EU Remains Competitive Despite U.S. Inflation Reduction Act
The $369 billion Inflation Reduction Act (IRA) signed into law by U.S. President Joe Biden last year initially raised concerns among European policymakers and industry leaders. The fear was that massive tax breaks and subsidies offered by the IRA would lure European companies across the Atlantic, leaving the EU’s economy hollowed out. However, a year later, it seems that these worries were largely overblown, with the EU still maintaining its competitiveness in most sectors.
While the U.S. has seen some investment decisions by European companies, there has been no mass exodus as initially feared. The EU’s Green Deal, which aims to make the continent climate neutral by mid-century, predates the IRA and has provided a strong foundation for the EU’s response. Brussels and member countries have also implemented their own policies, such as the Green Industrial Deal and the Net Zero Industry Act, to boost mining and the production of green technologies within the bloc.
The EU has allocated a minimum of €600 billion for combating climate change through its post-pandemic recovery fund and latest budget. The bloc is focused on competing on quality rather than subsidies, according to a Commission spokesperson. It is clear that the EU is not defenseless against the IRA and is actively working to maintain its long-term competitiveness.
European companies already faced higher energy prices than their U.S. counterparts and had to navigate “America-first” policies. This forced businesses to consider shifting some activities across the Atlantic. However, the EU’s competitiveness problems predate the IRA.
When it comes to solar panel production, both the U.S. and the EU are aiming to increase capacity. China, however, remains the dominant player in global production. The U.S. offers tax credits for solar manufacturers, resulting in a spike in module production capacity. While some European companies have been tempted by these subsidies, the impact on Europe has been negligible. The EU has also made adjustments to its Innovation Fund, and Germany has launched its own subsidy scheme for module manufacturing.
In the wind sector, the IRA grants U.S.-based manufacturers tax breaks and additional incentives for wind farm power generation. This has enticed some European companies to expand their operations in the U.S., but overall, the European industry remains relaxed about the U.S. program. The EU, on the other hand, has proposed the Net Zero Industry Act, which aims to produce 36 GW of wind capacity within the bloc by 2030.
Both the EU and the U.S. are investing heavily in electrolyzers, used to produce hydrogen from renewable electricity. The EU is ahead of the U.S. in total hydrogen production capacity, and while the IRA has not led to a groundswell of electrolyzer demand in the U.S., Europe is not standing still. The EU has set a target to produce 10 million tons of green hydrogen by 2030 and has launched a European Hydrogen Bank.
The IRA has had a remarkable impact on the battery sector in the U.S., with a significant acceleration of projects. This has pulled the U.S. even with the EU in terms of battery cell production. The U.S. offers tax breaks of up to 40 percent of production costs, enticing some firms to choose the U.S. over Europe. However, Europe is also attracting investments from Chinese companies, which is more difficult in the U.S. due to concerns about China.
In the electric vehicle (EV) sector, the IRA subsidy for buying EVs manufactured in North America initially raised concerns in the EU. However, U.S. sales of EVs have surged, with both domestically made and imported vehicles seeing an increase. The EU is incentivizing the uptake of EVs by banning the sale of new gasoline and diesel cars by 2035 and offering subsidies per vehicle. The EU remains committed to the transition to electric mobility.
The EU’s heat pump industry has not been significantly impacted by the IRA. While there may be a withdrawal of investment money from Europe to the U.S. in the future, it is not happening now. The EU has varying national subsidies for heat pumps, and the IRA has actually prompted the European Commission to be more active in promoting heat pumps.
Overall, while the IRA has had some impact on investment decisions by European companies, the EU remains competitive and has taken proactive measures to boost its own green industries. The fears of a mass exodus of European manufacturers to the U.S. have not materialized, and the EU is confident in its ability to compete on quality rather than subsidies.
Original Story at www.politico.eu – 2023-08-31 14:22:20