Green tech race? The US Inflation Reduction Act and the EU Net Zero Industry Act

Abstract

AbstractThe 2022 United States Inflation Reduction Act (IRA) is a significant and welcome climate law. It also includes trade‐distortive subsidies, including local‐content requirements prohibited under World Trade Organisation rules – the first time the US has done this and a blow to the international trading system that could trigger protectionism in other countries. The expected IRA green subsidies are of similar size to those available in the European Union, except in renewable energy production, where EU subsidies remain larger. However, there are important qualitative differences. In this article, we conduct a quantitative and qualitative comparison of the IRA with its preexisting European counterparts. We identify three main differences: European subsidies are less discriminatory, more focused on innovation rather than deployment and more fragmented than the IRA. Some IRA subsidies discriminate against foreign producers while EU subsidies do not. IRA clean‐tech subsidies are simpler, longer‐term and less fragmented, and they focus mainly on mass deployment of green technologies rather than innovation. We then examine the proposed EU reaction to IRA, the Net Zero Industry Act and discuss how it should be improved by the EU co‐legislators (the European Parliament and the EU Council) so as to become a useful building block towards a more comprehensive EU green industrial policy.