, wind, battery, heat pump and green hydrogen production by 2030.

The proposal will be published on Wednesday after the debate in the Commission and was still being discussed internally on Monday.

The clean tech industry has criticized the funding system in the EU for being too complicated to access the finance needed to scale up their businesses and said US tax credits are a simpler and more attractive system.

The document ties together several key legislative reforms already planned, including an overhaul of the EU’s electricity market and a law to boost domestic production of commodities like cobalt and lithium, which are crucial elements for clean energy technologies.

The draft followed a letter from Margrethe Vestager, the EU’s Executive Vice-President, who chaired the debate, in which she acknowledged that not all countries have the same ability to allocate state aid. Germany and France accounted for 77 percent of aid granted under looser competition rules introduced during the pandemic, she wrote.

The draft proposal said Brussels aims to set up a European Sovereignty Fund by the middle of this year to allow all 27 governments to fund state aid.

“To avoid fragmentation of the internal market due to different national support – and different capacities to provide such support – adequate funding at EU level also needs to be made available to facilitate the green transition across the Union,” it said.

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