The US and Europe are now locked in a subsidy race for the energy transition
2023/7/19
When Congress passed the Inflation Cut Act last summer, many companies had reason to celebrate: They would receive generous financial support to build or expand operations, so long as they fell into any "sustainable" category.
The mood in Europe is different. Business leaders in Europe had reason to start worrying about something else: that the Inflation Cut Act had increased the competitiveness of US goods, and with it the subsequent decline in the competitiveness of Europe's own goods.
Add to this the soaring cost of energy in Asia, while U.S. competitors enjoy lower rates of all kinds due to localized production. European business leaders are demanding a response from European policymakers.
To some extent, European policymakers have delivered on their promises. The European Union passed the Net Zero Industry Act earlier this year.
The EU bill aims to "improve the competitiveness and resilience of the EU's industrial base in net-zero technologies, which will form the backbone of an affordable, reliable and sustainable clean energy system".
That sounds good, but European businesses aren't happy about it. It appears that the Net Zero Industry Act was a hasty effort, but like all sloppy bills, it didn't quite succeed. But it was a typical Brussels document, "unnecessarily complex and not specific enough".
Ilham Qadri, chief executive of chemicals giant Solvay, told the Financial Times at the time: "The US has a simple strategy that immediately incentivizes business investment, while the EU's proposed political framework lacks precise elements. , and there is no simple and clear reason to attract foreign companies to invest.”
Meanwhile, in the US, implementation of the Inflation Cutting Act has not been all lighthearted. The initial price tag of the Inflation Cut Act was just under $400 billion, to be spread over 10 years. In June, the University of Pennsylvania estimated that the price tag of the Inflation Cut Act would actually exceed $1 trillion.
The figure could also be higher because there is no cap on the subsidies envisaged in the bill. Lawmakers who voted to pass the bill underestimated the cost of the subsidy package by as much as 300%, according to Goldman Sachs and Credit Suisse.
Arguably, people aren't really "investing" but are queuing up for money from the government with only a minimal contribution from their own money. However, the mood in both Washington and Brussels seems to be "anything goes" to get the job done, and the job here is to transition from an economy based on hydrocarbons to one based on other energy sources.
Americans are clearly more generous, although some skeptics warn that to fund the Inflation Cutting Act, the federal government will need to print more money, sending the economy into an inflationary spiral.
Meanwhile, the EU will allocate €500bn for its own subsidy work in the European Green Deal, with another €500bn coming from public and private financing under the European Union's Investment Program (InvestEU), as well as individual contributions from governments.
But the governments of these countries also have their own internal subsidy programs. The plans have pitted neighbors against one another because not all member states are equally rich, and those waiting to get rich complain that rich countries play an unfair game.
However, even with the internal squabbles, the biggest problem seems to be the Inflation Cut Act.
The Financial Times quoted the German economy minister as saying: "(Americans) want semiconductors, they want the solar industry, they want the hydrogen industry, they want electrolyzers."
In fact, Americans do want to have it all. And it seems that unless the EU comes together to simplify the process for distributing subsidies, business and investment will flow west from Europe.
Since last year, the continent's dependence on external energy supplies has been laid bare, and Europe has mourned the loss of its economic glory. In the meantime, the big show to watch will be how soon the money from the Inflation Cut Act will run out, and what the practical consequences of all these subsidies will be.
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