US move draws sharp criticism from Europe

Inflation Reduction Act seen as enticing investors away from Washington’s allies

Since the United States Inflation Reduction Act, or IRA, came into force on Jan 1, European countries have not let up on their criticism of it and are working on measures to respond to it.

The act, aimed at speeding up the US’ transition to a low-carbon economy, includes about $370 billion in subsidies for green energy, as well as tax breaks for US-made electric cars and batteries.

France’s Finance Minister Bruno Le Maire told the broadcaster France Inter on Wednesday that he was working on a bill to strengthen the country’s green industries that will include tax, regulation and legislative measures to accelerate the installation of industrial sites in France.

“The aim of the bill is to promote green industries, green hydrogen and the production of electric batteries, nuclear energy, of course, and renewable energies,” he said.

Josep Borrell, high representative of the European Union for Foreign Affairs and Security Policy and vicepresident of the European Commission, said in an article on Jan 2 that “this legislation is based on a very different philosophy from the one we have favored”.

“It does not foresee carbon pricing and mainly provides for important public subsidies to companies producing goods incorporating green technologies on American soil. This type of action penalizes European producers in our trade relations and does not respect World Trade Organization rules.”

The Energy Innovation Group, an energy and climate think tank in the US, estimated that the IRA would lead to the creation of 1.4 million to 1.5 million additional jobs and raise US GDP by 0.84 to 0.88 percent by 2030.

While bringing great economic benefits to the US, the act is widely considered to harm others, especially allies of the US, because it is starting to lure investment in green technology away from European manufacturers.

For instance, under the IRA, Northvolt of Sweden could receive up to 800 million euros ($836 million) in US government aid to build a factory making batteries used in electric vehicles, about four times what the German government is offering. Moreover, the cost of energy in the US is much lower than it is in Europe. So the company is considering delaying its plans to build a factory in Heide, northern Germany, Peter Carlsson, its chief executive, said.

Other companies’ executives have echoed that sentiment. A recent survey by the German Chambers of Commerce and Industry suggests that 39 percent of companies want to raise investment in the US, compared with 32 percent who want to raise it in Europe.

Energy crisis

For Europe, which is in the midst of an energy crisis, US subsidies for electric vehicles are a blow to its economy, said Zhao Yongsheng, a researcher at the Institute for Regional Studies at the University of International Business and Economics in Beijing.

“In the short term the biggest impact of the IRA will be on major European economies such as Germany, France and the UK, as well as Nordic countries with very high per capita economic indicators despite their small size. In the long term the bill will affect all European countries because green industries and ecological transformation are a must for all European countries.”

Some European academics, politicians and companies are calling on the EU to directly retaliate over the act and make coordinated responses to support their companies. France and Germany are calling for Europe to push efforts to develop an ambitious green industrial policy to give the continent a competitive edge against the US.

However, the prospects of the EU taking steps to restore European competitiveness to the US are dim, because the 27-member bloc has to go through complex administrative procedures to determine policies, said Dong Yifan, an assistant research fellow at the China Institutes of Contemporary International Relations in Beijing.

The formal implementation of the IRA will endanger the global industrial chain, especially green industry, and European countries will bear the brunt, Dong said.