A destructive competition for subsidies to attract green investment is currently at risk among the world’s top economies. This could erode the fair playing field in international trade, contribute to geoeconomic dispersion, and entail significant financial consequences. Ultimately, it would decrease the effectiveness and jeopardize the rules-based global trading system that has benefited the global economy for many years.
Richer countries with more financial resources may win a subsidy race even if the global economy is in worse shape. In a more protectionist world, emerging markets and developing economies with limited fiscal resources would find it particularly challenging to compete for investments with advanced economies, which could also obstruct knowledge transfer to these countries. The cost of the switch to a greener economy might ultimately increase.
The Green Deal in Europe
The Commission’s January proposal of a Green Deal industrial strategy, some of which have already been enacted, is currently being discussed by the European Union. To increase the amount of subsidies given to clean-tech companies, the plan temporarily relaxes European competition laws. This was, in part, a reaction to the US Inflation Reduction Act’s provisions, which the EU thinks will put its firms at a cost disadvantage and cause them to leave for the nation with the biggest tax breaks or subsidies.
Policymakers could take several actions as they create the EU’s Green Deal to maximize its advantages and minimize its drawbacks.
The EU should keep collaborating with other nations to create a universal, inclusive multilateral strategy to halt climate change. This might manifest as a global carbon price floor or a climate club. It might also take the shape of a deal on how subsidies should be used and designed, supported by carefully examining how different subsidy forms affect competitiveness, resource allocation, and international commerce, among other economic and climatic results. Green subsidies can be utilized collaboratively in the interim through open, nondiscriminatory plurilateral initiatives.
The integrity of the EU single market must be preserved at all costs. To create a level playing field, significant restrictions are imposed by EU state aid regulations on the assistance that governments may give to their corporations. This prohibits larger EU nations or those with greater financial clout from favouring their businesses more generously at the expense of rivals in other member states of the union. Thus, the extent, duration, and scale of any relaxation of state aid regulations should be constrained. Some financing at the EU level should accompany it to help overcome the varying capacity of members to use subsidies. It might be possible to coordinate financial assistance for clean-tech businesses across EU nations, perhaps through a centrally financed program. In the medium run, the EU would also profit from setting up a climate investment fund to aid in organizing and financing the additional public investment required to more efficiently and affordably meet emission-reduction targets.
Any funds from the EU should be directed toward projects that could help the climate the most from their actions. This includes funding the development of new, clean technologies and the early-stage use of existing ones.
Capital, labour, and knowledge must freely move to the single market areas where they are most required to promote and accelerate the green transition. According to the Commission, to achieve the EU’s 2030 carbon reduction goals, an additional 4 trillion euros in investments—three-quarters of which must be privately financed—will be required between 2021 and 2030. Faster development of a strong Capital Markets Union is still a top objective since it would help guarantee adequate finance from the private sector for the bloc’s transition to a greener economy. The Commission’s plan is optimistic from a labour perspective because it would improve labour market integration inside the EU and increase training in clean-tech industries. These objectives are crucial because the green transition will call for workers to have the ideal combination of skills and be able to switch from contracting to expanding industries. The EU’s reaffirmation of its intention to utilize a portion of the proceeds from the construction and road transportation sectors’ new carbon price for a new Social Climate Fund, which would assist vulnerable households during the energy transition, is also to be applauded.
