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The German government has rejected a proposal to subsidize electricity prices for energy-intensive industries, with business groups warning that the move would lead to a shift of manufacturing to countries with lower energy costs.

The decision is a setback for Green Economy Minister Robert Harbeck, who has argued that high energy costs are hurting the competitiveness of companies in Europe’s largest economy.

Markus Steilemann, head of the chemical industry lobby group VCI, said: “German industry is sending out a distress signal, but the government continues to ignore the current dire emergency.”

Tanja Gönner, managing director of BDI, Germany’s main business lobby group, said: “In the current difficult situation, the lack of any tools that can reduce the burden of electricity costs is fatal. The government cannot avoid this issue.”

But Chancellor Olaf Scholz insisted the government was heeding calls for help from industry, citing a €7bn corporate tax break package agreed by the cabinet.

Scholz said on Wednesday securing cheap energy supplies was an “ongoing problem” and highlighted that his government had spent “billions of euros” subsidizing prices since Russia’s full-scale invasion of Ukraine 18 months ago.

But “we’re seeing prices coming down now . . . import costs in Germany are coming down – thanks in part to the strategy we’ve put in place”.

Germany has been hit hard by Russia’s attack on Ukraine and a decision to cut gas supplies to Europe, which sparked panic in the business world when gas prices hit record highs last year. The Scholz government responded by building new LNG import terminals and spending billions of dollars securing emergency LNG supplies from the US and the Middle East.

Speaking after a two-day government retreat at the Schloss Meseberg palace outside Berlin, Scholz said: “The fact that we moved so fast means we’re already through the winter, And our apartments and factories are not cold.”

But energy costs remained above pre-war levels and were widely blamed for the German economy’s stagnation in the three months to June after contracting in the previous two quarters.

Harbeck, who first unveiled the subsidized electricity tariff plan in May, said the government would spend between 25 billion and 30 billion euros to ensure that large industrial consumers would pay no more than 0.06 euros per kilowatt-hour (kWh) for electricity by 2030. The current market price is €0.089/kWh.

The move comes amid growing concerns that low energy costs in the United States and huge subsidies from President Joe Biden’s inflation-cutting bill could lure German companies to relocate.

Scholz said the best way to tackle high gas and electricity costs was to increase renewable energy capacity and expand Germany’s grid. Germany plans to generate 80% of its electricity from renewable sources by 2030.

But Steilemann insists that until there is enough cheap renewable energy to generate electricity, the government must step in to help energy-intensive industries such as chemicals. The idea, he said, is “necessary to prevent deindustrialisation”.

A survey by the German Chamber of Industry and Commerce (DIHK) found that 32% of German companies prefer overseas investment over domestic expansion. That figure is double the 16 percent in last year’s survey.

Scholz’s refusal to subsidize is likely to anger many in his party, the Social Democrats (SPD). Its parliamentary group recently supported the idea of ​​a state-subsidized electricity tariff of €0.05/kWh for industry.

The Social Democrats and the Greens’ smaller coalition partners, the Free Democrats, are staunchly opposed to the idea. Finance Minister and Liberal Democrat leader Christian Lindner believes that energy subsidies only benefit large industrial groups.

“This will distort the competition between large companies and ordinary businesses middle class,” he told ARD TV, referring to small and medium-sized enterprises, the backbone of the German economy.

“We can’t make all taxpayers, all companies — bakers, traders, middle class Companies — pay reduced electricity rates for some companies,” he said on Tuesday.

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