Today, EU member states will respond to proposals for subsidy rule changes to make sure they don’t lose out to the US subsidy boost to green tech. But the immense challenge of the sustainability transition is too important to be reduced to a damaging trade war.

This Euroconsumers blog looks at what is unfolding in EU-US green policy and the threat this may pose not just to trade relations but to the global co-operation needed to meet the challenge of the green energy transition.

Promoting local green tech growth or a protectionist trade war?

Coming at a time of an extreme squeeze on incomes and high inflation across the globe, governments are also aligning green investment with policies to boost national growth, create jobs and retrofit homes to save energy. But national subsidies and tax breaks are causing controversy between countries.

There is a thin line between promoting local growth and trade protectionism and a move from the United States at the end of last year left EU governments both surprised and worried for their own industries.

US wants a home grown green tech EV market

The US Inflation Reduction Act is a huge piece of legislation which includes a lot of clean-energy incentives for industry. European perceptions are that this will give US companies an unfair boost by making local investment the best financial option. Of particular concern were provisions for tax credits for electric vehicles made in North America.

The policy is designed to support the roll out of electric vehicles (EVs) in the US and develop its own domestic supply chain.

However, this was perceived as a direct threat to EV production in Europe (and other major producers in South Korea and Japan) who felt manufacturing could shift to North America.

Europe responds with green tech subsidy plan

In response, competition commissioner Margrethe Vestager has proposed that EU state aid rules be temporarily simplified for renewable energy technology and green projects.

Hydrogen and electric-vehicle sectors could also benefit from looser state aid rules under the bloc’s General Block Exemption Regulation.

Also included was an offer of ‘anti-relocation investment aid’ in other words a fund to entice manufacturers not to leave the EU for the better conditions in US or other locations.

A common fund for European green subsidy?

She has requested member states feedback on these proposed changes by today, 25 January. But enabling a temporary loosening of state aid rules risks benefitting the countries with the most financial capacity, and threatening the foundation of the single market, which Vestager describes as “a risk for the integrity of Europe.”

To counter this, the proposal also includes setting up a collective European fund through the REPowerEU plan to make sure all countries can access funds for subsidization.

Net-Zero Industry Act announced

Last week, as disagreements rumbled on, the commission also announced it will propose a new act with a set of clean technology objectives.  This would enable investors to see clearly where opportunities lie in long term, strategic, whole supply chain projects.

At the announcement of the new Act, European Commission President Ursula Von Leyden was direct in linking the need for the change to the new US green subsidy package which had provoked huge concerns in Europe.

The idea of a common fund or the softening of state aid rules is not without controversy, with the risk that countries compete for business on the basis of subsidy and not on quality.

However, the scale of the investment challenge is causing others to consider it as a positive move for the EU to protect against the lure of third country packages.

Distracting trade war comes at the wrong time

The counter move by Europe to increase the single market’s subsidies has sparked a real concern that Europe and the US are embarking on a trade war that could have much wider impacts.

Firstly, it could weaken US-EU relations at a time when globally their co-operation on issues such as security and the war in Ukraine is crucial. Related to this, it could distract from the huge challenge of reaching net zero on a planetary level, and delay the urgent cross-border actions needed to help all countries adapt, slow down and mitigate the climate and biodiversity crisis.

The Russian invasion of Ukraine and energy war on Europe has focused minds on the need to speed up the energy transition. The key will be to enable fossil fuel independence without destroying the cooperation needed to meet global climate goals.

But the immense challenge of the sustainability transition is too important to be reduced to a damaging trade war. Now, more than ever we cannot be distracted from the task of securing competition that can benefit innovation, consumers and sustainability. Instead of fighting each other, we need to deliver for all.