America’s efforts to use renewable energy subsidies to protect domestic manufacturing interests will not only lead to higher costs. Because they flout World Trade Organization rules, they could also have significant political repercussions.
ROME – With the Inflation Reduction Act (IRA) promising the United States will make the biggest investment ever in the fight against climate change, expect the European Union to greet this bill with a bang. But while there is no doubt that EU leaders applaud the strengthening of the US commitment to the green transition, they too have important, and above all legitimate, doubts about the IRA.
The IRA law commits to allocate $385 billion in green subsidies (which are overfunded by $750 billion in tax increases and revenue savings) over the next decade. While this is a significant figure for the United States, the annual total (less than $40 billion) represents less than half the amount spent by EU countries on renewable energy alone (€80 billion, or $84,500). million dollars, in the year 2021), which is equivalent to approximately 0.5% of GDP in the EU, compared to only 0.2% projected in the case of the United States.
But the magnitude of the spending is not the EU’s main concern with regard to the IRA law. The real problem is that the United States is becoming the first major economy to explicitly link renewable energy subsidies to domestic product content requirements—requirements that are clearly inconsistent with World Trade Organization rules that prohibit discrimination against products based on their country of origin. EU leaders fear that the IRA’s provisions on local content will become an obstacle for the European industrial sector.
The IRA contains a wide variety of provisions, but European misgivings largely center on one relatively small provision: the so-called clean vehicle tax credit. American consumers who buy new electric vehicles qualify for a tax credit of up to $7,500, for this purpose the IRA law budgets $50,000 million over 10 years.
What irritates Europeans (and other car-producing countries, for example, South Korea) is that the tax credit applies only to cars assembled in North America (that is, those assembled in the United States, Canada or Mexico). . In the case of a car worth $50,000, denying it a $7,500 subsidy is essentially the same as imposing a 15% tax on imports from outside North America.
But the EU should refrain from complaining too much about the IRA tax credit for clean vehicles. After all, the EU imposes a 10% tariff on all imported cars, (but only a 2.7% tariff on batteries). The other conditions of the IRA, such as that the car battery does not contain critically important items from “foreign entities of concern,” do not cause much concern to America’s allies, as these provisions aim, in the made, to china.
In any case, the quantitatively most important subsidies contained in the IRA law are those directed to the renewable energy sector that represent 250,000 million dollars in expenses. Those who invest in new plants can get a subsidy worth 30% of the total investment, which translates into a subsidy of $0.03 per kilowatt-hour (kWh) produced. While three cents per kWh may not seem like much, it represents almost 40% of the average wholesale price of electric power in the United States: 7.8 cents.
However, additional benefits are also available, only under conditions of domestic content of the products. If all the steel or iron, and at least 40% of the manufactured products, that were used in a new plant were produced in the United States, the subsidies are increased up to 40% of the total investment, that is, to 3.3 cents. per kWh. This is equivalent to imposing a 25% tariff on imports, since domestically produced products can be much more expensive than imports without putting the investor at a cost disadvantage.
The IRA implicit tariffs are unlikely to create a new advanced manufacturing sector in the United States, as has been the case when the United States has imposed explicit tariffs (which were about the same size as current implicit tariffs) in the past on imports steel and Chinese products. Because wind turbines and photovoltaic panels are mature technologies, no lasting first-mover advantage can be expected. Europe learned this the hard way: it had to learn it when its indigenous solar panel industry (which was the product of generous subsidies given a decade ago) could not compete with Asian companies, especially Chinese ones, on cost.
Something similar is likely to happen in the United States. An industry whose development is enabled by protection against foreign competition is unlikely to become competitive. The low percentage of domestic US inputs required to qualify for the additional subsidy shows that even IRA supporters expect investment in renewable energy to be dominated by imports. Furthermore, whatever resources are used to supply parts to the US industrial sector that is dedicated to renewable energy, are resources that cannot be used elsewhere. Therefore, the IRA is unlikely to succeed in revitalizing the US manufacturing sector.
The United States may not even be able to finance all the subsidies that the IRA law promises. A study estimates that investment in renewable energy (mainly solar and wind energy) will grow to 180 billion dollars by 2024 and will reach 380 billion dollars by 2032, which is the year when the provisions contained in the law will expire. GO TO. Which means a total investment of more than 5 trillion dollars over the next decade.
But the $250 billion that the IRA provides for renewable energy would only be enough to cover a 40% subsidy for less than $700 billion in investment. So the United States is likely to follow in Europe’s footsteps, meaning the government will cut subsidies when costs get too high.
Finally, the IRA law offers generous incentives for renewable energy as well as significant protection for domestic inputs. However, North America’s partners both in Europe and abroad would do well to temper their criticism of the unfair subsidies given to automakers in North America, and instead focus on the opportunities offered by the market to make investments in renewable energies, a market that has a size of 5 trillion dollars. After all, most of these investment opportunities will remain open to competition from abroad.
American leaders, however, should take a more critical look at his approach. Protecting the interests of the domestic manufacturing sector will mean higher costs, which could slow down the green transition. It could also have major political repercussions. The IRA Act, by flouting WTO rules (rules that the US itself, in its role as a “benevolent hegemonic” actor, helped draft) could become the final nail in the coffin for US global economic leadership.
This is why Europe should not follow the example of the United States. For countries that are found throughout the world, China, being a country whose economic system allows it to combine formal adherence to the rules with a maze of indirect subsidies and other mechanisms aimed at favoring its national companies , is not a credible alternative on trade issues when compared to the United States. But the EU is. Europe should step up to defend the WTO, not because it is after seeking to advance its own industrial sector, but because it must come forward to reaffirm the principle of non-discrimination in world trade.
