EU shrugs off threat from US Inflation Reduction Act — for now

BRUSSELS — The $369 billion Inflation Reduction Act signed into law a year ago by U.S President Joe Biden put the fear of Washington into European policymakers and industry.

They worried that massive tax breaks and subsidies on everything from electric cars to wind farms and battery production would hollow out the bloc’s economy as companies scampered across the Atlantic.

But that hasn’t happened — at least not yet.

In sector after sector, the initial worries seem to have been overblown, although batteries are an exception. The U.S. has scored some wins when it comes to investment decisions by European companies, but there is no crisis.

“The [industry] narrative is very clear … the EU is not doing enough, the U.S. is storming ahead, and that’s a real challenge to EU long-term competitiveness,” said Antoine Vagneur-Jones, a senior analyst at BloombergNEF (BNEF). “But the mass exodus … of EU manufacturers is not something that’s been defining a lot of the investment figures.”

In part that’s because the EU isn’t defenseless; its Green Deal aimed at revamping the Continent’s economy to make it climate neutral by mid-century long predates the IRA.

Over the last year, Brussels and member countries have also boosted their policy responses.

The EU put forward its own Green Industrial Deal, relaxing state aid rules and putting forward proposals like the Net Zero Industry Act and Critical Raw Materials Act to boost mining and the production of green technologies inside the bloc.

The bloc’s post-pandemic recovery fund and latest budget also earmarked a minimum of €600 billion for combating climate change, a Commission spokesperson said, alongside research and development funding, and cash raised from carbon credits that feed its Innovation Fund.

“We want to compete on quality, not on subsidies,” the spokesperson said.

Even though the IRA is revolutionary, many of the EU’s competitiveness problems also predate the package.

European companies already faced much higher energy prices than their U.S. rivals, as well as a raft of America-first policies, and that forced businesses to think about shifting some of their activities across the Atlantic.

POLITICO took a look at six key energy and green sectors to see the impact of the IRA over the last year.

Solar

Both the U.S. and the EU want to increase solar panel production, but the big beast is China, which dominates global production.

The IRA offers solar manufacturers a tax credit of 17 cents per watt of solar module produced, which prompted a spike in module production capacity in the U.S., said BNEF solar analyst Jenny Chase. Over the last year the U.S. announced 49 gigawatts of new module production capacity, while Europe, which includes countries like the U.K. and Norway, announced less than 10 GW.

The U.S. subsides have tempted some businesses. Swiss-based solar panel manufacturer Meyer Burger last month announced a new production facility in Colorado.

But there are few other examples and Chase called the impact of the U.S. subsidies on Europe “negligible.”

The EU has tweaked its Innovation Fund. Germany also launched a national subsidy scheme incentivizing new module manufacturing.

“The atmosphere is feeling a lot more positive now,” said Bethany Meban of the SolarPower Europe lobby.

Wind

The IRA grants U.S.-based manufacturers a tax break of up to 70 percent of their upfront investment, as well as additional tax cuts for each kilowatt hour of power generated by wind farms.

That’s enticing some European companies to expand their U.S. operations. Denmark’s Vestas and Germany’s Siemens Gamesa both proposed competing plans to build a new blade manufacturing plant in New York.

But the green energy shift in the U.S. won’t necessarily prompt EU companies to leave Europe, said BNEF’s Vagneur-Jones, since turbine producers prefer to be “manufacturing near to end demand” given the logistics of transport.

The EU is responding, with the Net Zero Industry Act proposing that 36 GW of wind capacity be made in the bloc by 2030.

So far, the European industry is relaxed about the U.S. program.

“The IRA on its own is not a threat,” said Giles Dickson, CEO of the WindEurope lobby.

What’s more worrying, he said, is the threat from Chinese companies. They succeeded in snatching away most of Europe’s solar panel industry, and now manufacturers are concerned the same thing will happen with wind turbines.

Electrolyzers

Both the EU and the U.S. are throwing big money at electrolyzers, used to produce hydrogen from renewable-based electricity.

The U.S. has $155 billion in subsidies and tax breaks for the machines, while the EU plus other European countries are offering $113 billion, according to BNEF.

The tax breaks have tempted some, including Norway’s Nel, which announced its next investment would be a $500 million factory in Michigan.

Still, Europe is far ahead of the U.S. in total hydrogen production capacity. From the beginning of 2020 to the end of June, the U.S. announced 33 GW of new capacity while Europe announced 175 GW over the same period, according to S&P Global. Over the last year, 137 projects were announced in Europe and 23 in the U.S.

The IRA hasn’t led to “a groundswell of electrolyzer demand in the U.S.” said Alex Klaessig, senior director at S&P Global.

The EU isn’t standing still, setting a 2030 target to produce 10 million tons of green hydrogen and launching a European Hydrogen Bank aimed at closing the price gap between green hydrogen and hydrogen made from fossil fuels.

Batteries

Batteries are the exception, as the IRA has caused “remarkable” acceleration of projects in the U.S., said Ilka von Dalwigk, a senior expert advising the European Battery Alliance industry group. In the year since the IRA became law, 42 percent of all U.S. battery investments ever made have taken place.

That’s pulled the U.S. even with the EU. The U.S. has a battery cell production pipeline of 1,017 gigawatt hours while the EU has 1,005 GWh, according to BNEF.

Around a third of U.S. announcements came from firms choosing the U.S. over Europe, lured by tax breaks worth up to 40 percent of battery production costs, said Artem Abramov, a senior analyst at Rystad. Norwegian battery startup Freyr is one example.

Europe is also likely to attract investments from Chinese companies looking to take advantage of EU programs, something that’s much more difficult in the China-wary U.S., said von Dalwigk.

Electric vehicles

The $7,500 subsidy for buying electric vehicles manufactured in North America was one of the biggest IRA flash points between the U.S. and the EU. However, EU worries now appear overstated.

U.S. sales of electric vehicles in the first six months of this year surged by nearly 59 percent to 528,362 cars, with 80 percent of them made at home.

But U.S. imports of electric vehicles from the EU also increased by 82 percent, partly because of a separate IRA tax credit for leased electric vehicles with looser rules for foreign manufacturers.

Meanwhile, the EU is incentivizing the takeup of electric vehicles by agreeing to ban the sale of new gasoline and diesel cars by 2035.

Europe is also splashing the cash to get drivers to go electric: On average EU countries subsidize around €6,000 per vehicle, according to a European Parliament report.

Heat pumps

Europe’s heat pump industry has so far been largely untouched by the IRA.

While “there may be a withdrawal of investment money from Europe to the U.S.” someday, that’s not happening now, said Thomas Nowak, secretary-general of the European Heat Pump Association lobby, since “big companies see the importance of having factories close to the market.”

Under Washington’s new rules, Americans are eligible for a tax credit of up to $2,000 per year covering 30 percent of the cost of a heat pump. Meanwhile Europeans can access varying national subsidies, which in the case of Germany amount up to €18,000.

Instead of hurting the market, “the IRA has certainly led to the European Commission being a lot more active on heat pumps,” said Jan Rosenow at the Regulatory Assistance Project think tank.

The EU also wants 31 GW of homegrown manufacturing of heat pumps by 2030 and agreed to slash permitting times for installation to three months at most.

CORRECTION: This article has been updated to correct the IRA subsidy for solar modules. It is 17 cents per watt of solar module produced.