Transatlantic battle for green subsidies

The US’s Inflation Reduction Act – a USD 400bn package of subsidies and tax credits to help spur renewable energy and projects to slash emissions – has rattled European governments and politicians. Some European companies have already announced they are looking to build green energy projects in the US, while EU officials are looking for ways to keep them closer to home. Listen to a discussion on the likelihood of a tit for tat trade war and consequences for net-zero emissions targets. 

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guest: Niclas Frederic Poitiers, Research Fellow, Bruegel

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:04

Hello listeners and welcome to the Montel Weekly podcast, bringing Energy Matters in an informal setting. This week we look at the Transatlantic Scramble for renewable energy subsidies. The US has committed about$370 billion for green energy subsidies and its Inflation Reduction Act, or IRA for short. It's Landmark Climate Legislation. And is looking to attract European companies to invest in the country. What will the consequences be for Europe's net zero targets will many companies decamp to better rents in the us The legislation has upped the ante for the eu, which will need to at least match some incentives on offer. Could the law passed in August last year trigger a tit for tat trade war helping me, Richard Sverrisson. To discuss these issues and hopefully much, much more is Niclas Poitiers of the Brussels based think tank Bruegel, a warm welcome to you, Niclas.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 1:02

Thank you Richard, for having me. It's a great pleasure.

Richard Sverrisson, Editor-in-Chief, Montel: 1:05

The US Act has been quite prominently in the news in recent weeks and months. What is it exactly?

Niclas Frederic Poitiers, Research Fellow, Bruegel: 1:10

So it is a very big package of legislation that was passed in August and basically at the end of the legislative period before. The end of the, before the midterms and it encompasses a number of different measures, new taxes for corporates and drug pricing reform and reform of the healthcare system. But the part that really catched people's attention had nothing to do with inten, with inflation, but was really about green subsidies. Where the US with this 390, 370, depending on how you count, billion US dollar package, that that includes all kinds of different in industrial subsidies, production subsidies. And policymakers all over the world in Europe, but also many other places are concerned that these subsidies might lure away industries that they might to have compete with us now and subsidies. And this would be against the advantage of the companies. So why is it important to the us this act? It is important in, in, in multiple regards. It is important I think when we talk here about energy, it is important is it's the big headline. Decarbonization policy, and it's the American response to, to address climate change. At the same time. It's spending around a lot of money on re recharging the energy systems, switching transportation away from from fossil fuels electricity. So it touches on among many different things. But it wants to achieve different goals at the same time. And I think this is what makes it problematic. There's the green goals of the inflation reduction Act, where I think all of us would agree on, which is basically goals about decarbonizing the economy. But there's also industrial policy goals where the US wants to play a big role in the new industries and it wants to use subsidies to, to make sure that these industries are located in the US and no world. And there's a third geopolitical angle. Where part of the goal of the US is to push China out of these supply chains. And there are specific rules in there that, that say that you can only get these subsidies if you don't have Chinese inputs in your supply chains. And all of this is has different implications for the world. And we will get into this probably later, but there, there are implications on global governance of how we think about the subsidies, but also of course, the economic effects. What does it mean if companies have these incentives to reduce in us and not some world?

Richard Sverrisson, Editor-in-Chief, Montel: 3:24

Yeah, there are no. Global state aid rules are there.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 3:27

There are indeed global state aid rules. And the problem with this is that in that these status rules are broke are basically quite blatantly broken by the ra. So the for European listeners from the u US very stringent state aid rules. And if we, if. Say, and if you say you, the world doesn't have stated rules. You're right in the sense that the world doesn't have stated rules in any way comparable to what the U has, but there's some minimal rules. And one of these rules is that you cannot make stated conditional. On stuff on inputs being produced in your country. And this is something that is quite explicitly, for instance, in the subsidies that you get for, or the tax credits that you get for if you buy in u ev. This only applies if u ev is assembled in the US and it has content from partners of partner countries of the us. And one of the question is who is a partner? Who is not?

Richard Sverrisson, Editor-in-Chief, Montel: 4:15

Absolutely. We'll talk more about that, later, Niclas. Do you think it is a protectionist move

Niclas Frederic Poitiers, Research Fellow, Bruegel: 4:21

then in some way? It is protectionist in, in the way that it wants to. It wants to get industry in the us. It wants to protect the US markets from foreign competition, make sure that stuff is produced in the us So in that way it is. And I think it is it is a policy shift for the us. There has been, under Donald Trump, there have been a big protectionist push, which at the time was quite directed at China, but also European countries and in other East Asian countries were collateral damage of these, of some of these policies. But these policies really much, were about terrorists, were about making sure that imports, that basic, making imports more expensive. Whereas this is really an embracive industrial policy in a way that is very different and much bigger. And that, that is interesting. Because us, one of the complaints that US was using to justify their tariffs against China was that China was using, stated in a, in unfair way. And now US itself is embracing state aid. So I think there's really a bit of a shift.

Richard Sverrisson, Editor-in-Chief, Montel: 5:14

Do you see it as a continuation of what happened under Trump or, or a shift in a different direction

Niclas Frederic Poitiers, Research Fellow, Bruegel: 5:19

On the side of the trade rewards, it is a continuation. Of Donald Trump's rules. We see that United States has not shifted their stance on the W2 on the World Trade Organization. These policies violate the rules US blocks any, the legislative rules that road that con countries would have to to litigate against this. So they basically blocked the appointment of new judges to the appeals court in the international level. And that means that they constrict the way countries can react. And this was done under Trump and started to some extent on Obama. And then they started this trade war. And basically this hasn't really worked and it hasn't really delivered. So now they're trying something else. So that way it is basically, it's still not complying with international rules. It is maybe a bit more cooperative. We see the Trump administration being much more willing to discuss with Europeans. They're much more channels of communication. But it has not a different vision of internationalism than the Trump administration. It's still America First policy. It's still a policy. Whose goal is to promote American industry, if necessary, ex expense of other countries. And it's still a policy that very much targets China as the geopolitical enemy of the US.

Richard Sverrisson, Editor-in-Chief, Montel: 6:25

At the World Economic Forum In Davos recently the Czech Trade Minister called the Inflation Reduction Act, the equivalent to doping in sports. We have that or. Perhaps maybe financial fair play in football is similar. Do you think it breaches WTO rules?

Niclas Frederic Poitiers, Research Fellow, Bruegel: 6:40

Very clearly does. So there's some rules, there's some subsidies where you can debate. So there's some subsidies which are permitted unless they distort international markets. They have a scale where they distort international markets, and some of these subsidies are of a way that they're permitable and we expect them to distort international markets, but it's not, it's basically innocent until proven guilty. So there we can debate. It might not be something that we like, but it's something where, which in principles is okay. But there are other rules. For instance, the one on EVs, but also, this goes through many parts of the legislation which I explicitly that breaking an explicit rule that says you cannot use local content requirements. And that is what the US is doing. So I think there is no, in my mind, there's no doubt on, on this.

Richard Sverrisson, Editor-in-Chief, Montel: 7:24

Let's talk a little bit about the impacts on Europe. Do you do you expect. These kind of incentives and the subsidies on offer to draw away investments from the EU or from parts of Europe, even from Norway or, from the uk. They're not parts of the eu. Do you expect that to happen?

Niclas Frederic Poitiers, Research Fellow, Bruegel: 7:41

There, there are different parts of the package and my, maybe it's worth going through them one by one to discuss what impact they could have on investment. The one is the investment, the subsidies that we have on green electricity. This is the one I think where we should very clearly welcome this. This means a greening of the electricity grid. There's some concern this with low energy prices and compared to Europe, which already has quite high energy prices now with the gas, the high gas prices that this might lure away energy intensive industries. So this is one part, but this is, from international level, low perspective, this is, I'm not a lawyer, but this is the part where I would say both from a fair game, from basically a fairness perspective and a legal perspective, seems to be fine. If the US gets cheap electricity by greening, that's something, then we should basically up our game to get cheap electricity by greening. So I think that is totally fair. But that is one, one part of it is basically do lower energy prices through the decarbonization of the US energy grid. Mean energy intensive industries might move there. That's a bit of a question mark. There's a second part which is basically the electric car subsidies which ba you can get. 7,500 US dollars of the price of your car paid by the government. If this car is assembled in the US and has a specific power for specific origins here, there is some risk that this might lower European investment away from Europe to the US of car production. It is a bit, the question here is a bit how strict this rule is. There's already, now there seems to be loopholes in this rule. That might mean that, for instance, leasing contracts, you could import a car, you cannot buy it to get the subsidy, but you could lease a car, which still then as a commercial vehicle would benefit from subsidies. So there's some question about how strict this rule is. It seems to be that us also might consider a Europe, a country that has a free trade agreement, even though in the narrative definition of the. Word for trading rate doesn't have one. They might consider this term in a strange way, at least from my eyes. That might mean that we benefit. So there's a bit of a question what applies here? There's still a lot of things to work out, but this might push some car manufacturing to the us. There is a caveat here though this, that in some categories there's already a lot of us car manufacturing happen in the US because, for instance, on, on trucks, they're already quite high tariffs. So there's a bit of a question here. Whether this might just mean many of European carbon manufacturers already have production in the us so does it really mean relocation? Does it mean that people will use the the loophole or this is just basically that the US market will predominantly be served by US factories, whereas the rest of the world by other factories, but not in a way that quite different from what we do now? So that is the, and because car cars is such a big market and such a big export market, that's where a lot of the political fight is about right now. And then there's the third part, which is basically the production of clean tech, which would be batteries, which would be wind farms which would be solar panels. And here, there are investment subsidies, but also subsidies that give you, basically for every solar panel you produce that gives you a dollar value that you would receive. And here's a bit of a question mark. Is this actually effective way to subsidize? Does this mean that now this production will happen in US or in Europe? I think for some markets, solar. To be honest, there's very little solar production in Europe in the first place. So this is maybe not a big threat for the wind industry. It might be very different. So there, there's a bit of, I think that is where maybe the, maybe markets might shift around.

Richard Sverrisson, Editor-in-Chief, Montel: 11:12

Also hearing about you mentioned batteries as well. Sweden's, north Vault seems to be mulling a move maybe to the US rather than Germany, so that it's actually if companies. Maybe they haven't made that final investment decision yet, but they certainly must be considering it.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 11:25

So You get you get a subsidy for every battery you produce in the US and if you want to get us benefits, it might be, depending on what's the legal rule, you might only apply if you might not be able to get the subsidy if your battery is produced in Europe.

Richard Sverrisson, Editor-in-Chief, Montel: 11:40

No. So certainly I can see why it's caused so much controversy. But would you say it is a real threat? Actually companies, European companies they've always been involved in offshore winds in the states, or they have, certainly for the last five, five years maybe even further back than that. But would this sort of accelerate do you think European companies getting involved in, in, for example, offshore wind in the US?

Niclas Frederic Poitiers, Research Fellow, Bruegel: 12:03

So there, there are two effects. The one thing is that. By virtue of the electricity production subsidies and investment subsidies for new wind farms, there's gonna be a lot more demand for this kind of product going forward. How do you value that against the risk of this demand being predominantly served by us produced products? I think there, there is, this is the question that companies now have to decide where do they want to invest how they want to invest, how do they see this market? But I think. From a for an economist, we should be clear on this. There's the industry by industry question that every industry that is affected by this law has to ask himself what does it mean for us? And I quite frankly, I'm not an energy economist. I'm not able to really give a, have a. String strong view on whether the kind of value that is put on a solar wind power blade by might be a big value in 2027 or not. Know that's like these are, this is a long term product. Investment takes time. How do we assess this? How do we assess this against the cost of transport of labor, of permits in all the regulatory environment? This is I think this is the big question. How impactful is, how important are these subsidies relative to all the other costs that a company might bear? And I think for instance, in a industry like solar, it might actually be not as relevant or, I dunno, but might in some industry, what we saw in the past, for instance, solar panels, that they went to China, they didn't. Subsidies played a role certainly, but it was also access to resources and cheap labor. How relevant is this for Solar in 2027? I don't know. So I think there's a lot of this question, but then as Europe as a whole, I think I'm much more positive on this because it is maybe specific products have incentives to be produced in us now, but still they will have supply chains that, that are linked to them that then might be imported to us. And at the same time, this affects specific products. This is affects maybe a dozen products, but there's, so the European economy is so much bigger. I think we should not freak out too much about this. I think we should consider really, and analyze this now, what is the effect on the different industries and what can we do to counteract them and make sure we are competitive in this industry. But this kind of. Ghost of Deindustrialization that is now sometimes said in the press. I think that is way over, over overreaching. We are also doing a lot of subsidies in Europe as well. So to get a grip of kind of what is the actual effect of this I think is quite complicated Picture.

Richard Sverrisson, Editor-in-Chief, Montel: 14:30

A lot of firms or associations, find the move divisive. They've called it, instead of. Binding transatlantic ties, you're cutting them in this kinda sense. What do you expect the EU response to be? Will it, as some companies or some organizations want to set up a kind of similar generous subsidy regime, but as you say, with, there is a lot of already quite generous subsidies in the eu, especially in the energy sector.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 14:55

The challenge for the US is, I think, twofold. The one the big. The one question is, should we do something like this in the first place? And I think, for me the IRAI I'm, it's, I don't think it's a terribly good piece of legislation from a craft perspective. There's a lot of specific value set in there that, that are set for the next 10 years. Does any of us know what's gonna be the price of these things in 10 years? I'm not, so it is basically a very blunt way of doing things, and this might be the political way to get something through Congress these days. I'm not an expert in US law in any way, but it's not a particular refined way of doing subsidies. It's very, we, they just set a value for each wind turbine blade. That you get when you produce it. What was gonna be the price development of these things? What are actually cost structures? Legislation is not very sophisticated and weighting this, what is like our assessment of the cost of solar against wind. That just puts a number on this, but there's so many different things in there. What is actually the employment effect of these things? Where are they produced? In Europe we often use industrial policy very explicitly to promote specific locations. This is something that the youth framework, some of the frameworks allowed you to do, which they are a, not necessarily allows you to do in the same way. So there's many bits and pieces there, which I don't think are terribly effective or maybe the most cost effective way to do it. The already existing battery factory will as much benefit from the subsidies as the new one built. That is might be fair, but it means that also a lot of the money will just go to waste to promote stuff that's already there. So then I think that is a problem with the ra. So there is a bit of a question, how effective are these subsidies and are they actually cost effective? But then there's the other part of it, if we decide we want to do something like this, if you want to level the playing field between the U and the us, the problem is that basically what the US does is they prefer give preferential treatments to US producers. In a way that is W2 incompliant, if we want to counteract that the big challenge is to do that in a way that would be W2 compliant. So basically, if we say it's unfair that only us produced cars can get the consumer subsidy, then we could contact by saying only European produced cars get the consumer subsidy that we might set. But that again, would be violating the same rule. And SDU we saw, we would lose our credibility as being the kind of the champion of multilateralism that we spend so much time in, in paper promoting ourself as, and I think it's very much European interest to do so I think to, yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 17:24

So you wouldn't expect a kind of tit for tat response?

Niclas Frederic Poitiers, Research Fellow, Bruegel: 17:26

I would not expect that it for test response. I think there will be some response. It can have very different flavors. I think we're very much discussing now what could be the kind of, how do we finance this? What could be the instruments that we use? Do we need to weaken state aid or is the instruments enough? Do we need to introduce new instruments? All these kind of things are really open right now. But I would not expect to be there actually. Mirroring of the ra. This is a very different political context, a very fiscal context that is not easily transferrable to the eu.

Richard Sverrisson, Editor-in-Chief, Montel: 17:56

So it's not gonna be a kind of, gut reaction to respond in. That's quite interesting because that's seems to be what's some companies associations are urging here, but, but what in a sense, would it do to subsidy rules as such that the energy crisis has also increased calls for making, for making it easier to build green energy. Do you expect, a change in the way subsidies are handed out and perhaps you've mentioned state aid rules, perhaps a weakening of those as well?

Niclas Frederic Poitiers, Research Fellow, Bruegel: 18:23

So the European State Aid regime was intended to make sure. That companies compete each other by having cheaper, better products instead of by lobbying their respective governments to give them subsidies. So the fear was bit cliche here, that the funds would basically probably know in a way that Germany might not prop up Volkswagen or the other way around. And then that would be unfair within the single market. So to make sure this doesn't happen, we have constraints governments to hand out cash companies. This is really about, about basically protecting the single market. But even nowadays where we are now competing much in many more fields, very differently internationally, we still have these rules and the fear and what we've seen in the past with some of the Corona measures is that big member states and member states that had. More austerity or maybe more more restricted fiscal policy, have much more space of doing state aid than other countries. So there, there was this numbers from commissioner Tiga that 80% of state aid in the last year or so was given out by Germany and France, Germany always making half of state aid. Within the UN the last year. There's some issue with these numbers. They're a bit. Exaggerated if you want, but there's some truth to it that basically Germany has a different ability to give out state aid than any other member state. So one of the big questions here is basically how can we adopt state aid rules in a way that on one hand allows us to compete through subsidies where we think we have to do that internationally at the same time, make sure. That this doesn't gives, gives a free for all for Germany where they just hand out money and make sure that all these new ni shiny industries are in Germany where other countries might just simply not be able to compete with.

Richard Sverrisson, Editor-in-Chief, Montel: 20:02

And how do you see that playing out then, Niclas? And what do you see? Because there's a lot of talk, it's at the forefront. We're still in the middle of the energy crisis. People are capping revenues for renewable producers who are looking at market reform in the energy sector. But how do you see this subsidy state date discussion moving on.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 20:19

So there's different kinds of ways you could do this. One of the proposals to get around of the problem of the differential fiscal space that is there is to have EU funding. So do the same thing we did with the Corona with the next generation new package that the US a whole takes some money, and that is money then that's spent on stated instead of countries borrowing money on markets. That is one, one way to do this. The question is then how do you spend the money? Is it EU projects, it's national projects? Who decides on which project is financed? So this is one part of the question is how do you finance this? And there's this sovereignty fund idea, which will solve some of the problem. The other problem is basically under which rules would you spend this money? And and here is what Germany and France are arguing for, is loosening stated rules to allow them to give more money to companies where some other countries, some other member states. I actually quite happy with the restrictive rules because I think state is maybe not as sufficient tool as Germany funds think it is. That feel in the long run, they might be heard even though it might work out Now with the Sovereignty Fund in the medium term. This money might run out or whatever else might happen that this is not a good idea to do. So there's this kind of different camps and there's different deals you can make. Germany is a country that in the past was not very happy about joint borrow, but now really wants to do industrial policy through subsidies. So there might be trade off there. Other countries might think very differently about this. Netherlands is a country that traditionally is against state aid. But also it's traditionally fiscal conservative that doesn't want to have transfers. So how does a country like Netherlands stand on this? So I think there's a lot of different deals that could be made here. I think there has to be some kind of response. At the moment, it's really completely open how this could look like.

Richard Sverrisson, Editor-in-Chief, Montel: 22:01

And just as the final question, it's a fascinating discussion. It's all getting very, in a sense very geopolitical as well as the economic side of it, or the financial side of it. But in terms of. There has been a struggle, post COVID, you've got the energy crisis. There are issues in the supply chain. I'm hearing this for building out or rolling out renewables. What will, what could a potential transatlantic trade war between the EU and the US in the wake of the inflation reduction act mean for these kind of supply chains, both in solar and the solar sector and the wind sector. Niclas.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 22:35

So I think that's that would be the the worst case scenario is that we do not find something, some kind of agreement on this with the United States. And that could have the potential that we. We first, we escalate a subsidy race where basically we introduce new measures that might break rules or the US might perceive as unfair, and then we start putting terrorist retaliatory terrorists on each other. There's like a mild version of this, which is basically there's a rule that allows you to countervail it the subsidies that are on imports on eu. So basically if there's a subsidized US solar panel coming into the eu, we might put a special tariff on it to make up for the subsidies that EU producers might not receive. But that doesn't help you on third markets. So there's this kind of. Milder response. It's not necessarily ex escalatory. But there might be very escalatory things that you could do. You could complain at WT o and if you get a ruling, even though it might not go through the whole legal process, you might choose to use retaliatory tariffs as we've done with steel and aluminum in the past. And we've seen in the past many of these kind of trade wars also. And then trade conflicts also between the UN us. The question is really what kind of signal does this send and what kind of does it mean for supply chains? And we are in Europe in a moment of war where we get a lot of military assistance where the US really wants to also make sure on their front, basically make sure that they're not, that they have allies in their struggle against China. And I think in all these different, in all these different geopolitical situations that are really complicated. Like some kind of transatlantic trade war would really would be super damaging. Not just from an economic perspective, but also just from a geopolitical perspective. What kind of message do we send to the world by this if, what kind of does it mean for the global green agenda if instead of trying to build together to decarbonize together and build a positive sum. Kind of green policies where we start putting retaliatory terrorists on on, on green goods. I think all the kind of messaging is really problematic. So I really hope that we avoid that and that we manage. I think there is a good communication channel between the European side and the Americans. Right now. There are constraints of what can be achieved given that Congress in U-S-S-M-S and they might not be as easy to adjust the legislation as we might hope to it, but I think at the end of the day. We have a lot of alignment on some of these goals. I think there's an agreement between the S that we want to decarbonize economies. I think there's agreement between the S that we want to diversify our supply chains. We disagree on where we diversify. Everyone would prefer that to happen at home, and the US is willing. To do quite radical things to make sure it is on. That's not in our interest, but that's just one part of this whole package. The bigger part, we, I think we are risking losing the bigger picture. The bigger picture is we have a green legislation with the US now that we should welcome. There are parts we don't like, but it is a, it is an approach that US has taken and now we should find a way to to live with that and make sure that everyone that we are not pushed out of some industries because of that.

Richard Sverrisson, Editor-in-Chief, Montel: 25:29

Let's let's hope so Niclas fingers crossed that the politicians or the policy makes on both Atlantic Sea Sense and that the, that this, that there isn't a slowdown in the decarbonization process and the goal towards Net zero. So Niclas, thank you very much for being a guest on the Montel Weekly podcast.

Niclas Frederic Poitiers, Research Fellow, Bruegel: 25:47

Thank you very much for having me. It's a great pleasure.

Richard Sverrisson, Editor-in-Chief, Montel: 25:50

So listeners, you can now follow the podcast on our own Twitter account. Aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.