EU allows member states to subsidize green tech in reaction to US

The European Commission decided on Thursday that individual member states are temporarily allowed to support local industries developing green technologies. The move answers protectionist measures in the United States and China. Among other carmakers, the Volkswagen Group awaited this approval to decide on its battery plant in Poland.

As Europe fears that its multinationals will shift their investments to the US and China, where they are welcomed with millions to construct plants for building battery packs, EVs, and components, the Commission is relaxing its grip on state aid. For competitive reasons, member states weren’t allowed self-control to fund industries outside the European framework.

‘Strategic equipment’

But under the new rules, which are temporary and apply until the end of 2025, national governments will be granted to subsidize what Margrethe Vestager, the EU Commission vice-president in charge of competition policy, called “strategic equipment”.

The term refers to batteries and electrolyzers, which both play their role in decarbonizing vehicles running on electrons and hydrogen. It also refers to solar panels, windmills, carbon capture, heat pumps, etc. Companies active in producing and recycling critical raw materials are also eligible.

“The framework that we have adopted today gives Member States the option to give State aid in a fast, clear, and predictable way,” said Vestager at the press conference.

The timing of the announcement is strategic, as the President of the European Commission, Ursula von der Leyen, is meeting the President of the US today to discuss a trade agreement that must loosen the tensions arising from the Inflation Reduction Act. Moreover, a worldwide race in subsidy schemes for green technology is ongoing. And Europe joins it at a later stage.

For the ID.4 only

For the automotive industry, the American IRA gives enticing tax credits to locally manufactured low-emission and zero-emission vehicles. The conditions comprise the complete value chain, like battery manufacturing, and the rates of nationally sourced and assembled components intensify over the years.

The VW ID.4 is the only European-rooted electric car benefitting the ruling. It doesn’t apply to commercial vehicles, for which the EU and the US already rubberstamped a bilateral deal.

The revised ruling on European national subsidies isn’t met with enthusiasm all over Europe. On the contrary, smaller member states fear that the big nations with deeper pockets will have the advantage now.

Pressing the pause button

Several carmakers and suppliers recently showed signs of moving infrastructure or diverting their focus to the US. For example, Volkswagen would construct a new factory for the Scout, but the recent ruling could save their plans for a battery plant in Poland.

Audi is reportedly considering an American factory. Two other companies that halted European expansion because of IRA are Tesla and Northvolt, who pressed the pause button on expanding battery plants in Germany.

An analysis from Transport and Environment also indicated that two-thirds of the European battery production was at risk of being relocated. You can read our report on that here.