EU to relax curbs on tax credits in response to US green subsidies

The EU is planning to hit back at the US’s $369bn Inflation Reduction Act with looser state aid rules on tax credits for green investment.

Under a draft plan seen by the Financial Times, the European Commission will further loosen the rules to support investment into new production facilities in green sectors, including via the creation of tax benefits. Some of the €800bn in its NextGenerationEU Covid-19 recovery fund could also be redirected towards tax credits, according to the draft.

The proposed measures, which have yet to be finalised and could change, are part of a comprehensive Brussels plan to respond to the US legislation, which has provoked a flood of warnings that companies will decamp from the EU to the US to take advantage of the subsidies.

By relaxing restrictions on tax credits the commission is attempting to emulate one of the most-vaunted benefits of the IRA, namely the simplicity of companies accessing federal tax credits. But in doing so it is straying into controversial territory within the EU, because it will be far easier for deep-pocketed countries such as Germany to dole out fiscal incentives for the green transition than their fiscally stretched counterparts in the south.

A spokesperson said the commission does not comment on leaked documents.

Member states are divided over whether and for how long to allow relaxed rules. Some countries in the south warn that it risks tilting the level playing field by disproportionately aiding rich countries to pour money into their companies.

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

“The provisions on tax benefits would enable member states to align their national fiscal incentives on a common scheme, and thereby offer greater transparency and predictability to businesses across the EU,” it added.

Brussels also intends to simplify and accelerate approvals for projects of common European interest involving several countries and will set overall targets for green industrial capacity by 2030.

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

Brussels estimates that industry needs to invest €170bn by 2030 in manufacturing plants for solar, wind, battery, heat pump and green hydrogen production.

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

Clean technology industries have criticised the funding regime in the EU for being too complicated to access the financing needed to scale up their businesses, saying the tax credits in the US were a simpler and more attractive system.

The document binds together several major legislative reforms that were already planned, such as an overhaul of the EU’s electricity market and an act to boost domestic production of raw materials such as cobalt and lithium that are crucial elements for clean energy technologies.

The draft followed a letter from Margrethe Vestager, the EU’s executive vice-president overseeing the debate, in which she acknowledged that not all countries have the same capacity to hand out state aid. Germany and France accounted for 77 per cent of aid given under looser competition rules introduced during the pandemic, she wrote.

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

“To avoid fragmenting the single market due to varying levels of national support — and varying capacities to grant such support — there also needs to be adequate EU-level funding to facilitate the green transition across the union as a whole,” it said.