Impact of the Inflation Reduction Act on EU competitiveness
Last year, US Congress passed the Inflation Reduction Act (the Act) which offers billions in tax breaks and subsidies for US-based companies producing, among other things, renewable energy and green hydrogen. The tax breaks and subsidies effectively lower US production costs for green hydrogen and refined electrofuels to a degree that makes these fuels very competitive on a future global market, despite relatively large transportation costs. We find that in some scenarios, the US can supply green hydrogen in Central Europe at lower costs than low-cost producers around the North Sea.
What does this mean for Europe?
Since the adoption of the Act last Summer, policy makers, in particular in Europe, have been debating heavily how the Act will impact on Europe and what the EU should do to respond. The answer is not clear cut, as low-cost American green hydrogen may impact Europe in several ways.
On one hand, the Act will enable the US to attract more foreign direct investments in renewable energy, green hydrogen, and refined electrofuels. All things being equal, this could postpone similar investments in the EU, thereby delaying the EU’s own production of these products.
On the other hand, low US production costs may also provide low-cost, low-carbon fuels to the EU market which could ‘fuel’ the green transition in the EU and lower the costs of the green transition in the EU.
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While the net impacts on the EU’s green transition and EU businesses remain to be seen, the Act is a major step for decarbonisation in the US. This has ramification for the global climate, given that North America accounts for 12 per cent of global net anthropogenic CO2 emissions primarily from the US (see the new IPCC report).
A final EU response to the Act is yet to be seen, and there are certainly many considerations for the EU being taken into account in terms of climate policy, industrial policy, energy independence, trade policy, as well as state aid regulation. Concerns have been raised that after losing solar panels to China and losing global market share in semiconductor production, ‘losing traction’ in production of green hydrogen before it has even kicked off is yet another lost industrial opportunity for Europe.
Is green hydrogen the next foregone or delayed industrial venture for a European Union with such lofty ambitions for decarbonisation and energy independence?
Last Wednesday, the Confederation of Swedish Enterprise and Copenhagen Economics published reports on the Inflation Reduction Act and its impacts on EU competitiveness. See both reports in a combined document here:?https://lnkd.in/gsRxCxwm
For more information, please reach out to Senior Economist? Morten May Hansen or Managing Economist? Signe R?lmer Vejgaard .