The US’s Inflation Reduction Act (IRA) is a moonshot moment in global climate protection, underscoring that the public sector will spend hundreds of billions in subsidies to drive decarbonization and a green economic transition. The EU’s bet on carbon pricing doesn’t rule out state aid, too. It now has to match the US plan. Paul Hockenos explains the details in the first installment of a two part series.
In stark contrast to the transatlantic ignominy over the climate crisis to date – marked by the EU begging the US to catch up – 2023 began with the Europeans rebuking the Biden administration for excessive zeal. The row announces a new age of whatever-it-takes, state-sponsored climate protection and the advantages of a constructive rivalry.
Europeans were startled at the suddenness and sheer magnitude of the $369 billion Inflation Reduction Act (IRA), ultimately a climate protection act, which in one stroke jacked climate policy, globally, to another dimension – closer to a scale commensurate with the problem. International Energy Agency director Fatih Birol called the IRA “the most important climate deal since the Paris Agreement.” Passed last year, the seminal legislation announced that the US is prepared to set the world pace on climate action; moreover, the state itself will, in terms of spending, undertake heavy lifting on a scale inconceivable until now. The IRA makes hundreds of billions (perhaps together with other legislation even upwards of $500 billion) available to reshape US industry in the name of rescuing the planet.
“We may have finally come to that point we often called for in past years – the moonshot moment or Marshall Plan for climate, where resources of an entirely different magnitude are mobilized for decarbonization,” Michael Mehling, Deputy Director of the Center for Energy and Environmental Policy Research, told me.
The issues of disagreement
The transatlantic discord – the EU is accusing the US of protectionist measures that will sink its clean tech sector and trigger global trade wars – underscores that there are multiple approaches to what is after all a shared global problem.
The US is putting its money on massive direct subsidies to its private sector (known informally as the carrot method), while the EU is betting big on carbon pricing and other taxes (the stick alternative). Neither is bit-piece tinkering: in undertaking this grand scale of landmark climate measures the Western heavyweights have accepted that the global economy as we know it will mutate in order to make decarbonization happen. Our economies will now change to accommodate and expedite the low-carbon transformation, not the other way around.
But if this transpires at cross-purposes across the Atlantic, the greater cause will suffer.
Biden’s climate centerpiece
The IRA is a federal spending measure that, in the form of tax incentives, grants, and loan guarantees subsidies American industry’s costly buildout of renewable energy sources, electrification, electric cars, hydrogen technology, and other green tech. Reading the IRA, one grasps immediately that the US took a page from the Europeans, who have been at work on this transformation for decades. The measures are ultimately traditional America-first industrial policy that is designed to stimulate the economy, create green jobs, and, as its title implies, reduce inflation – and reduce carbon emissions too as the comparatively disadvantaged fossil fuel economy is phased out in favor of clean tech.
A key provision, which is at the heart of the EU’s unhappiness, is that only US companies or one with which the US has a free trade agreement are eligible for the incentives. (The EU is not one of them.) This is most probably a contravention of international trade rules and the kind of measure that the EU prohibits within the single market.
This looks like a clear case of protectionism and indeed some American legislators intend it thus: to decrease the overwhelming dependence on clean tech resources from China, which until now has invested more than either the EU or the US. China’s technology market is highly subsidized and leads on battery production, solar cell manufacturing, EV production, chips, and more. Moreover, it has been outspending and out-installing everyone in the world on wind and solar deployment.
At stake – and foremost in most minds rather than climate protection – is a market for mass-manufactured clean energy tech that could triple by 2030 to around USD 650 billion a year, according to the IEA.
Pros and cons
The US spending plan offers a fast-track, straightforward path to a clean tech economy, which could put the US at the front of a wide-ranging transformation worldwide. “It has the potential to drive down the cost of solutions, to build and strengthen constituencies in the US to overcome the overpowering fossil industries, and to drive technological innovation,” Camilla Bausch of the US-German think tank Ecologic told me.
Another upshot is that it could mean rewriting global free trade rules, since it does appear to contradict them. “The biggest bones of contention over the IRA,” opined the Financial Times, “are subsidies and tax credits for US-manufactured products ranging from solar panels to electric vehicles. The domestic content requirements appear to run counter to the World Trade Organization’s rules on trading without discrimination. “
“The financial incentives deployed to meet the US’ climate objectives unfairly tilt the playing field to the advantage of production and investment in the US at the expense of the EU and other trading partners of the US,” barked the UN last year. So lush are the act’s incentives, claim European companies, that some are relocating to the US, costing Europe jobs as well as its edge in green technology.
A clear negative, though, the IRA doesn’t apply direct pressure on the fossil fuel industry or emissions-intensive industries to change or shut down. In theory, the cheaper (subsidized) clean tech will prompt the ancien régime to crawl away from the stage.
Moreover, a spending bonanza carries with it the risk that its expenditures are neither wise nor cost-effective. The hope “is that throwing government subsidies into things like advanced nuclear, blue hydrogen, ‘advanced’ biofuels, etc. will pay dividends in the future,” E3 Analytics energy think tank director Toby Couture told me, noting that this choice of clean energy products are held in disrepute by many in the field in Europe, including himself.
“This kind of big spending carries risks,” Couture explained, “it is often misguided, on projects and technologies that appeal to a certain type of thinking, or a certain type of vision of how we should tackle the climate crisis, or that are being peddled by a certain type of lobbyist. We’ve already spent hundreds of billions subsidizing nuclear power already, and it hasn’t moved the dial, or brought that industry any closer to economic competitiveness.”