If the European Union has drawn a clear conclusion from the energy crisis derived from the Russia-Ukraine conflict, it has been to accelerate the energy transition in order to reduce its dependence on energy sources from third countries, and not to repeat scenarios of high prices that have put domestic companies and consumers in check, and even generated doubts about the security of supply. It has also become clear that there is strength in numbers, which is why common policies are essential to compete globally.
Thus, the EU’s firm commitment to lead the energy transition by promoting green energy has become one of the priority objectives of the European partners. However, a major setback came from the other side of the Atlantic. The US passed a bill that Joe Biden’s administration was trying to push through. The so-called Inflation Reduction Act (IRA) provides for around 400 billion dollars in aid to the green energy industry, the so-called green subsidies. This news put the EU on alert, as it dealt a direct blow to the waterline of the European green economy. It was therefore time for the EU-27 to come together and fight back.
For this reason, the President of the European Commission, Ursula Von der Leyen, announced the Green Deal Industrial Plan. The European equivalent that aims to stand up to its American counterpart, kicking off a new battle between the EU and the US, frictions that seemed to have been overcome when Donald Trump and his America First policies occupied the White House.
US green subsidies
On 16 August 2022, President Biden signed the Inflation Reduction Act, after the US Senate passed his ambitious climate, health and tax plan, with 370 billion dollars for investments in green energy over the next ten years. It was not easy to get it approved, as the Republicans announced their negative vote, considering that the tax increases to raise funds for this Plan would harm the American middle class more than the large corporations, and that it would only serve to increase inflation. It took more than 20 hours of parliamentary session, overcoming Republican amendments, the united vote of all members of the Democratic wing, and the tie-breaking vote of Vice-President Kamala Harris, for the bill to pass.
The bill represents the largest public investment to combat climate change in US history. It aims to make the country a world leader in clean energy technology, manufacturing and innovation. It is estimated that it could lead to a 40% reduction in greenhouse gas emissions by 2030. This is intended to meet the goal of reducing greenhouse gas emissions by 50-52% below 2005 levels by 2030. This would be equivalent to saving the emission of more than 1 billion metric tons of CO2, or the combined annual emissions of all US households. It includes aid to the sector and tax exemptions for companies in the sector that invest in the US.
Graph 1: Investment and new renewable electricity generation capacity in the US by year.
Source: Wood Mackenzi.
The reason why it has not gone down well in the EU that its Atlantic partner has approved this law is because of the fear that companies, including European ones, will be more inclined to invest in the US because of the announced aid. This would be a terrible blow to Europe’s aspirations to be energy self-sufficient and not be able to meet its decarbonisation targets.
Companies such as Audi, part of the Volkswagen Group, are considering building a factory in the US to take advantage of subsidies for electric cars. Tesla has also confirmed that it will focus its efforts on manufacturing batteries in the US. And this is what angers the Old Continent, that US companies compete with better conditions than European companies, and that even the companies themselves prioritise investing in the US. The fact is that only companies that manufacture on American soil can benefit from this aid.
Europe accuses the US of violating international trade rules of the World Trade Organisation (WTO), and calls for at least measures in this law, such as those agreed with Canada and Mexico, to obtain exemptions for European companies and products.
European green subsidies
And the anger turned to self-criticism, and once again united the 27 to compete with the world’s major economies, and to lead the clean technology revolution. Driven by Europe’s driving force, the Franco-German axis, the European Commission was urged to form its own subsidy scheme. The challenge was enormous, as 27 different industrial approaches had to be unified, and a joint European vision had to be developed, avoiding internal races between member states to counter American green subsidies. They set to work to have Europe’s own subsidies in place by the beginning of 2023.
On 27 January 2023, Ursula Von de Leyen announced the Green Deal Industrial Plan, or in other words, the European plan to counter the American one. It is based on four basic pillars:
- To have a predictable and simplified regulatory framework, so that it is simpler, faster and more predictable. There are three initiatives to support this work:
- Zero Net Emissions Industry Act: determining zero net emissions industry capacity targets, providing an appropriate regulatory framework for rapid implementation.
- Critical Raw Materials Act: ensuring sufficient access to materials such as rare earths.
- Electricity market reform.
- Faster access to financing on European soil, ensuring a level playing field within the single market, simplifying for states the granting of support. States will be able to access REPowerEU funds with around 270 billion euros.
- Improving the skills needed, which implies the need for an increase in the skills of skilled workers.
- Facilitating open and fair trade, encouraging global cooperation, in accordance with the principles of fair competition and open trade, strengthening ties with EU partners and the work of the WTO, thus tackling unfair trade practices.
This Plan must be compatible and complementary to the respective National Plans of each Member State to meet the targets set by the EU to achieve climate neutrality by 2050. Specifically in Spain, according to the PNIEC 2021-2030, the following renewable energy installation targets were set:
Graph 2: Installed capacity of renewable technologies (MW)
Source: Ministry for Ecological Transition and the Demographic Challenge, 2019.
Winner of the EU vs. US battle?
If we look at history, or the size of the economy in comparison, it seems clear that the US has an advantage. The fact that it anticipated the EU is also a point to be considered. And they also have a clear advantage, because while the White House only had to defeat the Republicans internally, the European Commission had to deal with 27 different visions to push through a common plan, ensuring that there is no disloyalty between member states with disparate economies.
But there is a reason to believe in Europe’s greatest success. The ultimate goal of energy self-sufficiency, and the commitment to the ecological transition implemented within the EU decades ago.
But it is clear that, whoever wins, the big winner will be Planet Earth, in its desperate struggle to mitigate the effects of climate change.
Aleix Pujols | Energy Consultant