EU should refrain from subsidy race with the U.S. – econ research institute

Germany’s Institute for Economic Research (ifo) has urged the European Union to refrain from further debt-financed subsidies as a response to the U.S. Inflation Reduction Act (IRA). "The EU should avoid entering into a subsidy race to locate battery or solar cell factories that work with known technologies - that is self-defeating," says ifo president Clemens Fuest in a report to the German finance ministry. Ifo researcher Niklas Potrafke adds that the EU should instead focus on “competitively awarded funding for research, development and innovation as well as the development of infrastructures”. Potrafke recommends, however, that the EU defends itself against protectionist elements of the U.S. IRA law while underscoring the need for negotiations between the EU and the U.S. on these issues. The EU already has the Next Generation EU programmes for climate protection, the funds for which have not yet been exhausted, said ifo. Europe must make up for its own shortcomings in industrial policy, the report adds. “Inexpensive and reliable energy supply requires greater integration of the European energy markets, expansion of energy networks, renewable energy sources and nuclear power, and the promotion of research in these areas,” the ifo states. It also calls for a new regulatory framework that would enable “the emergence of a platform economy in the energy sector, in which private households and companies act simultaneously as consumers and producers of energy.”

The European Commission recently presented the Critical Raw Materials Act, the Net-Zero Industry Act, plans for a European Hydrogen Bank, and proposals on long-term competitiveness to “create a conducive regulatory environment for the net-zero industries and the competitiveness of European industry.” Many of the proposals are part of the EU’s Green Deal Industrial Plan, which was presented in February in response to the U.S. IRA, but also to subsidies in other countries, such as China. The EU worries that key future technology industries could move to, set up or remain in other parts of the world to the detriment of EU industries. The U.S. had agreed the IRA, a landmark climate legislation that allows significant support for green tech companies producing in the United States.