The EU plans to retaliate against the US $369 billion Cut Inflation Act with looser state aid rules on tax credits for green investments.
Under a draft plan seen by the Financial Times, the European Commission will further ease rules to support investment in new generation facilities in green sectors, including through the creation of tax benefits. Part of the €800 billion in its NextGenerationEU Covid-19 recovery fund could also be redirected to tax credits, according to the plan.
The proposed measures, which have yet to be finalized and could change, are part of an overall plan by Brussels to respond to US legislation, which has prompted a flood of warnings that companies will leave the EU for the US to take advantage of the subsidy.
By easing restrictions on tax credits, the commission is trying to mimic one of the most touted benefits of the IRA, which is making it easier for businesses to access federal tax credits. But in doing so, it strays into controversial territory within the EU, as it will be much easier for deep-pocketed countries like Germany to hand out tax incentives for the green transition than their southern counterparts, in budgetary terms.
A spokesperson said the commission was not commenting on the leaked documents.
Member states are divided on whether and for how long to allow relaxed rules. Some southern countries are warning that it risks tipping the balance of the game by disproportionately helping wealthy countries pump money into their businesses.
A temporary crisis and transition framework would allow greater support for more mature technologies and renewables, going beyond those already defined by current EU renewable energy laws to include green hydrogen and biofuels, says the draft proposal.
“The provisions on tax advantages would allow Member States to align their national tax incentives with a common regime, and thus provide greater transparency and predictability for EU businesses,” he added.
Brussels also intends to simplify and speed up 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 reviews transactions under its state aid “block exemption” regime. This would make it easier for governments to subsidize hydrogen, carbon capture, zero-emission vehicles and energy efficiency measures.
Brussels estimates that the industry must invest 170 billion euros by 2030 in plants producing solar, wind, batteries, heat pumps and green hydrogen.
The proposal will be published on Wednesday after debate in committee, and was still under discussion internally on Monday.
Cleantech industries have criticized the EU funding scheme as too complicated to access the funding needed to grow their businesses, saying tax credits in the US are a simpler and more attractive system.
The document brings together several major legislative reforms already planned, such as an overhaul of the EU electricity market and a law to boost domestic production of raw materials such as cobalt and lithium, which are crucial for clean energy technologies.
The draft followed a letter from Margrethe Vestager, the EU’s executive vice-president in charge of the debate, in which she acknowledged that not all countries have the same capacity to distribute state aid. Germany and France accounted for 77% of aid granted under looser competition rules introduced during the pandemic, she wrote.
The draft proposal said Brussels would aim to create a European Sovereignty Fund by the middle of this year to enable the 27 governments to fund state aid.
“To avoid fragmenting the single market due to varying levels of national support – and varying capacities to provide such support – there must also be adequate funding at EU level to facilitate the green transition as a whole. of the Union,” he said.
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