When President Biden introduced the Inflation Reduction Act (IRA) last summer the scope of the policy surprised many, viewed as the first climate policy of its kind. The IRA focuses on incentivizing decarbonization and the rollout of green energy projects. Companies are now rewarded for making the switch, rather than punishing them for their carbon emissions – seen in many countries through carbon taxing. Soon after the IRA’s release, pressures mounted on other countries around the world to introduce their own far-reaching climate policies, a feat that none have so far been able to achieve.
The IRA was designed to be a game-changer, seen as a landmark climate law. The Act deemed carbon dioxide an air pollutant, thereby allowing the Environmental Protection Agency (EPA) to legally regulate greenhouse gases and push the adoption of renewable energy. It took away any ambiguity and made action towards a green transition easier, signaling a stronger EPA and the potential for lawsuits to be won on the grounds of climate change thanks to the IRA’s use of language around CO2.
In addition to providing clearer definitions, the IRA provides a huge quantity of funding for America’s green transition. The law offers $369 billion for the rollout of electric vehicles, to spur renewable energy projects, and to develop new green energy sources and support climate technology, over the next decade. It provides the biggest investment in climate-change solutions in the history of the United States and is expected to lead to an emissions reduction of 40% below 2005 levels by 2030.
Given the attention paid to the IRA for its ground-breaking climate aims, international organizations, and the media, quickly turned to other parts of the world to ask if other countries would be establishing their own versions of the climate law. Many view the IRA as a blueprint for others to follow, particularly the European Union, which, to date, has provided some of the most ambitious policies.
How is Europe Following in America’s Footsteps?
After months of little action, in January at the World Economic Forum in Davos, the president of the European Commission (EC), Ursula von der Leyen, stated that the EC was drafting a new law, aimed at making Europe the home of clean tech and innovation. Von der Leyen said, “We will put forward a new Net-Zero Industry Act … The aim will be to focus investment on strategic projects along the entire supply chain. We will especially look at how to simplify and fast-track permitting for new clean tech production sites.” She added, “We need to create a regulatory environment that allows us to scale up fast and to create conducive conditions for sectors crucial to reaching net zero. This includes wind, heat pumps, solar, clean hydrogen, storage, and others.
The statement follows reports that the EU feared the impact of the IRA on Europe, the loss of competitiveness and the potential loss of European innovation. The IRA is pumping a huge amount of money into green energy and related technology, totaling around half of the amount set for the NextGenerationEU initiative, which was launched in 2020 to spur the EU’s post-pandemic economy. The IRA directly threatens Europe’s green tech industry, as companies look to move to a friendlier investment environment, with the U.S. offering a plethora of tax breaks and subsidies to companies wanting to go green. The EU worries that unless it can develop as far-reaching a law as the IRA, it could lose a great deal of talent and innovation to the U.S.
Executives at the CERAWeek energy conference in Houston last week echoed this sentiment. Energy experts believe that the IRA will put the U.S. in first place in the decarbonization race, leaving others lagging behind. However, U.S. Energy Secretary Jennifer Granholm defended the IRA at the conference, suggesting that Europe adopt a similar policy to boost competitiveness and accelerate the global green transition. Granholm stated, “We don’t want to stoke trade wars or anything like that… We keep saying ‘have at it – you should do the same thing’ – a little friendly competition is all.” She added, “But we are serious about bringing supply chains back into this country.”
The Rest Of The World Must Now Follow Suit
It’s not just Europe that is worried about the U.S. competition. Australia is also under threat of losing its clean energy experts. Guy Debelle, director of Fortescue Future Industries, believes that Australia’s blossoming green hydrogen industry is at risk of being overwhelmed by the “huge and aggressive” climate policy support in the U.S. and the Middle East. Debelle explained that the IRA is “one of the largest pieces of industrial policy we’ve ever seen.” Without a formal spending cap, it could eventually top $1 trillion.” He added, “It’s not just money… It’s actually people, it’s expertise and know-how, which [are] migrating to the US.”
And now it seems Biden is addressing the subsidy race head-on. The EU’s Ursula von der Leyen is set to visit the White House to discuss climate policy. An EC spokesperson stated of the visit, “We want to achieve as much non-discriminatory treatment for EU products and companies as possible, avoiding distortions of the level playing field.”
However, Anna Rosenberg, head of geopolitics at Amundi Asset Management, suggested, “I do not think der Leyen will manage to extract meaningful concessions from the U.S. on the IRA. Ultimately, the whole point of the IRA is to strengthen U.S. industry in sectors related to the green transition.” She added, “Therefore, the IRA is targeted at the EU simply because European firms have so far been leaders in that space and the U.S. wants to attract them. Granting meaningful concessions would defeat the purpose of the IRA.”
The launch of the IRA last year provided the U.S. – and the world – with the first climate policy of its kind. The huge investment provided by the law to accelerate the green transition will help the U.S. attract talent from around the world and spur innovation across the entirety of the green energy and climate tech industries. But some global powers worry that this will reduce competitiveness and innovation in other parts of the world. This will leave them with two choices – adopt a far-reaching climate policy or fall behind in the race to decarbonize.
