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The Threat of the US Inflation Reduction Act on European Businesses

Updated: Sep 13, 2023

By Clarissa Bigasz Mascarenhas

Last August, the US Congress and President Biden passed the Inflation Reduction Act (IRA). The IRA aims to control inflation by, among other things, investing in domestic energy production while promoting clean energy. However, what is the impact of this legislation on the EU? President von der Leyen gave the answer in last week’s letter to the European Council summit. There are evident possibilities that the IRA causes an “un-leveling playing field and discriminate European companies”, which will be disastrous for the EU internal market.

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1. What is the Horizon Europe Program?

Currently, Europe is dealing with various problems, ranging from geopolitical issues to economic instability. Although fixing these issues is complicated, many can be solved through technological and scientific advances. The European Union (EU) has historically been a leader in innovation. However, many European industries are behind, creating a noticeable technology gap. To help close this gap and continue to promote innovation, Horizon Europe is a key EU funding programme with a budget of 95.5 billion euros to be invested within a period of seven years.

The primary aim of the programme is to maximize the impact of the EU's investments in research and innovation to enhance the scientific and technical foundations of the EU. This will improve the level of competitiveness compared to other economic power blocs such as China or the USA. The Horizon Europe programme is furthermore of utmost importance to achieve the Paris Climate Agreement or the Sustainable Development Goals.

The programme is structured in three pillars focusing on research, global challenges and competitiveness, and innovation. It is particularly pillar II that is most likely to be threatened by the IRA because it predominantly focuses on Digital, Industry, Climate, Energy and Mobility. The EU must therefore invest in these sectors to cope with the IRA’s impact on American competitiveness.

Even though designed deals like the ‘Made in Europe’ partnerships are expected to “boost European manufacturing ecosystems towards global leadership in technology”, there is an urgency among European leaders to formulate a plan to meet the 367 billion dollars package approved by the US Congress.

2. How Can the IRA Impact the EU?

The Inflation Reduction Act is the most comprehensive federal legislation ever approved to combat climate change. For instance, a project conducted by Princeton University found that investments in climate initiatives from the IRA could lead to a 42% decrease in carbon emissions by 2030. This is close to the federal goal of a 50% reduction, which would put the nation on track to reach net-zero emissions by 2050.

At the same time, the US government is offering assistance to help American factories make more products, as well as incentives for people to purchase American-made items such as automobiles, batteries, and renewable energy. This is where European leaders are demonstrating their concern about the IRA, even though legislation only enters into force next year. The European frustration is that European businesses, which are dealing with significantly higher energy costs than their American counterparts, could become less competitive. This could lead to a stop in investments or, even worse, a move to the United States to take advantage of government assistance and cheaper energy prices.

3. So, What Now?

Overall, there are two clear paths that the EU could take to combat the unfair competition regarding the IRA. First, as presented by President von der Leyen, the EU should look into temporarily simplifying state aid rules for renewable energy, decarbonising industrial processes and clean tech. This encourages, in the short term, the boost of the European Commission's plan to transition away from Russian fossil fuels and speed up the energy shift.

It, thereby, acknowledges the need for extra EU funding to speed up Europe's transition to clean energy. The second path could be the implementation of a European Sovereignty Fund, which would help the continent become a front-runner in green technology. This could work as the European IRA equivalent and, as a result levelling the playing ground again. Nevertheless, Margrethe Vestager, the Vice-President of the European Commission, alerted the European Parliament that government assistance could not solve all problems. She defends that “State aid can be a short-term solution to the current challenges, but to be competitive on the world stage, [the EU] must make further efforts to remove single markets barriers that unfortunately still exist”.

Last but not least, the leaders of the 27 EU member states recently had a summit to talk about transatlantic relations in order to explore ways to increase partnership and to figure out how the EU should react to the newly established US subsidy program. For weeks now, representatives from Europe and the United States have been attempting to determine possible allowances for European businesses before the enactment of the bill in January. During France’s recent state visit to Washington, President Biden even said that ‘tweaks’ were possible. However, the IRA represents a great achievement for his administration and makes it more than likely that future compromises will not be reached anytime soon.

Sources: Euronews, Reuters, EFFRA, Princeton University, European Parliament, European Commission.

Written by Clarissa Bigasz Mascarenhas

December 2022

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