The United States has developed a subsidy program for clean energy: the Inflation Reduction Act (IRA). French economist Camille Landais expects limited impact in Europe and the United States and suggests that Europeans draw inspiration in part from this model.
What European response to the Inflation Reduction Act (IRA), this American subsidy program for clean energy? What impact in Europe, and what European responses? The Franco-German Council of Economic Experts publishes a joint analysis to answer these questions. Camille Landais, co-president of this body, and deputy president of the Economic Analysis Council, details it on franceinfo.
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These experts expect that the overall macroeconomic impact of this American program will be very limited, both for the United States and for the European Union. If we should not launch into a race for subsidies, they say, the EU can take inspiration from the simplicity and speed of the IRA’s approach. The European priority, these economists argue, must be to work together on a European scale to reduce energy prices and accelerate the development of renewable energy production.
franceinfo: Why has the IRA, which came into force at the beginning of the year in the United States, caused concern at the European level?
Camille Landais: The Inflation Reduction Act is, above all, Americans’ awareness of the need to tackle the environmental transition, and that is something very welcome. Now, what was surprising, what was a little shocking, is that behind this ecological transition there are many issues of industrial policy and commercial policy vis-à-vis China, but also potentially vis-à-vis view of Europe. And that came about because the Americans put a certain number of grants into the IRA, which have what is called a local content clause. That is to say, these subsidies are only given if the products are manufactured not only on American territory, but with a certain number of intermediate products, which are also produced on American soil. This was seen as a distortion of trade rules, as a desire to twist the world order.
Do we already have an idea of the impact of this American policy, for us Europeans?
He is still too early to have an impact, even if there were to be one. What we have done in this note, in this joint work with our German counterparts, is to try to quantify what the long-term effects of all of these provisions could be. The first thing we realize is that there is a lot of uncertainty about the total cost of these measures. But on the other hand, from the point of view of their impact, even in the case where the total cost would be really very, very high, we remain within orders of magnitude which are sufficiently small so that the total macroeconomic impact, both at the United States but also in Europe, is relatively limited. Obviously, behind this limited aggregate macroeconomic impact could hide very strong sectoral issues. We talked, in particular, about sectoral issues regarding electric cars, with the idea that with these local content clauses, we would have a massive departure of the production of electric vehicles towards the United States. It turns out that today, what we have understood is that there is a flaw in this local content clause: it does not apply to vehicles that are sold through leasing. Everyone immediately jumped into this leasing option, and it is believed that there will be relatively little effect on the European automotive sector.
Would we benefit from drawing inspiration in part from the Inflation Reduction Act?
I think the first thing that needs to be said is that we have really very different policies, and we still need to qualify this difference. I think that European policy is much more balanced, undoubtedly much more effective because it also focuses on putting a price on carbon, which the Americans do not want to do. Their policy is essentially an industrial policy which aims to subsidize investment and production in the energy sectors and a little in the electric vehicle sector, in hydrogen, that kind of thing. We decided to put a price on carbon in addition to industrial policy. That, I think is a good thing. Now, the big difference is that the Americans are very good, they are very pragmatic and the fact of putting in place these subsidies which are very close to the market, it gives a very predictable side. People know when they are going to invest, that they are going to receive these subsidies. The European system is based on subsidies which are much further upstream, more on research and development, which sometimes require application procedures which are very long and very uncertain. And so I think that we have a lot to gain from this ease of access to subsidies in the American model.
What should be the European compass when it comes to green investments?
There are a whole bunch of subjects around the areas in which we must actually invest to develop technological comparative advantages. What we say in this report is that without doubt, the area where there is really a huge degree of urgency is the energy transition. We have challenges in terms of energy for both the Germans and the French, which are colossal. And what we are saying is that the most urgent thing is undoubtedly to stop pulling each other in the leg over our strategies in terms of energy transition: that French nuclear power after all is very Well, we will undoubtedly need the German hydrogen strategy, and rather than trying to block each other, we should benefit from the different choices which give us assurance at the European aggregate level.