EU’s Initiative Is a Potential Game Changer in Green Tech Quest

In the last three years, the European economy has been impacted by two significant events—the Covid-19 pandemic and the ongoing war in Ukraine. This has caused supply chain and trade disruption, stalling of existing contracts and projects, and increased energy prices and inflation. To stabilize markets and support impacted sectors, the European Commission took the decision in March 2022 to adopt the Temporary Crisis Framework, or TCF, to loosen existing state aid rules.

One year later, the commission acted again and amended the TCF into the Temporary Crisis and Transition Framework, the TCTF, to accelerate the roll-out of renewable energy and decarbonization by helping to speed up investment and financing for clean tech production in Europe. The TCTF will bring simpler, faster, and easier calculations and procedures, and accelerated approvals for state aid.

Competition from US and China

The move is partly in response to President Joe Biden’s $370 billion Inflation Reduction Act, signed in August 2022. The IRA prioritizes projects repurposing retired fossil fuel infrastructure and incentivizes foreign direct investment in the US through subsidies in the form of tax credits that are conditional on production being US-based, and on sourcing inputs from North America.

The TCTF also was a response to China’s Five-Year Plan, officially endorsed by the ruling National People’s Congress in March 2021, to make manufacturing a priority and subsidize clean tech innovation, accompanied by a $280 billion pipeline of clean technology investments.

Multinational enterprises voiced their concerns about the impact on the investment attractiveness of the EU. Numerous companies are considering moving operations and planned investments state-side, with some already taking the leap.

In response to the incentives implicit in the IRA, in February this year the European Commission announced its “Green Deal Industrial Plan for the Net-Zero Age” designed to scale up EU net-zero manufacturing capacities. It focuses on four main pillars: simplified regulatory environment, funding, skills, and trade. The commission has proposed amending national funding and state aid rules via the TCTF.

Potential Funding Opportunities

The TCTF is a supranational document without legal powers, but it provides guidelines for EU member states on how to shape national legislation. Consequently, TCTF implementation will vary from country to country.

Aid delivered through the TCTF can take the form of direct grants, tax advantages, subsidized interest rates, guarantees, and repayable advances, with levels based on factors such as company size and aid instrument type.

Major TCTF amendments include aid for:

Accelerating rollout of renewable energy and energy storage, introducing investment and operational aid for energy production from renewable sources (solar, geothermal, wind, biomass, hydrogen) as well as aid for investments in electricity and thermal storage. Up to 100% is available through a competitive bidding process, and up to 45% if determined by the EU member state. Aid will be granted under a notified scheme and is directed at energy producers.
Decarbonizing industrial production processes, supporting reduction of direct greenhouse gas emissions by at least 40% and of energy consumption by at least 20%. Eligible activities include electrification, use of green hydrogen and hydrogen-derivative fuels, and increasing energy efficiency. The allowable amount of aid should not exceed 40% of the eligible cost and not exceed 200 million euros ($218 million). The aid will be granted under a notified scheme and is directed at industrial players.
Accelerating investments in strategic sectors, including battery production, solar panels, wind turbines, heat-pumps, electrolyzers, carbon capture and storage equipment (and production of key components for such equipment), and production or recovery of related critical raw materials. The aid can be granted under a notified scheme in the amount of up to 350 million euros, and the aid intensity is up to 35% of eligible costs (region-dependent) and directed at green tech manufacturers.

On the last point, aid can be granted individually, as well as under a scheme, allowing for higher aid intensities on a case-by-case basis. Beneficiaries also need to prove that without the aid, investments would be diverted outside the European Economic Area. Timing-wise, aid must be granted by Dec. 31, 2025.

Challenges Ahead

Following the TCTF, power lies with the EU member states to introduce new aid measures. EU member states are required to leverage existing funds and adapt national recovery plans such as the Recovery and Resilience Facility. It is yet to be seen if, when, and how, EU member states will follow the proposals set out in the TCTF communication and how national funding programs will develop.

The OECD’s BEPS 2.0 Pillar Two rules, in effect from Dec. 31, will establish a global minimum tax rate of 15% and might pose another challenge for TCTF implementation. Where tax incentives reduce effective tax rates below 15%, top-up taxes may be due, essentially negating the impact of tax incentives.

Under the financial accounting standards, cash grants and refundable tax credits are treated as income and therefore not impacted. Similarly, normal rules in the EU for trade (for example, origin and duties) and energy (for example, excises or the carbon border adjustment mechanism) still apply, and a mix of the carrot and the stick may accelerate the desired effect.

Next Steps

These developments should open the door for new financing opportunities for innovators, especially in manufacturing. While a lot remains to be determined, it’s worthwhile for tax teams to monitor developments ahead.

The TCTF should be considered among other national funding programs and the wider EU funding landscape, including Important Projects of Common European Interest, Horizon Europe, and the Innovation Fund.

In short, the EU has developed a new more flexible state aid framework to support net-zero innovation and help jurisdictions stay competitive. It should act as a trigger for companies to review business and tax strategies in line with government agendas and the funding landscape at a private, national and EU level.

Mikhail Alekseev, Robert Esik and Hein Brinkmann of the EY organization contributed to this article.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alexandra Loran-Wisznievski is EY Europe, Middle East, India and Africa tax deputy leader and Simon Moger is EY EMEIA global location services and incentives leader. The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.