America’s IRA Rankles Europe but a Full-scale Green Trade War Unlikely

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The game-changing Inflation Reduction Act (IRA), with a whopping $369 billion in funding for clean energy provisions signed by U.S. President Joe Biden last August, continues to rankle Europe and other parts of the world for its ‘protectionist’ intent.

It appeared that French President Emmanuel Macron’s meeting with Biden in Washington in early December could have somewhat allayed Europe’s fears, but the misgivings about the IRA’s provisions that ‘discriminate’ against European companies, especially automobile makers, persist.

Earlier this week, Belgium Prime Minister Alexander De Croo was particularly trenchant when he said that the U.S. was aggressively telling European firms not to invest in the continent but to come to the other side of the Atlantic because ‘we can give you better.’

The IRA, which makes the single largest investment in climate and energy in American history on a pathway to a net-zero economy by 2050, came into effect on the first day of the New Year. The legislation delivers billions of dollars in taxes and other incentives to U.S. solar and other clean energy manufacturers.

Not just European but Japanese and Korean auto majors have opposed the ‘discriminatory’ design of the American legislation, which proposes incentives to automobiles manufactured or assembled in the U.S. It is feared that small and mid-sized auto component suppliers could make a beeline to the U.S.

Against WTO rules

The European Union countries consider that some $207 billion out of the total $369 billion is tied to locally-produced content provisions that potentially violate World Trade Organization (WTO) rules. To get full credit for electric vehicles (EVs), car manufacturers must use batteries and other components from the country or its trade partners. This, the EU, South Korea, and Japan consider discriminatory.

Last month, UK Trade Secretary Kemi Badenoch wrote to her U.S. counterpart Katherine Tai that the green subsidies proposed in the U.S. legislation would harm multiple economies. She said America must stick to the rules of the international trading system.

In fact, protectionism has become a recurring theme in renewable energy discourse in recent months. Although not in the context of the IRA, India’s Power Minister R.K.Singh also invoked the term recently when he called on the EU countries to keep green hydrogen open to competition and said huge subsidies by developed nations were distorting the market. Ironically, India has also rolled out a Production Linked Incentive program for solar modules and EVs which can also be dubbed protectionist.

There have been talks of some concessions to European EV makers during meetings of a joint task force of the two sides, but the EU is not fully satisfied and considers what has been offered only as a start.

EU recalibrating approach

The opposition against the IRA in Europe and other countries has not translated into an all-out trade war with the U.S. despite the calls for the dispute to be taken to the WTO. There is also a realization that that’s not a wise course of action since dispute resolution at the international trade body is tedious and time-consuming. Moreover, each of these countries has its own net-zero goals to take care of.

As Raj Prabhu, CEO of Mercom Capital Group, put it, “It is a different world out there after the pandemic. Every country realizes the need to invest in its domestic manufacturing supply chains to avoid the supply shortage and logistical issues that plagued the world during the pandemic for over two years. As a result, energy and supply chain independence is now at the forefront of policymakers around the world.”

“You cannot expect a country to invest $400 billion towards green energy and not have any incentives to develop industries locally. Eventually, the U.S. and Europe could come up with something more palatable to their domestic constituencies and keep the focus on the climate goals,” he added.

In October, company heads of 13 leading European solar organizations urged the European Commission to call for action to boost investment in the continent’s solar photovoltaic industrial base in the wake of the enactment of the IRA.

Parallelly, European leaders are calling for more flexible state aid rules for the green sector and speed up approvals for clean energy programs to counter the effect of the IRA. There is a growing realization, and rightfully so, that taking on the U.S. should not be the sole approach but making Europe more competitive and investment-friendly a bigger priority.

The European Council is meeting for a special session on February 9 and 10, when the members are expected to finalize a more cogent and unified approach to the IRA. At its last meeting in mid-December, Council President Charles Michel outlined the EU’s resolve and ambition to ‘step up’ and put in place a package of measures to support competitiveness in the face of decisions in the U.S. to support domestic industry.