Europe’s Latest ‘Green New Deal’ Is Counterpunch To U.S. Inflation Law

Ever since President Biden enacted the Inflation Reduction Act (IRA), Europe has been on the offensive. Unfortunately, they were mistaken in thinking that Biden’s “working with allies” approach meant that he would ask Europe to give the green light to the US administration’s trade and economic development policies. Dubbed the Climate Law by many, this law gives a boost to the post-fossil fuel economy through tax incentives. The one that really hit Europe’s goat was a ban on tax credits of up to $7,500 for electric vehicles that meet the law’s regional content requirements. That would cut Mercedes, Audi, BMW and Volkswagen imports out of the loop and automatically make their electric vehicles more expensive than those that qualify for the domestic tax credit.

However, Washington has not budged on this issue.

The IRA is already working through a number of measures. BMW said in October it would invest $1.7 billion to manufacture electric vehicles in the US. That means new middle-income jobs and new tax revenues for the state.

“Many European firms have already announced that they are preparing plans to increase their investments in the US,” says Barclays Capital analyst Maggie O’Neal in London.

In addition to BMW, she named the Norwegian battery company Freyr and the Italian solar company Enel. “Since the passage of the IRA, at least 20 new or expanded clean energy manufacturing facilities have been announced in the US, and half of them are foreign companies,” she says.

So now Europe comes out with its bigger, worse version of a Green New Deal; a deal they’ve been bragging about since it was announced in 2019.

Coupled with the fact that their previous base supplier of natural gas is Russia unwanted person There, Europe is trying both to find new substitutes for Russian fuel and, in particular, to catch up with American policy on electric vehicles.

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Europe is going green again

The anti-inflation law poses a serious threat to Europe’s car industry. The law offers companies billions of dollars in tax credits to boost investments in clean energy technologies here, not just for the car supply chain. To push back and compete, the European Commission is asking EU members to respond with counterbalancing tax breaks and subsidies. And speed up the processes for investing in the post-fossil economy that Europe loves so much.

On February 1, the European Commission presented a package of proposals called the Green Deal Industrial Plan for the Net-Zero Age (GDIP) to support Europe’s post-fossil fuel manufacturing base. It is officially presented as a genuine ‘industrial policy’ for Europe that would ‘support the twin transitions towards a green and digital economy, make EU industry more globally competitive and strengthen Europe’s open strategic autonomy’.

The new Green New Deal “marks a major shift from the Commission’s previous rhetoric,” says Philippe Gudin, a European economist at Barclays in Paris. The old Green New Deal, heralded in the Trump years (as a countermeasure and a sign of virtue after Trump’s exit from the Paris Climate Agreement), focused mostly on competition rules, free trade, and had little government involvement in the new clean-tech economy.

That has changed.

No money was provided for this. But the money is there and more could come by summer.

Big industrial powers, especially Germany, will outspend Spain and Portugal. Germany, for example, can afford to forgo tax revenue. Spain and Portugal will have a hard time with that. Most of Europe’s auto industry is concentrated in Germany, France and Italy, but Spain has a few solar factories.

According to figures released by the European Commission in January, Germany and France account for almost 80% of the €672 billion approved for state aid unrelated to the Green Deal. Italy recently joined Spain in demanding EU-wide funding to ensure the green tech industry’s base isn’t just French and German.

In terms of money, the Commission says around €270 billion is available for new energy regulations, mainly through REPowerEU, to be used alongside the Innovation Fund and InvestEU. They want to throw the kitchen sink at it to compete with the US so manufacturers don’t move there and export to Europe. The European Union is our second largest trade deficit after China.

Barclays predicts that the macroeconomic impact of the DGIP on the EU could be greater than the 1.5 percentage points of additional GDP expected from the pandemic recovery fund, known as the NextGenerationEU Recovery Plan (NGEU). Without these Green Deal measures, Europe’s industrial sector would “probably be hit dramatically,” says Barclays.

However, unlike the IRA, the GDIP does not have a unified budget. Barclays says it will initially use unallocated funds from NGEU and REPowerEU, which were formed in May to reduce the EU’s dependence on Russia. Collectively, Barclays estimates public spending at over $440 billion over 10 years. While it’s not easy to make a direct comparison, IRA spending totaled $336 billion.

Barclays believes additional funding could be announced in Europe after the May 2024 election season.

It will not be easy. The EU has identified a €210 billion financial hole over the next four years as it attempts to decouple from Russian energy. Assuming they don’t return to Russian oil and gas markets, Europe will continue to seek new sources of old fuels, including coal, and finance to build the technologies needed for new energy – be they batteries, wind turbines or solar energy.

China is a major player in these markets and Europe depends on them.

Therefore, the GDIP is also motivated by the risks related to China.

The IRA and the EU Green Deal strategy were created to address energy security and supply chain risks. Both packages are attempts to diversify supply chains away from Russia and China.

European Commission President Ursula von der Leyen, sounding like a member of Capitol Hill, said at the World Economic Forum last month that the EU wants to “de-risk rather than decouple from China”.

Europe’s energy dependency on China has increased. EV battery materials and solar are closely related to Chinese supply chains. In the first half of 2022, European imports of Chinese solar panels increased by 137% compared to 2021.

The EU is no longer tied to Russian gas imports for around 35% of its gas supplies. But China now accounts for 75% of all EU solar panel imports, says Barclays.

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