Countries Wage War Over Clean Energy Subsidies

• The United States and Europe are locked in a subsidy race for the energy transition.
• Economists are warning that huge subsidies could trigger a new wave of inflation.
• Poorer EU member states are crying unfair game on the part of the wealthy ones.

Journalists are calling it a subsidy war. Those involved in it are keen to preserve an image of cooperation and agreement. Whatever you call it, it's hard to deny the obvious: the United States and Europe are locked in a race—a subsidy race for the energy transition.

When Congress passed the Inflation Reduction Act last summer, many companies had reason to celebrate: they were going to get generous financial support to build or expand their businesses as long as they fell into any "sustainable" category.

The mood was different in Europe. There, business leaders had reason to start worrying about one more thing: the increased competitiveness of U.S. goods thanks to the IRA and the consequent reduced competitiveness of their own goods.

That was on top of their soaring energy costs while the U.S. competition enjoyed low rates thanks to local production. European business leaders demanded a response from European decision-makers. 

In a way, decision-makers delivered. After several national government officials, most notably French President Emmanuel Macron, openly slammed Washington for not playing fair, the EU passed earlier this year something called the Net Zero Industry Act.

The act aimed to "increase the competitiveness and resilience of the EU's net-zero technology industrial base which will make up the backbone of an affordable, reliable, and sustainable clean energy system."

That sounds good on paper, but businesses were not happy with it. It appears the Net Zero Industry Act was a rushed job, and like all rushed jobs, it was less than a success. Yet it was a typical Brussels document: needlessly complicated and insufficiently specific. Related: Biden Reaffirms America’s Unwavering Commitment To NATO

"The US has adopted a simple strategy that immediately incentivises businesses to invest while the EU is coming with a political framework that lacks precise elements and misses simple, clear cut reasons for businesses to invest," the chief executive of chemicals major Solvay, Ilham Kadri, commented to the FT at the time.

Meanwhile, it was not all fun and games in IRA-era United States, either. The initial price tag of the bill was a bit below $400 billion, to be spread over ten years. Last month, the University of Pennsylvania estimated that the price tag of the IRA will in fact top $1 trillion.

It could go even higher, too, because the subsidies envisaged in the bill are not capped—there is no upper limit. According to Goldman Sachs and Credit Suisse, the Democrat legislators who voted the bill into law underestimated the cost of the subsidy package by as much as 300%. 

Such a significant underestimation might look problematic to some but not to White House adviser John Podesta, who actually said this was good news because "this is evidence that the bill was actually working, that people are making plans, they're investing money."

It could be argued that people are not really "investing money" but rather waiting in line for government money with a minimal contribution of their own funds. Yet the mood in Washington, as in Brussels, seems to be "Anything to get the job done," where the job is the transition from a hydrocarbons-based economy to one based on other sources of energy.

The Americans are clearly more generous, although some skeptics have warned that to fund the IRA, the federal government would need to print more money, trapping the economy in an inflation spiral. 

The EU, meanwhile, is allocating half a trillion euros for its own subsidy efforts, packaged in the European Green Deal, another half a trillion should come from public and private financing under the InvestEU program as well as from national governments as individual contributions.

But these national governments also have their own internal subsidy plans for the transition. And these plans are pitting neighbors against each other because not all member states are equally wealthy, and the poorer ones are crying unfair game on the part of the wealthy ones.

Yet even with the internal squabbles, it seems the big problem is the IRA. It is such a big problem that Germany's strongly pro-American economy minister Robert Habeck recently called it a declaration of war.

"The [Americans] want to have the semiconductors, they want the solar industry, they want the hydrogen industry, they want the electrolysers," Habeck elaborated, as quoted by the FT.

Indeed, the Americans do want all that. And it seems that unless the EU gets its act together and simplifies the subsidy distribution procedure, there will be a business exodus from Europe in a western direction.

Europe will be left to mourn the loss of its economic glory, which began in 2022 when the continent's dependence on external suppliers of energy was revealed in full light. Meanwhile, the blockbuster show to watch will be how long before the IRA money runs out and what the actual outcomes of all that subsidizing will be.

By Irina Slav for Oilprice.com

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