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EU green plan said to lack 'financial teeth' of US law, risk '2-speed Europe'


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EU green plan said to lack 'financial teeth' of US law, risk '2-speed Europe'

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European Commission President Ursula von der Leyen presents the commission's Green Deal Industrial Plan in Brussels on Feb. 1.
Source: Thierry Monasse/Getty Images News via Getty Images

Matching up to the U.S. Inflation Reduction Act will not be possible for the European Union's clean-tech stimulus package, policy observers told S&P Global Commodity Insights as EU leaders prepare to convene in Brussels to discuss the bloc's response to the U.S. climate law.

The EU's Green Deal Industrial Plan lacks the financial firepower of the $369 billion Inflation Reduction Act and, due to the nature of the 27-member union, also raises the specter of trouble inside the bloc, observers said.

Presented by the European Commission Feb. 1, the plan aims to speed up investment and financing in clean-tech industries and fend off what EC President Ursula von der Leyen described as "aggressive attempts" by countries to lure manufacturing capacity away from the EU. It relies mostly on funds left over from the Recovery and Resilience Facility, the temporary instrument set up to respond to the COVID-19 pandemic.

The industrial plan "lacks [the] financial teeth to match key competitors such as the U.S. and China," said Máximo Miccinilli, senior vice president and head of energy and climate at public relations agency FleishmanHillard in Brussels.

"At this stage, EU leaders understood that responding to the U.S. will not be possible neither desirable politically," Miccinilli said.

Divisions emerging

EU heads of state meet in Brussels Feb. 9-10 for a special European Council, where the Green Deal Industrial Plan will be high on the agenda.

A central element of the strategy is a proposal to temporarily reform the EU's rules around state aid — the concept of companies gaining advantages due to government funding. The proposal has created a divide among EU member states, with wealthier nations such as Germany and France coming out in favor of loosening the rules.

The two countries "get all the attention because of the industrial capacity they have," according to Christina Kouremenou, senior energy consultant and EU team lead at political intelligence firm DeHavilland.

They also account for nearly 80% of the €672 billion of state aid approved under the Temporary Crisis Framework, which was set up to support European economies after Russia's invasion of Ukraine and which, under the commission's proposals, will transform into the Temporary Crisis and Transition Framework.

Most of the remaining EU nations are pushing to make sure the Green Deal Industrial Plan does not leave any country behind.

The commission admitted there is a risk that certain member states will be able to deliver more funding than others.

"That's why we need to make this possibility temporary, well targeted in size and scope, and pending real benefits for people and the European economy at large," said Margrethe Vestager, executive vice president at the commission in charge of competition.

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'Competing' national subsidies

As part of the simplification of state-aid rules, member states will not have to notify the commission about every project that receives funding. Support will be calculated as a percentage of investment costs, with absolute maximum caps in place both of which will be higher for less developed regions, according to Vestager.

The proposal also includes "matching aid," whereby member states can match subsidies offered by third countries those not part of the EU's single market to prevent investments from leaving Europe.

"This is of course a serious risk to competition and the integrity of the single market," Vestager said in a Feb. 1 speech in Brussels. "And those risks are not temporary. Because not all countries have the same capacity to match aid."

As such, the matching aid proposal comes with several conditions, including around how the aid is calculated, whether the investment is critical to achieving the Green Deal's objectives, and whether there are benefits to other countries in the EU, Vestager said.

Still, some industry observers think the EU's reforms risk widening the economic disparity in the bloc.

"It's a major concern," Cillian O'Donoghue, policy director at utilities trade association Eurelectric, said about the discrepancies in state aid allocation. The reform proposals could boost rich nations and reduce clean-tech investment in less developed regions, O'Donoghue said, effectively creating a "two-speed Europe."

The Green Deal Industrial Plan also only briefly mentions the European Sovereignty Fund, which was supposed to help EU nations with less fiscal space, according to Niclas Poitiers, research fellow at Brussels-based think tank Bruegel.

"By building its strategy on (competing) national subsidies, this proposal fails to create a more coordinated European industrial strategy," Poitiers tweeted Feb. 1.

'Painful' road ahead

EU leaders gathering in Brussels this week will outline their national position on the Green Deal Industrial Plan. Member states still have to ratify the commission's proposals, and changes to the plan could yet be made.

The meeting comes ahead of a "big month" for European institutions, according to Kouremenou, with the texts of two key pieces of legislation — the Net-Zero Industry Act and the Critical Raw Materials Act — set to be presented in March alongside draft proposals for redesigning the EU's electricity market.

"This is the holy trinity of the Green Deal Industrial Plan," Kouremenou said in an interview.

The plan's passage through the various layers of EU scrutiny will almost serve as a "fitness check" for the von der Leyen administration's climate and industrial policies ahead of the European elections in 2024, Kouremenou added.

O'Donoghue called the strategy a "quick and dirty response," adding that there is a need for a broader EU industrial plan that contains new sources of funding though such an endeavor would be for the next commission to undertake.

According to Miccinilli, the EU plan highlights that industries need more public money, not only to recover from the energy crisis but to rebuild an industrial value chain around clean technologies.

"The road ahead is painful as this will be very topical during EU elections," Miccinilli said.

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