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News 24 January 2023

Division and uncertainties over the potential EU-wide response to the US’ Inflation Reduction Act

On 17 January, intervening at the Davos’ World Economic Forum Annual Meeting, the European Commission President Ursula von der Leyen elaborated on the European Union’s possible response to the United States’ Inflation Reduction Act – the $369 billion green subsidy package which has sparked concerns throughout the EU that its industry might be incentivised to relocate to the US. The “EU Green Deal Industrial Plan”, as she called it, will aim to increase “investments on strategic projects along the entire supply chain”, particularly through simplifying and fast-tracking permits for new clean tech production sites. Additionally, a European Sovereignty Fund to support Europe’s green industry and digital transition is also expected to be presented next summer by the Commission. Tax-breaks for green industries and lighter state aid rules for clean tech represent other proposals that are expected to be put forward. 

Nonetheless, the Commission’s proposal and the details of such a legal act have sparked discussions, as some fear that the plan could have unwanted consequences. Margrethe Vestager, the EU’s competition chief, has opposed the plan and put forward a temporary state aid framework proposal to support green projects, instead of the long-term framework announced by the Commission President. On the other hand, the German Economic Institute has stated that the criticism towards the IRA has been exaggerated. The institute argues that not only does the IRA show that the US is taking climate protection seriously, but it will also have a smaller impact on European companies than what is currently being expected. The German industry “doesn’t seem to think there is a massive problem” and this is now a “great opportunity to finally push this through at the European level as well”, as stated by Jürgen Matthes from the institute. 

Additionally, there are fears about the potential negative impact of a “subsidy race” between the EU and the US, as the latter seems not to be willing to budge on the main structure of the IRA. Considering the fact that the addition of back-door exemptions for EU companies or the establishment of some transatlantic deals are either highly unlikely or legally challenging, the focus thus shifts to Europe’s very own response. In that regard, the tax breaks possibility either at the national or EU level, and the origins of the funding stand as two crucial questions. The research community fears that these legislative proposals may diverge funds away from the EU’s Horizon Europe research programme in order to fund the new strategy. 

Still, despite the doubts, there is a substantial amount of support towards the Commission’s plan. France and Spain have put forward a joint statement in support of a “real Made in Europe strategy and instruments”, as stated by Emmanuel Macron, France’s President. The statement urges the undertaking of a fast, agile and effective set of solutions to simplify and accelerate existing instruments and funds “towards a more ambitious European industrial policy”.