EU relaxes subsidy rules to prevent green tech companies from relocating to the United States

The European Commission has made good on its promise to further relax the EU’s long-standing rules on national subsidies to prevent green tech companies from relocating to the United States and retain the bloc’s ability to compete on a global scale.

The rules were already under an extraordinary state of relaxation due to Russia’s invasion of Ukraine and the energy crisis, an amendment that allowed member states to pump public money more easily into struggling companies and vulnerable households.

But the approval last summer of the Inflation Reduction Act (IRA), a massive programme of state aid promoted by US President Joe Biden, has pushed the Commission into further prolonging the crisis framework and even expanding its scope to shield homegrown companies needed to fight climate change.

Over the next ten years, the IRA will dole out up to $369 billion in tax credits and direct rebates to help firms scale up the production of green, cutting-edge technology – but only if these products are predominantly manufactured in North America.

Brussels considers this provision to be discriminatory, unfair and illegal, and fears the allure of the generous American bill will trigger an industrial exodus across the Atlantic Ocean, dealing a fatal blow to the EU’s long-term competitiveness

With this in mind, the Commission has adapted the state aid rules to simplify the approval of subsidies into six key areas – batteries, solar panels, wind turbines, heat pumps, electrolysers (an apparatus required to obtain green hydrogen) and carbon capture technology –, as well as for the production of the components and raw materials needed to manufacture them.

The new procedures will allow greater margins for member states to inject public money – in the form of grants, loans or tax credits – with the goal of sustaining the development of these green tech products, which are indispensable to reducing greenhouse gas emissions and achieving climate neutrality by 2050.

In cases where the risk of relocation is high, countries will be able to match the subsidies offered by a non-European government, such as the US, and retain the company within EU borders. Alternatively, countries will be able to compensate for the funding gap the company estimates to have.

This option, known as “matching aid,” is considered the most innovative element of the relaxed rules and raises the possibility of a subsidy race between EU and non-EU countries at the expense of taxpayers.

The Commission admits this scenario is likely and has proposed several “safeguards” to guarantee the “matching aid” does not spiral out of control, such as compelling the aid to be granted in less developed areas or mandating the project to be located in at least three member states.

The company that benefits from the “matching aid” will do so on condition that it will not relocate outside the EU for the next five years, or three years for SMEs.

The new rules will apply until the end of 2025 but disbursements could continue afterwards.

Although not mentioned by name, the safeguards appear to be designed to avoid Germany and France from further amassing subsidies for their national industries.

The two countries accounted for 77% of the €672 billion in approved programmes across 2022, a stunning stat that led other countries to urge the Commission to exercise extra caution before further relaxing state aid rules.

Margrethe Vestager, the European Commissioner in charge of overseeing competition policy, has insisted the amended rules will be “proportionate, targeted and temporary.”

But in early February, when she first previewed the changes, Vestager warned that using money from taxpayers to benefit hand-picked companies “only makes sense if the society as a whole benefits.”

“Using state aid to establish mass production and to match foreign subsidies is something new,” Vestager said back then. “And it is not innocent.”