Europe Competing for the Green Transition

EU Industrial, Climate and Trade Policy Response

Key Recommendations

▪ The Inflation Reduction Act (IRA) of the Biden administration is an exemplary climate investment package: it is a non-bureaucratic, consistent and forward-looking combination of climate, trade and industrial policy aspects. The IRA shows how industrial and climate policy can be interlinked to achieve the necessary momentum for the climate transition of industrial value chains.

▪ German industry is critical of those aspects of the IRA that disadvantage European and other foreign companies. Specifically, these include the tax credits for electric vehicles (EVs), as well as the “Buy American” and local content requirements throughout the IRA

▪ The European Commission should use all available channels to ensure the implementation guidance of the US authorities is as inclusive as possible in order to minimise discrimination against European manufacturers. The EU and the United States should take care to avoid a subsidy race or trade disputes. European retaliatory measures in the form of customs duties or “Buy European” regulations would be counterproductive.

▪ In comparison to the United States, EU industrial policy on climate protection has complicated regulation, long-winded planning and approval procedures and little support for private investment. The measures of the individual member states are also insufficiently harmonised. Due to the strong support provided in the United States, China, Japan and other industrial nations, the EU is lagging behind and falling short of its self-proclaimed goal of being a pioneer in green technologies. The total funding volume for climate measures in the EU currently stands at around 645 billion euros (2021–2027).

▪ The EU must substantially boost its competitiveness on the path to ecological sustainability through rapid regulatory decision-making, lean planning and approval procedures, and administratively simple funding measures for a broad spectrum of industries and technologies within a flexible framework of subsidies. Like the United Sates, the EU should adopt a pragmatic course and introduce tax credits.

Executive Summary

The Inflation Reduction Act (IRA) of the Biden administration is an exemplary climate investment package: it is a non-bureaucratic, consistent and forward-looking combination of climate, trade and industrial policy aspects. In principle, this push in climate policy by the United States is welcomed and has been called for repeatedly by the European Union. However, German industry is critical of those aspects of the IRA that disadvantage European and other foreign companies. These include, in particular, the tax credits for electric vehicles (EVs), as well as the “Buy American” and local content requirements throughout the IRA. These regulations violate the WTO disciplines on anti-discrimination and subsidies. The European Commission should use all available channels to ensure the implementation guidance of the US authorities as inclusive as possible in order to minimise discrimination against European manufacturers. At the same time, the EU and the United States should take care to avoid a subsidy race or trade disputes. Retaliatory measures in the form of custom duties or “Buy European” regulations would be counterproductive

The IRA considerably reduces the production costs of electricity from renewable energy and the necessary equipment and technologies. This could well accelerate the global competition in the production of green technologies and disadvantage Europe and Germany as industrial business locations. With its tax credit programme, the United States has adopted a pragmatic course to promote climatefriendly technologies swiftly and unbureaucratically and it has provided a high degree of security for investments. The comprehensive, holistic approach of the IRA and its uncomplicated, reliable and predictable structure is an unprecedented example of how a consistent and unbureaucratic integration of industrial and climate policy can contribute to achieving the large-scale green transformation of industrial value chains

On a macroeconomic level, investment flows from abroad are increasingly trending towards the United States. We expect to see this particularly in areas with lower taxes and other favourable location factors such as pragmatic and coherent regulation and straightforward access to funding, both of which apply to the IRA. This could pose a serious risk for German and European industry, especially in the hydrogen, renewable energy, sustainable fuels and electromobility sectors The United States also offers other benefits, such as substantially lower energy costs and a large and uniform domestic market

Of course, the incentives for investment in climate protection provided by the IRA also open up additional short-term business opportunities for European manufacturers of specific technologies, which could also benefit Germany and the EU by means of increased exports and business operations in the US.

In comparison to the United States, EU industrial policy on climate protection has complicated regulation, long-winded planning and approval procedures and little support for private investment. The measures of the individual member states are also insufficiently harmonised. The EU must urgently take fundamental decisions to make the legal landscape, funding procedures, subsidy framework and infrastructure better, faster and more effective. Otherwise, in view of the high-volume funding measures in the United States, China, Japan and other industrialised nations, the EU will lag behind, thus jeopardising the competitiveness and appeal of Europe and Germany as an industrial business location. This also stands in the way of the EU’s self-proclaimed goal of being a pioneer in green technologies.

To deal with the massive industrial, economic and geopolitical changes that are already emerging in the course of the transition to net zero, Europe needs a strategy to increase its competitiveness and productivity that is powerful enough to move key levers. This includes cutting red tape, simplifying procedures, accelerating approval procedures, expanding the hydrogen industry and appropriately adjusting the EU subsidy and support framework. The work on the Green Deal Industrial Plan for the NetZero Age must focus on substantially lowering the regulatory obstacles that are impeding a climateneutral European industry. This applies particularly to the rapid expansion of renewable energy and the ramp-up of the hydrogen market.

The announcement of a targeted and time-limited adjustment of the current Temporary Crisis Framework for State Aid (TCF) as well as the planned revision of the General Block Exemption Regulation (GBER) and further development of the IPCEI instrument are certainly steps in the right direction. In addition to simple and predictable support regulations for renewables and industrial decarbonisation, the TCF amendment should also address shortcomings regarding provisions designed to cushion the additional costs caused by the steep increases in natural gas and electricity prices.

Funding should also be consolidated at the EU level to increase and speed up financing processes. Under current programmes, EU funding for the relevant industries amounts to less than 100 billion euros over seven years, or 0.1 percent of GDP per year. The total framework for climate measures stands at around 645 billion euros, or 0.3 percent of economic output. In comparison, green industry funding in the United States and China is about twice as high in relative terms. The EU will need to double its current efforts to achieve its climate targets. This will require targeted support measures under the REPowerEU programme, national subsidies – also in the form of tax relief for investments –and simplified IPCEIs. However, due to practical realities and distributional effects, these steps alone will not be enough to ensure an adequate and comprehensive response. Finding a consensus on broader funding for strategic sovereignty is under discussion in these and other fields. Such a consensus should not involve redistributions funded by the EU Innovation Fund at the expense of industrial decarbonization projects.

A competitive environment for industry cannot be built on subsidies alone. Above and beyond providing the necessary financial incentives, European policy must urgently improve the regulatory environment for investment and business operations in Europe, cut red tape and shift the focus back to securing the international competitiveness of European industry. For example, the current planning and approval procedures for industrial plants, energy generation plants and the required infrastructure in Germany and the EU present high barriers that block a swift scale-up of alternative technologies. The pace of approvals must be stepped up around fourfold to achieve the scale of expansion required to meet the climate targets.

Instead of supporting industry in its green and digital transition and in the diversification of its value chains with practical framework conditions, European legislators have introduced numerous initiatives that contradict this objective and weaken Europe as an industrial business location. These include the revision of the Industrial Emissions Directive (IED), the planned Data Act, the Artificial Intelligence Act and the proposed Corporate Sustainability Due Diligence Directive (CSDDD). Avoiding new red tape and simplifying and harmonising the regulatory environment must form part of the European response to the IRA.

1. The Inflation Reduction Act

The Inflation Reduction Act emerged as a compromise among Senate Democrats after months of wrangling in the United States over the 2.2 trillion US dollars legislative package called Build Back Better. The IRA pared back many of the social spending components in Build Back Better, but maintained substantial spending on climate-related provisions. On 16 August 2022, US President Joe Biden signed the IRA into law. This is expected to raise an estimated 737 billion US dollars in additional budget revenue through a combination of new taxes on corporations, increased tax enforcement and a reform of prescription drug pricing. At the same time, the IRA earmarks around 369 billion US dollars for investment in climate protection and about an additional 64 billion US dollars for health care subsidies under the Affordable Care Act or “Obamacare”. The difference between revenues and expenditures is expected to reduce the budget deficit by an estimated 300 billion US dollars over the next ten years.

1.1. The Climate and Energy Policy Elements of the IRA

For the Biden administration, the IRA is a key element in meeting its climate goals. The act aims to reduce US emissions an additional 10 percentage points by 2030 from an anticipated 30 to 40 percent compared to the 2005 baseline. The Biden administration has made international pledges to cut emissions by 50 to 52 percent, which will require additional measures. The IRA provides approximately 369 billion US dollars over the next ten years for investments in climate protection measures, primarily in the form of tax credits. Such investments include electricity generation from renewable sources and the production of the corresponding plants and equipment, carbon capture and storage (CCS), energy storage, low-emission fuels, hydrogen, battery electric vehicles and critical minerals. According to the US Congressional Budget Office (CBO), 127 billion US dollars will be spent on renewable energy measures, 37 billion US dollars on green industries, 13 billion US dollars on hydrogen, 12.5 billion US dollars on electric vehicles and 10.4 billion US dollars on sustainable fuels. However, it should be noted that these figures are CBO estimates and only serve as a guideline. The actual funding levels may end up being higher or lower and are not capped. Smaller additional funding programmes and initiatives at the state level will mobilise further funds for climate protection. In principle, the push in climate policy by the United States is welcomed and has been called for repeatedly by the European Union.

The Inflation Reduction Act is the first major piece of US climate legislation since the Clean Air Act, which was last amended in 1990. In addition to reducing greenhouse gas emissions, the IRA aims to establish value chains for climate-friendly emerging technologies in the United States. It builds on the current Production Tax Credit (PTC) and Investment Tax Credit (ITC), both of which will be relaunched by the IRA from 2025 onward to become technology-neutral and emissions-based.1 The PTC and ITC apply, among other things, to the production of energy from wind, solar photovoltaics (PV), hydropower and biomass and the construction of the corresponding plants and equipment in the United States. The Clean Hydrogen Production Tax Credit was introduced to stimulate the development of climate-friendly hydrogen. The IRA also prolongs the timeframe and extends the scope of the present Carbon Capture and Sequestration Tax Credit. The Zero-Emission Nuclear Power Production Tax Credit encourages the further use of existing nuclear power plants. Tax credits for investments in manufacturing facilities and the production of renewable energy components (PV, wind, battery storage and inverter technology) are provided through the Advanced Energy Project Credit and the Advanced

Manufacturing Production Credit. A combination of either Production or Investment Tax Credit and Manufacturing Tax Credit is expressly permitted

The Bipartisan Infrastructure Law (BIL) and Inflation Reduction Act (IRA) include 479 billion US dollar in new climate and energy spending

Carbon free energy

Transportation

- Tax credits for investments in solar and storage

- Tax credits for producing wind and nuclear energy

- Tax credits for transmission related to these clean energy projects

- Funding for energy efficiency

- Tax incentive for purchase of electric vehicles

- Funding for EV charging infrastructure

- Carbon capture tax credit for point source capture

- Carbon capture tax credit for direct air capture (DAC)

- Tax credit for production of clean hydrogen

- Funding for hydrogen and DAC hubs

- Funding for sustainable aviation fuels (SAF)

- Funding for advanced manufacturing production

- Investment for advanced industrial facilities

- Agriculture initiatives

- Methane emissions charge (revenue generating)

- Resilience investments (e.g., rural area dev.)

- Greenhouse gas reduction fund

Estimates put the volume of cumulative investments in climate-friendly technologies triggered by the IRA in the next ten years at 3.5 trillion US dollars.2 The US Department of Energy (DoE) estimates that the IRA will cut the GHG emissions of the United States by a further ten percentage points by 2030 compared to 2005.3 This would represent a cut in GHG emissions for the United States of 40 percent compared to the 2005 baseline level, which is still about ten percentage points below the target of 50 percent pledged by the United States in the Paris Agreement.

The cost reductions brought about by the IRA could well accelerate and intensify the global competition to produce green technologies and will certainly place further pressure on global supply chains by increasing demand.

Example: Wind Energy

Wind turbine manufacturers benefit primarily through the IRA’s Advanced Manufacturing Production Credit (AMPC) and the Advanced Energy Project Credit (AEPC). The AMPC provides a tax credit for the production of eligible components. There are specific subsidy rates for each component, which are then multiplied by the rated power of the wind turbine. The rates are 20,000 US dollars per MW for rotor blades, 50,000 US dollars per MW for nacelles, 30,000 US dollars per MW for towers, 20,000 US dollars per MW for fixed offshore platforms and 40,000 US dollars per MW for floating offshore platforms.

2 Princeton University, Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022, August 2022, < https://repeatproject.org/docs/REPEAT_IRA_Prelminary_Report_2022-08-04.pdf>.

3 US Department of Energy, DOE Projects Monumental Emissions Reduction From Inflation Reduction Act, 18. August 2022, <https://www.energy.gov/articles/doe-projects-monumental-emissions-reduction-inflation-reductionact#:~:text=DOE%27s%20analysis%20of%20greenhouse%20gas,of%20nearly%201%2C150%20MMT%20when>

The production of wind turbines can also be eligible for the Advanced Energy Project Credit. This expands the scope of the present Investment Tax Credit to include climate-friendly energy technologies and provides an additional 30 percent credit toward the construction of production facilities

The combination of tax credits under the AMPC and the AEPC and tax credits for climate-friendly power generation (PTC) or the construction of climate-friendly energy projects (ITC) brings the total amount of financial support to a much higher level than is available in the EU.

The huge improvement in economic viability is likely to accelerate the expansion of wind energy and other renewable energies considerably. The steep learning curve expected as a result of the large increase in capacity and the associated reduction in costs will further add to this.

Example: Hydrogen

The ramp-up of the hydrogen industry will also be given a powerful boost by the IRA. Taxpayers can choose between the Production Tax Credit (PTC) as an OPEX-based support tool or the Investment Tax Credit. Tax credits are granted depending on the carbon intensity (“life cycle emissions”) of the hydrogen. The credit under the PTC amounts to up to three US dollars per kg H2, with a planned annual adjustment in line with inflation using 2022 as the base year. Credits can also be traded with third parties. The support will run for ten years and applies to all hydrogen plants on which construction has started before the end of 2032. To qualify for the financial support, the plant must be located in the United States but the hydrogen it produces can also be exported. This tax credit can also be combined with the tax credit for renewable energy. The IRA, once it takes effect, could bring production costs for hydrogen down to 1.2 US dollars per kilo of green hydrogen and down to 0.8 US dollars per kilo for blue hydrogen.4

This will make green hydrogen increasingly more profitable than grey hydrogen and turn the United States into one of the most competitive locations in the world for the production of climate-friendly hydrogen. What is particularly noteworthy, is the IRA’s approach of considering the entire production chain and remaining open about which technologies are used by focusing instead on the carbon intensity of the produced hydrogen The PTC system is much simpler and less bureaucratic than the complicated hydrogen funding landscape in the EU

4 According to estimates of the German National Hydrogen Council: https://www.wasserstoffrat.de/fileadmin/wasserstoffrat/media/Dokumente/2022/5_NWR-Stellungnahme_IRA_final.pdf

Development of hydrogen production costs through the Inflation Reduction Act green

Example: Electromobility

The debate in Germany and the EU has so far focused on the US revision of the tax incentives for electric vehicles (Section 30D Internal Revenue Code). Pursuant to the new regulation, electric vehicles of up to seven tonnes could receive a tax credit of up to 7,500 US dollars. The benefits only apply to sedans with a retail price of up to 55,000 US dollars and SUVs/pick-ups with a retail price of up to 80,000 US dollars (as of 1 January 2023).

Electric vehicles must meet the following requirements to qualify for the tax benefits (initially until 2032):

- The final assembly must take place in the United States. This requirement has been in force since 17 August 2022.

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From 2023 (or as soon as the US Treasury and Internal Revenue Service, IRS, have published their implementation guidance), 40 percent of the critical raw materials in the battery (mined, processed or recycled), such as lithium, must be sourced from the United States or from a country with which the United Sates has a free-trade agreement (FTA). This percentage will increase annually by ten percent until 2027, i.e., up to 50 percent in 2024, 60 percent in 2025, 70 percent in 2026, and will remain at 80 percent from 2027 onwards. From 2025, these critical minerals may no longer be sourced from Russia, China or any other “foreign entity of concern”. Buyers of electric vehicles that meet this requirement receive a tax credit of 3,750 US dollars.

- From 2023 (or as soon as the US Treasury and Internal Revenue Service, IRS, have published their implementation guidance), 50 percent of the value of the battery components of electric vehicles must be produced or assembled in the United States. This percentage will increase to 100 percent by 2029. From 2024, these components may no longer be sourced from Russia, China or any other “foreign entity of concern”. Buyers of electric vehicles that meet this requirement also receive a tax credit of 3,750 US dollars, bringing the maximum amount of available funding to 7,500 US dollars.

The level of the tax credit was previously based on the electric car’s battery capacity. This principle still applies until the implementation guidance is published, presumably in March 2023. Car manufacturers must then certify that their models meet the requirements for critical battery minerals and components. The new regulations on battery minerals and components are intended to make supply chains less reliant on China. The funding for electric vehicles in the United States is expected to total around 7.5 billion US dollars over the next decade. The US authorities have not yet defined the term “free-trade agreement” for the purposes of the tax credit. The EU does not have a free-trade agreement with the United States. However, in a White Paper from 29 December 2022, the US Treasury concluded that the term “free-trade agreement” was not expressly defined either in the IRA or in any other piece of legislation, meaning that the Treasury is free to define the term itself in the implementation guidance 5

An entirely new provision included in the IRA is a tax credit of 4,000 US dollars for used vehicles (“previously-owned clean vehicles”) (Section 25E Internal Revenue Code). Another new addition is a tax credit for commercial vehicles (“commercial clean vehicles”) (Section 45W Internal Revenue Code). Light commercial vehicles are eligible for a tax credit of up to 7,500 US dollars, and heavy-duty commercial vehicles for a tax credit of up to 40,000 US dollars. European producers may also benefit, at least indirectly, from these tax credits as electric vehicles that are commercially leased in the United States are classified as “commercial vehicles”. In contrast to the tax credits for private electric vehicles, eligibility is not based on where the vehicle is finally assembled. The regulations on battery raw materials and components do not apply here either, giving foreign producers a loophole that may have not been intentional on the part of the legislator. Producers must ensure that the leasing agreement does not contain any provisions that could lead the Treasury to classify it as a sale 6

In addition to the direct financial support for electric vehicles, the IRA also reinstates expired tax incentives for charging infrastructure. This tax credit closes the gap for taxpayers regarding the development of charging infrastructure. Along with charging stations, the credit is also available for hydrogen filling stations and other alternative fuel infrastructure. The development of charging infrastructure is also promoted under a different piece of legislation, the Bipartisan Infrastructure Law (BIL), adopted by the Biden administration in November 2021. However, this law focuses primarily on the development of charging infrastructure along motorways and roads.

The IRA supports the ramp-up of alternative fuels with long-term tax credits for clean hydrogen via its Clean Hydrogen Production Tax Credit. Tax credits are also provided for the production of sustainable aviation fuels (SAF Credit) until 2024 and for the production of alternative fuels that reduce emissions by at least 50 percent compared to fossil fuel alternatives (Clean Fuel Production Credit) between 2025 and 2027. The tax credit in both cases amounts to between 1.25 and 1.75 US dollars per gallon of fuel, depending on the respective fuel’s emission reduction potential.

6 IRS, Topic G Frequently Asked Questions About Qualified Commercial Clean Vehicles Credit, 30 December 2022, <https://www.irs.gov/newsroom/topic-g-frequently-asked-questions-about-qualified-commercial-clean-vehicles-credit> (viewed on 24 January 2023).

Example: Battery Raw Materials

The IRA promotes the use of battery raw materials from the United States or partner countries by offering tax credits if the final assembly takes place in the United States and the requirements on the sourcing of battery raw materials and components are met. In addition, mining companies that mine one of the 50 minerals classified by the IRA as “critical” can apply for a credit to cover ten percent of their production costs. To qualify for this credit, the mined mineral must meet a defined degree of purity. The tax credits can also be “stacked” so that a company can receive a credit for both the mining and the refining of the mineral.

Companies that process, refine or recycle critical materials (as defined in Section 7002(a) of the Energy Act 2020) are also eligible for the Advanced Energy Project Credit. The tax credit starts at a base of six percent and can cover up to 30 percent of the qualifying investments in plants and equipment used for such projects and certified by the US Department of Energy. In combination with other legislation, the IRA promotes the establishment of a domestic battery supply chain. For example, the IRA will mobilise up to 500 million US dollars for the increased use of the Defense Production Act (DPA) to strengthen US supply chains for critical minerals used in electric vehicles. This also includes expanding existing mines and developing new mines in the United States. Several companies have already announced their investment plans. The Bipartisan Infrastructure Law (BIL) also authorises more than seven billion US dollars to supply domestic manufacturers with critical minerals and other components required for battery production. No less than 2.8 billion US dollars are going to 20 companies from twelve US states that focus primarily on the production of battery minerals such as lithium, nickel and graphite. The US defence budget also earmarks more than 200 million US dollars up to 2025 to pave the way for a US supply chain for rare earth permanent magnets, also used in electric engines. Financial support is also available for the processing and recycling of these minerals. At 74 million US dollars, the funding volume for ten recycling projects under the BIL is on the lower side. The potential for increased recycling will take some time to manifest, as a sufficient number of electric vehicles – and correspondingly raw materials – will only become available for recycling down down the line. Altogether, the BIL, the CHIPS & Science Act and the IRA will invest more than 135 billion US dollars in setting up the US electric vehicle production landscape, including the sourcing and processing of critical minerals.

The legislative package will only meet the objective of reducing dependencies if the United States lays the foundation required to expand its domestic mining, processing and recycling capacities and if partner countries also invest heavily in the extraction, processing and recycling of the critical minerals required for the production of electric vehicles. In fact, the United States faces similar challenges as Germany and Europe, with long-winded approval procedures, contradicting legislation, local protest, and a shortage of labour and technological expertise. Efforts are underway to reform mining, draw up an action plan for permits, prioritise the list of critical minerals and to strengthen national reserves. The United States has also set up programmes for lithium battery research, a further education initiative in battery technology, the G7 Partnership for Global Infrastructure and Investment, and the Minerals Security Partnership.

The EU and Germany also have a range of financing options, alliances and programmes that could be used to support the mining, processing and recycling of battery minerals. The EU fostered the development of a European battery ecosystem by founding the European Battery Alliance in 2017. Apart from the European Raw Material Alliance, however, there are very few projects, tools and financing programmes that expressly promote the mining, processing and recycling of battery minerals. The EU lacks a joint strategic approach here.

EU programmes that could potentially cover such operations are InvestEU, the Innovation Fund, Horizon Europe, RRF and, for operations abroad, EFSD+. Further options are IPCEI and CEEAG subsidies and the programmes of the development banks EBRD, EIB and e.g. KfW IPEX. The EIB is currently reviewing a potential investment of up to 150 million euros for the converter project of the company Rock Tech in Guben, Brandenburg. These converters are designed to carry out the complete refining process from resin that contains lithium (spodumene) to the lithium hydroxide used in batteries. The two IPCEIs on batteries also provide funding for the extraction, processing, reuse and recycling of minerals. The Federal Ministry of Science and Research has earmarked almost three billion euros for the development of battery cell production until 2031, and the investment volume in Germany under the IPCEIs alone amount to more than 13 billion euros through 2031. Other funding programmes are available in Germany at both the federal and state level.

At the same time, the raw material policy landscape in Europe poses several challenges. Europe has large deposits of critical minerals such as lithium, and because these deposits have so far not been fully explored or charted for battery production purposes, the potential for the discovery of new reserves is high. However, both the German regulatory framework and the lack of acceptance among the local population for mining these deposits encumber such operations. The lengthy approval procedures for new projects often also represent a stumbling block. Furthermore, high energy costs mean that the energy-intensive processing of raw materials has lost its economic appeal. The EU is also in danger of failing to reach its targets for the recycling of battery raw materials due to a shortage of recycling capacities and a shortage of incoming material. This could lead to a situation where companies have to pay a premium for unavailable recycled material. Finally, if three of the lithium salts are going to be classified as toxic at the EU level, the EU’s objective of achieving an integrated battery value chain in Europe will be very hard to reach.

Overall, the approach taken by the United States to promote the mining, processing and recycling of the critical minerals used in batteries in the United States and partner countries seems more targeted and sends out clear signals. The support in the form of tax credits keeps the administration simple and red tape relatively low. The EU, too, should design its overall package using an intelligent mix of instruments and invest on a massive scale in developing its own capacities and the capacities of partner countries to advance the mining, processing and recycling of raw materials used in batteries, while also laying down suitable framework conditions. The announced EU Critical Raw Materials Act is an important step on this path.

1.2. Economic Policy Context

The BDI is highly critical of those aspects of the IRA that disadvantage European and other foreign companies. These include the criteria for tax credits for electric vehicles as well as the “Buy American” and local content requirements in other areas that need to be fulfilled in order to qualify for the full tax credit. These requirements do not send a good signal for transatlantic cooperation and are at odds with the policy of “friendshoring” and Washington’s push to restructure international value chains in a way that accounts for geopolitical challenges

On a macroeconomic level, investment flows from abroad are increasingly trending towards the United States. We can expect to see this particularly in areas with lower taxes and other favourable location factors such as pragmatic and coherent regulations and straightforward access to funding, both of which apply to the IRA. This could pose a serious risk for German and European industry, especially in the hydrogen, renewable energy, sustainable fuels and electric mobility sectors. The United States also offers other benefits, such as substantially lower energy costs and it’s a large and uniform domestic market

On the other hand, the incentives for investment in climate protection provided by the IRA also provide additional short-term business opportunities for European manufacturers of specific technologies, which could also benefit Germany and the EU through exports and business operations in the United States. Indirectly, additional export opportunities will open up in areas that are not being funded, as investments in the required plants and equipment, such as electricity grids, will also be needed

However, in light of the new funding measures in the United States, individual European investment plans in these selected areas are probably already being reviewed. The scale of the redirection of investment triggered by the new US legislation remains to be determined.

1.3. EU Trade Policy and Diplomatic Response

In order to minimise the negative consequences of the IRA for European industry, the US authorities’ guidelines on implementing the legislation should be as favourable as possible. It is thus all the more important that alongside the TTC, a special US-EU Task Force has been set up between the European Commission (von der Leyen’s cabinet) and the White House to negotiate solutions and exemptions for European companies. At the same time, we should be aware that the implementation guidelines will only allow for very limited adjustments. US Members of Congress have made it very clear that they do not want to make any further amendments to the legislative text. On the contrary, voices in the Senate have warned that if the implementation guidelines by the US Treasury is deemed too permissive, legal steps will be taken to restore the “original intent” of the IRA.

The EU and the United States must make every effort to ensure that this dispute does not turn into a trade war. The experiences from the Trump administration have shown us that it is always preferable to talk with rather than about each other. There are no winners in a trade war.

The EU should thus be cautious and considerate in its response. First, the volume of funding under the IRA, 369 billion US dollars over a period of ten years, should be seen in relation to the annual GDP of the United States, which is 23 trillion US dollars. Second, we should be realistic about the scope for action available through the World Trade Organization (WTO). Unfortunately, we cannot expect a swift and genuinely effective decision from the WTO. German industry nonetheless regrets this clear violation of WTO regulations regarding non-discrimination and subsidies, particularly at a time when no fully functional dispute settlement mechanism is in place. The risk of sparking a spiral of protectionism where others respond with similar local content requirements and subsidies is high. To avert such a spiral of WTO non-compliant subsidies to fund green and transition technologies, the EU and the United States, together with Japan, should intensify their work on the Trilateral Initiative to reform the WTO Agreement on Subsidies and Countervailing Measures, the SCM Agreement. The partners should continue their efforts to achieve a comprehensive reform of the SCM Agreement and also address the issue of WTO-compliant funding of green technologies. If the United States is not prepared to actively and constructively advance the Trilateral Initiative, then the EU should press ahead with this initiative together with other major partners.

Imposing retaliatory “Buy European” regulations against the United States – in other words, doing what we have been criticizing for years, not just in the IRA – cannot be the answer. These kind of sourcing quotas are only advisable to maintain strategic sovereignty against autocratic states (see below). The establishment of international markets for sustainable fuels such as green hydrogen and low-carbon fuels could benefit industry and the climate on both sides of the Atlantic. Transatlantic cooperation instead of confrontation should therefore remain the guiding principle in the field of climate protection. Threats to impose European retaliatory measures in the form of customs duties would only further escalate the conflict.

2. Tasks for Industrial Policy in the European Transition

In the EU, investments in technology fields relevant to the transition are being supported by a wide range of national and EU-wide programmes. There is no consensual overview of all the relevant programmes, but there is clarity at least about the programmes at EU level.

2.1. European Funding Measures for the Transition

Under the current legal framework, the EU will provide about 645 billion euros for the years 2021–2027 for climate-related transition tasks, of which slightly less than 100 billion euros (over a period of 7 years) will be channelled into direct support for private investment or innovation in this field (with an EU27 GDP of about 100 trillion euros in the same period). The total amount of EU funding for the transition therefore corresponds to 0.3 percent of economic output per year, of which private investment funding accounts for about 0.1 percent. An overview and estimate of the amount of additional national measures is not available; this sum includes measures under the Recovery and Resilience Facility. For comparison, the Commission estimates that the Inflation Reduction Act provides the equivalent of about 330 billion euros to stimulate private investment (until 2032), while China has adopted about 260 billion euros and Japan about 140 billion euros in stimulus measures.

The main sources of financing are the EU budget under the Medium-Term Financial Framework, the NextGenerationEU programme, and the ETS Innovation Fund. The EU budget and the Green Deal framework fund investments in local public transport, energy production from renewable sources (subprogramme PowerUp), energy efficiency, energy-efficient building refurbishment, decarbonisation of transport and other areas. The lion’s share of the funds is available for public investments, while a smaller part can also be used directly for the promotion of renewable energies and individual technologies. The Horizon Europe programme promotes innovation activities. Other funding instruments are the Connecting Europe programme, the ETS Innovation and Modernisation Fund, the Just Transition Fund, cohesion funds (structural funds), the REPowerEU programme that is to be adopted in the coming months, and the InvestEU programme jointly managed by the European Investment Bank and the European Commission.

Further measures are being planned. At the recommendation of Germany and later also of France, the European Commission announced the Clean Tech Europe Initiative in late November 2022. The European Commission’s proposal for a Green Deal Industrial Plan of 1 February 2023 is also of central importance. This includes a proposal for a Net-Zero Industry Act, a reworked Temporary Crisis and Transition Framework, a Critical Raw Materials Act, a new hydrogen bank and a premium model for green hydrogen. Specifics on the implementation of the Green Deal Industrial Plan and the structure of the announced implementation measures are still largely undefined at present.

The European Commission is striving to mobilise high additional investments in the relevant areas until 2030. The European Commission puts the current gross value added in this sector at around 100 billion euros and expects the global market to reach a volume of 650 billion euros by 2030 (based on IEA analyses). To improve the investment environment, the European Commission intends to reduce regulatory barriers, speed up access to financial support measures, and adopt qualification measures and trade policy measures to build resilient supply chains. The proposals were discussed at the special

European Council meeting of 9 and 10 February and decisions are scheduled to be taken at the regular spring meeting of the Council in late March.

The EU aims to support the clean-tech sectors (batteries, wind power plants, heat pumps, PV plants, electrolysers, CCS technologies) in a more targeted manner to avoid strategic dependencies. It also intends to make planning and approval procedures shorter and more predictable, speed up standardsetting processes in these fields, and use the procurement system to ramp up the market. Further goals are to make the state aid framework more flexible for national funding purposes, such as renewable energy projects, the decarbonisation of industrial production and the compensation of distortion caused by foreign subsidies, through tax relief and higher notification thresholds.

It is not yet possible to estimate the funding volume of the Green Deal Industrial Plan, nor to quantify the extent of possible state aid based on the European Commission’s proposal. Financing from EU funds will mainly be provided by the REPowerEU programme, which the European Commission intends to furnish with 20 billion euros in new funds, 5.4 billion euros from the Brexit adjustment reserve, and up to 225 billion euros of so-far unused credit lines from the national Recovery and Resilience Plans. This would require adaptations to the Member States’ Recovery and Resilience Plans, for which the Commission also presented proposals at the same time. Tax breaks are possible here as well now. In addition, available guarantees amount to the sum of 26.2 billion euros for InvestEU, which is designed to mobilise loans of around 370 billion euros. The European Commission also intends to improve and facilitate the use of the IPCEI toolbox to promote innovative projects in the field of renewable energy. The reallocation of other programme lines could mobilise further investment of up to 17 billion euros. Unused cohesion funds from the previous financial framework (2014–2020) could also be added to this volume. However, a reallocation of funds to the detriment of industrial decarbonisation projects under the EU Innovation Fund would be the wrong way to go.

The additional REPowerEU funds for grants amount to almost 2.8 billion euros each for Italy and Poland, 2.6 billion euros for Spain, 2.4 billion euros for France, 2.1 billion euros for Germany and 1.3 billion euros for Romania. The grants available for the other member states are less than one billion euros. Member states can also reallocate up to five or 7.5 percent of funds from other programmes, which would amount to low single-digit billions for some member states (with Poland at the top of the list with 3.6 billion euros, followed by Italy with 2.1 billion euros). Further funds in the single to tripledigit million range per Member State can be reallocated from unused funds from the Brexit Adjustment Reserve.

In addition, Member States can apply for loans from the Reconstruction and Resilience Facility of the NextGen EU programme. So far, three Member States have applied for the full amount: Greece, Italy and Romania. Three other states have applied for small amounts: Poland (12.1 out of 24.8 billion euros), Portugal (2.7 out of 14.2 billion euros) and Slovenia (0.7 out of 3.2 billion euros). In total, 220 billion euros are still available. Spain has indicated that it will apply for the full 84 billion euros. This would leave 135 billion euros in unused funds; however, these cannot be reallocated, but will remain earmarked for individual countries on the basis of the RRF calculation method. Some Member States do not intend to apply for funds from the credit lines, partly for budgetary reasons, including Germany. This means that the volume of funds that can actually be used is significantly lower. In general, measures can also be financed in combination with other EU funding programmes, such as the Cohesion Fund.

The European Commission has requested the submission of applications for REPowerEU funds by 30 April 2023; late applications can be made subsequently until 31 August 2023. Member States that have not yet submitted applications to use RRF credit lines must do so within 30 days of the REPowerEU legislation coming into force (around mid-March). All grants must be approved by the end of the year, so applications made after April risk not getting through the approval processes in time.

The programme will fund the following kinds of measures:

- Improving the energy infrastructure, particularly for LNG;

- Energy efficiency in buildings, critical energy infrastructure, production and use of biomethane, renewable and non-fossil hydrogen and expansion of renewable energy systems;

- Decarbonisation of industry, including investment in the decarbonisation of steel production, production of wind and solar plants, energy storage units in industrial plants and the reuse of batteries.

The European Commission has also called for the creation of a sovereignty fund to promote investment in areas of strategic sovereignty, which will also include areas related to ecological transformation. A proposal has been announced for June. The European Commission has not yet presented a consensual proposal for financing the fund.

Out of the total EU-wide funds (budget, NextGeneration EU, EU Innovation Fund), around 650 billion euros (grants and loans) are currently earmarked for climate protection measures until 2027. The lion’s share of these funds is budgeted for public investment. Apart from the direct funding programmes for renewable energy systems in the two-digit billion euro range, the only funds providing direct financial support for transition-related private investments until now were the IPCEIs on batteries and hydrogen, that are run through national programmes with available funds in the low two-digit billion range (see below). Other options are the low-cost loans of the InvestEU programme (see Annex for programme description and table of the funding programmes).

In the last three years, the Important Projects of Common European Interest (IPCEIs) have become the main project funding tool in the EU. Several successful IPCEIs have been initiated during this time, attracting substantial private investments. More IPCEIs are currently being initiated and planned. The funding volume from German funds is generally between one and 1.5 billion euros per project. Depending on the number of partners, the volume of funding can be considerable. The number of companies participating in a project varies greatly. The work involved in coordinating the projects on the part of the leading member states is substantial. Joint financing by the EU is legally possible but this option has so far not been used in practice.

There are currently three IPCEIs directly connected to climate protection:

- Battery Cells I/ Summer IPCEI (approved for funding in December 2019) with a total funding volume of 3.25 billion euros. Coordinated by France, with participation from a total of seven member states (Belgium, Germany, Finland, France, Italy, Poland, Sweden) and 16 companies (including five from Germany). The project focuses on commodities and materials, cells and modules for use in cars and other areas, battery systems (incl. software) and the circular economy.

- Battery Cells II/ Autumn IPCEI (European Battery Innovation (EuBatIn) approved for funding in January 2021) with a total funding volume of 2.9 billion euros. Coordinated by Germany, with participation from a total of twelve member states (Belgium, Germany, Finland, France,

Greece, Italy, Croatia, Austria, Poland, Slovakia, Spain and Sweden) and 42 companies (including ten from Germany). This project has a similar focus to the Summer IPCEI.

- In view of the IRA, the BDI believes that further measures (including IPCEIs) are needed in the batteries sector.

- Hydrogen: More than 22 member states and Norway are involved in a total of 400 projects, including 62 from Germany, that focus on integrated projects along the entire hydrogen value chain, particularly on investments in the production of green hydrogen, in hydrogen infrastructure and in the use of hydrogen in industry and in transport. Germany has promised eight billion euros for these projects with the Federal Government participating in the financing with funds from the German Recovery and Resilience Plan to the sum of 1.5 billion euros. The bureaucratic and longwinded implementation process of this IPCEI is unfortunately slowing down urgently needed investment decisions.

2.2. National Programmes also Apply in Many Areas

The total spending of member states from their national Recovery and Resilience Plans is tied to a climate quota. The full amount of funds available to member states has not yet been used as some member states have not yet planned in the credit components, or not in full. The funding of projects as under the IRA is not the focus of most of the plans as this would not be in line with the terms and conditions of the plans and the state aid guidelines.

It should nonetheless be taken into account that specific industries also receive financial support through national, regional, structural and research funding. Various support measures are in place that promote electric vehicles in the EU and in Germany, ranging from purchase incentives to the charging infrastructure. There are also specific funding measures including the high-profile German programme for hydrogen with a volume of over nine billion euros. Germany’s plan to introduce Carbon Contracts for Difference will be the first of its kind, if it is implemented in 2023 as scheduled, but the concept already featured in the EU Industrial Strategy as a generally useful instrument. Further funding measures from national and subnational development banks and subordinate regional authorities have also been set up.

The BDI welcomes the proposal recently presented by the Federal Ministry of Economy and Climate Protection for a directive to help fund climate-neutral production processes in industry through “climate protection agreements” (Förderrichtlinie Klimaschutzverträge = Guidelines on awarding grants/subsidies for Climate Protection Agreements). Working together with the Federal Government, we want to swiftly develop a modern and efficient tool for climate protection and state aid policy that we hope will be put into practice before the end of the year 2023, provided it is approved by the European Commission as compliant with EU state aid regulations. Climate protection agreements between the state and companies distribute the investment risk, thus boosting industrial transformation even in cases where climate-friendly production is not yet profitable. If companies are left to shoulder the investment risk by themselves, they will avoid making certain investments as they do not make economic sense for the individual company even though they are desirable on a political and macroeconomic level. The biggest challenge for industry in making such investment decisions are not just the capital costs but also the substantially higher operating costs of climate-friendly technologies. The operating costs of lowcarbon production processes and fuels must be made more competitive compared to fossil fuels and conventional processes by introducing funding for operating costs alongside the funding for capital expenditure. The funding of operating costs is also essential to drive transformation among small and medium-sized enterprises. The funding guidelines for climate protection agreements that are in the process of being drawn up are complex, which harbours the risk that the negotiation processes within the Federal Government and with the European Commission may lead to undesirable delays in their implementation.

In addition to this, the funding programme for the Decarbonisation of Industry (DDI) has been in effect for some time. This programme of the Federal Ministry of Economy and Climate Protection supports projects in energy-intensive industries through which process-related greenhouse gas emissions that are difficult or impossible to avoid given the current state of technology are reduced as much and as sustainably as possible. The funded projects are required to be highly innovative and to serve as a potential role model for other companies.

Until 2040, the federal budget includes a total of around 50 billion euros for both of these funding programmes (Climate Protection Agreements, Decarbonisation of Industry) with around 2.2 billion euros available for 2023.

2.3. Expand the National Toolbox

It should be reviewed whether the necessary private investments in transformation technologies and energy production (wind, PV, biomass, cable, thermal pumps, etc.) could not be supported more strongly with other instruments that conform to the state aid regulations. Possible instruments here would be different tax regulations for depreciation, such as the special depreciation regulations for investments in the double transformation that were originally proposed by the coalition government, low-interest credit lines from federal and state development banks or the EIB, guarantees, hybrid instruments and similar measures.

2.4. Difference between US and EU Funding and Regulatory Environment

A substantial amount of research would be required to calculate the exact amount of funding available in the EU for activities comparable to those funded by the IRA. Some characteristics nonetheless stand out. In the EU, public sector activities are focused on public investments themselves, primarily in infrastructure, transport and buildings, and on the funding of innovative technologies in the private sector, primarily through IPCEIs. In the field of transformation technologies these include in particular the IPCEIs on batteries and the IPCEI on hydrogen. IPCEI Hydrogen is intended to provide substantial financial support to private investments for the production and application of hydrogen in future, but red tape and long-winded procedures are delaying urgent investment decisions.

The funding divide on the two sides of the Atlantic is particularly distinctive in the field of renewable energy and, in part, the decarbonisation of industry, which is currently only marginally funded in the EU, as well as in alternative fuels. Regarding the hydrogen industry, the programmes of Germany and France alone match the entire volume of US funding. The stumbling block here are regulatory aspects that still need to be clarified in EU legislation.

The incentives to advance electromobility in the EU and Germany consist of a combination of regulations, funding incentives and carbon pricing. In its targeted support measures, the federal government of Germany rightly focuses on two aspects: the demand-driven and fast expansion of charging infrastructure as well as on compensating for the additional costs of buying an electric vehicle with an “environmental bonus”. The federal government currently also promotes electromobility with a lower vehicle tax rate (only for purely battery-powered vehicles) and company car tax rate However, those are much lower incentives than the environmental bonus. In its restructuring of the environmental bonus, the German government has unfortunately decided against sending out a clear, long-term signal and changed the commitments of the preceding government regarding the groups of buyers and vehicles eligible for the purchase grant, the level of funding from 2023 onwards and the expiration of the funding by the end of 2024. If the funds earmarked for the environmental bonus from the Climate and Transformation Fund are exhausted before this date, the purchase grant may even be terminated earlier. The German Climate and Transformation Fund only consist of 2.1 billion euros for 2023 and a commitment of another 500 million euros for 2024, while the budget for 2022 was five billion euros. The United States, on the other hand, has opted for long-term funding, and has set up a funding horizon for tax credits on electric vehicles until 2032. Regarding the further expansion of charging and filling infrastructure for passenger cars and commercial vehicles, the German government has announced funding to the sum of around 6.3 billion euros until 2025. It will provide 1.8 billion euros in grants alone for the tender of the so-called “Germany Network”, a fast-charging grid for electric passenger cars.

Germany and the EU support the ramp-up of green fuels primarily through financial support for production facilities. The EU is planning to establish an Innovation Fund to meet the planned quotas for aviation and the greenhouse gas reduction targets for maritime transport under the EU Green Deal. This fund will be financed through revenues from the EU ETS and fines for violations against the regulations ReFuelEU Aviation and FuelEU Maritime. The structure and scope of the Innovation Fund have not yet been clarified as the negotiations on the legislative proposal are still ongoing. Germany is directly funding the development of production facilities for sustainable aviation fuels (SAF) with around 2.6 billion euros until 2038 through the national Climate and Transformation Fund. Further indirect funding for hydrogen and its derivatives results from the implementation of Germany’s National Hydrogen Strategy. Around 550 million euros are earmarked in the Climate and Transformation Fund for hydrogen and fuel cell applications in transport until 2028. For investors, the environment for investment decisions is less predictable than in the United States due to the cap on German funding and more challenging eligibility requirements combined with unclear regulatory frameworks

Broad funding measures to trigger a swift scale-up of established technologies for climate protection are only possible to a limited extent in the framework of state aid regulations. The targeted and temporary amendment of the current Temporary Crisis Framework (TCF), the revision of the General Block Exemption Regulation and the further development of the IPCEI instrument, as set out in the Green Deal Industrial Plan of 1 February 2023, are therefore the right way to go. The amendment of the TCF must aim to lay down simple and predictable support regulations for renewable energy and industrial decarbonisation and also focus on state aid measures to cushion the cost increases caused by the unusually steep increases in gas and electricity prices.

2.5. Regulatory and Administrative Obstacles Pose Major Problem

Auf A competitive industrial structure cannot be built on subsidies alone. Above and beyond providing the necessary financial incentives, European policy must therefore urgently improve the regulatory environment for investment and business operations in Europe, cut red tape and shift the focus back to securing the international competitiveness of European industry. For example, the current planning and approval procedures for industrial plants, energy production plants and the required infrastructure in Germany and the EU present high barriers that block a swift scale-up of alternative technologies. The pace of approvals must be stepped up around fourfold to achieve the scale of expansion required to meet the climate targets.

As these obstacles are largely a result of substantive rules of procedure within EU legislation, these can only be addressed with a drastic amendment. National planning and approval procedures also need amending. In addition, important regulatory parameters still need to be clarified in several important fields, including the legal definition of different types of hydrogen. The same applies to the sustainability criteria of green fuels. These kinds of regulatory uncertainties could lead to a diversion of investment decisions in favour of the United States. The possible consequences of such a diversion of investment would not just be the negative impact on Europe as an industrial business location but also a shortage of fuels, which would, in turn, cause steep price increases and competitive disadvantages for European air and maritime transport. These developments can be prevented by creating a pragmatic and reliable investment environment at national and at European level.

Instead of supporting industry in its green and digital transition and in the diversification of its value chains with practical framework conditions, the European legislator has introduced numerous initiatives that stand in contradiction to this objective and weaken Europe as an industrial business location:

- The revision of the Industrial Emissions Directive (IED) extends the scope of application of the present directive, tightens the criteria, and makes the procedure more complicated. This is counterproductive for the decarbonisation and transformation of industries that require numerous plant permits. Although European Commission President Ursula von der Leyen did announce plans to accelerate authorisation procedures for green technologies in her speech at the World Economic Forum in Davos, this is not nearly enough. Apart from the danger of creating a hotchpotch of different procedures for different projects and foreseeable difficulties in clearly differentiating green from non-green operations, this does not address the root problem that authorisation procedures in the EU are too complicated and take too long.

- In digital policy, the planned Data Act and the Regulation on Artificial Intelligence will greatly restrict entrepreneurial freedom in the handling of data and business secrets and the use of artificial intelligence at a very early stage. These kind of framework conditions stifle innovation and will lead to investments in the data industry taking place outside of Europe. The same applies to applications that can contribute greatly to environmental and climate protection.

- The proposed Corporate Sustainability Due Diligence Directive (CSDDD) setting down due diligence in supply chains for standards in human rights and the protection of the environment creates unquantifiable legal risks for companies that could encourage them to withdraw from new markets while also making it more difficult to diversify supply chains – not least in the sourcing of raw materials and intermediates that are essential for the green transition of industry but are not available in Europe.

- Numerous other initiatives, particularly related to the environment or taxation (e.g. the revision of the Air Quality Directive and new reporting requirements) curb investment and hold Europe back in the international competition between locations – when in fact, the EU already has stringent regulations in place in these areas and certainly does not have too few regulations.

On the other hand, initiatives such as the “one-in, one-out” approach and the “competitiveness check” do not make it past the announcement stage. As long as the European institutions fail to put the competitiveness of Europe as an industrial business location at the top of the agenda, the EU will lose ground as a location for investment and business and will lose appeal in international comparison. Avoiding new red tape and simplifying and harmonising the regulatory environment must form part of the European response to the IRA.

Funding for Climate-Related Measures in the EU

The Multiannual Financial Framework (MFF) for the period 2021 to 2007 and the NextGenerationEU recovery package were adopted in late 2020 to support the recovery from the Covid-19 crisis and the long-term priorities of the EU in various policy areas. The total volume of the measures amounts to 1,824 billion euros. Funds of around 645 billion euros are available for climate measures from the various sources (budget, NextGen, REPowerEU, Innovation Fund). Less than 100 billion euros have currently been earmarked to promote private investment through funding measures in renewable energy and IPCEIs (batteries, hydrogen).

Thirty percent of all funds under the MFF (1,074 billion euros) are intended to be spent on climaterelated measures; that corresponds to 322 billion euros. The centrepiece of NextGenerationEU (750 billion euros) is the Recovery and Resilience Fund (RRF) with a volume of 672.5 billion euros. At least 37 percent of the expenditures planned by member states for reforms and public investment with these funds must be used for the ecological transition. That corresponds to around 249 billion euros.

Funding for climate-related measures in the EU

The REPowerEU package was set up in response to the Russian war of aggression in the Ukraine to boost the diversification of the energy supply and accelerate the transition to a sustainable energy system. It is financed through reallocations from already existing programmes. The ETS Innovation Fund, with a total volume of around 38 billion euros, provides financial support to corporate projects in energy-intensive industries, renewable energy and energy storage.

Multiannual Financial Framework of the European Union, 2021 to 2027

The EU’s multiannual financial framework (Council Regulation 2020/2093, 17 December 2020) has a volume of around 1,100 billion euros and forms the basis of the EU annual budgets for the years 2021 to 2027. The multiannual financial framework includes almost 40 spending programmes focusing on growth, innovation and economic cohesion. The climate spending target for the EU budget was increased from 20 to 30 percent, bringing up the volume of funds available for climate measures to a good 320 billion euros. The measures support the common climate targets of reducing greenhouse gas emissions by 55 percent by 2030 and reaching climate neutrality by 2050.

Total spending is divided into seven policy areas:

- Single market, innovation and digital

- Cohesion, resilience and values

- Natural resources and environment

- Migration and border management

- Security and defence

- Neighbourhood and the world

- European public administration

Allocation of funds for the individual policy areas:

NextGenerationEU

In response to the profound economic and social impact of the Covid pandemic, the European Union set up the NextGenerationEU (NGEU) as a temporary programme with a volume of 750 billion euros.

The NGEU package comprises several components. The centrepiece is the Recovery and Resilience Facility (RRF) with 672.5 billion euros. Of these funds, 312.5 billion euros are earmarked for grants that member states do not have to pay back to the EU and 360 billion euros are available in the form of loans.

The remaining 77.5 billion euros of the total volume of 750 billion euros are being used to stock up other programmes that are already in place, such as the research programme Horizon Europe, the Just Transition Fund and rural development programmes.

All member states had to submit a Recovery and Resilience Plan to the European Commission to access the funds of the RRF. At least 37 percent of the expenditures planned by member states for reforms and public investment with these funds should be used for the ecological transition. That corresponds to around 249 billion euros. In total, more than 300 billion euros are available.

NextGenerationEU – Distribution of funds per programme component

Just

Total

REPower EU

11

In response to Russian’s invasion of the Ukraine, the European Commission set up the comprehensive package of measures REPowerEU in May 2022 to reform the European energy system. The objective of the package is to strengthen the strategic autonomy of the EU by diversifying its energy supply and accelerating the transition to a sustainable energy system. The plan is based on measures of the European Commission’s Fit for 55 package.

To implement the programme, member states will add a new REPower-EU chapter to their national recovery and resilience plans under NextGenerationEU to finance important investments and reforms that contribute to meeting the targets of REPowerEU.

REPowerEU is not financed through new funds but through reallocations from other funds. Member states can use the remaining funds from RRF loans (225 billion euros), and an additional 20 billion euros will be made available in the form of RRF grants. These additional funds will be taken to 60 percent from the ETS Innovation Fund and to 40 percent from early sales of the ETS certificates of member states. However, taking into account the loans that can still be applied for until August 2023, the sum of the remaining funds is actually likely to be much lower than 225 billion euros, as Spain, for example, intends to take full advantage of this loan. The volume of remaining funds is more likely to be between 100 and 130 billion euros.

To support SMEs and financially weaker households, member states will also be allowed to use remaining funds from the cohesion fund of the MFF 2014 to 2020 and to make voluntary reallocations from the Brexit Adjustment Reserve.

The final adoption of the proposals by the Council and the Parliament is scheduled for February 2023.

Financing of REPowerEU through reallocations from existing programmes

Source of financing Sum

Unused loans from RRF 225 billion euros

ETS Innovation Fund (60 %) 20 billion euros

ETS certificates (40 %)

Funds from the Cohesion Fund of the MFF 2014–2020 Volume not determinable as no direct reallocation

Optional reallocations from the Brexit Adjustment Reserve

5 4 billion euros

Total 250 4 billion euros

EU Innovation Fund

The Innovation Fund is a financing instrument set up to enable the EU to meet its obligations under the Paris Convention and to create a climate-neutral Europe by 2050. The fund provides financial support to companies that are carrying out large-scale projects in energy-intensive industries, renewable energy, energy storage, CCS and CCU. To qualify, the projects must lead to a substantial reduction in emissions. The financial support is provided in the form of grants.

The Innovation Fund will be financed by the auction of 450 million certificates from 2020 to 2030 from the EU Emissions Trading System (EU-ETS) and unused funds from the NER300 programme. For the period 2020 to 2030 the volume of the fund is planned to be around 38 billion euros depending on the carbon price.