Turning on subsidy tap for EU green deal a hard sell to smaller countries, critics

By Foo Yun Chee

BRUSSELS (Reuters) - The European Union is poised to turn on its subsidies tap again, this time to counter U.S. clean energy aid, after already doling out billions in the last three years to businesses hit by the COVID-19 pandemic and subsequent war in Ukraine.

However, easing the bloc's state aid rules to grant more money to companies has drawn criticism from smaller EU countries and experts who argue there are less costly and more effective solutions.

The looser rules, which the European Commission wants to apply until the end of 2025, are part of the EU executive's Green Deal Industrial Plan announced on Wednesday, which includes simplifying rules and fast-tracking permits for green projects.

It is designed to counter the U.S. Inflation Reduction Act (IRA) which the EU fears will lure their companies across the Atlantic.

Critics say turning on the subsidies tap would mostly benefit Germany and France, which together accounted for almost 80% of the state aid that has been approved so far under the so-called temporary crisis framework.

"Let's not sacrifice industry in 25 member states so the two richest ones can continue splurging," said an EU diplomat, adding that the potential impact of the IRA on industries such as electric vehicles was debatable anyway due to existing tax credits and import tariffs.

There is a risk of throwing subsidies towards sectors that may inevitably shift their production in a low-carbon world, said Milan Elkerbout, a research fellow and head of the climate policy programme at think tank CEPS.

"Sectors that need vast amounts of clean electricity and clean hydrogen will go where those resources will be cheapest – not always likely to be the EU," he wrote in a research note.

"This doesn't mean that the EU will deindustrialise as specialised downstream industries may well maintain their EU presence as they are part of well-integrated value chains."

Echoing the concerns of smaller EU countries, lobbying group BusinessEurope warned of a subsidy race, saying the issue is more than just money.

"The answer needs to simultaneously address the push factors resulting from higher energy and regulatory costs as well as lengthy permitting procedures, and counter the financial pull factor created by the IRA," BusinessEurope President Fredrik Persson said.

"If the EU fails to deliver on all those aspects, we will lose even more ground on global competitiveness," he said.

(Reporting by Foo Yun Chee;Editing by Elaine Hardcastle)