Why Europe is low-key mad about the landmark US climate bill
Just a few small issues to work out.
The landmark Inflation Reduction Act is the largest US contribution to date toward meeting global emissions reduction goals. And American allies aren’t happy about it.
To be sure, they’re glad to see the US is (finally) spending hundreds of billions of dollars to push its economy away from the fossil fuels that cause climate change.
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The problem is that the US approach to decarbonization relies heavily on subsidies to nudge industries toward renewable energy. That means financial support for major automakers to switch their plants to producing electric cars, and tax credits for consumers who buy them. And that support is largely contingent on how much of the production of those vehicles was done in the US, Mexico, or Canada.
In other words, an electric Ford, GM, or Tesla might cost $7,500 less than a clean Volkswagen or Hyundai, depending on where and how the cars were made.
Europe, as well as Japan and South Korea, have their own clean-tech and automotive industries, and they see this kind of industrial policy (with some justification) as a violation of international trade rules about government support for key industries. French president Emmanuel Macron, in the US for a state visit last week, has has been outspoken about the unfair treatment between US and European companies, which do not benefit from a free trade agreement.
For all the pleasures of the state dinner over the weekend, with its calotte of beef served with shallot marmalade, the real action is now taking place today (Dec. 5) at EU-US trade talks. US president Joe Biden says he is confident that concerns over the deal can be resolved through a special US-EU task force.
Can US green subsidies work with global trade rules?
Once upon a time, these issues might have been worked out at the World Trade Organization, but that bureaucracy is slow, and arguably broken—hence the bilateral talks.
A different option would be to strike a free trade deal between Europe (or Japan) and the US, but that’s also a long process and would invite other controversies, from agricultural rules to digital speech regulations.
Another possibility, backed by Macron, is to create an equivalent framework for the EU to subsidize its own renewable transportation and energy sectors. This might help solve both the economic and climate problem, but economists will note that it’s not exactly efficient at a time when the world needs to commit as many resources as possible to decarbonization. There’s a fine line between creating incentives for renewable energy and wasting money in a trade war.
“Globally this combination of policies would likely be bad for the world,” Chad Bown, an economist at the Peterson Institute for International Economics, said last week on the Trade Talks podcast. “[Automative] plant sizes may end up being smaller if companies can’t take advantage of economies of scale from their domestic markets alone. And ultimately what that might mean is EVs end up being more expensive and there are fewer of them, and we don’t address the climate crisis as quickly as we could have otherwise.”
In the near-term, the best outcome may be US regulators carefully parsing the bill and writing the rules to implement it in such a way that foreign companies aren’t locked out of all the US subsidies, something Biden hinted at recently.
It’s early days on the IRA
Predicting how government interventions will effect a market isn’t always easy. As Bown noted, it’s possible US subsidies won’t actually be large enough to convince American car producers and battery makers to divest from their China-centered supply chains. And, if the policy does succeed in meaningfully pushing US companies away from those suppliers, it’s possible that EU firms will reap the benefit of cheaper cleantech components thanks to falling demand.
The global backlash to the legislation has been fairly muted because that money is, after all, going to help reduce US carbon emissions—a good thing for humanity writ large. But it underscores the challenge of shifting the global economy away from fossil fuels: The transition could make fortunes, or destroy communities whose prosperity depends on industries that can’t transition or do so too late. It’s a coordination problem on a massive scale, and it’s not clear that the institutions to solve it even exist yet.
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