Director of Europe and Transatlantic Partnerships Max von Thun writes a piece on the EU’s green subsidy response to the Inflation Reduction Act, risking the success of small businesses.

The Biden administration’s Inflation Reduction Act (IRA) has led to something of a panic in Europe, due to concerns that the IRA’s incentives for US manufacturing of clean technologies will disadvantage European businesses.

In response, the European Commission has set out its own “Green Deal Industrial Plan” proposing, among other things, a significant relaxation of the EU’s state aid rules when it comes to investment in green technology.

The rise of green industrial policy, both in Europe and the US, is in principle a good thing.

The sheer urgency of the need to tackle climate change, combined with the inability (or unwillingness) of the private sector to move fast enough, are compelling reasons for a splurge in public investment.

Moreover, the COVID-19 pandemic and Russia’s invasion of Ukraine have demonstrated the vulnerability of our globalised, just-in-time supply chains to sudden shocks, and the subsequent need for less concentrated – and more resilient – production of critical goods, including those needed for the green transition.

Here, as well, there is an obvious role for public investment in accelerating and coordinating this process.

Yet the shift does not come without risks. The biggest criticism of the Commission’s increasingly laissez-faire attitude to state aid is that it undermines the EU’s level playing field.

The worry is that flexible state aid rules primarily benefit the largest EU member states with substantial fiscal firepower – think France and Germany – at the expense of smaller countries, thereby distorting trade and competition within the Single Market.

A recent and oft-cited statistic showed that the Franco-German duo monopolised almost 80% of the €672 billion in state aid granted since March 2022.

These fears are undoubtedly valid and need to be handled carefully by the Commission. But there is a related and potentially greater threat to the Single Market posed by the loosening of the subsidy floodgates.

This is the risk that increased state aid is captured by a narrow subset of dominant firms, leading to weaker competition and increased market concentration within and across member states.

This problem is closely linked with that of the level playing field between member states, as Europe’s biggest companies typically come from its largest countries.

The political nature of subsidies means they are often disproportionately allocated to the very largest firms, who have the resources, administrative know-how and lobbying clout to secure funding, even when there are more deserving recipients elsewhere.

While it is true that investment in the green transition often requires a certain degree of scale, many emerging (as opposed to mature) technologies – from carbon capture to hydrogen – are being driven by startups and SMEs, not incumbents.

A green subsidy splurge that overwhelmingly favours large firms would likely lead to higher costs, less choice and less innovation, and leave us with less competition in the industries of the future. As a recent Commission study put it: “state aid to SMEs is less likely to distort competition and affect trade between Member States”.

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