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EU to relax curbs on tax credits in response to US green subsidies

The EU plans to retaliate against the $369 billion US Inflation Reduction Act by proposing softer state aid rules on tax breaks for green investments.

According to a draft plan seen by the Financial Times, the European Commission will further loosen rules to support investment in new production capacity in green sectors, including through the creation of tax incentives. Some of the €800bn in its NextGenerationEU Covid-19 recovery fund could also be redirected towards tax credits, according to the project.

The proposed measures, which have yet to be finalized and are subject to change, are part of Brussels’ comprehensive plan to respond to US legislation, which has sparked a flood of warnings that companies will move from the EU to the US to take advantage of subsidies.

By easing restrictions on tax credits, the commission is trying to emulate one of the IRA’s most lauded benefits, the ease with which companies can access federal tax credits. But in doing so, it veers into disputed territory within the EU because rich countries like Germany will find it much easier to hand out fiscal stimulus to transition to a greener economy than their financially constrained counterparts to the south.

A spokesman said the commission would not comment on the leaked documents.

Member states disagree on whether to allow relaxed rules and for how long. Some southern countries warn that they risk breaking the level playing field by disproportionately helping wealthy countries invest in their companies.

The draft proposal says that a temporary crisis and transition framework would allow increased assistance to more mature technologies and renewables beyond those already defined by current EU renewable energy laws, including green hydrogen and biofuels.

“The provisions on tax incentives will allow Member States to align their national fiscal incentives with the overall scheme and thereby provide greater transparency and predictability for businesses in the EU,” it added.

Brussels also intends to simplify and speed up the approval of projects of common European interest involving several countries, and by 2030 will set common targets for the creation of “green” industrial capacities.

In addition, it would increase the threshold above which the commission scrutinizes transactions under the bloc exemption state aid regime. This will make it easier for governments to subsidize hydrogen, carbon capture, zero-emission vehicles and energy efficiency measures.

Brussels estimates that by 2030 industry should invest 170 billion euros in manufacturing plants to produce solar, wind, batteries, heat pumps and clean hydrogen.

The proposal will be published on Wednesday after discussion in the commission, and on Monday it was still discussed internally.

Cleantech industries have criticized the EU’s funding regime for being too complicated to access the funding needed to expand their business, saying the US tax break was the simpler and more attractive system.

The document ties together several major legislative reforms already planned, such as an overhaul of the EU electricity market and a law to increase domestic production of raw materials such as cobalt and lithium, which are key elements for clean energy technologies.

The project follows a letter from Margrethe Vestager, the EU’s Executive Vice President who moderated the debate, in which she acknowledged that not all countries are in the same position to provide state aid. She wrote that Germany and France accounted for 77% of aid provided under looser competition rules introduced during the pandemic.

The draft proposal says Brussels intends to set up a European Sovereignty Fund by the middle of this year to allow all 27 governments to fund state aid.

“To avoid the fragmentation of the single market due to different levels of national support – and different opportunities for providing such support – adequate funding at the EU level is also needed to facilitate the transition to a green economy across the union,” the message says.

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