Projections and Future Perspectives of TCTF and IRA in a Political Context
Authors: Steffen Sühnel and Giselle Ramacher
TCTF Overview
The Temporary Crisis and Transition Framework (TCTF), altered in March 2023, allows EU countries to subsidize companies producing components necessary for the transition to a net-zero economy. The framework is a reaction to the IRA in the US. It is set to expire in 2025, raising questions about its future. While some EU Member States support the extension of the TCTF to enhance competitiveness and clean technology investments, others express concerns over market inequalities and advocate for common EU funding to ensure equal opportunities of the single market.
European Commission's Position
The previous EC has set key objectives for the period 2024-2029, with a primary focus on strengthening the EU's competitiveness. This includes enhancing sovereignty in strategic sectors to position the EU as a technological and industrial powerhouse. In terms of the geopolitical atmosphere, it saw an urgency to develop industrial policies capabilities to be autonomous in strategic domains and the necessity to react to strong global competition on FDI.
The new European Commission, in place since December 2024, is expected to introduce the European Clean Industry Policy Initiative, inspired by the TCTF, to foster innovation and growth in the clean industry sector. The potential phasing out of the TCTF by the end of 2025 calls for a debate, as part of this initiative, on the possibility of creating a Clean Industrial Deal Framework with the incorporation of sections 2.5, 2.6 and 2.8 of the TCTF and transforming it into a more permanent framework.
Member States Positions
Some Member States, like Sweden and Finland, advocate for phasing out the TCTF without a new framework due to concerns about market distortion and the level playing field. In contrast, larger economies like Germany and France support its extension to enhance competitiveness in the global market. Germany, for instance, has been authorized to grant significant subsidies under the TCTF.
In a statement, German Economics Minister Robert Habeck dismissed concerns from EU member states regarding the potential fragmentation of the single market if major economies like Germany and France were allowed to invest significant sums into their industries. Habeck argued that the current system primarily focuses on the internal market, whereas the true challenge lies in competing globally with other major players in the clean technology sector.
Academic Perspectives
Politicians like Enrico Letta and Mario Draghi have contributed to the discourse on the future of the TCTF. Letta recommends integrating the most effective elements of the TCTF into a unified governance system to ensure that the benefits of these frameworks are retained while addressing their limitations. Another perspective is outlined in Mario Draghi's report, “The Future of European Competitiveness”, which serves as a valuable contribution to the debate offering critical insights and recommendations. In his opinion, the TCTF should be extended and adapted to support long-term industrial transformation.
Impact of Trump's Re-election on the IRA
Trump's re-election introduces uncertainty regarding the future of the Inflation Reduction Act (IRA), which aims to invest significantly in green technology. Trump's administration may prioritize rolling back parts of the IRA, potentially undermining its effectiveness. However, some aspects of the IRA may remain intact due to bipartisan support and economic interests.
The expectation of the IRA's survival is also a significant question in the political discussions among EU leaders. It is to be expected that Trump’s victory would bring several impacts on US-EU relations in terms of subsidies.
Global Subsidy Strategies
Canada and China are also actively engaging in subsidy programs to attract investments in green technology. Canada's initiatives, such as the Electric Vehicle Charging Strategy and the Critical Minerals Infrastructure Fund, highlight the competitive pressures faced by the EU. Canada can serve as an example of why the EU should view support for investments within its internal market not just as a reaction to crises or temporary situations, but as a long-term European Industry strategy.
As green technologies gain prominence in international trade, China has set ambitious renewable energy goals and implemented subsidies to boost electric vehicles, renewable energy, and energy-efficient technologies. The Chinese government has strategically employed subsidies to help these industries scale up rapidly. This strong subsidisation has led to significant concerns in the EU regarding market distortions and unfair competition. Estimates suggest that China's overall subsidies range between three to nine times that of other OECD countries such as the USA or Germany.
However, China has recently claimed that the EU misunderstands its state support programs for industries. The truth is that the EU is dependent on essential Chinese components for its car industry.
Conclusion
The future of the TCTF and IRA will significantly impact global subsidy policies and competitiveness. The EU must navigate these uncertainties by developing a more integrated and equitable state aid framework that aligns with its long-term strategic objectives. The envisaged Clean Industrial Deal Framework may transfer the TCTF in a more permanent framework addressing previous points 2.5, 2.6 and 2.8 of the TCTF.
