EU Struggles To Match Renewable Energy Incentives In Inflation Reduction Act

The European Union  is in a bind. Because of the Russian invasion of Ukraine, supplies of methane gas have been slashed, driving up the cost of electricity needed to keep its industries churning out manufactured goods. In addition, supply chains have been disrupted [Volkswagen used to get wiring harnesses for its ID. branded electric cars from Ukraine, for instance], further driving up prices of finished goods. One way out for Europe is a massive increase in its renewable energy resources.

Europe has seen the light on thermal generation. It now knows it cannot rely on Russia or any other country to supply it with methane gas. It needs to shutter its coal-fired generating stations to lower carbon emissions, and so it must transition to renewable energy as rapidly as possible. But there’s a problem. The US has stuffed a whole lot of tax credits and other incentives for wind and solar power development into the so-called Inflation Reduction Act passed last August. Leah Stokes, a political science professor at the University of California Santa Barbara, estimates the total amount of the tax credits in the IRA could amount to more than $1 trillion if fully maximized.

Grumbling At Davos

At the recent meeting of the World Economic Forum in Davos, Switzerland, several senior European leaders were heard to mutter darkly about the Inflation Reduction Act. “It is no secret that certain elements of the design of the Inflation Reduction Act raised a number of concerns in terms of some of the targeted incentives for companies,” Ursula von der Leyen, the president of the European Union, told delegates on Tuesday, according to the New York Times.

On stage at the forum last Tuesday, von der Leyen announced a plan for a “Net-Zero Industry Act,” that would focus investment on projects to meet clean tech goals by 2030, as well as temporarily changing state aid to “keep European industry attractive.”

The next day, Olaf Scholz, the chancellor of Germany, said the local content requirements in the law “must not result in discrimination against European businesses.” While he said he welcomed the plans for clean energy investments, he added that “protectionism hinders competition and innovation and is detrimental to climate change mitigation.” European Union members “are talking to our American friends about this.” Out in the halls, talk of a “trade war” was heard in unguarded moments.

“We’re on the cusp of a clean tech arms race,” David Victor, professor of innovation and public policy at the University of California San Diego, told Ashkat Rathi of Bloomberg Green recently. Rathi writes that sometimes an arms race can be a zero-sum game, where US investments mean Europe loses out, but it doesn’t have to be so. If the US and Europe can work together to allow their industries access to each other’s markets, Victor said, then investments made in technologies will be able to deliver greater good. That kind of cooperation is in Europe’s interests.

Renewable Energy & Policy Predictability

Though it’s a late entrant, the US already has the advantage when it comes to climate tech. The US is a bigger market with more regulatory consistency and offers fewer barriers to entry and scaling new industries — as well as more funding opportunities. The European Union, on the other hand, is made up of 27 independent countries. “The European market is fragmented,” says Hans Kobler, managing partner of Energy Impact Partners, a venture capital fund that invests in clean-energy startups. That’s why “there’s a big sucking sound for global climate technologies coming to the US.”

As climate solutions attract larger sums of money, touch ever expanding areas of the world economy, and lure more and more people, they’re bound to create friction among major powers. What’s clear is that most of those powers see a big opportunity. That’s why, despite the challenges that an era of competition will bring, the rich and powerful at the Davos meeting welcomed increased investment in a green future.

“Having a competition to drive things faster, and bigger scale is not a bad thing,” Jennifer Morgan, Germany’s climate envoy, said in an interview at the World Economic Forum in Davos this week. “It’s kind of like: Game On.”

The Washington Post reports that senior European Union official Thierry Breton said in Davos last week that the IRA “is of course front of everybody’s minds,” and that Europe’s response to American or Chinese industrial policy “cannot only be about short-term temporary solutions. Europe needs its own plan, not only to accelerate the deployment of clean technologies, but also to develop the necessary manufacturing base. It’s not about a subsidies race. It’s a matter of ensuring our security of supply, competitiveness, export ability and job creation.”

French finance minister Bruno Le Maire added, “there is no time to lose in establishing a new European industrial policy to support green industry and encourage industries to relocate to European territory.” He proposed simplifying the process of allocating government aid to industry, and making assistance speedier and on a much larger scale for clean-energy sectors.

While the risk of lost investment in Europe is evident, some delegates said it was more important to praise Washington for its huge investment plans in clean energy and technology, after the nation had been berated in the past for not taking enough action on climate, the New York Times reports.

“In my view, the Inflation Reduction Act is, by far, the most important climate action after the Paris Agreement 2015,” Fatih Birol, the executive director of the International Energy Agency, said in an interview. “I understand that many countries, including the European countries, see that it may create some challenges for them.” Though they have legitimate concerns, he added, “I would say that Europe can develop its own clean energy industrial framework as a complementary tool.”

The Takeaway

Policies have consequences. The Inflation Reduction Act will drive massive investments in clean energy technologies. Already solar panel manufacturers like Qcells and EV charger manufacturers like Tritium have announced they are building new factories in the US. Offshore wind projects are moving forward, and companies like Mercedes, Volvo, BMW, Volkswagen, and Hyundai are investing in new factories to manufacture electric cars in the US and bringing employment opportunities to tens of thousands of American workers.

The key to the IRA is the certainty it provides to companies when they invest in America. Europe has every right to look out for its own best interests, but the US is leading the way forward. It will be up to Europe’s leaders to figure out how to keep up and attract investments in renewable energy and clean manufacturing as well.