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Subsidy rules take center-stage in EU clean-tech drive
18 January 2023 17:11 by Lewis Crofts
The EU’s response to Chinese and US advances in the green technology race has put the bloc’s state-aid rules in the spotlight, as officials wrestle with how to adapt them to investment needs without trampling antitrust law underfoot.
On Feb. 1, the European Commission will put flesh on the bones of a policy response that will see temporary rules to handle the Ukraine crisis extended to help the green transition and new encouragement to invest via the Net-Zero Industry Act.
Faced with concerns that softer rules will only benefit large economies such as France and Germany, the EU's executive arm is also working on a collective fund to ensure fair access to finance.
All of these measures are expected to feature in a new “communication” that will explain Europe’s drive to remain competitive in clean technologies, and which will build on Tuesday’s speech by Commission President Ursula von der Leyen. It will be subject to intense debate within the commission.
This will then influence discussions among EU leaders, scheduled for Feb. 9, on how to counter China’s advance in clean tech and the US Inflation Reduction Act, which subsidizes green technologies.
Once governments have given high-level direction, the commission is then expected to bring legislative proposals forward ahead of a second summit in late March.
The three main strands of the response are: immediate changes to crisis state-aid rules, which should be ready in draft form by the Feb. 9 summit; new legislation designed to improve the speed and access of clean technology projects, known as the Net-Zero Industry Act; and an EU sovereign fund.
At first sight, the challenge resembles other crises, such as the collapse of banks in the 2000s, the Covid-19 pandemic and the Ukraine war. The EU’s subsidy rulebook once again is being targeted as part of the problem — not the solution — to rescuing and growing Europe’s industry.
But in past crises, the commission managed to preserve its state-aid rules, making targeted changes for the banking sector and crisis-ravaged industries, while safeguarding the overall regime.
This time, though, the challenge is more daunting. It is more about industrial and foreign policies, and less explicitly about a systemic crisis.
The clean-tech debate also has many cross-currents: both China and the US feature as rivals; Russia appears as an aggressor; smaller governments want subsidy control; France and Germany want to turn on the money hose; Europe fears the erosion of its industrial base; and no-one wants to miss out on the green transition.
The complexity of the problem has resulted in a broader policy response, which is now emerging. In that, the fate of the state-aid rulebook is again in play.
The regulator already has an open avenue for state-aid changes, namely the temporary loosening of the rules that dealt with the fallout from Russia’s invasion of Ukraine.
Member states were asked for feedback on potential changes to that framework in December. EU competition czar Margrethe Vestager gave this consultation a fresh push on Jan. 13 when she wrote to finance ministers, saying it could also be adapted to handle the “transition” to a greener economy.
Ministers need to respond to Vestager by Jan. 25, and then a draft of the new framework will likely appear before EU leaders meet at their next summit.
Vestager is proposing two main routes to more cash. The first is making all renewable projects simpler to subsidize. This could mean a change to the rules which exempt certain projects from state-aid scrutiny — a law known as the General Block Exemption Regulation — which is currently under review.
The changes would involve creating an easier framework to calculate the aid given to a project, and extending those simplified provisions to all renewable-energy sectors.
A second change envisaged by Vestager will allow aid to stop companies from relocating outside the bloc. This would go beyond similar provisions set out in EU's guidelines on regional aid, but wouldn't likely lead to a review of that text.
Net-Zero Industry Act
Another avenue for supporting investments in Europe will be the newly coined Net-Zero Industry Act, inspired by similar legislation promoting the production of semiconductors in Europe.
The Chips Act, which is still under review by governments, addressed the exceptional supply shortages of chips and the EU’s strategic dependency on them. At the time, the commission said that existing rules* could be used to distribute aid to that industry, given its specific challenges, and so there was no need to create a new power.
That meant that the EU executive in October could already approve support to STMicroelectronics for a new plant in Italy. The Chips Act won’t affect that ability.
The commission’s pre-summit communication, expected for Feb. 1, could also flag this existing power as a means to support new green technology projects. But, on the other hand, the clean-tech sector is in a very different situation to the semiconductor industry with its global supply crunch. So, the commission may argue that this legal avenue isn’t yet appropriate.
In another strand to the EU’s response, Von der Leyen also spoke about making it easier for governments to run joint investment projects for strategic sectors, such as batteries and hydrogen.
The aim is to make the process for such Important Projects of Common European Interest faster, although this doesn’t seem based on any legal changes. The commission hopes rather that talks with national governments, which are often the sticking point in such projects, can prompt improvements.
Clearing governments to distribute aid is always risky for the antitrust watchdog. Given France and Germany account for about two-thirds of aid approved, smaller countries fear that they will be steamrolled by larger economies that simply have deeper pockets to spend their way out of the crisis.
Therefore, any weakening of the state-aid rules or additional possibilities to pump money into the economy will just be used by France and Germany to steal a further advantage over poorer countries. At least, that is how the argument goes.
Von der Leyen, Vestager and trade commissioner Valdis Dombrovskis appear sensitive to this risk. They refer to state-aid changes as “temporary” and argue that subsidies do not build competitiveness in the longer term. Industry chief Thierry Breton supports a longer-term slackening of the rules.
How that argument plays out once EU leaders meet in February and March remains to be seen.
Nevertheless, the commission’s answer to this risk is a new collective European fund to ensure smaller countries have access to finance. The problem for the EU executive is that such a step would be based on the budget cycle and would therefore have to wait until June.
This means the commission is considering how to “bridge” that period by looking at existing funding mechanisms and ensuring the money can start to flow sooner.
The next weeks will be a defining moment for the EU’s state aid rules. They have weathered many crises to date, but the current storm appears to be their toughest challenge yet.
* TFEU Article 107.3.c
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