In the summer of 2022, the Biden Administration signed the Inflation Reduction Act (IRA) into law. This massive bill allocates federal spending towards reducing national carbon emissions, lowering healthcare costs, funding the Internal Revenue Service (IRS) and improving taxpayer compliance. One of the most significant aspects of this bill concerns clean energy and advancing climate technology. This aspect works in conjunction with the Infrastructure Investment and Jobs Act (IIJA) and the CHIPS and Science Act. All three of these bills invest spending in manufacturing, job creation, infrastructure, and research and development in clean energy. The Inflation Reduction Act directs nearly $400 billion in federal funding to clean energy via tax incentives, grants, and loan guarantees. Clean electricity and transmission received the largest sum, followed by clean transportation, such as electric vehicles. The goal of the IRA, in addition to the IIJA and the CHIPS Act is to improve U.S. economic competitiveness, innovation, and industrial productivity while considering advancing clean energy efforts and encouraging investment. Leaders of the European Union have voiced their disapproval of the U.S. enacting the IRA for fear that it will disrupt the clean energy market, driving investment away from EU member states due to incentives offered by the U.S. However, the EU’s fears have no real merit. The U.S.’s commitment to clean energy generates a net positive on the global scale in terms of addressing climate change and puts no significant dent in Europe’s clean energy economic sector.
Europe’s biggest concern in the IRA are the incentives it offers for private investment. The majority of funding for the bill is in the form of tax credits which are going primarily to corporations, approximately $216 billion of the nearly $400 billion bill. To be eligible for the full IRA tax credits, corporations must meet a set of criteria. These include prevailing wage and apprenticeship requirements, domestic-production, or domestic-procurement requirements, and in some cases a percentage of critical minerals that have been recycled, extracted, or processed in North America or a country that has a free trade agreement with the U.S. as well as being manufactured or processed in North America. EU leaders believe these incentives will encourage European corporations to relocate to the U.S. and their worries are not entirely unfounded.
During the World Economic Forum in Davos, U.S. governors from Michigan, Georgia, Illinois, and West Virginia Senator Joe Manchin attempted to lure European clean energy businesses to their states, promising cheaper costs of production. German, French, and Belgian leaders all denounced the U.S. politicians’ attempts to strip Europe of their clean energy producers. In response, French President Emmanuel Macron has indicated that he believes the EU should introduce a comparable spending package to the IRA to bolster clean energy corporations in Europe. Some potential issues with this reaction is that the EU is unable to provide tax credits in the way the U.S. can, as only nation states have this authority. Many nation states do provide tax credits and Germany is already operating under a similar model to the IRA, however it is unlikely it would make a significant impact due to the smaller scale of their clean energy production market. Other EU leaders, such as Dutch Prime Minister Mark Rutte, believe throwing money at their existing system would make no difference, rather they should redistribute funding that already exists in clean energy investment.
If the EU is content with the current state of the clean energy market, which considering their reaction to any possible shift they are, then they are realistically making a mountain out of a mole hill. Almost half of the funds provided by the IRA will be spent on upgrading, repurposing, and replacing the energy infrastructure and will be used as loans rather than subsidies. The biggest sector the EU may have concerns with is electric vehicles, however the EVs they are already manufacturing will most likely qualify for subsidies. Germany is the only major exporter of cars to the U.S. and Volkswagen is the only corporation that produces large numbers of electric vehicles. Its best-selling model is already being produced in Tennessee, making it qualify under the IRA as a corporation who will receive subsidies. Other major European automobile corporations such as Audi, BMW, and Mercedes already produce in North America as well. Because they all produce in either the U.S. or a nation with a U.S. free trade agreement, they will also qualify for subsidies.
Concerning our transatlantic allyship, any significant shift would be an overreaction. Although these new subsidies concern European nations, the primary focus should be on coordinating with the U.S. on how to approach the clean energy market. Europe’s trade commissioner, Vladis Dombrovskis said as a reaction to the IRA that the fight against climate change should be done by “building transatlantic value chains, not breaking them apart”. Importantly, the U.S. and the EU need to ensure that they do not battle to drive away business and investment through distortionary subsidies and place reasonable boundaries on the support they are able to give to corporations.
At first glance, it is reasonable for Europe to approach the enactment of the Inflation Reduction Act with a degree of hesitancy. It appears to threaten their existing clean energy market and disrupt this sector of the economy. Their fears were validated by U.S. politicians attempting to lure these corporations stateside with the appeal of subsidies, tax credits, and easy access to loans. Upon further analysis, however, it is highly unlikely Europe’s clean energy market will be disrupted at all by the IRA. The corporations which draw the most concern are manufacturing in the U.S. and already qualify for most of the IRA’s benefits. It is necessary for European leaders to take a less reactionary stance on the bill and focus on further coordination with the U.S. on how to approach clean energy and climate technology efforts moving forward.