European executives eye Biden’s green plan with envy in Davos

BRUSSELS is coming under pressure from European businesses to respond to the US’ multi-billion-dollar clean-energy subsidy plan, or risk losing investment and falling behind in the green-energy revolution.

The region’s reaction to the US Inflation Reduction Act (IRA) has become the key issue in meetings between industry leaders and politicians at the World Economic Forum’s annual gathering in Davos this week. The Act includes billions in financial aid that Europe fears will unfairly benefit US businesses.

One key concern raised by executives is the European Union’s fragmented market, which hinders the type of growth that the bloc needs to improve its ability to compete.

Martin Lundstedt, chief executive of Swedish truckmaker Volvo, said that the US is “creating a movement from a brown-fossil-based platform to a green platform”, and that Europe needs to take inspiration from that.

The EU has been seeking changes to Biden’s plan, but anything meaningful looks unlikely. The view from businesses suggests that the bloc would be better off focusing its energy on fixing its own issues, rather than seeking concessions.

The US passed legislation last year to subsidise the energies of the future (from hydrogen to batteries, wind and solar), build manufacturing self-reliance, and ensure that the country is not dependent on China or other nations. If Europe does not go big too, it risks being left behind in the green-energy revolution that has become one of the dominant global themes.

“There’s a big sucking sound for global climate technologies coming to the US,” said Hans Kobler, founder and managing partner of Energy Impact Partners, which invests in clean-energy startups. There is great technological innovation in Europe, he said, but those startups have a harder time scaling because of the fragmented nature of the European market.

The IRA was part of a broader package of measures – including incentives for chip manufacturing – to ensure that the US has home-grown industries of the future.

But the Act has sparked a backlash in Europe, which fears that domestic industry will divert investment to take advantage of the generous tax credits and other subsidies, estimated to be worth around US$370 billion.

SEE ALSO

UBS head says regulators’ ‘eyes off the ball’ on non-banks

Integrate ESG reporting and accounting to align unlisted businesses, say corporate figures at Davos

“I didn’t expect to talk about this at all, and it’s all everyone’s talking about,” Tim Adams, chief executive of the Institute of International Finance, said on Wednesday (Jan 18) on the sidelines of the Davos conference. “What I’m hearing is that Europe needs to do the same thing with a green deal that’s as transformative as the American one. The IRA was clearly a catalyst for action in Europe.”

On Tuesday, European Commission president Ursula von der Leyen said that the bloc will respond with its own plans to redress the balance.

“To keep European industry attractive, there is a need to be competitive with offers and incentives that are currently available outside the EU,” she said.

The threat has sparked fears of a tit-for-tat subsidy war and a new protectionism that could split the global economy and drive up prices for consumers. With world growth already on uncertain ground, that is something that businesses desperately want to avoid.

German Chancellor Olaf Scholz said on Tuesday that he is convinced that such a scenario can be avoided. He also said that he supports the basis for Biden’s plans – boosting green technology and carbon reduction – but added that the question for the US is “how to deal with your friends in the world”.

But this is far from just a US-EU issue, and geopolitical tensions on multiple fronts are feeding into the new green-technology race.

Kobler is concerned that governments on both sides of the Atlantic Ocean have not quite grasped how dependent clean-energy technologies are on a supply chain tied to China, the world’s largest producer of solar panels, batteries, electric cars, and hydrogen-producing electrolysers.

“We are going into a dependency on critical minerals, solar panels, and batteries on China that is almost worse than German dependency on Russian gas,” he said. “To overcome the years of advantage that China has, a little bit of government help is needed.”

For the EU, one option is to loosen the rules on state aid to bring industries up to speed. But, as ever in the bloc, political differences and national interests are getting in the way of a uniform response. 

Some countries are worried that bigger economies with more fiscal firepower will gain more from any relaxation of restrictions.

Different groups are also angling to attach some of their traditional campaigns to the debate. A number of nations see it as a way to push for fresh borrowing, while others argue for top-down interventions and national-industry champions, or more government aid.

EU Trade Commissioner Valdis Dombrovskis acknowledged some of those concerns on Wednesday.

“We’re looking at how to adjust our state aid framework, while keeping the integrity of a single market and a level playing field among EU member states,” he said.

Nick Stern, a professor of economics at the London School of Economics, said that the starting point for countries is “what are we going to need in the future, and (how to) ensure robustness of supply”.

“Friend-shoring”, US Treasury Secretary Janet Yellen’s idea that only allies can be trusted suppliers, goes too far, he said. Instead, there should be four core producer regions – in the US, China, Europe and India.

To get there, countries will need to accept a “reasonably liberal interpretation of the global trading rules”, as state subsidies are used to get industries up to speed. BLOOMBERG