When US President Joe Biden signed the Inflation Reduction Act into law, he enacted the biggest climate investment in American history \u2014 a landmark moment for a nation that pumps more carbon into the atmosphere than any country bar China.
\n\u201cOur Department of Energy estimates that the new law will reduce emissions in the United States by about 1 billion tons in 2030, while unleashing a new era of clean-energy-powered economic growth,\u201d Biden told world leaders at the UN\u2019s COP27 climate summit in November.
\nBut in directing roughly $370 billion in federal funding toward the rapid buildout of clean energy infrastructure, the United States has also kickstarted a global subsidies race, as world leaders claim the package unfairly favors American companies and say they have no choice but to respond with hefty incentives of their own.
\nLast week, the European Commission unveiled its Green Deal Industrial Plan, which will marshal more than $270 billion in existing funds toward cutting red tape and delivering tax breaks for net-zero investments. The package was discussed at a meeting of EU leaders this week.
\nEurope would push ahead with work \u201cto allow for targeted, temporary and proportionate support to be deployed speedily, including via tax credits, in those sectors that are strategic for the green transition and are adversely impacted by foreign subsidies or high energy prices,\u201d the EU leaders said in a statement on Friday.
\nHere\u2019s what you need to know about the rivalry and its potential consequences.
\nWhat are subsidies?
\nSubsidies are monetary benefits awarded to companies that a government or public body wants to help, in theory because their work benefits the public or has strategic importance.
\nThis can take the form of a tax break, a cash grant or loans at below-market rates. Even government procurement deals can function as subsidies if a government agency offers to pay extra for goods or services it could have acquired more cheaply elsewhere.
\n\u201cThe idea is governments can do something that the markets aren\u2019t doing themselves,\u201d said Stephanie Rickard, a political science professor at the London School of Economics and the author of \u201cSpending to Win,\u201d a book on subsidies. \u201cEither there\u2019s a technology that\u2019s not being created or adopted, or there\u2019s an industry that\u2019s not growing at the rate it might be.\u201d
\nCritics argue that governments, which have their own political motivations, aren\u2019t good at picking winners and losers. But with the state taking a much bigger role in the economy since the pandemic, supporters say subsidies have a vital role in tackling the climate crisis. They also note that fossil fuel producers have benefited from them for decades.
\nWhy are green subsidies popular?
\nOne of the biggest hurdles in efforts to address climate change is the \u201cgreen premium,\u201d or the difference between what it costs to buy a product or service that uses clean energy versus one with heavy emissions.
\nThis premium is expected to shrink as clean energy technologies become more advanced and infrastructure to produce them is scaled up. In the meantime, though, it\u2019s dissuading businesses from choosing greener options, even when they\u2019re available.
\nThat\u2019s where companies think government aid can help. They see it as a means to supercharge activity in the private sector and help bring costs down.
\n\u201cInnovations need that push in the beginning,\u201d said Nils Aldag, CEO of Sunfire, a German company that builds technology for producing green hydrogen. \u201cThey need that market opening.\u201d
\nWhat\u2019s in the Inflation Reduction Act?
\nMost of the money the IRA has earmarked for clean energy initiatives comes in the form of tax credits. An estimated $43 billion is available for consumers and $216 billion for corporations, according to McKinsey.
\nAmerican households can now claim a credit of up to $2,000 for installing an electric heat pump, for example. A credit of up to $7,500 is available for the purchase of a new electric vehicle \u2014 though this may require the rewiring of supply chains, given coming stipulations that eligible vehicles need be built in North America, with batteries and components also from North America. There\u2019s $2 billion in grants included to expand domestic manufacturing capacity as demand grows.
\nThe law also gives generous tax incentives to businesses that invest in green energy projects, from wind and solar farms to facilities for battery storage and producing renewable hydrogen. Companies have already announced at least $40 billion in capital investment for such projects, along with 20 new facilities or facility expansions, according to the American Clean Power Association, an industry group.
\nThis all sounds great. What\u2019s the problem?
\nLeaders in Europe have applauded renewed US leadership on climate, but have complained that the IRA is \u201csuper aggressive\u201d and even discriminatory. They fear the IRA is tempting green energy businesses from their countries to invest in the United States instead of in their home markets, resulting in a loss of expertise, jobs and tax revenue. Domestic firms that stay put could fall behind as American companies leverage subsidies to quickly ramp up operations.
\n\u201cA lot of investors are asking us why we are keeping our operations here,\u201d said Heike Freund, chief operating officer at Marvel Fusion, a German startup developing technology to produce clean energy from fusion power.
\nThe European Union has also argued that the IRA\u2019s conditions on tax credits for electric cars violate World Trade Organization rules.
\n\u201cThis nationalistic approach when it comes to the local content requirements in the Inflation Reduction Act is what generates the tension,\u201d said Simone Tagliapietra, a senior fellow at the Bruegel think tank in Brussels.
\nWhile the European Union\u2019s outcry has been the loudest, it\u2019s not the only worried party. The United Kingdom, South Korea and Japan have also raised concerns.
\nHow are they responding?
\nOne challenge for European leaders is how to loosen rules on state aid without creating a new competition for subsidies between member states. That could weaken a core pillar of Europe\u2019s vast internal market.
\nIn the meantime, government officials are lobbying the United States to rethink parts of the IRA.
\n\u201cThere is still a fair chance to reach agreements that will allow European industry to participate [in], and not be excluded from, the Inflation Reduction Act,\u201d German Economy Minister Robert Habeck told reporters during a visit to Washington this week with French Finance Minister Bruno Le Maire.
\nThe White House, for its part, emphasizes that the IRA will benefit all countries by reducing the cost of green technologies. It says talks with foreign partners are ongoing.
\n\u201cEurope and other allied countries have nothing to fear from the Inflation Reduction Act and quite a bit to gain,\u201d said Brian Deese, Biden\u2019s top economic adviser.
\nWhy does it matter?
\nWhile greater funding for clean energy production and green technologies is essential, a fight over subsidies runs the risk of focusing too much on geography and not enough on the bigger picture.
\nIf a gigafactory that would have been built in Germany is simply stood up in South Carolina instead, that doesn\u2019t make the world more likely to hit its emissions targets, said Aaron Cosbey, a senior associate at the International Institute for Sustainable Development.
\nThe fight over green subsidies also comes as geopolitical tensions are pushing countries to focus on greater localization of production \u2014 not just for green energy, but also for sensitive technologies like computer chips. China\u2019s subsidies for net-zero sectors \u201chave long been twice as high as those in the EU\u201d relative to the size of the economy, the European Commission said when outlining its new industrial plan.
\nThis could accelerate the remaking of supply chains and the global economy over the long term, as national interests trump commitments to open markets.
\nNgozi Okonjo-Iweala, the director-general of the WTO, has warned against this shift, arguing that a subsidy arms race could damage global trade at a moment when it\u2019s needed to spur growth.
\n\u201cLet\u2019s not make it [a subsidy war] a reality because of the cost to the global economy,\u201d Okonjo-Iweala told CNN\u2019s Richard Quest in January.<\/p>\n
edition<\/p>\n
Tags:Armaments subsidy<\/p>\n","protected":false},"excerpt":{"rendered":"
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