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How is international rivalry driving green industrial policy?

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Following the UK update of its green strategy, Matthew Lewis (partner and UK head of energy & utilities sector), James Watson (partner and head of decarbonisation) and Nick Thody (head of knowledge) at Osborne Clarke explore how international rivalry is driving green industrial policy through Europe’s response to US policy.

  • The US Inflation Reduction Act (IRA) contains $500 billion in funding for health and clean energy in the hopes of securing domestic manufacturing and increasing tax revenues.
  • The EU Green Deal Industrial Plan targets clean tech manufacturing with the Net Zero Industry Act, setting a goal of 40% domestic manufacturing of clean tech demand by 2030.
  • Despite the UK’s Green Day announcements, there remains a lack of clarity on UK industrial investment plans in clean tech.

The IRA was signed into law by President Biden on 16 August 2022 and has been described by the White House as “the most significant action Congress has taken on clean energy and climate change in the nation’s history”.

The Act will channel $370 billion of federal spending – mainly in the form of tax credits, loan guarantees and grants – to promote American domestic manufacturing through the clean energy supply chain and drive the development of green technology.

Lower energy costs, private investment in clean energy solutions, strengthened supply chains and the creation of good-paying jobs have all been cited as drivers behind the introduction of the Act.

There are a multitude of eye-opening clean energy provisions included in the IRA, with billions of dollars worth of tax credits available for the manufacturing of sustainable infrastructure, support for heavy polluters to reduce emissions and the development of EV manufacturing and renewable technologies.

Several of these tax credit programmes run for up to ten years, providing “planning certainty” for researchers, developers and manufacturers, and incentivising them to use and produce components and equipment within the US domestic supply chain.

The European reaction to the IRA

The Act has fundamentally changed the terms of debate on clean energy funding and supply chains in the US and in Europe. European policymakers are concerned that this enormous programme will incentivise developers and manufacturers to locate investments in the US and away from Europe in order to benefit from its provisions.

The EU lacks one of the most important tools deployed by the IRA – tax breaks (a Member State competence) – and with currently limited funding options at the Commission level, it cannot match the grants and subsidies which the IRA offers.

President Macron of France described the IRA’s subsidies as “super aggressive”, and Margrethe Vestager, the European Competition Commissioner, thought the law could be “very damaging” for European business. The EU also views the IRA’s “local content” requirements as potentially in breach of World Trade Organisation rules.

On 1 February 2023 the EU Commission proposed its Green Deal Industrial Plan which, with its aim of “enhanc[ing] the competitiveness of Europe’s net-zero industry” has clearly been developed, at least in part, in response to the IRA.

The Plan has four main pillars, and looks to relax EU state aid rules to drive funding, up-skill people in strategic industries, make trade work for the green transition, and implement the Net Zero Industry Act (NZIA), which was formally presented by the EU Commission on 16 March 2023 . The NZIA will support the EU’s scale up of net-zero technology manufacturing, increasing funding with the aim that by 2030 at least 40% of the EU’s demand for clean technology is met domestically.

Is there a UK response?

A post-Brexit UK is not constrained by EU state aid rules and so in theory is able to create an independent response to the IRA.

UK business leaders have been calling for the UK to “up its game”, noting that the UK cannot compete with US and EU subsidies. The UK’s chancellor, Jeremy Hunt, was reported as saying he had “some concerns” about the IRA before his UK Budget delivery on 15 March 2023.

In that Budget speech, the chancellor announced that the newly created Department for Energy Security and Net Zero will be responsible for overseeing investment in the UK’s energy system, including through £20 billion of funding for Carbon Capture, Usage and Storage, the launch of the Great British Nuclear project in support of nuclear builds, and a two-year extension of the Climate Change Agreement scheme. More detail on these projects was given in the UK’s ‘Green Day’ announcements on 30 March 2023.

Despite those ‘Green Day’ statements, some may see it as disappointing that we have to wait until the Autumn Statement later in 2023 to see a substantive response to the $370 billion of subsidies and incentives available under the IRA in the US.

The EU has already proposed some relaxing of state aid rules and other measures to enhance the competitiveness of the EU’s net-zero industry in reply to the IRA. In a post-Brexit world, we hope to see the UK Government take the opportunity to create a swift independent response.

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