The EU’s Response To Biden’s Inflation Reduction Act Is Finally Here

Authored by Felicity Bradstock via OilPrice.com,

• Following the passing of the Inflation Reduction Act in the U.S., pressure grew on the EU to introduce its own legislation to help fund the clean energy push on the continent.

• Russia’s invasion of Ukraine and the resultant energy security issues in Europe have only added to the pressure on EU politicians to solve the bloc’s energy problems.

• The EC’s new draft proposal is designed to encourage companies to remain in the EU rather than move operations to the U.S. to take advantage of IRA-related benefits.

When President Biden introduced his Inflation Reduction Act (IRA) last summer, he surprised the world with the extent of the climate commitments within it While supposedly aimed at inflation reduction, the legislation also provides extensive political support and funding for the green transition, providing tax cuts, subsidies, and other incentives for companies looking to use cleaner alternatives to fossil fuels. The EU has long been hailed as the leader in the switch to renewable energy, encouraging other countries worldwide to follow in its footsteps when it comes to climate pledges and policies. However, following the introduction of the IRA, pressure on the EU grew to introduce its own far-reaching, region-wide climate policy. After several months, it appears that the EU is ready to launch a transition policy that will provide the funding needed to keep up with the U.S. in the race to green.  The EU has announced plans to reduce restrictions on tax credits for renewable energy projects in response to Biden’s IRA. Following mounting public pressure to expand its climate policy following the introduction of the new U.S. law, the European Commission (EC) has stated that it aims to loosen state aid rules to encourage greater investment in production facilities in the green energy industry. However, this kind of major policy shift requires broad support from its 27 member states, which often slows down the introduction of new laws.

Since the Russian invasion of Ukraine and subsequent sanctions on Russian energy, the EU and many other parts of the world have experienced severe energy shortages and rising consumer costs. This has led to greater pressure from the public and policymakers to accelerate the green transition, to ensure the future of the region’s energy security. The EC’s draft proposal reportedly proposes the redirection of some of the $869.8 billion in Covid-19 recovery funding to green tax credits. It states: “The provisions on tax benefits would enable member states to align their national fiscal incentives on a common scheme, and thereby offer greater transparency and predictability to businesses across the EU.” 

The EC appears to be following in the footsteps of President Biden, having seen a flurry of activity in the green energy industry following the introduction of the IRA. The leader of the EC, Ursula von der Leyen, stated in January at the World Economic Forum that the EU is planning to mobilize state aid and a sovereign fund for renewable energy companies through the introduction of a new Net-Zero Industry Act or Green Deal Industrial Plan. The introduction of an expansive new climate policy is hoped to encourage companies to remain in the EU rather than moving operations to the U.S., where they may be eligible to receive tax credits and other incentives for using renewable energy in their operations. 

This news will be encouraging for renewable energy firms that have been discouraged from expanding operations in recent months. Following the Russian invasion of Ukraine, the EU imposed revenue caps on wind and solar firms to protect consumers facing rising energy costs. In contrast, the IRA offers tax credits that boost U.S. wind and solar project profitability, making the U.S. a more attractive environment to develop new projects. 

At present, EU state aid rules do not allow countries to provide direct support for national companies, a rule that the EC is open to temporarily adapting to accelerate the green transition and boost the EU’s energy security. Explaining the plan, von der Leyen stated: “To keep European industry attractive, there is a need to be competitive with the offers and incentives that are currently available outside the EU.” However, for it to become a reality, the Net-Zero Industry Act needs to achieve broad support from EU member states. 

Pierre Tardieu, chief policy officer at lobby group WindEurope, believes the EC’s plan demonstrates “a conscious decision to emulate…rather than challenge” the IRA.

He believes it to be an extension of the 2022 REPowerEU strategy, which aims to reduce Europe’s reliance on Russian energy and speed up the green transition. The new climate Act would improve permitting procedures for clean-tech product sites across the region and simplify state-aid rules to provide both grants and subsidies. It would also help Europe to solidify its position in the global green energy transition, not only ensuring that it meets its climate targets but that the U.S. does not become the leading green energy hub for energy and manufacturing firms. However, clear action on von der Leyen’s aim of making “Europe the home of clean tech and industrial innovation” has yet to be taken. 

The introduction of a far-reaching climate policy by the EU would help position the region at the center of the global transition away from fossil fuels to renewable alternatives. Following the launch of President Biden’s IRA, the unveiling of a new policy from the EC would not be surprising, as it hopes to make the EU a favorable and competitive region for the development of green energy operations and technologies. Further announcements will likely be made to expand upon von der Leyen’s aims over the next few months, with a new EU climate policy on the horizon.