Europe’s initial anger at President Joe Biden’s massive green subsidy plan has waned in light of assessments that rank EU incentives to boost clean technology as equal to or surpassing some of the benefits offered in the US law.The US’s Inflation Reduction Act — which offers as much as $369 billion in handouts and tax credits over the next decade for clean energy programs — is playing catch-up to the EU, which currently spends more than €70 billion ($74 billion) in renewable energy subsidies each year, according to people familiar with the thinking in the European Commission and some capitals.
Frans Timmermans
Now that some EU officials no longer regard the IRA as a threat in the race to support climate-friendly domestic manufacturing, many in Europe are instead shifting their focus to China, which they believe presents a much greater risk, said the people, who spoke on the condition of anonymity.
“The IRA is an opportunity to green the US economy, but we have some advantages vis-a-vis the US that we need to emphasize,” Frans Timmermans, the EU’s green deal chief, told reporters earlier this month in Strasbourg, France. The EU provides an amount that “is at least comparable to the amount of money that the Americans are putting on the table,” he said.
Moreover, the EU also has a green trade tool of its own: the Carbon Border Adjustment Mechanism, which will slap a levy on emissions-intensive imports like steel, cement and hydrogen from countries with less-strict climate rules. The US, which does not put a federal-level price on carbon, would in theory be subject to the measure, which will be phased in later this year.
Renewable Energy
The IRA has allocated about $95.6 billion to boost renewable energy sources, including hydrogen, solar and wind. On average, the EU has spent about €72 billion on renewable energy subsidies each year since 2015, according to a commission report.
Given high demand in Europe, the EU’s wind manufacturing capacity is not expected to relocate unless financing dries up, the people said. The EU’s solar industry, however, is more exposed as it imports most products, especially from China.
Read More: Can Trade Rules Overshadow IRA-Led US Solar Boom, Shake Supply?
Europe needs to team up with the US to find its own “optimal area of green transformation,” said Alicia Garcia-Herrero, a senior fellow at the Brussels-based Bruegel think tank.
“If not, what’s going to happen? Europe is going to continue to import everything from China from batteries to solar panels, and the US will create its own ecosystem,” she said. “That’s what Europe cannot afford.”
Hydrogen
The tax credits in the IRA to boost hydrogen production are worth about $13 billion, according to the CBO analysis. This is roughly in line with the €10.6 billion in public spending projects that EU countries have allocated to boost the hydrogen value chain.
Ultimately, the IRA is unlikely to have a significant impact on the EU as the level of subsidies suggests that most of the focus will be on the domestic US market, according to European officials. The EU is currently aiming to produce 10 million tons of renewable hydrogen and import the same amount. Should the US become a source of hydrogen, it could benefit the EU. The recovery fund provides significant support across the whole hydrogen value chain, from production to end-use.
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