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18 January 2023

Commission President proposes IRA look alike for Europe

This week the European Commission President Ursula von der Leyen used a speech at the World Economic Forum in Davos to promise investments from the EU very similar to the Inflation Reduction Act (IRA) act passed by the US.

Von der Leyen said she will bring in new legislation, adding a new Green Deal Industrial Plan, to go with Europe’s original European Green Deal, the Just Transition Fund, and its NextGenerationEU and REPowerEU energy security pieces of legislation.

The Green Deal Industrial Plan is a sort of stand-off and it is framed as either a parallel island of investment which can co-exist with the IRA or a direct rival to it, to incentivize European companies to stay at home and not run off to the US or China. But throughout her speech she gave the impression that there are deep conversations with the US, to prevent a full scale global trade war happening, by keeping their respective steps in harmony.

Von der Leyen boasted that the EU has already replaced around 80% of Russian pipeline gas and brought down gas prices quicker than anyone expected, and added, “We see energy being used as a weapon. We see threats of trade wars and the return of confrontational geopolitics. In addition, climate change already comes with a huge cost and we have no time to lose in the transition to a clean economy.”

She repeated IEA estimates that the size of the market for mass-manufactured clean energy technology is to triple to around $650 billion a year by 2030. And clearly she wants Europe to have its share.

She reminded us of the early move of the European Green Deal to set the path to climate neutrality by 2050 and how this has been followed up with further investment of NextGenerationEU, an €800 billion investment plan, and RePowerEU which focusses on getting the EU off Russian gas.

She highlighted how India is already using its Production Linked Incentive Scheme to build up renewables competitiveness, in solar and batteries. And then pointed to the Inflation Reduction Act, which has shaken Europe up and then she introduced the idea of a new Green Deal Industrial Plan to make Europe the home of clean tech and industrial innovation based on four key pillars; regulation, financing, skills and trade.

Von der Leyen says she will introduce a new Net-Zero Industry Act based on EU Chips legislation to identify clear goals for European clean tech by 2030 and to simplify and speed up permitting. Ok we knew that really.

But she will also introduce a Critical Raw Materials Act looking for strong relationships around rare earth metals, bringing refining and recycling of such metals to Europe. The idea is to overcome the Chinese monopoly on batteries, but at the same time it will rival and challenge the US initiatives from the IRA and the Bipartisan Infrastructure Investment and Jobs Act which spent $billions on streamlining raw materials supply chain.

And the EU says loud and clear that it wants to work with like-minded partners – from the US to Ukraine – to collectively strengthen supply chains and to diversify away from single suppliers.

Radically, von der Leyen plans to temporarily adapt EU state aid rules so that similar incentives can be offered across the EU around tax-break models. Under EU law subsidies like those the US has enshrined in law are illegal – but not for long.

This should counter relocation risks from foreign subsidies – remember how VW talked about putting all of its battery plants in the US, just weeks ago. To do this she will introduce a European Sovereignty Fund as part of the mid-term review of the EU budget later in 2023.

This paints a picture of EU factories for EU products, similar to the US under the IRA act, and raw materials which are interchangeable between the US and the EU – in EVs, solar, wind and batteries.

She may also introduce some emergency funds if this Sovereignty Fund takes too long. The third pillar of the Green Deal Industrial Plan is developing the skills needed to make the transition happen and the fourth pillar is to facilitate open and fair trade – which sounds as far as you can get from the trade war that the US has initiated against China and which has inadvertently caused consternation among US partners in Europe, Japan and South Korea.

She promised that the EU would hold out a hand of friendship to the UK, Mexico, Chile, New Zealand and Australia for raw materials and in the future to India and Indonesia, not to mention the countries of the Mercosur agreement – Argentina, Brazil Paraguay and Uruguay.

She then hit out at China for subsidizing all aspects of renewables, which as a result dominates global production in electric vehicles and solar panels, but favors de-risking reliance on China, rather than decoupling their economies entirely.

Biden last week was reported as saying “I never intended to exclude folks who were cooperating with us. That was not the intention. We’re back in business, Europe is back in business. And we are going to continue to create manufacturing jobs in America, but not at the expense of Europe.”

He said exemptions would be made for companies that had free-trade agreements with the US but suggested that this should be extended more generally to “allies.”

What is interesting is that the term “Free trade agreement” is not yet defined anywhere inside the IRA Act, and the US Treasury and the IRS say they will define it more closely by March. In essence the Act is being used as a blunt instrument to move more US trade into “Free Trade” agreements, which it openly says are anticipated with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore. Not just Mexico and Canada then, but certainly as yet, only likely to include Europe once these new changes are brought in by von der Leyen.

In a hard hitting analysis published this week by Rethink Energy entitled “IRA – opening salvo in global trade war – which way will Europe jump?” (see here for more details) we have analyzed out how the IRA is an attempt to reverse 40 years of history during which US companies sent their manufacturing to China, Mexico, India and Taiwan Now the US wants it back again to secure ownership of critical renewables technologies – EVs, solar, wind, hydrogen and batteries.

Rethink argues that there is simply not enough money built into the Inflation Reduction Act and the previously passed Bipartisan Infrastructure Investment and Jobs act combined, to make more than a few percentage points swing on emissions reduction. And it has also concluded that at least 50% of the Inflation Reduction Act funding will be completely wasted, and its impact on emissions will be miserly.

The 10,000 word report concludes that much of the appetite for investment was already in place, and that the spending needed to really accelerate US plans would have to have been many times larger.

While there is little else that President Joe Biden could do, the emphasis on everything being US centric has triggered what is likely to be a full scale trade war against China, and the US has invited everyone in the west – Europe, Japan, South Korea and Latin America to follow its lead. But China too is courting those same countries.

Rethink Research says the outcomes of the IRA will be:

  • Failure to secure long term competitive US manufacturing
  • Failure to steepen the curve on emissions reduction
  • To witness fledgling US industries created, only to be swept aside in a price war with the Chinese
  • To start a trade war with most of Asia and Europe and turn them towards stronger Chinese links
  • To break the bonds holding the World Trade Organization together