To Lead in Cleantech, the EU Must Rethink Its State Aid Strategy
If the European Union wants to lead the global cleantech transition, it must move beyond its outdated, project-by-project State Aid approach. Instead, it needs a system of automatic, bankable, and output-based support. This shift is essential to attract private investment, scale innovative businesses, and lower production costs — all of which are key to competing globally.
President Ursula von der Leyen’s flagship initiative, the Clean Industrial Deal, assigns Vice-President Teresa Ribera the task of reforming State Aid rules to align with modern industrial policy. The urgency is clear: European manufacturers are feeling the squeeze from lower-cost Chinese competitors and generous U.S. subsidies offered under the Inflation Reduction Act (IRA). With public budgets under pressure, every euro must be spent strategically — to unlock private capital and stimulate growth.
Why the Current System Fails
Transport & Environment’s report, State Aid 2.0, summarises how existing frameworks like IPCEI, CEEAG, TCTF, and CISAF fall short. These mechanisms primarily rely on lump-sum aid awarded through slow negotiations based on vague criteria, such as the “funding gap.” This process leaves companies uncertain about the level of support they’ll receive, making aid effectively unbankable and unfit for driving investment.
Even worse, these one-off payments don’t reduce marginal production costs, which are vital for global competitiveness. Navigating the current aid maze often requires large legal teams and extensive resources — advantages only major incumbents and wealthier member states typically have. Startups and smaller nations are left behind. For example, six EU countries have never participated in an IPCEI, underscoring the system’s lack of inclusivity.
The Case for Output-Based Support
To stay competitive, Europe needs smarter support, not just more of it. This means enabling automatic, conditional funding tied to production outcomes under the new Clean Industrial Deal State Aid Framework (CISAF).
Unlike traditional subsidies, output-based aid is tied to actual production volume. It rewards success, not promises. It can scale with business growth, include sunset clauses, and incorporate “Made in EU” conditions to ensure local benefits.
The U.S. IRA has shown how effective this approach can be. By offering straightforward production-based tax credits, it has already triggered over $110 billion in private cleantech investment. Companies responded because the incentives were predictable and de-risked.
Ironically, the EU already embraces performance-based models in other areas: Contracts for Difference in renewables and per-unit payments for EV chargers under CEF-AFIF. Yet, in cleantech manufacturing — where it’s most needed — the EU continues to rely on outdated, case-by-case aid models that create uncertainty and delay.
Making CISAF Fit for Purpose
As currently proposed, CISAF lacks the one tool the EU needs most: performance-based production support tied to local manufacturing.
To be effective, CISAF should include:
Per-unit production aid (e.g., €25/kWh for battery cells), with caps per company and declining rates over time to encourage efficiency.
Bonuses for local content and disadvantaged regions, ensuring the benefits of support reach deeper into European supply chains and cohesion areas.
Conditionality on European ownership or control, preventing disproportionate aid to foreign companies without shared strategic interests.
Transparent and predictable eligibility criteria, aligned with EU environmental and social standards.
Investment Won’t Just Follow the Money
Production incentives won’t only benefit the wealthiest EU countries. Investment decisions depend on multiple factors, such as the availability of skilled labour, infrastructure quality, and how efficiently permits are granted, not just the size of subsidies. While a €20/kWh battery incentive won’t overcome every challenge, it can tip the balance in favour of locating production in Europe.
A recent European Commission report shows that cleantech manufacturing capacity is already spread across the EU. With well-structured production support, there’s a real opportunity to unlock more potential, particularly in less-developed regions. An open, transparent system would level the playing field and give startups and scale-ups a fair shot at competing.
To prevent a fragmented subsidy race among member states, EU-level funding must complement national schemes. The proposed Competitiveness Fund in the next EU budget offers a chance to align efforts and truly "Europeanise" \industrial policy, promoting collaboration instead of competition within the Union.
The Time to Act Is Now
Europe has the talent, innovation, and political will to lead in cleantech. But without the right incentives, the manufacturing of clean technologies will happen elsewhere.
The European Commission must ensure CISAF goes beyond bureaucratic tweaks. It should be the tool that enables scale, supports local industry, and unlocks private capital through smart, outcome-driven aid. It’s time to make State Aid work — for the climate, for competitiveness, and Europe.