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News 16 January 2023

European Commission prepares to counteract US' Inflation Reduction Act

The United States’ 2022 Inflation Reduction Act (IRA) is the single biggest investment in climate and energy in American history, propelling the US’s position as a world leader regarding the production of clean energy. Despite the importance of the legislation for the US’s sustainability and energy practices and the worldwide impact it may have, the IRA was received with concern in Europe. This reaction is mainly due to the short and long-term risk that it poses to the EU, potentially incentivising green tech industries to relocate to the US. The subsidy support and increase in green investment set forward by the IRA provides an attractive environment for such companies vis-à-vis the European framework in its current form. 

This has prompted criticism towards the US not just from EU Member States, but also from EU institutions who have argued that there should be a level playing field in the competition. In their present definition, the tax breaks established through the IRA puts European companies at a disadvantage towards their US competitors. 

Subsequently Thierry Breton, the Commission’s industry chief, has begun an attempt to plan an EU coordinated response to the IRA, which would come in the form of a “Clean Tech Act”. Such a legislative proposal would subsidise key industries in Europe, particularly green supply chains, and “make sure that there is a level playing field in terms of equal access for all EU countries to funds”. Nonetheless, there is not yet, at least for the moment, a consensus on that plan, with figures such as Margrethe Vestager, the EU’s competition Commissioner, stating that “you can’t build competitiveness out of subsidies”. Others warn that state intervention in the market should be done with caution as it brings certain risks. Moreover, that strategy would risk creating a further imbalance within the EU as richer countries would be able to support their companies in a way that other countries cannot. 

Attempting to garner support for the cause, Breton has been meeting with EU heads of state, such as the Belgian, Spanish, Polish and French leaders, in an effort that aims at finding a consensus on the necessity of a fast and coordinated response. A common criticism present in the discussions is that the current EU projects that have been implemented, such as the Important Projects of Common European Interest, have been too slow in aiding the clean energy transition efforts in Europe. The Commission is expected to give more details about the plan at the World Economic Forum in Davos this week, despite the fact that it is still in its conceptual phase, and it is still not known where the funding for that Act would come from. 

In alignment with that discussion, France has recently announced that a new bill will attempt to support and encourage green industries, from green hydrogen to nuclear energy, in order to “become the leading decarbonised nation in Europe”, as stated by French Economy Minister Bruno Le Maire. As one of the players at the forefront of such efforts, France’s announcement comes at a time when EU leaders have agreed to ask the Commission to put forward a proposal as a reply to the US’ IRA, a discussion that is expected to take place at a European Council summit in February.