On 4 April, IIGCC hosted a webinar exploring similarities and differences between the EU Green Industrial Plan and the US Inflation Reduction Act (IRA).
Investors and policy experts came together at the invite-only event to explore the strengths and shortfalls of these key climate legislations.
The webinar was moderated by our Climate Policy Programme Director Emily Murrell and featured international policy experts and IIGCC investor members, finishing with an audience Q&A which drew out some of the key issues facing investors.
Among other points the webinar covered whether the EU Net Zero Industry Act truly offers a competitive edge against the US IRA; if the EU still has greater long-term net zero policy certainty than the US; and what policies would better enable investment in the transition.
The US Inflation Reduction Act (IRA)
The US Inflation Reduction Act came into effect on 16 August 2022, offering almost USD 400bn in green subsidies. Speakers considered it to be “very good news” for climate policy, and necessary for turning US climate targets into a realistic and workable pathway.
The IRA incentivises clean energy projects in a relatively simple manner like never before and is already encouraging production of climate solution industries such as electric vehicles. It reinforces the importance of sustainability from an investor perspective, as well as a climate perspective, speakers agreed.
THE US IRA IS “VERY GOOD NEWS” FOR CLIMATE POLICY.
The EU’s response
The EU responded with its own Green Deal Industrial Plan on 1 February 2023, driven in part by the US legislation and including the EU Net Zero Industry Act.
There are three parts to the EU Net Zero Industry Act which most affect investors: it creates a list of strategic net zero technologies, fast tracks regulatory approval, and enables greater state support.
The strategic net zero technologies include heat pumps, solar energy, and carbon capture and storage (CCS) – but nuclear energy has been excluded. The target is for 40% of these green technologies to be produced within the EU by 2030.
Setting domestic production targets is an unprecedented step for the union.
Member states will identify these net zero strategic projects, which will then be fast-tracked and prioritised for public procurement, unless they are 10% more expensive than other options.
In contrast to the US IRA, the Net Zero Industry Act does little to offer direct funding to companies. Instead, the Green Deal Industrial Plan allows European countries to provide more state aid to support the green transition, for example through expanding clean technology manufacturing capacity.
However, there is some optimism that an EU-wide dimension to the funding may be offered before the end of the summer.
SETTING DOMESTIC PRODUCTION TARGETS IS AN UNPRECEDENTED STEP.
Criticisms of the EU response
There was a general feeling from investors that the EU’s response is slower and more complicated than the US IRA. The need for agreement from all EU countries, sometimes with conflicting interests, means a longer deliberative process. There have been differing opinions about how to respond between member states and even within the directorates-general of the European Commission itself.
The situation also highlights the relative weakness of Europe’s capital markets union, and the potential distortion that loosening state aid rules would have on the single market, where larger countries always have the deepest pockets to subsidise. EU manufacturing also suffers from a skill deficit accompanied by structurally higher costs of energy.
Comparably, the US IRA’s subsidies are easier to access. While a positive development, the EU equivalent is more time-consuming and bureaucratic, putting Europe on the backfoot.
THE US IRA’S SUBSIDIES ARE EASIER TO ACCESS.
A bigger question
There is an ongoing debate about how much and when to use incentives versus regulation when it comes to climate policy. The US IRA is almost all the former, whereas the EU’s approach is a mix.
Some argue that carbon emissions demonstrate the “Free Rider effect”, in which a party receives the benefits of a public good without contributing to the costs. In this case, those who benefit from carbon intensive economic growth are not contributing to the environmental costs that this creates for the planet. Therefore, one speaker felt that the government needed to address this with regulation, even if it was politically unpopular.
Climate change is not a nation state-based problem, but a global problem which requires global solutions.
The US IRA and the EU’s response are both focused on increasing domestic production, an exciting next step, but longer term a bigger solution which involves China and India is vital. This shared expertise could help to innovate the breakthrough technologies needed to reach net zero, but which do not currently exist.
The key message from our speakers was on the importance of accelerating actions and global collaboration – to address climate change we need to think bigger, and more collectively.
With special thanks to our panellists and expert speakers:
Dr Simone Tagliapietra (introduction): Senior fellow at Bruegel, and professor of Energy, Climate and Environmental Policy at the Catholic University of Milan and at The Johns Hopkins University – School of Advanced International Studies (SAIS) Europe
Jennifer Wu:Global Head of Sustainable Investing at JP Morgan Asset Management
Clemence Humeau:Head of Sustainability Coordination and Governance at AXA IM
Bryn Gostin: Managing Director on the Business Development team at Capital Dynamics
Kristina Church:Head of Responsible Investing at BNY Melon Investment Management
If you’d like to take part in our working groups and be the first to join our webinars for insights and analysis, why not speak to ourinvestor relations manager today to find out more about becoming a part of IIGCC.