Relay Race, Not Arms Race: Clean Energy Manufacturing Implications of the IRA for the US and EU

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The passage of the Inflation Reduction Act (IRA) in the US has elicited two competing reactions from policymakers in Europe. European officials are relieved that with the passage of the IRA, the US has a credible pathway to meet its 2030 emission reduction target under the Paris Agreement, provided it is paired with federal climate regulations and additional state-level climate action. At the same time, many in Europe are concerned that incentives for US clean energy manufacturing investment in the IRA could harm European industrial competitiveness. In response, the European Commission has proposed a Green Deal Industrial Plan to further support clean energy manufacturing on the continent. This has generated headlines warning of a “subsidies arms race” between allies.

In this note, we unpack the IRA and what it means for European industry. We find that while the IRA includes meaningful new incentives for the US clean energy industry, the share of IRA spending that supports US manufacturing directly at the expense of European industry is considerably lower than recent reporting on the transatlantic clean energy rift might suggest. The primary driver from the IRA shaping the clean energy manufacturing landscape is likely to be the overall accelerated pace of clean energy deployment in the US. This will expand clean energy manufacturing in the US, but will also create opportunities for European companies and lower the cost of clean energy on both sides of the Atlantic.

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