Will America's massive state support for clean energy help or hinder its relationship with Europe?
- China approved 82 new coal power plants in 2022, the highest number in seven years.
- Sixty prominent scientists signed a letter calling for research into the impacts of solar geoengineering.
- Greta Thunberg joined activists protesting the construction of wind turbines on land traditionally used by the Sami indigenous people of Norway.
America’s clean energy subsidies have turned heads across the world. Just last week, Markus Duesmann, Audi’s chief executive, said the Inflation Reduction Act (IRA) had made building a car plant in the US “very attractive”, while Tesla said it would focus its cell production there.
The enthusiasm isn’t limited to carmakers. Drax, a power generator, said it was “increasingly excited” about building a bioenergy power station with carbon capture in the US and had identified its first preferred site.
So what? The clean energy subsidies are a welcome display of US leadership on climate change – but aspects of the legislation that tie financial support to domestic production have strained transatlantic unity. To qualify for a $7,500 tax credit, for example, electric vehicles need to be assembled in North America.
Tom Thackray, the CBI’s programme director for decarbonisation, said multinationals which would once have seen the UK as their first or second choice for investment were pushing the country down the ladder because of the IRA.
By the numbers:
369 – billion dollars, the total IRA investment in tackling climate change, of which $270 billion will be in tax incentives.
32-42 – per cent, the extent to which the IRA will cut US greenhouse gas emissions by 2030, below 2005 levels, according to the Rhodium Group.
1 – per cent, annual emissions reduction in the US from 2005 to 2022.
The IRA will significantly speed up the pace of decarbonisation in the world’s largest economy. But the fact that the US is causing dismay among allies risks the cooperation that will be needed to solve climate change, the world’s biggest collective problem.
There is scope for compromise, but not much. In December the US Treasury said electric vehicles assembled outside North America would be eligible for the subsidy if they were leased to consumers. Some EU officials hope for more flexibility when the US gives further interpretation of the law next month.
At the Munich Security Conference, John Kerry, the US climate envoy, told Tortoise that “Europe is our partner” and the US is open to discussion on “somewhat chauvinistic” elements of the law. But his main message was that the IRA would create incentives for innovation. “Europe should get over it. Europe should do the same thing,” he said.
Part of Europe’s response is to temporarily loosen the rules on state aid. That will chiefly benefit the countries with the deepest pockets: France and Germany. The EU is also open to repurposing unused loans from its Covid-19 recovery fund. UK industry is also looking to next month’s budget for government support, though Jeremy Hunt, the Chancellor, says there is little scope for that.
Brussels-watchers now say the conversation is now shifting away from the US challenge to focus on rivalry with Beijing.
“Nobody wants a fight with America on subsidy,” said Mujtaba Rahman, managing director for Europe at Eurasia Group. “Now it’s about China, unfair Chinese state competition and more broadly what the Europeans are going to do to counter what the Chinese are doing.”
Next month the EU will bring forward a critical raw materials act to build up strategic reserves of substances like lithium, essential to the green transition. The law is openly aimed at providing a shield against China’s domination of this supply chain, an area where the US could find common ground with its allies.
The politics of climate has driven a wedge between Washington and Brussels. Geopolitics could bring them back together.
