This week, the European Commission published a report analysing what needs to be done to promote the development and deployment of clean technologies in Europe. It was conducted at the request of national governments, who are anxious that the US Inflation Reduction Act (IRA) adopted last year is going to lure cleantech businesses from the EU to the US with its massive subsidies in the form of tax exemptions and rebates.

The Commission has already adopted a raft of policy responses to calm these fears, including the Net Zero Industry Act put forward in February and a European Sovereignty Fund in September 2022. Both are intended to compete directly with the IRA. European businesses say it’s not enough.

It is difficult to tell whether the concern from EU businesses is genuine, or if they see an opportunity to swing policy and funding in their direction by harnessing panic over the IRA. It is also difficult to compare the funding available from Brussels and Washington because, in many ways, it is apples and oranges. The $369bn (€337bn) available as part of the IRA’s climate and industry initiative in the form of subsidies and tax incentives has grabbed headlines, with Goldman Sachs estimating that it translates to more than $1tn in investment when combined with private finance. But this is money spread out over the next seven years, and it is a cap. It is not known if companies will take full advantage of the subsidies available. The money comes from financial incentives such as assigned financial envelopes for specific technologies and infrastructure, tax credits and loans. The EU, on the other hand, has prioritised regulations such as carbon pricing, binding targets, performance standards, sectoral regulation and grants.

IRA vs EU: where’s the money?

According to the report published on Tuesday by the Commission, in the seven-year period from 2021 to 2027 (the EU’s current financial planning period) 32.6% of the total EU budget, or €578bn, will go toward climate action. That is in addition to national subsidies and tax credits granted by EU member states. In the past seven months alone, the Commission has approved such national schemes with a total budget of €6.9bn for investment in clean technologies, and it is currently assessing more, according to the report.

The problem, however, is that the EU climate funding is spread over many different envelopes in the budget, it can be difficult to find, and the amount of this money that is going to new, clean technologies is not clear.

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“In the EU we have many envelopes of money but within those envelopes, it’s extremely hard to figure out what’s going to cleantech,” says Jules Besnainou, executive director of Cleantech for Europe, an association launched in 2021 to bring together EU cleantech businesses and policymakers.

“Yes, there’s a certain amount dedicated to climate [action] but EU auditors have said this is very fuzzy. A large amount is going to solar and wind. We believe the share going to next-generation [clean energy] technologies is very low right now. And that’s where it’s going to be harder to compete with the US."

Besnainou adds: “What we would say is there are plenty of huge pots of money available in the EU that could get you to €1tn [i.e. equivalent to the Goldman Sachs estimate for the impact of the IRA when, like that figure, leveraged with private financing], but the allocation of that [money] to scale up green technologies just isn’t there.”

In other words, the EU probably has just as much money available in clean energy subsidies as the IRA, even without the European Sovereignty Fund. The problem is that it isn’t as targeted and it isn’t as certain. The EU has stayed wedded to the idea of 'technological neutrality', with the Commission insisting it will not pick winners or losers but let the market decide where to invest. Since the market tends to favour established industries, however, this has left innovative technologies in a less certain place. This becomes a particular problem for scaling up innovation, where the EU has already long lagged the US. In 2021, even before the IRA was announced, 53% of global cleantech venture capital went to US companies, compared to 14% for cleantech companies in the EU.

“The IRA is a massive subsidy scheme, but it’s also extremely simple and transparent, with a very clear list of targeted technologies,” says Besnainou. “The investment signal is extremely strong, whereas in the EU the carrots [financing] are often less obvious than the sticks [regulation]. If you’re a European entrepreneur and you have 30-40 employees, trying to scale up will take you two of those employees to figure the regulations out, and another two to get public funding.”

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The EU has traditionally pursued a more regulation-intensive approach, which businesses have long bristled against; "just give us money", they’ve said. That is what’s happening in the US, where gridlock and dysfunction in Congress (where only spending bills can get the 60% of votes needed in the Senate) has meant that even with the IRA, significant climate regulation has not been passed.

“Let’s remember that the US did its big subsidy package because it didn’t have the votes for actual regulation,” notes Besnainou. “In the EU, we have the advantage of having both. You do need targets in addition to financing. And anyway, the EU does not have competence over taxation. Even if we wanted to replicate what the US did, we couldn’t. We have to find our own way of doing it.”

Cleantech businesses operating in both Europe and the US understand this. Eric Dresselhuys, CEO of the US energy storage company ESS, which is involved in building Europe’s largest clean energy hub in Germany, told Energy Monitor that the key reason the IRA offers a more attractive investment landscape is because of its certainty, not because of the amount of money.

“There’s more predictability with the IRA,” he said. “Having clarity on what these funding mechanisms are for will accelerate and spark action – because if you know you are eligible for a 30–40% reduction in capital costs from the start, it lowers the hurdle. There’s a lot of EU money sloshing around for very early days innovation funding – the EU has two times the number of patents in innovation as the US. But where is the scale-up money later on to compete with established players?”

Besnainou agrees: “The EU is fantastic on the innovation side in terms of funding. Horizon Europe [the EU’s flagship research programme] was a game-changer. But then you have a big gap. There are very few instruments that can scale these technologies. Once they’re scaled up we do have plenty of funding to deploy them. But it’s that middle part that’s missing and that’s why we keep losing industries. We don’t have the support the IRA provides.”

Diagnosing the problem

The Commission's report highlights this gap and floats possible solutions. “The US approach to support the green transition is based on direct and indirect subsidies to create a domestic manufacturing ecosystem of low-carbon technologies,” the report notes.

“Although analysis to date points to a rapid acceleration of cleantech investments in the US, it is difficult at this stage to fully assess the impact of the IRA on the EU economy, and on the longer-term development of the EU's clean technology industrial base. This is also due to the fact that sufficient data on support disbursed under the IRA is not yet available. Investment decisions may also take time to materialise into actual projects.”

Besnainou says the need to better target funding is starting to become apparent to EU policymakers and can be seen in the Net Zero Industry Act’s first proposed article, which makes it clear that the purpose is to scale up the manufacturing of cleantech. “The innovation fund, for instance, 99% of it still goes to large incumbents instead of scaling up newcomers.”

The central question is whether the IRA should be feared, or welcomed. Besnainou says he welcomes the IRA’s stimulation of a conversation in Europe about better financing for cleantech. However, at the same time, it is not realistic to think that the US can leapfrog Europe’s strong lead on climate action overnight simply by throwing buckets of money at cleantech.

“The IRA is a strong incentive for both partners and competitors to react – it should be a race to the top,” he says. “Once you start with something like that it creates a very positive dynamic. But you need to make sure it stays a race to the top and not a race to the bottom in terms of subsidies. Yes, it’s a challenge for the EU because there will be a strong pull for companies to go to the US. [But] that’s always been the case. So let’s finally do something about it.”