Report

Europe can withstand American and Chinese subsidies for green tech

This report from UK think tank the Centre for European Reform looks at how the EU can be competitive in green goods and should use subsidies to producers with caution.

European policy-makers are worried about losing out to subsidised production in the US and China in the booming global market for green technologies. A new CER policy brief, ‘Europe can withstand American and Chinese subsidies for green tech’, shows that the EU can be competitive in green goods and should use subsidies to producers with caution. According to the analysis, the EU has a sizeable share of global exports in green goods, although not as large as China’s – and the US is languishing behind both. China’s share of global exports in ‘low carbon technology (LCT)’ goods has exploded, from 23 per cent in 2019 to 34 per cent last year, but the EU’s share has also grown from 19 per cent to 23 per cent last year, while the US is stuck on 13 per cent of the global market. The CER also shows that the EU should continue to excel in domestic production of some of these green technologies, because supply chains are shortening as technologies mature, and companies are expanding production nearer to consumers to reduce shipping costs. Across six key categories of green goods that are at the heart of US, Chinese and EU green industrial policy (electric vehicles, batteries, heat pumps, solar, wind turbines and electrolysers), the pull of geographical distance on trade increased significantly in almost all cases between 2017 and 2022. For example, for every 1 per cent increase in distance between two trade partners, exports of electric vehicles fell by 1.3 per cent in 2022, up from 0.9 per cent in 2017. The EU should be cautious about directly subsidising green production, as the US and China are doing. In a world where distance between trade partners is increasingly important, and where markets for green technologies are rapidly maturing, money will be put into companies that would have robust demand for their products anyway. A subsidies race may also distort the EU single market, weaken incentives to innovate, and create excess production capacity, while any protectionist backlash risks slowing the green transition by driving up the prices of inputs that the EU needs to decarbonise.