Photo credits designer491 from Getty Images

It is one year now since the US Inflation Reduction Act (IRA) was signed into law. This newsletter has already covered its main features and pointed to the shockwaves this piece of US legislation has sent across Europe. It was a wake-up call for the EU to adopt a consistent and effective zero carbon industrial policy. The bulk of the climate funding through the IRA is slated for private companies, which receive about 216 billion dollars of the tax credits. For Europe, the most alarming thing about the IRA was that it ‘worked’, as it also made a business case for climate policy objectives for industry. One year on, it is time to take a look at whether it really works and how the EU is trying to cope with the consequences.

Benefits of the IRA for the US economy

According to the Financial Times, by the end of August 2023, investments of at least 224 billion dollars in the US cleantech and semiconductor manufacturing sectors had been announced since the passage of the IRA and the Chips Act. In total, based on calculations by the Financial Times, they are expected to create 100,000 jobs, taking into account company announcements of at least 100 million dollars in this period. While the pace of announcements has slowed, each month since the acts were passed has brought new projects. Experts agree that the IRA works, it accelerates the US energy transition and contributes to a renaissance in American manufacturing (or at least slows down or reverses its decline). South Korean and European companies have led the foreign capital influx, announcing 20 and 19 projects respectively since last year’s legislation. There are ongoing reports of a series of investment projects that favour US locations instead of European ones, ranging from BASF and BMW to Total Energies, Linde (hydrogen) and Northvolt.

Paolo Gentiloni, the EU’s economy commissioner, expressed his concern that the ‘pull factor of the IRA is increasing’. An analysis by Schroeders reveals that, since the IRA was passed, the US has been catching up with the EU on battery projects and, on the basis of investment projects announced, the 2030 US battery capacity pipeline overtook Europe’s in April 2023. Although manufacturing job creation is important, the 100,000 US jobs likely to have been created by the IRA are just a fraction of the 800,000 additional jobs created in manufacturing since the Biden administration took office. Moreover, the IRA was an attempt by the US to catch up with China and, to some extent, with the EU on low-carbon industrial development.

Broader impacts on Europe

The IRA (and the Chips Act), however, have a broader dimension in the light of the tectonic geopolitical changes of the past years. One central political objective (now bi-partisan) in the US was to contain China’s influence, preserve US economic hegemony and decouple the US economy from China’s as much as possible (this ‘ambition’ has recently been reduced to ‘de-risking’). It would go far beyond the scope of this article to start a debate about whether this great power confrontation could bring any benefit to the rest of the world or even put global climate policy targets at risk; here, I would simply wish to raise a few points about how this affects Europe and the European responses that are emerging.

Trade data with China show opposite developments for the US and the EU in the past four years. The share of Chinese imports in total US imports fell from 21% in 2018 to 16% by 2022. Sectoral breakdown and country composition reveal that, while China’s share in US imports fell substantially in different categories of goods (end products), at the same time the share of India and South East-Asian economies grew to a similar extent (even if it was often Chinese companies behind these exports). The picture in the EU is completely different: Eurostat data demonstrate that the value of goods imported by the EU from China almost doubled between 2018 and 2022. A secondary effect of the IRA and ‘de-risking’ strategies will be how countermeasures and responses by China affect the rest of the world. For example, the trend in battery capacities in China shows that China is building up significant overcapacities in the next decade (more than quadrupling its current battery manufacturing capacities). Between the US and the EU, it is Europe that will be more vulnerable to possible Chinese battery dumping.

How is Europe responding?

A previous article in this Newsletter has already covered the main industrial policy measures launched by the EU earlier this year, from the Green Deal Industrial Plan and the Critical Raw Materials Act to an amended State aid Temporary Crisis and Transition Framework and the Important Projects of Common European Interest initiative. In response to concerns raised by several Member States, experts and interest groups that making state aid rules more flexible without additional EU resources would lead to growing disparities in Europe, the Commission proposed setting up a European Sovereignty Fund by summer 2023 in the context of the review of the Multiannual Financial Framework. The Commission has, however, backed away from the idea of the Sovereignty Fund and, in June 2023, presented a much downscaled version in the form of a Strategic Technologies for Europe Platform (STEP). It will be a dedicated funding platform to support innovative technology solutions in the context of the green and digital transitions. This result is rather disappointing, involving only 10 billion euros in fresh money. Even with the usual optimistic expectation that this will ‘leverage private capital’ (the Commission expects up to 160 billion euros), it might be seen as paltry when compared to resources mobilised by the US and China.