Industry source: EU should learn from US Inflation Reduction Act

By Sarantis Michalopoulos | EURACTIV.com

09-02-2023

"The US IRA should be a wake-up call for Europe. Instead of complaining about the American approach, we should see what we can learn from it. And instead of punishing our own industries, we should see how we can help them drive decarbonisation," the source said. [Shutterstock/Vladimir Mulder]

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Instead of nagging, the EU should take lessons from the US Inflation Reduction Act (IRA) by stopping "punishing" its own industries and starting to help them drive decarbonisation, a high-ranking source from Europe's aluminium sector told EURACTIV.

EU leaders will discuss their response to Washington's green tech investment plan at a summit on Thursday in Brussels.

"The US IRA should be a wake-up call for Europe. Instead of complaining about the American approach, we should see what we can learn from it. And instead of punishing our own industries, we should see how we can help them drive decarbonisation," the source said.

An EU diplomat told EURACTIV that it's a lengthy process that will only start now, making it clear that final decisions should not be expected before June.

However, the European aluminium industry raises the alarm about what has so far been presented, warning that Europe is due to repeat the same mistakes against its own industry.

The source said the investment-driven US IRA has already produced "tangible" results.

"Many European countries have already announced plans to relocate their planned investments away from Europe and towards the USA. Companies from other regions are also being enticed: last month, the Korean solar panel manufacturer Hanwha Q Cells announced that it would spend €2.32 billion on a new manufacturing facility in Georgia, USA," the source said.

The source explained that although the US IRA is "undoubtedly protectionist" from a trade law perspective, still it's a clear signal that Washington has recognised that "climate change can only be combatted with massive investments in clean tech and is actively trying to facilitate these investments."

The source insisted that the EU industry's constant declining competitiveness due to heavy regulation is not something new and definitely not the result of the US fresh protectionism or the war in Ukraine.

"We lost our solar PV manufacturers to China, who now control over 80% of every key stage of the PV manufacturing process. All of Europe's wind turbine manufacturers are haemorrhaging money," the source said, adding that when it comes to the raw materials, the situation is even worse.

The aluminium production, which is required to produce all the key decarbonisation technologies (RES units, electric vehicles, heat pumps, hydrogen electrolysers, electricity grids etc.), has lost one-third of its capacity over the past twenty years due to uncompetitive operating conditions.

"And around 50% of the remaining production capacity is currently offline as a result of the energy crisis and may never return," the source added.

In late January, EURACTIV published a leaked EU Commission proposal to counter the US green subsidy bill, in which it was stated that "over €477 billion of additional investments are needed in the energy system and transport each year by 2030 on top of the historical annual average. Measures under REPowerEU would further require an additional €300 billion cumulative investments by 2030".

However, the source said this reference is missing from the final document that was published on 1 February and emphasised that Europe is about to repeat the same strategic mistakes.

"Unfortunately, this plan contains very little in terms of a fresh policy approach […] we need a seismic shift to create a positive business environment that actively encourages companies to proceed with the necessary investments," the source said.

The industry source explained that a key element would be to reassess the "massive regulatory costs" that current policies are placing on European businesses, citing as an example the EU's Emissions Trading System (EU ETS) combined with the Carbon Border Adjustment Mechanism (CBAM).

"Independent studies have shown that fully implementing the CBAM will increase the cost of producing aluminium in Europe by 43%. This means that producing aluminium in Europe will be at least 43% more expensive than anywhere else in the world," the source said.

"If production is so much more expensive in Europe, why would any company invest in Europe?" the source wondered, adding that the current design of the EU ETS will not lead to industrial decarbonisation but instead "further deindustrialisation".

"This point is crucial because if we do not produce steel or aluminium in Europe, then we will not be able to produce RES units, electric vehicles or other clean tech either. It will simply be easier and cheaper to produce these technologies elsewhere (most likely China or even the USA) where they have competitive access to raw materials," the source said.

Referring to the US approach, the source said Washington presented an alternative to decarbonisation which does not rely on "punitive" carbon pricing but is based on "carrots rather than sticks".

"It actively supports the companies that will be tasked with investing billions of dollars in clean tech and raw materials. This can be contrasted with Europe's disciplinary approach, which seems to have been designed by people who have never set foot in a company's boardroom to see the challenges involved in reaching an investment decision," the source noted.

The source said Europe's approach creates a paradox, considering that the ETS burdens EU companies with massive carbon costs and then expects the same companies to find even more money to fund expensive decarbonisation projects.

The source also said the superiority of the US carrot-based approach could even be evidenced by our own experiences in Europe, where the electricity sector is often portrayed as a sector in which carbon pricing has successfully driven decarbonisation.

"But this is simply not accurate: investments in renewables have been mainly driven by positive policies, like subsidies, not by the ETS," the source noted.

"In fact, the vast majority of Europe's RES plants are not exposed to the market price for electricity, meaning that the ETS has had no impact on these investment decisions whatsoever," the source concluded.

[Edited by Alice Taylor]

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