February 9, 2023


The EU and the IRA

This is the eighth edition of The Polycrisis newsletter, written by Kate Mackenzie and Tim Sahay. Subscribe here to get it in your inbox.

At Davos last month, European Commission president Ursula von der Leyen announced Brussels’ “Green Deal Industrial Plan for the Net-Zero Age.” A response to Washington’s multibillion dollar commitment to manufacturing and energy investment, Europe’s new industrial plan will institute sweeping reforms to reduce greenhouse gas emissions. “Our economies will rely ever more on international trade as the transition speeds up to open up more markets and to access the inputs needed for industry,” she said, pointedly urging the attendees to “facilitate open and fair trade for the benefit of all.”

Europe’s climate policies include the world’s oldest emissions trading scheme to date—now in its eighteenth year. The plan commits to net zero by 2050 across all domestic infrastructure and industries. Those impressive plans were devised in very different conditions to those of the US. While much of its Green Deal roadmap was developed during Covid lockdowns and updated after the Ukraine invasion, European policy was crafted in a world where carbon taxes and pricing on carbon markets were going to do the job domestically, while cheap green goods could be imported from elsewhere. The US, by contrast, has forged its signature climate policy in a period of protectionism and wariness towards China.

Europe is now experiencing whiplash as it adjusts to the US’s more zero-sum vision for energy investment. If China imposes export controls on its cheaper solar panels, electrolysers, or wind turbines in retaliation to US chip controls, those backbones of EU’s climate policy would break.

Two tracks

Europe proposes to initially provide funding under an existing program, NextGenerationEU. It is the centerpiece of Green Deal funding, providing up to €723.8 billion in grants and loans, evenly divided. The amount compares favorably with estimates of total Inflation Reduction Act (IRA) funding (if the DOE loans are excluded), but EU countries have spent somewhere in that vicinity—about €600bn—to shield consumers from energy price rises in a single year! The total quantum of IRA funding is limitless to evade spending constraints imposed by deficit-hawks in Congress. Uncapped tax credits offered under IRA could end up providing $250bn just for solar, wind and battery manufacturing, according to estimates by Credit Suisse—eight times the official estimates. 

The European Commission also proposed to loosen state aid rules, extending temporary reprieves made under Covid and the Ukraine war. That benefits the big member countries who can lavish funds on corporate champions. Other states will be compensated, eventually, with money from a European Sovereignty Fund. The proposals face opposition from some members, such as Netherlands and Sweden, although the FT quotes an unnamed official acknowledging that “Even the more liberal ones in the flock realize the world has changed.” Countries so far are divided on state aid and joint funding; Germany is for the state aid changes and against joint debt, for example, while Italy has the reverse stance. 

The trans-Atlantic differences extend well beyond financing structure. The EU has historically spent its green state funds differently to the US. The bloc is now heavily dependent on China for the devices and even minerals that are essential to its relatively strong climate goals. Indeed, the Chinese solar PV industry can in part thank Germany’s Energiewende for catalyzing it into world-domination status. Meanwhile, European solar PV manufacturing has all but vanished. “I don’t mind that we put €450 billion a year into the green transition. But if it is about buying Chinese solar panels and losing our jobs, I say No,” internal markets commissioner Thierry Breton declared on French television last month.

For decades Europeans have bemoaned US foot-dragging on climate action. When Washington finally embraced green industrial investment, rather than rejoicing, European politicians responded with complaints that their companies will be enticed to invest across the Atlantic. 

The EU approach has avoided industrial policy in favor of retrofitting existing industries and decarbonizing infrastructure, while the IRA hands out tax credits to all comers willing to locate in the US, with extra incentives for those using domestically-sourced components. 

For example, Spain’s most recent grant from the EU’s pandemic-era Resilience & Recovery Facility recovery fund, which will become a key part of Green Deal industrial plan support, goes towards projects such as decarbonizing buildings and the domestic energy system, as well as public mobility measures. New guidance for the mechanism mentions solar-panels manufacturing alongside subsidies for heat pumps, building retrofits, and decarbonizing industry. 

Meanwhile, the IRA has announced a simpler proposition. By offering companies billions of dollars—largely through a system of tax credits—the law aims to jump-start investment in new and nascent clean energy technologies.The IRA will provide $3 per kilogram of solar grade polysilicon, $12 per square meter of PV wafer, 40c per square meter of polymeric backsheet, and so on. 

We wrote in December that changes made amid the Covid and Ukraine crises could last longer than intended: “Many of the moves are temporary—hurriedly developed and justified as emergency response measures—but they set precedents for which tools count as legitimate. Increasingly frequent crises in the material world can open up new political pathways.”

Europe may be more intentional than the US in its energy transition policies, but it is also backward-looking. Ahead of a meeting this week of European leaders to discuss the Commission’s proposed green industrial plan, Breton warned that the strategy of reactive tinkering with rules—in response to Covid, then Ukraine, then the IRA—is not suited to a “permacrisis era.” (The comments echoed Isabella Weber’s account of devising the German gas price brake scheme.)

The demand side

The bloc is unlikely to achieve its dream of becoming a solar manufacturing superpower as quickly as it would like, but it might have an edge in other ways. 

Europe and other wealthy countries have rediscovered the merits of intervening in the supply of critical goods, as well as in managing prices. Shaping demand, however, has often been the neglected stepchild of energy transition policymaking. Even the Intergovernmental Panel on Climate Change reports did not deeply explore measures like “social-cultural transitions and lifestyle changes” until the most recent review cycle.

The importance of demand-side efforts is obvious for critical minerals. The steep projections for EV and renewable energy global boom has created a Malthusian panic. Policymakers are anxious about the geological supply of transition minerals such as lithium, cobalt, graphite—and about the geopolitical implications of China dominating that supply. Such hand-wringing obscures demand-side assumptions. 

A new report by Thea Riofrancos, Alissa Kendall et al argues demand management is a powerful tool for decarbonization. The paper models how lithium demand in the US could be radically reduced with holistic transportation policy. Fleets of electric Hummers might lead to scarcity and dependence on China, but will certainly involve a chaotic extractive frenzy in global south countries that supply these minerals. Alternative pathways involving more public transport, smaller cars, and recycling could cut future lithium demand by two thirds, simultaneously addressing security of supply, scarcity and price concerns, and destructive extraction. 

Making these recommended changes are challenging in the US, however, where federal climate policy is all carrot and no stick. Regulatory measures are excluded from the IRA and Credit Suisse estimates that only about 20 percent of the bill’s spending will be focused on the demand side. In Europe, by contrast, there is a stronger political consensus on climate action and, consequently, a systematic effort to decarbonize on all fronts: electricity generation, construction, vehicle manufacturing, industry and mass transit. All this gives the EU more agency over resources.
The EU’s proposals to bring industry to net zero will go “hand in hand” with its Critical Raw Materials Act. Europe’s approach to critical transition minerals is premised on keeping commodities exporters compliant and away from Chinese influence; the details of the Act smack of colonialism. But its approach of upgrading and replacing old infrastructure, improving car-free mobility, maximizing efficiency, mandating battery recycling, and even nebulous sounding concepts like the “circular economy,” while not as sexy as becoming a solar PV manufacturing superpower, is more engaged with the nature of the challenge.

The Polycrisis is a publication focusing on macro-economics, energy security & geopolitics.

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