The Inflation Reduction Act: Is the new U.S. industrial policy a threat to Europe?

Executive Summary

The central instrument of the U.S. Inflation Reduction Act (IRA) is a funding programme for climate projects, with an officially estimated volume of 369 billion US dollars. The Act’s goals are in particular the decarbonisation of energy production and use. At least 70 % of the programme for climate projects aims at subsidising private investments in low-emission technologies. Companies receive particularly high subsidies if a large share of the raw materials and primary products used comes from the U.S. – or from countries with which the U.S. has free trade agreements. The IRA subsidy volume for green technologies is roughly equivalent to the size of the European Union's (EU) Green Deal Industrial Plan.

The largest single item in the IRA is subsidies for low-emission and sustainable electricity generation. For this, 43.6 % of the planned subsidy volume is earmarked in the form of tax credits. Studies estimate that the IRA will reduce the price of electricity in the U.S. by about 1 ct per kWh. The expansion of renewable energies and the IRA's battery and hydrogen production are likely to increase demand for critical raw materials.

The GCEE estimates the overall economic impact of the IRA for Europe to be rather low. For individual industry branches, the subsidies of the IRA could increase the attractiveness of the U.S. as an investment location. However, urgent action is needed due to existing energy price differences, which have a much greater impact on the relative attractiveness of the EU than the IRA.
 

Potential courses of action

• Coordinate responses among EU member states. Avoid a subsidy race with the U.S. and within the EU.
• Adapt EU funding programmes: Reduce bureaucratic hurdles, simplify applications, align funding with emission reductions.
• Rapidly expand energy supply and infrastructure, increase incentives for supply and demand flexibility and strengthen European coordination in infrastructure development to reduce energy prices.
• Press ahead with negotiations on a free trade agreement with the U.S. and ratify agreements already negotiated (e.g. Mercosur).
• Secure and diversify the supply of critical raw materials: Conclude agreements with commodity-producing countries, strengthen domestic extraction and recycling and expand international cooperation.