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Why Europe is struggling to compete with the US on green subsidies

As the world’s main trading blocs decarbonise, there is a race to attract green investment.

The US rolled out the Inflation Reduction Act, $369bn of largesse that has left Europe scrambling to work out a rival plan.

As officials formulated a response, one of the region’s most totemic businesses made a bombshell announcement.

Volkswagen, the continent’s largest carmaker, will reorder its priorities, choosing a North American battery plant ahead of one in eastern Europe.

The reason? It estimates it could receive $10bn in subsidies and tax breaks over five years, the Financial Times reported this week.

The sum is vast.

When Swedish battery start-up Northvolt set up its first plant, it received a grant for just $22mn (a separate $350mn loan from the European Investment Bank was repayable with interest). Yet it believes it can get $8bn for a full-size US facility.

This is existential. Fear courses through Brussels that the region will bleed talent and technology to its North American rival.

Its answer is to bend even further EU state aid rules, allowing countries to pay whatever it takes to match US incentives.

Several things are worth noting.

First, companies must beware abandoning strategic sense in favour of chasing the largest pot, whichever flag it bears.

VW says it would have opened a North American factory anyway to help its revived Scout brand; this merely moved the project up the list.

Others have been less canny.

UK start-up Arrival ditched an electric delivery van for Europe and its UK plant in favour of an American one, arguing it could get better subsidies. The move set the revenue-less business back two years, triggering further job cuts.

Second, matching the US dollar-for-dollar is not enough.

The structure of the US tax breaks, split between federal and state, make it comparatively easy for VW to calculate the $10bn figure.

Yet Europe’s current system is a patchwork that companies complain often requires something approaching Kremlinology to unlock.

Allowing EU countries to fork out eye-catching sums also favours richer nations. Germany’s economy can bear the cost of matching the huge payments needed to outbid America. Bulgaria’s may not.

Finally, consider the end game.

The US is doing far more than simply trying to prevent its historic auto industry from being hollowed out: It is trying to build a walled garden of clean energy expertise that will provide energy security in an increasingly fractious world.

In the battery arena, its aim is to rebuff China, which missed the boat on traditional engines and sees electric vehicles as its great hope for conquering the auto industry.

But it places Europe in a bind.

Europe cannot ban Chinese cars, much as some auto executives might like it to. VW makes most of its money from China. One-fifth of Mercedes-Benz shares are owned by Chinese companies.

It also cannot ban Chinese technology. Already the largest number of battery factories planned in the region use China’s systems.

What then?

Europe may be able to stem the bleeding but its plan for strategic security is not clear.

There is a proposal that 85 per cent of batteries sold in the region are made locally.

But there is nothing about local content requirements and no suggestion of a US-style blacklisting of technology from rival nations.

Until there is, the wall around the garden will remain riddled with holes.

Read the full article here

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