Europe’s response to Biden’s green subsidy law lacks teeth

February 8, 2023

The European Commission calls on the industry to scale up the development and production of “clean technologies”. But fails to pick priority sectors and to fill the financing gap.

The initiative to create a Green Deal Industrial Plan for Europe pays tribute to the green transition’s crucial role in strengthening Europe’s economy, strategic autonomy and climate ambition. Powerful, not toothless EU support is needed to capture green supply and value chains in a context of global competition.

The Plan presented on Wednesday sets the correct direction of travel for the decarbonisation of industry and rapid deployment of green products. It focuses on regulation, goal setting, mobilising public and private funding. 

At this stage, the Commission’s plan has two major shortcomings. First, its broad scope. It doesn’t target truly transformative and innovative technologies such as renewables, batteries or green hydrogen. Rather, it includes unproven or environmentally harmful technologies as well as fossil fuels related activities – such as biofuels, biogas, Carbon Capture Utilisation and Storage (CCUS) and non-renewable hydrogen. In light of the global competition on clean technologies and the climate urgency, there is no time left for business as usual and technological neutrality. This is why during next week’s meetings EU ministers and heads of State should call for restricting the scope to priority sectors having the biggest added-value for the decarbonisation of Europe’s economy. Member States and EU institutions should support the list elaborated by the Spanish government of ten sectors enabling the acceleration of the green and digital transitions and the Union’s strategic autonomy, and further narrow it down to 3 to 4 sectors including renewable energy, e-mobility, batteries and clean hydrogen.

Second, the plan is not backed by the firepower needed to fill the financial gap. The Commission suggests mainly a re-packaging and re-directing of old instruments. At this moment, it doesn’t foresee additional and targeted EU funding. This means that the financing gap identified by the European Commission itself would not be filled, neither in the short nor in the long term. Re-purposing loans under the Recovery and Resilience Facility and REPowerEU to clean industrial sectors can bring impact only if it is also complemented by a significant level of grant funding for operations which will not necessarily yield returns on investments. The European Sovereignty Fund (ESF) which it proposes to create before summer 2023 should become the cornerstone of a future major climate investment plan at EU level which is backed by additional money. By providing a variety of financial instruments, from grants to loans, guarantees and equity, the ESF should be tailored to provide effective support to various segments of the industry, including Small and Medium size Enterprises.

About permitting processes it hits the target by recommending to speed them up and build national capacity to manage them. As to state aid rules, the suggested simplification and streamlining of the tax break system at EU level are necessary. So is the creation of so-called “matching clauses”. According to Margrethe Vestager, Commissioner for Competition, “to help Member States prevent that investments are unfairly diverted to the highest bidder outside Europe, [they should be allowed] to match the subsidies offered by third countries. Put simply, if a company is offered 1 billion dollars by a third country to support, for instance, a new battery plant, a Member Stater could offer the same up to funding gap”.

The EU Innovation Fund will subsidise, through competitive bidding, 100% of the funding gap for scaling up clean tech deployment and manufacturing. The aim is to reduce the difficulties for investors in stacking different revenue streams and funding sources. Winners of “competitive bids” or “auctions” will receive a fixed premium for producing more, or at lower cost, or in a more sustainable manner. The Commission’s proposal to expand competitive bidding under the Innovation Fund beyond renewable hydrogen is another step in the right direction. It is urgent to implement the Commission’s proposal to launch targeted competitive auctions to rapidly scale up manufacturing of components in strategic sectors such as solar and wind energy, batteries and electrolysers.

Authors: Isabell Büschel (Director, Spain), Julia Poliscanova (Senior Director, Vehicles and Emobility) and Xavier Sol (Sustainable Finance Manager)

This opinion piece was first published in Expansión.

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