EU green spending puts pressure on UK to act

EC president Ursula von der Leyen said Europe had a “once-in-a-generation opportunity… to secure the EU’s lead in the fast-growing net zero technology sector” through the plan.

Proposals include a previously announced measure to simplify regulations so that green projects can be developed more quickly, faster access to funding, support for skills development and measures for open trade to “support resilient supply chains”.

The ‘temporary crisis framework’ adopted in the wake of the Covid-19 pandemic to support industry across the bloc will morph into the ‘temporary state aid crisis and transition framework’ (TCTF), which will allow for state aid rules to be circumvented until the end of 2025 to support green projects.

TCTF-funded schemes will have more flexible ceilings than those operating under current rules, allowing them to “match the aid received for similar projects by competitors located outside of the EU”, it said.

The commission will make around €225bn (£200bn) of as-yet unclaimed loans from the EU’s €800bn post-pandemic recovery fund available to spend.

It argued that initiatives elsewhere could have “undesired collateral effects” on the bloc’s green tech sector. China’s subsidies are twice as high as those in the EU, relative to GDP, it said. The US, meanwhile, is mobilising $360bn (£300bn) by 2032 through the Inflation Reduction Act, while Japan is planning to raise ¥20tn (£125bn) in green transition bonds.

In the medium term, the commission plans to set up a European Sovereignty Fund to back projects and will accelerate plans for a European Capital Markets Union, which would facilitate more continent-wide bond issuance and reduce reliance on bank debt.

But loosening state aid rules to allow for bigger subsidies is not without controversy in a bloc that was built around removing trade barriers.

“The idea of jumping to a sort of race to the bottom on state aid is not to our liking, because one of the most successful things in the EU since 1957 is the internal market,” Dutch prime minister Mark Rutte told the Financial Times.

 

Need for speed

The EU was already in the process of reviewing the General Block Exemption Regulation (GBER), which allows national governments to lawfully provide state aid without prior permission from the European Commission, with the aim of supporting green projects more effectively.

Yet the billions on offer under the US’s Inflation Reduction Act proved to be “a catalyst” for the bloc to act quickly, said Andrew Finfer, a lawyer at Dentons.

A Net-Zero Industry Act and a Critical Raw Materials Act (aimed at securing the supply of important transitional materials, such as rare earth metals) will both be introduced in the second quarter of this year.

Until then, “we are some way off being able to quantify the upside” for Europe’s industrials sector, UBS analysts said in a note.

The Swiss bank nonetheless identified industrial catalyst makers Clariant (CH:CLN) and Johnson Matthey (JMAT), batteries chemicals producers BASF (DE:BAS) and Umicore (BE:UMI), polysilicon producer Wacker (DH:WCE)  and hydrogen providers Air Liquide (FR:AI) and Linde (US:LIN) as likely beneficiaries. More broadly, makers of a raft of green energy technologies including batteries, windmills, heat pumps, electrolysers and carbon capture and storage systems stand to benefit, it said. 

The battery and electric vehicle sector is the biggest point of contention between the EU and the US, according to the Rystad Energy consultancy. The Inflation Reduction Act allocated $23bn to transport initiatives, with tax incentives of up to $7,500 per vehicle on offer for cars whose batteries were either made or assembled in North America.  

Even with its new raft of measures, the EU “finds itself between China’s existing market dominance and the US’s fiscal firepower,” said Lars Nitter Havro, a clean tech senior analyst at Rystad.

Its main challenges are developing an entire battery supply chain and fending off competition from Chinese competitors. Contemporary Amperex Technology, a Chinese battery maker with a global market share of around 35 per cent, announced plans to open its second European plant last August – a 100 gigawatt (GW), €7.3bn plant in Debrecen, Hungary.

Europe’s new industrial plan was welcomed by its carmakers, however. Industry body ACEA said a strong response to the Inflation Reduction Act had been needed to prevent “investment leakage”.

The biggest loser from the new deal looks set to be the UK’s green tech sector, investment bank Berenberg said.

 

Odd one out

“Stuck in the middle between two large economies that are planning to subsidise their green sectors, the UK will find its own green industry’s relative trade positions weakened in both regions,” the bank’s analysts said in a note.

“And this is at a time when production levels in its green transformation sectors, such as automotive, have already fallen by more than 50 per cent since 2016.”

Mike Hawes, chief executive of the UK’s car industry body, the Society of Motor Manufacturers and Traders, said countries should avoid a subsidies “arms race” that distorts markets.

“Recent measures in the US with its Inflation Reduction Act, China and now the EU could put the UK at a disadvantage. We need a framework and pitch that allows us to compete and delivers sustainable projects, long-term economic growth and rapid decarbonisation,” he said.

The EU was always likely to engage in some form of policy response to the US’s subsidy push, in a bid to prevent R&D investment being siphoned off to the US, said prof Michael Gasiorek, co-director at the Centre for Inclusive Trade and a director of the UK Trade Policy Observatory.

However, he warned of a growing risk of “competitive protectionist subsidy policies by country, which are ultimately going to be welfare-decreasing”.

“You’re protecting less efficient industries, at the expense of importing more efficient industries,” he said.

He acknowledged that the moves by the EU and the US leave the UK “in a difficult situation”.

Chancellor Jeremy Hunt highlighted green industry as one of five growth sectors that he expects to use “Brexit freedoms” to support – the others being digital technology, life sciences, financial services and advanced manufacturing.

In a speech setting out his growth plan last month, he described the UK as a “world leader” in green energy and said there was a global market opportunity worth £1tn to pursue between now and 2030. The plan was light on detail, which he said would have to “wait for budgets and autumn statements in the years ahead”.

Richard Austin, head of manufacturing at accountancy firm BDO, argued something would need to be done in next month’s Budget if the UK is to compete on a level playing field with peers.

The country has already lost ground in the development of EV battery technology, he said, but it still has some advantages in wind power expertise and has an opportunity to “take a lead” on developing hydrogen as a fuel source.

“Unless we are seen as being a competitive economy… I think we are going to have a bit of a struggle on our hands on that as well.”

One challenge will be the limited headroom for giveaways from the chancellor in light of the constrained state of the UK’s public finances. Another will be the relatively small size of its end market when compared with the EU or the US. A third, according to Gasiorek, is its reduced standing on the world stage.

The prospect of a reciprocal agreement with the EU, for instance, seems unlikely given relations are “cordial at best” and the UK’s stated intention to tread its own path.

“I think the domestic and international relationships, and international policy environment is increasingly challenging for the UK as a sort of mid-sized industrial power,” he said.