The US Inflation Reduction Act is one year old today. Its first 90 days were enough for the US to overtake the EU’s second-place spot in producing cleantech; meanwhile, European investments in renewables halved in 2023. But Brussels still has the potential to ramp up domestic production by building on the successes of the European Green Deal, write Markus Pieper and Bernd Weber.
Dr Markus Pieper is a German politician and Member of the European Parliament for Germany. He is a member of the Christian Democratic Union of Germany, part of the European People’s Party; Dr Bernd Weber is Founder and CEO of the think tank EPICO KlimaInnovation, and Visiting Professor of EU Energy Policy at the College of Europe.
The US’s subsidy package for clean industry, the Inflation Reduction Act (IRA), is one year old today.
It has been a perfect wake-up call for Europe. The consequences of the energy crisis are threatening to seriously impair the international competitiveness of large parts of the industry. Europe must now find a pragmatic, complete, and comprehensive strategy, suitable to the industrial context and building upon the full strength of the EU’s Internal Market instead of full-fledged bureaucracy, if we want to remain world-leading economies.
In America, the US has laid the ground for massive investments in climate protection through the IRA, most notably by channelling hundreds of billions of dollars into building and expanding the future energy economy and manufacturing industry.
In Asia, China has long supported the domestic production of climate-friendly technologies and is now the first wind energy producer in the world. Japan, Korea, and India are also planning more incentives for investment and support for their domestic industries.
In Europe, there have been little to no improvements.
We must move away from the many individual building sites to a coherent overall industrial policy approach. To stay in the upper side of the standings in the race to the top, the EU must rev up its competitiveness with the Net Zero Industry Act (NZIA) and prepare further legislation addressing the entire value chain of transformation, while maintaining the driving seat of global decarbonisation we achieved thanks to the European Green Deal inter alia by a functioning and now-extended EU Emissions Trading Scheme (ETS).
To such aim, the idea of establishing regional industrial ecosystems and regulatory sandboxes can be pivotal. These can spur and enhance regional cohesion and accelerate innovation while leapfrogging bureaucracy and helping to scale the technological and regulatory innovations to decarbonise the European Union.
The building blocks are sound: The EU has all the tools necessary to drive investment and competitiveness. In Germany alone, the “Energiewende” and European Green Deal helped spur investment in renewables, second only to the US, overtaking China.
The path is also clear, and enough time has been put into theory and targets. Now we need action – and to provide certainty to the market to spur competitiveness and investments in strategic innovation.
At the national level, we need to proceed in a coordinated manner. Rather than banning technologies unilaterally, for example in the heating sector, member states should coordinate to promote key innovation. This can take the shape of a coordinated tax policy with tax breaks and super write-offs for investments, for instance in green hydrogen, Carbon Capture and Storage (CCS), battery storage, microchips, nanotechnology, or support for research and development of fusion technologies.
EU acceleration packages must no longer contradict supply chain bureaucracy. A central pillar of the EU’s comprehensive industrial agenda therefore needs to be a pragmatic Burden Reduction Act to increase coherence.
And another threat is looming. We should avoid by all means a clean tech race from becoming a subsidy race. Unleashing broad subsidy spirals and protectionist measures in Europe in response to the IRA would have questionable effects on competitiveness in Europe as a business location. Subsidies carry high risks for trade policy. They can unexpectedly shift the paradigm to a race to the bottom, harming both the European and the global green transition.
Similarly, excessive import substitution of key products for the energy transition, in the face of sufficiently diversified supply, is counterproductive, as it further increases the costs of decarbonisation. EU national governments should rather focus on the Green Deal industrial plan, and enhance it through a unified EU strategy focused on bilateral relations with third countries, consistent with, and not counterproductive for, internal policies. It is the best way of reducing high import dependence on individual trading partners, with a view to ensuring European security and resilience.
We need to strengthen Europe’s supply chains, greening them and ramping up domestic production of technologies key to net-zero. The successes of the European Green Deal are a sound basis, and its lacunae provide us with a more targeted direction to go towards. This means a competitive domestic industry, sectorial climate cooperation and bilateral deals with reliant third countries.
The US is one year ahead – but the EU has the power to catch up.