EU’s response to the US Inflation Reduction Act (IRA)

BRIEFING

Requested by the ECON Committee

Policy Department for Economic, Scientific and Quality of Life Policies

Author: Christian SCHEINERT

Directorate-General for Internal Policies

PE 740.087 - June 2023

EU’s response to the US Inflation

Reduction Act (IRA)

The US Inflation Reduction Act (IRA) of August 2022

is a budget reconciliation measure comprising eight

titles, which cover a very large spectrum of US policies. In essence, IRA aims to curb inflation and to invest

into domestic clean energy production. The law represents the largest effort into addressing climate change

in US history. It aims to achieve a reduction of around 40% of greenhouse gas emissions in 2030 compared

to 2005. The IRA represents a radical departure from the politics of the Trump era and remains controversial

within the US political establishment. Outside the US, its resolute pro-climate aspects have been broadly

hailed, yet a number of its measures, most notably local-content requirements (LCRs), such as ‘Made in

America’ requirement for cars and batteries, have come under severe criticism.

This paper will concentrate on the IRA’s main aspects that have sparked a severe trans-Atlantic dispute, and

that might have consequences not only for the bilateral trade relations and a possible diversion of direct

foreign investments, but also on the possible re-shaping of EU policies, including a shift in the balance

between the Single Market and industrial policy. EU reactions will be outlined, such as the adaptation of

State aid rules and the Green Deal Industrial Plan

. Beyond US-EU relations, LCRs also have the potential to

undermine the free trade principles that are at the core of the World Trade Organisation (WTO).

US Inflation Reduction Act - A new paradigm

Successive US administrations went in and out of international climate agreements, with President Clinton

signing the Kyoto protocol, President Bush not pursuing that policy, President Obama signing its follow-up,

the Paris protocol, President Trump reversing these policies, and finally President Biden opting back into the

Paris protocol. He then instrumentalised climate policies through several measures, including the IRA.

However, the IRA contains very heterogeneous measures and is more than just about climate.

The essence of the IRA is in its name, i.e. an intended reduction of inflation achieved through withdrawing

excess purchasing power from the economy by way of increased taxation. It therefore comes in

addition to the Fed’s efforts to curb inflation. Much of the intended climate-enhancing is achieved

through targeted tax brakes, such as subsidising the purchase of electric vehicles through a reduction of

sales taxes.

Over a period of 10 years

, the IRA is estimated to raise revenue of around USD 739 billion from prescription

drug price reform to lower prices, imposing a selective 15% corporate minimum tax rate for companies with

higher than USD 1 billion of annual financial statement income, increased tax enforcement, imposing a 1%

excise tax on stock buybacks and a 2-year extension of the limitation on excess business losses.

For full text of the bill, see https://www.congress.gov/bill/117th-congress/house-bill/5376/text, for more details, see Analysis by the Committee

for a Responsible Federal Budget https://www.crfb.org/blogs/whats-inflation-reduction-act, White House, Guidebook to the Inflation’s

Reduction Act’s Investments in Clean Energy and Climate Action, https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-

guidebook/.

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In the same time-period, the IRA provides for spending this revenue on addressing domestic energy security

and climate change, deficit reduction, extending the Affordable Care Act subsidies originally expanded

under the American Rescue Plan Act of 2021 for three years, and increases funding for the Internal Revenue

Service (IRS) for modernisation and stricter tax enforcement.

Climate issues, which are a declared priority of the Biden administration, are dealt with in a large

number of pieces of legislation and government policies. Besides the IRA, other US policies and acts

introduced under President Biden are related to climate.

The CHIPS and Science Act

of August 2022 aims at strengthen American manufacturing, supply chains,

and national security, and invest in research and development, science and technology, and the

workforce of the future to keep the United States the leader in the industries of tomorrow, including

nanotechnology, clean energy, quantum computing, and artificial intelligence.

In June 2022, President Biden authorised the use of the Defense Production Act (DPA) to accelerate

domestic production of clean energy technologies. Five key energy technologies are concerned: (1) solar;

(2) transformers and electric grid components; (3) heat pumps; (4) insulation; and (5) electrolysers, fuel cells,

and platinum group metals.

The variety of issues that touch upon climate is demonstrated by the Infrastructure Investment and Jobs Act

of November 2021, which addressed climate in several ways well before the IRA was decided:

• by repairing and rebuilding roads and bridges with a focus on climate change mitigation;

• by improving transportation options and reduce greenhouse emissions through the largest

investment in public transit in U.S. history, considering that the transportation sector is the

largest single source of greenhouse gas emissions in the US. Amongst others, the legislation

will replace thousands of deficient transit vehicles, including buses, with clean, zero emission

vehicles;

• by upgrading airports and ports and waterways to address repair and maintenance

backlogs, reduce congestion and emissions near ports and airports, and drive electrification

and other low-carbon technologies;

• by positioning rail to play a central role in transportation and a climate-friendly alternatives

for moving people and freight;

• by building a national network of electric vehicle (EV) chargers, as a critical step in the

President’s strategy to fight the climate crisis. The legislation will provide funding for

deployment of EV chargers along highway corridors to facilitate long-distance travel and

within communities, aiming at building a nationwide network of 500 000 EV chargers to

accelerate the adoption of EVs, reduce emissions, and improve air quality, by upgrading the

power infrastructure to deliver clean, reliable energy across the country and deploy cutting-

edge energy technology to achieve a zero-emissions future;

• by making the infrastructure resilient against the impacts of climate change, cyber-attacks,

and extreme weather events;

• by investment in tackling legacy pollution by cleaning up Superfund and brownfield sites,

reclaiming abandoned mines, and capping orphaned oil and gas wells.

Concentrating on the IRA’s State aid aspects, the main instruments will be in form of tax credits and tax

deductions. To a lesser extent it will also provide grants, loans as well as offer loan guarantees. The various

measures differ considerably in duration, with some expiring as early as September 2024, such as the

grants for the domestic production of heat pumps, while other measures are permanent, such as the tax

credit for domestic manufacturing of critical minerals. For details on the measures, see Annex I.

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The heavy leaning on tax brakes may however have deep and unpredictable consequences, as it is not

possible to know the precise amount the measures will have on the public coffers. By its design, the IRA may

have a significant impact on the level of US sovereign debt should there be a high uptake of the

programmes.

EU and Member States programmes

It can be argued that the Green Deal Industrial Plan is an answer to the IRA, in an attempt to avoid clean-

energy companies to leave the EU for the US. It builds predominantly on relaxing State aid rules further, thus

allowing more national support, including through tax benefits. When comparing US and EU action in favour

of climate, it is necessary to also consider measures introduced before the IRA was adopted. In this respect,

the EU

Recovery and Resilience Facility (RRF) plays an important role, as it concentrates on the green and

digital transition, with most of the subsidies allocated to the green part.

The Commission’s Green Deal Industrial Plan, which was presented on 1 February 2023, is destined to

enhance the competitiveness of Europe's net-zero industry and support the fast transition to climate

neutrality. The Plan aims to provide a more supportive environment for the scaling up of the EU's

manufacturing capacity for the net-zero technologies and products required to meet Europe's ambitious

climate targets. It is based on four pillars: a predictable and simplified regulatory environment, speeding up

access to finance, enhancing skills, and open trade for resilient supply chains. It proposed the

Net-Zero

Industry Act, to provide a regulatory framework suited for quick deployment of a net-zero industrial

capacity, ensuring simplified and fast-track permitting, promoting European strategic projects, and

developing standards to support the scale-up of technologies across the Single Market. It also announced

the

Critical Raw Materials Act, and a reform of the electricity market design. The Commission announced

it would be proposing a European Sovereignty Fund.

Other instruments have also to be taken into account. Launched in May 2022, REPowerEU is helping the EU

to save energy, produce clean energy, and diversify its energy supplies following the adaptation of EU’s

energy supply to the war in Ukraine. The

InvestEU Programme supports sustainable investment, innovation

and job creation in Europe.

After IRA was enacted, the EU, to counter the IRA’s negative effects on EU industry, decided upon additional

support to industry to be made available through the relaxation of EU State aid rules. This is based on an

extension of the more generous application

of State aid rules in response to the Russian invasion of Ukraine,

for which the Temporary Crisis Framework was created in March 2022. On 9 March 2023, its latest

modification transformed it into the Temporary Crisis and Transition Framework (TCTF), which de facto

also made it a response to the IRA. The framework uses the flexibility foreseen under State aid rules to

support the economy. In 2022, the Commission declared specific categories of State aid compatible with

the Treaty if they fulfil certain conditions. Under the TCTF, in most cases State aid still has to be notified,

however, if certain conditions are fulfilled, the aid will be declared compatible. Under the revised General

Block Exemption Regulation (GBER) the respective thresholds have been increased to allow that many cases

of aid do not need to be notified anymore. The actual policy measures, i.e. subsidies, are then handed out at

national level, using national resources.

In the words of Commissioner Vestager, when starting this approach in March 2022, the Temporary Crisis

Framework ‘complements the existing State aid toolbox with many other possibilities already available to

Member States, such as measures providing compensation to companies for damages directly suffered due to

exceptional circumstances, and measures outlined in the Commission Communications on energy market

developments. The new framework will enable Member States to (i) grant limited amounts of aid to companies

affected by the current crisis or by the related sanctions and countersanctions; (ii) ensure that sufficient liquidity

remains available to businesses; and (iii) compensate companies for the additional costs incurred due to

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exceptionally high gas and electricity prices. These types of measures will be available also to companies that

qualify as being in difficulty, as they may face acute liquidity needs due to the current circumstances, arriving on

the heels of the coronavirus pandemic. Sanctioned Russian-controlled entities will be excluded from the scope of

these measures.’

The Temporary Crisis Framework was already prolonged

and amended on 28 October 2022, before being

transformed into the TCTF on 9 March 2023. On the same day, the Commission also amended the General

Block Exemption Regulation (GBER) to further facilitate and speed up the green and digital transition. It

mainly

increased the limit on Member States’ aid in line with inflation and introduces allowances of larger

sums of State aid in the EU’s less-developed periphery. The GBER will now be in force until the end of 2026.

The TCTF also enables governments to discourage companies from moving overseas by authorising them

to match the subsidies offered by a third country, but only for a limited period. While it is exclusively in the

Commission’s competence to take such decisions, a number of Member States signed a letter

urging the

Commission to use ‘great caution’ in loosening State aid rules.

The Recovery and Resilience Facility is a temporary financing instrument that is the centrepiece of

NextGenerationEU

. It was put in place to counter the economic consequences of the COVID-19 crisis, and

has a very strong climate component. It is therefore part of the EU’s climate response, introduced a couple

of years before the IRA was decided, making the EU first in providing large climate subsidies. The

Commission is funding up to EUR 250 billion (or 30%) of NextGenerationEU by issuing NextGenerationEU

Green Bonds. This should make the Commission the largest green bonds issuer in the world.

The RRF comprises grants and loans. Together with other NGEU contributions, their total amount is capped

at EUR 750 billion, but inflation adjusted it would be in excess of EUR 800 billion. The repayment of the

Commission borrowing will be spread from 2028 to 2058.

Designing the RRF was a legal challenge. It was created based on Article 122 TFEU

, which is a legal base for

action in crisis situations. As the EU Treaties do not allow the EU budget to be financed by debt (Articles 310

and 311 TFEU), the RRF had to be run outside the EU budget’s framework. Following a thorough legal

analysis, Eurostat categorised the debt taken up for provisioning the RRF as Commission debt contracted

on behalf of the EU, not common debt of the Member States.

The EU has legal personality, making it an independent entity in its own right. The EU can take up debt,

something the Commission is routinely doing on behalf of the EU, albeit only for small amounts. For the RRF

(and for the programme

SURE), the Commission was exceptionally, and as a one-off measure, authorised to

take up a considerable amount of debt. It is to be noted that under the RRF, in order to satisfy the

requirements of the no-bail-out clause (

Article 125 TFEU) the Member States do not guarantee another

Member State’s debt. Rather, the RRF guarantees are solely covering liquidity problems the Commission

may encounter, and the guarantees need to be paid back by the Commission to the Member States as soon

as the EU institution’s RRF-related liquidity problem is solved.

In the absence of common debt, what makes the RRF special is the high level of debt the Commission is

allowed to go into, as well as the redistributive effects of the grants part, where a substantial difference exists

between what individual Member States will get from the RRF, and what they will later contribute to the

Commission’s reimbursement of its debt. At the present juncture, it is not yet possible to say how strong the

redistributive effects will be, as three years after the inception of the RRF, it has not yet been decided how

the Commission will collect the amounts necessary for reimbursing its debt. The loans part of the RRF does

not contain such redistributive effects, as each Member State contracting a loan from the Commission will

have to reimburse the entirety to the Commission.

Consequently, despite the high amounts involved, the RRF will be cease to provide grants and loans at the

end of 2026, and due to its exceptional character, being conceived as an Article 122 TFEU based crisis

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mechanism, it cannot be easily prolonged or replicated in the absence of a major crisis. This will diminish

the amounts available for combating climate change.

At the present juncture, the EU instruments in favour of climate as well as serving to counter the IRA are

substantial.

Cross-Atlantic comparison and effects

Although the resolutely pro-climate stance of the Biden administration and its main instrument, the IRA

were welcomed by the EU as a valuable alignment on the world-wide trend to fight climate change, the

amounts involved as well as several of the instrument’s specifications sent shock waves through the EU. The

first impression was that a new, major shock was about to hit the EU, after those of COVID-19 and the Russian

invasion of Ukraine. As a consequence, numerous calls to react were made. However, the range of the

requested actions varied considerably.

Before designing and implementing remedial action, it is necessary to estimate the effects the IRA would

have on the EU and its industries, and to compare, where possible, US and EU climate-related action. In this

part, a number of aspects are analysed.

Tax breakes vs. debt financed funds

The main difference between the US and EU is that the IRA doesn’t create funds, and even less so debt-

financed funds, while the EU is mainly relying on funds, and these are being financed by debt. Yet, in case

of a large uptake of the programmes in the US, massive tax relieves may create a substantial reduction in

government tax collection which needs to be compensated by sovereign debt.

The different approaches reflect a difference in philosophy. The US administration is trying to re-allocate

existing resources within its budget, by cutting on old priorities in favour of new ones, in this case climate.

The EU’s approach, in and around the RRF, is adding policy priorities without cutting on old ones, with the

additional expenses mainly being burdened on taxpayers in some distant future.

The macroeconomic effects also differ, with the IRA poised to fight inflation, as its name implies. By

increasing taxes it supports the Fed’s efforts to curb inflation by removing purchasing power from the

economy. In contrast, the EU’s approach involving debt financed funds increases the current purchasing

power, thus contravenes the Eurosystem’s endeavour to lower the inflation to a level near 2%, and might

force to conduct an even more restrictive monetary policy. Philip Lane, the ECB’s chief economist, has

already called

on governments to reduce their support for gas and electricity bills, which he says are fuelling

price increases.

Achilles heels

How viable are the two approaches, both financially and politically? Both the US and the EU are establishing

policies and funding with a possible Achilles heel.

The US programme, by mainly and massively relying on tax brakes, is not capped and might therefore

become a victim of its own success. It bears the potential of substantially increasing debt in a country where

the government is already highly indebted, thus might have to take corrective action in case of pressure

from the financial markets. The UK recently came under such pressure, as experienced by the Truss

government in 2022.

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A Hertie School study by Jansen, Jäger and Redeker warns that USD 370 billion for security and climate

change programs for the next ten years - a number based on an estimate from the Congressional Budget

Office (CBO) - may be too conservative. Should industries request more than the CBO calculated, then the

amounts would increase in a dramatic way. In a Brookings study, Bristline, Mehrota and Wolfram

warn that

up to USD 1.200 billion dollar could be reached because of non-capped tax relieves, as incentives in the

energy markets span the entire energy sector, from producers of raw materials to end-use consumers, and

will set considerable new forces in motion.

Another danger to the IRA programme is political. First, through Republican opposition to additional debt

expressed during the bi-annual debt ceiling negotiations

. It was only in May 2023 that an agreement was

reached. Failure to agree on a higher debt ceiling, the US would have defaulted on its debt, with potentially

deep consequences on the IRA. Second, an electoral defeat by the incumbent president would also impact

IRA in a major way. In view of the fundamental divergences of views on climate change, it should be

expected that a Republican administration sets new priorities and discontinues Biden’s climate

programmes, or at least cuts them to size. IRA’s long term future cannot be taken for granted.

A possible Achilles heel in the EU programmes stems from trying to establish permanent funds that are

using a temporary source of income. The RRF is planned to dry up at the end of 2026, when the last RRF

disbursements will be made. The RRF was established as an instrument that is exceptional, capped, time-

limited, and a one-off. There is also cognitive dissonance at work, as the RRF was specifically established to

soften the blow to the economy due to the COVID-19 pandemic and its lock-downs, which occurred in the

2020-2021 period, while the RRF subsequently morphed into something different, trying to satisfy further

goals, such as digitalisation and combating climate change, where the time horizon goes well into the

medium and long term. Strictly speaking, the RRF made its first disbursements when the COVID-19 induced

economic downturn it was meant to counter was already over.

An Achilles heel common to the US, the EU and the Member States’ programmes is inflation and the

increase in interest rates, which make the taking up and servicing of debt more difficult for high-debt

countries, and more expensive for all countries. When the RRF was launched in 2020, interest rates were near

zero and the mantra of ‘low for long’ was prevailing. Nearly unlimited access to cheap capital seemed to be

certain. Despite warnings

, many EU governments felt that there was no limit to increasing debt, mainly due

to the ease by which sovereign bonds could be monetised through the central banks’ quantitative easing

(QE) programmes, as well as near-zero costs for servicing that debt. Now, three years later, rates are

expected

to stay ‘high for long’. Servicing debt is getting substantially more expensive. Already, high debt countries

are being downgraded by credit rating agencies, most visibly France in April 2023, which Fitch

justified by

citing amongst others its relatively large fiscal deficits and only modest progress with fiscal consolidation.

How do the US and EU programmes compare in numbers and quality?

It should be borne in mind that an exact comparison of numbers is more than difficult, almost impossible.

This is not only due to the divergences in time horizons and instruments, especially tax brakes as opposed

to debt financed funds, but also to open issues such as the known unknowns of the uncapped uptake of tax

brakes. Further, there are the unknown unknowns of the political struggle in the US concerning the recurring

debt ceiling negotiations, as well as possible changes of administration following elections, which may put

an abrupt end to some key instruments, especially those involving taxation and subsidies. In the EU, the

unresolved issue of large scale financing of funds beyond 2026, thus the ability to create or not permanent

funds, provides for another unknown. In addition, even if the financial aspect may be solved, there might

not be a consensus amongst Member States for creating these funds in the first place.

It has been argued

that new funds, such as a European Sovereignty Fund, would need to draw from existing

EU funds for clean-tech industries, by unifying existing funds. This would make bureaucratic sense, but will

fall short of what the Commission initially promised.

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An additional challenge stems from the range of government structures that need to be considered. It would

neither be sufficient nor useful to solely compare the measures of the US federal level with those of the EU’s

supranational level. Doing so would leave out all the measures taken at Member State level as well as those

taken at state and local levels in the US. To give an example: in the EU subsidies for the purchase of electric

cars and their batteries are a Member State matter, each subsidising by using their own budget and doing

so along their own rules

, while since the inception of the IRA, US measures mainly stem from the federal

level, yet most US states also provide their own support.

Providing exact numbers for each of the fields concerned would go further than what can possibly be

provided in this paper. However, estimates were made, and it is useful to have a look at them, albeit with

caution, as analyses are often tainted, mostly to justify political action of some kind. Also, for the outcome

of measures, qualitative aspects may often be more important than quantitative ones. Simply looking at the

level of subsidies may not help in comparing the efficacy of the measures on both sides of the Atlantic.

A comprehensive analysis

was undertaken by a large team from the Bruegel think tank, which also gains

credibility by clearly stating the limitations of its own findings. The authors conclude that ‘while the EU has

no flagship green subsidy scheme like the IRA, it has a multitude of initiatives at EU and national levels that use

subsidies for broadly similar purposes.’ They further conclude that ‘EU and expected IRA green subsidies are of

about similar size, except in renewable energy production, where the EU subsidies remain larger. However, there

are significant qualitative differences. Some IRA subsidies discriminate against foreign producers while EU

subsidies do not. IRA clean tech subsidies are simpler and less fragmented. These also focus mainly on mass

deployment of green technologies, whereas EU-level support tends to be more focussed on innovation and new

technologies.’

To stay with electric cars subsidies, which is the field that created a substantial conflict between the US and

the EU, the IRA subsidises for vehicle purchases, including a USD 7 500 consumer tax credit for electric cars

and a tax credit for companies, including leasing companies that buy clean vehicles. On average, EU Member

States subsidise around EUR 6 000 per vehicle, while they typically do not discriminate between different

producers. However, beyond numbers other aspects need to be taken into account: by design, US electric

car subsidies avoid subsidising electric car purchases by the rich. Bruegel’s authors’ takeaway is that IRA and

EU subsidies for electric vehicle purchases are of similar size.

Concerning the efficacy of the instruments, the Hertie study comes to the conclusion that ‘the US will deliver

subsidies to green manufacturers much faster and more predictably than what is available in the EU. Most EU

support programs are project based and require lengthy notification and application procedures, making it

especially challenging for small and medium-sized enterprises to receive funding. They also mostly focus on

capital expenditures, helping with the initial investment needed to build up production and research capacity. In

contrast, the new US subsidies operate largely through the tax code and focus on operation expenditures. That

means that they are directly available and help push down the costs of production for the next ten years. As a

result, they send a direct signal to manufacturers how much they can benefit from moving investments and

production to the US.’

Effects on the WTO’s international trade order

The IRA’s protectionist elements in form of local content requirements (LCRs) came as a shock. By any

standards, this can be considered as a frontal attack on the World Trade Organization’s (WTO) international

trade order. As shown in Annex I, many of IRA’s subsidies are subject to LCRs.

For convenience, here is the annexe’s example of clean vehicles (electric vehicles, but other technologies

such as hydrogen and biofuels also qualify): Subject to income requirements (maximum USD 300 000 gross

income for couples or USD 150 000 for singles), a clean vehicle credit provides buyers with a tax credit of

USD 3 750 for vehicles for which a minimum percentage of critical minerals has been extracted or processed

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in the US or a country with which the US has a free trade agreement, and an additional USD 3 750 tax credit

for vehicles meeting the requirement that a threshold percentage of battery components are manufactured

or assembled in North America. Vehicles must meet other requirements to qualify, including final assembly

in North America and vehicle retail price limits of USD 55 000 for cars and USD 80 000 for vans, SUVs and

pickups.

In essence, this represents a continuation of President Trump’s hard-nosed ‘America First’ approach. The US

are one of the founding members of the WTO, yet the IRA makes no effort to abide to elementary trade rules

such as non-discrimination, as defined by the WTO’s most-favoured-nation (MFN) principle.

Canada and Mexico were granted exemptions, as were countries which signed free trade agreements with

the US. With no agreement on TTIP, the EU does not qualify for exemptions, but negotiations between the

two parties may correct that.

It is not clear yet what collateral damage the disregards of the MFN nation principle by the US will have on

world trade, the international division of labour and to world-wide wealth creation, but it may have created

a precedent for those who would like to see multilateralism end, or who are keen to introduce their own

protectionist policies. The IRA and other pieces of legislation, such as the CHIPS and Science Act are trade

distortive and further contribute to accelerate the ongoing subvention race, which, if it goes on

unchecked, might spiral out of control.

The impact of IRA on the EU

To analyse the impact of the US measures on the EU, and to put things into perspective, two points need to

be taken into account:

First, the EU was running its climate programmes and mobilising finance through the RRF together with

action at Member States level well before the US started with the IRA and related programmes like the CHIPS

and Science Act. The EU is not in a situation where it is now forced to ‘react’ by introducing similar funding,

as national and the EU’s mechanisms are already in place and running, cf. the clean car subsidies.

Second, contrary to the two shocks of COVID-19 and the Russian invasion of Ukraine, which were massive

and impacted the whole of the world, the effects of IRA are of limited size. The EU economy is not expected

to go into recession because of the IRA.

The largest impact will stem from trade distortions, including by further fuelling an already ongoing

subvention race with high stakes, such as that of attracting enterprises producing car batteries or

microchips. The trade distortions are further exacerbated by IRA’s local content requirements. According

Bruegel, ‘the IRA’s $7500 consumer tax credit on electric cars could reduce the cost of an eligible vehicle of

average price by about one fifth, to the detriment of electric vehicles presently excluded from the credits. This

could have a substantial impact on the ability of foreign automotive producers to maintain their present shares

in the US market. For the EU, the consequence could be large losses of exports to the US.’

However, a Hertie Schools study takes a slightly different view on this. It states that ‘while the EU initially

focused on the protectionist consumer credits for EVs, these subsidies likely have a limited impact in practice, at

least in the short term. EU exports of EVs to the US are small in quantity. Many European manufacturers already

have or are building up production facilities in the US and can benefit from the handouts. Moreover, most EU EV

exports are in the upper price segment, making them ineligible for the IRA subsidies in the first place. However, in

other sectors, the IRA could have substantial effects. For example, if US producers can make use of all subsidies

within the legislation, batteries could become 30% cheaper in the US than in the EU, production costs for solar

panels could fall by two-thirds relative to the EU, and prices for producing renewable hydrogen could fall to zero

by 2030. Moreover, in many of these sectors, the fact that the US provides direct production subsidies instead of

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merely supporting capital investments will make scaling the production of advanced technologies much more

attractive than in the EU.’

LCRs will not only reduce international trade, but should also impact foreign direct investment, especially

through the possible relocation of EU firms to the US. The questions are, whether IRA will trigger some

relocation, or massive relocation? Or if subsidies are the main factor that determine relocation, or if they are

one amongst many other factors?

Relocations of EU firms to the US started well before the recent crises, and certainly before the IRA came into

existence. Factors such as substantially cheaper energy in the US, the pushing back on multilateralism that

started under Trump, and the trend to produce in the proximity of the markets rather than exporting into

them, all this weights on location and re-location decisions. Firms like certainty and long-term planning. It

is questionable that companies will move business to the US if the subsidies are limited in time, or even

worse, if they might be terminated on political grounds without notice. Further, it is possible that

negotiations or a trade agreement open up again specific segments of the US markets to EU products, thus

negating some of the benefits of relocation.

There is another side to the coin: both the EU and its firms may also profit from IRA. Firms that already

decided to relocate part of their production to the US will happily take up the new subsidies and compete

on equal footing with US firms. Further, to again cite the Bruegel study, ‘the IRA will likely harm Europe through

its competitiveness effect, while it will likely benefit climate transition in Europe and most of the rest of the world.

However, the magnitude of both effects is very uncertain, partly because the IRA will induce substitution away

from Chinese inputs. By forcing the reorganisation of supply chains, the IRA may make the EU and other

economies more competitive relative to China. It may also initially slow the green transition. But in the longer run,

this effect should be outweighed by the reduction in the cost of clean tech driven by the IRA.’

Nicolas Crawford’s conclusions

are that the ‘The Biden administration’s geopolitical internationalism is at odds

with its geo-economic nationalism. The fact remains, however, that Europe is unlikely to be severely affected by

the IRA. Moreover, European political leaders have threatened more aggressive responses to the IRA than they

can deliver. A trade war is unlikely. It is more likely that booming green industries in the EU and US will open new

avenues to cooperation between them.’

How to react to the IRA? - Single Market vs. industrial policy

The IRA is generally seen as a US vs. EU topic, yet one might argue that finding responses to the external

challenge is very much depending on the perception of what the markets should do, and what the state

should be doing. Finding responses to the IRA is deeply linked to the fundamental discussion on the future

of European economic and industrial governance. Amongst others, it is accelerating the debate on whether

or not a successor to the RRF should be created.

At the risk of simplifying, the IRA has exacerbated the struggle between supporters of the Single Market and

associated free market economy, and those in favour of a stronger role of the state, instrumentalised in form

of an EU industrial policy. The main trigger of this discussion were very strong initial demands by the

Commission to create new policy instruments, to create, prolong or increase various European budgets and

funds, to shift economic decision-making from the national to the European level, and at European level, to

shift power from the Council to the Commission. This requested power shift is best exemplified by the

Commission proposals for reforming the EU’s fiscal rules, which would give the Commission the right to

negotiate individual fiscal plans with the Member States. Under present rules, all decisions are taken by the

Council. Article 126 TFEU

only foresees the right for the Commission to send a warning to a Member State

that didn’t comply with Council decisions.

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10 PE 740.087

This discussion was amplified by strong positions taken by some governments immediately after the

announcements of IRA, although their positions might not be identical to that of the Commission on a

number of points, notably by their opposition to the curtailing of national competences. Amongst others,

issues that were taken up concerned strategic autonomy, national/EU preference on trade, curtailing

competition policy, and increasingly leaning on EU financing of programmes. The discussion on whether

and how to modify European fiscal rules is also linked to these topics.

This is a continuation of a debate that already got amplified during the COVIC-19 pandemic, when the RRF

was created, providing the Commission with a strong role in the coordination of the national economic and

fiscal policies. Before the RRF, in the framework of the European Semester, the Commission would make

country specific recommendations to the Council, which the Council could amend at will before

transforming these into Council recommendations destined to the individual Member States. The latter

were not obliged to follow the recommendations, except where they concern a serious breach of the fiscal

rules.

With the RRF, the Commission has therefore gained time-limited powers that go far beyond what the EU

Treaties conferred upon the institution. Although the EU is not a state, and the Commission is not a

government, de facto, in economic and fiscal matters, it is currently close to what can be considered a

government. This is facilitated by the absence of countervailing action

by the Member States, which have

essentially stayed passive in view of the Commission’s actions and also by keeping the European Parliament

out of the loop, the latter due to the RRF having been created based on

Article 122 TFEU, which is a legal

base for action in crisis situations. Parliament is only informed after decisions were taken.

However, once the RRF disbursement phase comes to an end, the Commission’s new powers will be

curtailed, as the Commission’s ‘carrot and stick’ powers concerning economic coordination will come to an

end.

It should have been expected that the Commission would propose new instruments that would serve as an

anchor for its current level of power. The debate on the responses to the IRA could be serving as a

justification for maintaining the institution’s powers. The Commission President’s since called to create a

European Sovereignty Fund.

According

to Commissioner Breton, ‘the future Sovereignty Fund must be granted with the right budgetary

means to be credible. Its design should allow for direct, fast and flexible budgetary support to well-identified

projects of interest for EU sovereignty across any sector of our industrial spectrum.’ Should his plan be realised,

the fund would have the potential become an instrument for carrying out industrial policy in each and every

segment of the EU’s economy, across all Member States. The Commissioner further stated that the fund

should also ‘play an important role in preserving the integrity of the Single Market by collectivising investments,

while maintaining a necessary level playing field between Member States who do not have the same fiscal space

to help de-risking investments in future technologies and industrial production capacities.’ This indicates that

the fund may prioritise those Member States whose capacity to support investment is impaired due to a

high level of sovereign debt. The proposal met immediately

opposition from a coalition of Member States.

In March, Commissioner Breton announced that joint debt for green transition was no longer a priority.

It should be reminded that prolonging the RRF, or the creating another RRF-type instrument is not an option,

as its legal basis was Article 122 TFEU, where measures can only be taken to support Member States in

difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional

occurrences. These circumstances cannot be invoqued in the case of the IRA.

The other aspect that will shape EU’s response to the IRA is how the EU understands its position on free

markets vs. interventionist economic policies. In this field, the Member States’ positions differ widely.

State Aid: EU’s response to the US Inflation Act (IRA)

PE 740.087 11

In economic matters, by its Treaties the EU is essentially tuned towards free market economy, free

international trade, competition between enterprises, and entrepreneurship. Its main instruments are the

Single Market, a common competition policy also covering State aid that is enforced by the Commission, a

common trade policy based on WTO principles, and a common currency run by an independent and

stability-oriented system of central banks. A limited number of EU prerogatives and policies come in

addition to this, conferred upon EU institutions by the Treaties and based on the principles of subsidiarity

and proportionality.

However, this framework is increasingly being challenged, including through notions such as strategic

autonomy, industrial policy, national/EU preference in trade, and calls for a relaxation of competition rules.

The Commission proposals for the Net-Zero Industry Act, the European Chips Act, and the Critical Raw

Materials Act all contain targets and numerical limits reminiscent of state dirigisme, which is a new approach

for the EU. Especially in relation with the support of Ukraine, the Commission would like to gain direct

powers on some industries concerning production priorities.

Competition rules are being eased at the possible expense of the Single Market, and for the first time opened

to other policy goals than effective competition on the internal market. Further, a European Sovereignty

Fund would be created to correct the possible market distortions due to the easing of European State aid

rules. This should be the first time the Commission openly justifies the creation of a fund on the grounds

that this would be necessary to correct the negative consequences of one of its own decisions, in this case

the relaxation of EU competition rules.

A study by Holzhausen from Allianz Research considers

that the Commission ‘has struck a Faustian bargain:

It opened the floodgates for national subsidies that will inevitably tilt the playing field in Europe – and thus

strengthen the case for supranational remedies such as a new common fund underpinned by common debt. This

is a hazardous strategy. There is a real danger that the EU Commission will end up empty-handed: State aid rules

remain a mere fig leaf, but the hoped-for sovereignty fund never sees the daylight.’

The common purchases for a range of products are envisaged in an increasingly wide range of products,

especially raw materials and energy, which may infer in free markets.

Taken together, recent measures that were enacted, like the Next Generation EU, and many others that were

proposed, may end up straining the legal framework on which the EU is based. Leino-Sandberg and Ruffet,

from Helsinki University, warn

that, ‘while explained as exceptional and justified with reference to the pandemic,

in substance, the NGEU is not a crisis measure. It will change the reading of EU law permanently by establishing a

new type of instrument for redistribution between the Member States and funding this through debt.’ They argue

that ‘consensus among large Member States and key institutional stakeholders is insufficient for disregarding key

Treaty principles.’

There are alternatives to these policies, which also have the benefit of being in line with the EU’s traditional

positions and be safely anchored in the EU Treaties. The actions could include the following: completing the

Single Market, improving education and training, spurring R&D, reaching a trade agreement with the US,

filing a complaint with the WTO against the IRA’s local content requirements, implement encompassing CO2

taxes to avoid and correct climate problems, reducing bureaucracy, reform company taxation, and

streamline and accelerate vetting procedures for businesses.

The Bruegel study advises that ‘in responding to the IRA, the EU should not just seek to protect its

competitiveness relative to the US but to pursue broader aims, including competitiveness in general, speedy

decarbonisation and broad foreign policy and development policy goals. These aims imply that the EU should

not impose local-content requirements of its own, should not loosen state-aid rules and should not mimic the

IRA’s approach to manufacturing subsidies. Rather, it should focus on boosting its structural competitiveness,

formulate a trade policy response that includes reform of the international subsidies regime, and develop an

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12 PE 740.087

instrument for EU-level subsidies that focuses on early-stage development and increasing EU resilience to trade

disruptions.’

A study

for the EP by Amighini, et al. advises that ‘the EU should also provide a proper industrial policy response

to the IRA. More specifically, the Commission should review the state aid framework in a targeted way. It could

consider allowing for additional subsidies focused on sustainable innovation. Anyway, the EU should refrain from

mimicking the IRA with some kind of “Made in EU” Act as this would be incompatible with the WTO, and

detrimental to the EU’s credibility as a trading partner. As a rule, the EU should refrain from entering a subsidy

race, but rather maintain and shape the rules-based multilateral trading system.’

The Hertie School study suggests that ‘the IRA will undercut European production costs in several sectors. This

does not mean the EU must mimic the US program. However, it does mean that the EU needs to turn its piecemeal

Green Deal Industrial Plan into a coherent strategy. This requires a greater focus on green industries in which

Europe can develop a competitive edge and more joint financing at the EU level.’

Negotiation channels between US and EU on climate and IRA

The election of Biden was seen in the EU as a major relief from its predecessor’s openly aggressive stance

vis-à-vis the EU. Biden may use a more moderate tone, yet he resolutely maintains his predecessor’s ‘America

First’ approach, also in view of internal politics, which leave him little margins for concessions. A number of

channels for discussion and negotiation, both already established and newly created, can be used to defuse

possible conflicts.

The EU-US Energy Council is the lead transatlantic coordination forum on strategic energy issues for policy

exchange and coordination at political and technical levels. It was created in 2009 and last met on 4 April

2023, to re-affirm

the common commitment to achieving net zero emissions by 2050, and working jointly

with the global community to keep a 1.5 degrees Celsius limit in global temperature rise within reach, while

pursuing a just and inclusive energy transition to climate neutrality.

The Joint Energy Security Task Force was set up in March 2022 by Commission President von der Leyen

and US President Biden with the aim of supporting the rapid elimination of the EU's reliance on Russian fossil

fuels by diversifying its natural gas supplies, taking steps to minimise the sector's climate impact, and

reducing the overall demand for natural gas. A progress report was

published on 3 April 2023. The Task

Force has facilitated engagement with the U.S. LNG industry on the EU Energy Platform and its upcoming

implementation to attract U.S. LNG to Europe.

More specifically, a US-EU Task Force on the Inflation Reduction Act destined to address specific concerns

raised by the EU related to the IRA, was created

on 25 October 2022. In a Joint Statement by US President

Biden and Commission President von der Leyen on 10 March 2023, they reaffirm that the US and the EU are

committed to addressing the climate crisis, accelerating the global clean energy economy, and building

resilient, secure, and diversified clean energy supply chains. Both parties recognise that these objectives are

at the heart of the U.S. Inflation Reduction Act and the EU Green Deal Industrial Plan. They announce the

begin of negotiations on a targeted critical minerals agreement for the purpose of enabling relevant

critical minerals extracted or processed in the European Union to count toward requirements for clean

vehicles in the Section 30D clean vehicle tax credit of the Inflation Reduction Act. They announced the

launch of the Clean Energy Incentives Dialogue to coordinate the respective incentive programs so that

they are mutually reinforcing. Both sides vow to take steps to avoid any disruptions in transatlantic trade

and investment flows that could arise from their respective incentives.

The Clean Energy Incentives Dialogue will become a part of the EU-U.S. Trade and Technology Council

where it will also facilitate information-sharing on non-market policies and practices of third parties - such

State Aid: EU’s response to the US Inflation Act (IRA)

PE 740.087 13

as those employed by the People’s Republic of China (PRC) - to serve as the basis for joint or parallel action

and coordinated advocacy on these issues in multilateral or other fora. Five areas of cooperation were

agreed at the inaugural meeting on 29 September 2021: export controls; foreign direct investment

screening; secure supply chains (especially regarding semiconductors); technology standards, including

cooperation on Artificial Intelligence; and global trade challenges.

For negotiations on IRA, the guidelines that are being established are more important than the original act,

as there may be some leeway left in the technical part. However, the chances to achieve large breakthrough

are limited. As described

in the Hertie School study, the ‘main political goal of these Made in America

requirements is to reduce US dependencies on Chinese imports in critical sectors of the green transition. However,

they also discriminate against European producers and violate World Trade Organizations (WTO) rules.’

Concerning the negotiations, it concludes that they have led to ‘some carve-outs, for example for leased

vehicles, and both sides are eying targeted free trade agreements that could broaden the scope of the US subsidies

EU manufacturers can qualify for.’ However, the study warns that ‘most protectionist elements for green tech

industries are hard-wired into the law and impossible to change ex-post.’

Some results were achieved in December 2022: guidance on the relevant IRA provisions published by the

US Treasury would make commercial clean vehicle credits available to EU companies.

When solely concentrating on the IRA topic, the failure to agree on the EU-US trade agreement TTIP is now

a distinct disadvantage for the EU, resulting in being treated less favourably than Canada or Mexico. A

solution would be to find an agreement that is as encompassing as possible, e.g. a trade agreement.

However, some advice to refrain from negotiating exceptions for the EU within the IRA, in order to avoid

taking part in measures that are in violation with the principles of the WTO, notably the most-favoured-

nation clause. A study

for the EP by Amighini, et al. advises that ‘regarding United States’ IRA policy, the EU

might try to search for a bilateral solution within the newly established IRA Task Force to remove the local

production content requirements in the law itself. However, we would discourage the EU from asking for an

exemption, as provided in the IRA for Mexico and Canada, as this would continue to flout WTO rules. Instead, the

EU should file a case at the WTO, possibly together with other concerned partners. Filing such a complaint is not

an act of unfriendliness, but rather a necessary step to keep the WTO as the key institution for GVC governance. If

the EU does not file a complaint against the IRA, it would damage its own trade policy strategy and the credibility

of the multilateral trading system. In addition to filing a WTO case, the EU should work with allies and countries

also affected by the IRA, such as South Korea, Australia, New Zealand, and Japan.’

Conclusions

The EU went through two major crises recently. COVID-19 forced lockdowns, disrupted production chains

and brought much of the world’s economy to a standstill. Then, as the world economy was just about to

recover from the pandemic, the Russian war of aggression in Ukraine disrupted international trade and

brought an energy crisis to large parts of the EU. Compared to these two events, IRA is not a crisis, but an

issue. As shown above, the IRA should not have the potential to cause a recession in the EU.

The EU’s reaction to the IRA should not be expected to be as massive as that to the major crises. This is also

due to the EU having started with climate action and related subsidies earlier than the US, so much of the

‘reaction’ to IRA was already in place before President Biden launched its own climate package. This

concerns both the Recovery and Resilience Facility created in the aftermath of COVID-19 and the loosening

of State aid rules through the Temporary Framework as well as the revised General Block Exemption

Regulation.

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14 PE 740.087

Additional relaxation of State aid rules were decided after the inception of IRA, and further programmes,

such as the Commission’s Green Deal Industrial Plan, encompassing in particular proposals for a Net-Zero

Industry Act and a Critical Raw Materials Act was presented.

However, the several hundred billion Euro Recovery and Resilience Facility (RRF) is limited in time, and due

to its exceptional character as a crisis-fighting instrument based on Article 122 TFEU, cannot be prolonged

beyond 2026 or emulated in a different form. The Commission has since announced that it would make

proposals for a European Sovereignty Fund, however the reception of this plan by the Member States has

been muted, with a number of countries strongly opposed to such plans. The Commission did not yet

explain how this fund would be financed.

The US is now on track for fighting climate change, which, from the European point of view is a major break-

through. After strong initial fears about profoundly negative effects of the IRA on the EU, which led to a wide

range of often strong demands to counter the IRA, academic research, as shown above, now identifies the

emergence of a more nuanced appraisal. This includes acknowledging that the EU and its Member States

already had put in place instruments with similar aims and financial support, e.g. for the support of clean

vehicles. Further, a range of positive effects from the IRA for the EU and its industry has been identified.

European firms operating in the US will benefit from the IRA. It has also been advanced, that the IRA may

make the EU and other economies more competitive towards China. After an initial slowdown of the green

transition, in the longer run, this slowdown should be outweighed by the reduction in the cost of clean tech

driven by the IRA. Rather than triggering a trade war, it is more likely that growing green industries in the

EU and US will open new avenues to cooperation between them.

The biggest issue with the IRA are its local content requirements (LCR), the embodiment of an ‘America

First’ mentality, which many in the EU thought to be overcome since the last US elections. LCRs come in

gross violation of the international trade architecture that is enshrined in the WTO statutes, of which the

most-favoured-nation principle is blatantly disregarded. This is both a problem for European exporters, as

they can be discriminated against by US subsidies to the extent of becoming uncompetitive on US markets,

as well as for the stability of the international trade order based on multilateralism, which is central to EU’s

concept of trade policy as well as to the EU’s capacity to export. A further issue is a possible relocalisation of

EU industries to the US, although there is no consensus on the expected level of relocalisations, due to many

other factors influencing direct foreign investment decisions.

Concerning the LCRs, three main trade policy options are possible. First, by setting up a similar policy of

EU/national preference, which may however have profound consequences for EU’s exports once third

countries retaliate, as well as for EU’s credibility in upholding free trade and multilateralism. Second, by

trying to negotiate exemptions from the IRA, similar to those granted to Canada and Mexico. Although

negotiations are ongoing, with the aim of softening-up IRA implementing measures, and some concessions

were actually made by the US side, little additional progress is to be expected, as LCRs are hard-wired into

the main IRA act. Here too, the EU’s credibility might suffer, as it would accept that the US maintains

discrimination vis-à-vis third countries. Third, the EU may decide to file a complaint with the WTO.

The IRA and similar US policies further increased an ongoing subvention race in sectors like clean cars, and

the manufacturing of batteries and microchips.

The IRA anchors a debate on the EU’s economic and fiscal governance structure, opposing supporters of the

Single Market to those of an active industrial policy. The Commission and some Member States are

requesting a stronger industrial policy, which may include elements of state dirigisme, are advocating

community preference, and ask for a strengthening of EU funding, e.g. through a European Sovereignty

Fund. Others are opposing these positions, and some are also sceptical about the Commission’s action to

loosening competition rules.

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PE 740.087 15

For the Commission, there is much to lose once the disbursement phase of the RRF will come to an end. The

facility gives the institution a central role in the determination and coordination of the economic and fiscal

policies of the Member States, which goes well beyond the procedures foreseen in the European Semester.

The RRF provides the Commission with a carrot and a stick, while within the European Semester framework,

it can merely issue a recommendation (of the Commission) for a recommendation (by the Council) to the

Member States, which in addition is generally not binding.

Most experts advise not to react dramatically to the IRA, an opinion that is also shared by those experts who

did identify strong discriminations against the EU in some fields.

Much can be done leaning on current EU policies, such as completing the Single Market, improving

education and training, spurring R&D, streamlining and accelerating permitting processes for green

investment, reaching a trade agreement with the US, as well as pursuing broader aims, including

competitiveness in general, speedy decarbonisation and formulating broad foreign policy and

development policy goals, and review the state aid framework in a targeted way. The EU could consider

allowing for additional subsidies focused on sustainable innovation, and turn the EU’s piecemeal Green Deal

Industrial Plan into a coherent strategy. A multitude of further actions are possible.

A fundamental question will be whether the climate-related investments are to be financed by public debt,

or if the new priorities, mostly climate, should replace some of the old priorities within existing budgets or

funds, i.e. lead to a reallocation of resources rather than their increase.

Finally, the macroeconomic environment is changing. Many of the current programmes, as well as some

that are proposed, are financed by debt. The return of inflation reminiscent of what the European

Community went through 40 years ago, as well as high interest rates have fundamentally altered the

perception on sovereign debt. While until recently it was possible to finance climate change related

expenditure via seemingly costless debt, the soaring interest rates have triggered a major re-thinking, with

increased attention paid to the sustainability of state finances.

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16 PE 740.087

ANNEX I - Key Provisions of the IRA

Source: Boehm, L. and Scalamandrè, C.: EU-US climate and energy relations in light of the Inflation Reduction

Act., EPRS, European Parliament, January 2023.

Key provisions for manufacturing and industry support include:

• A tax credit for investments into advanced energy projects including projects which

expand or establish manufacturing facilities for the production of clean energy equipment

and vehicles, as well as projects which re-equip manufacturing facilities with equipment

reducing GHG emissions by at least 20 % (IRA statutory provision: 13501).

• A production tax credit for domestic manufacturing of components for solar and wind energy,

inverters, battery components, and critical minerals (IRA statutory provision: 13502). The

credit for critical minerals is permanent, starting in 2023. For other items the full credit is

available between 2023-2029, phases down over 2030-2032, and varies by technology.

• USD 250 million in grants for the domestic production of heat pumps (IRA statutory

provision: 30001), to remain available to September 2024.

• USD 5.8 billion in grant support to energy-intensive industry for the installation of

advanced technology to reduce facilities' GHG emissions (IRA statutory location: 50161).

The IRA places specific emphasis on zero-emission vehicles to support the Biden administration's goal of at

least half of all new passenger cars and light trucks sold in 2030 being emission free

• Subject to income requirements (maximum USD 300 000 gross income for couples or USD

150 000 for singles), a clean vehicle credit (IRA statutory location: 13401) provides buyers

with a tax credit of USD 3 750 for vehicles for which a minimum percentage of critical minerals

has been extracted or processed in the US or a country with which the US has a free trade

agreement, and an additional USD 3 750 tax credit for vehicles meeting the requirement that

a threshold percentage of battery components are manufactured or assembled in North

America. Vehicles must meet other requirements to qualify, including final assembly in North

America and vehicle retail price limits of USD 55 000 for cars and USD 80 000 for vans, SUVs

and pickups.

• The purchase of second-hand clean vehicles (IRA statutory location: 13402) is bolstered by

a tax credit of USD 4 000 or maximum 30% of the sales price, subject to household income

limits. Businesses are to benefit from a tax credit for purchases of commercial clean

vehicles (IRA statutory location: 13403) while consumers and business alike can benefit from

a tax credit for alternative fuel vehicle refuelling and charging property (IRA statutory

location: 13404) including electricity, ethanol and biodiesel.

• Domestic production of clean vehicles is to be bolstered by a USD 2 billion grant

programme for the manufacture of hybrid, plug-in electric hybrid, plug-in electric drive and

hydrogen fuel cell electric vehicles (IRA statutory location: 50143).

• A USD 3 billion purchase programme for the federal government to acquire US Postal Service

zero-emission vehicles (IRA statutory location: 70002).

Key provisions on clean energy include:

• Tax credit for production of electricity from renewable sources, for projects beginning

construction before 1 January 2025 (IRA statutory location: 13101), as well as a tax credit for

investment into renewable energy projects (IRA statutory location: 13102). Additional tax

credit is granted for small-scale solar and wind facilities in low-income communities (IRA

statutory location: 13103, 13702(h)).

State Aid: EU’s response to the US Inflation Act (IRA)

PE 740.087 17

• Tax credit for electricity produced at a qualified nuclear power plant (IRA statutory

location: 13105).

• A 'technology neutral' tax credit for production of clean electricity (IRA statutory location:

13701), as well as investment in facilities that generate clean electricity (IRA statutory location:

13702), until at least 2032, or in case US GHG emissions from electricity fall below 25 % of 2022

emissions.

• A USD 27 billion greenhouse gas reduction fund providing grants for clean energy and

climate projects especially in low-income communities (IRA statutory location: 60103).

• A USD 3.6 billion loan guarantee programme for innovative clean energy technologies

(IRA statutory location: 50141).

• A USD 5 billion loan guarantee programme to invest in new energy infrastructure

including carbon capture, utilisation and storage (IRA statutory provision: 50144).

• Loans and loan guarantees for the upgrade and provision of renewable electricity in rural

communities, including USD 1.7 billion in grants for agricultural producers to invest in

renewable energy and clean technology (IRA statutory provision: 22002(a)).

• Provisions for the development and use of transportation fuels such as tax credits for biodiesel

and renewables diesel (IRA statutory location: 13201), tax credits for the domestic production

of sustainable aviation fuels (IRA statutory location: 13704) and the sale or use of sustainable

aviation fuel (IRA statutory location: 13203), grants for biofuel infrastructure (IRA statutory

location: 22003).

• A tax credit for the production of clean hydrogen (IRA statutory location: 13204).

• USD 2 billion for energy research.

• Grants for climate justice and air pollution monitoring and reduction programmes, with

an emphasis on low-income and disadvantaged communities.

In terms of home improvement and household and commercial building support, the IRA will provide,

inter alia:

• Tax credits for energy-efficient home improvements (IRA statutory location: 13301), such as

insulation or efficient heating and a tax credit for the purchase of residential clean energy

equipment such as battery storage (IRA statutory location: 13302), as well as the construction

of new energy efficient homes (IRA statutory location: 13304).

• Tax deductions for energy efficient commercial buildings (IRA statutory location: 13303).

• Grants to develop energy saving house retrofits (IRA statutory location: 50121) and high-

efficiency electric home rebates (IRA statutory location: 50122).

• Grants for state and local government to adopt energy-efficient building codes (IRA

statutory location: 50131).

In addition, the IRA will invest in the US energy grid with:

• A USD 2 billion loan programme for transmission facilities (IRA statutory provision: 50151).

• USD 760 million in grants to speed-up the construction of interstate transmission lines

(IRA statutory provision: 50152). Grants are aimed at the examination of alternative siting

corridors in particular, as well as the participation in regulatory proceedings in other

jurisdictions.

• USD 100 million to plan interregional and offshore wind electricity (IRA statutory

provision: 50153).

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18 PE 740.087

Furthermore, the IRA will provide billions of dollars to US agriculture, fisheries and local communities, for

example in the form of:

• USD 8.45 billion in technical assistance grants for the conservation of ground water and

reduced soil erosion (IRA statutory location: 21001(a)(1)), USD 3.25 billion in grants to

agricultural and forest producers who adopt conservation activities (IRA statutory location:

21001(a)(2)), and further grant programmes aimed at environmental protection.

• To support coastal restoration and marine resources, a USD 2.6 billion federal spending

programme will benefit coastal communities (IRA statutory provision: 40001), while a USD 4

billion drought mitigation programme (IRA statutory provision: 50233), coupled with

related initiatives is directed at regions in the American South-West and far West suffering

from extreme heat and low rainfall.

MAIN REFERENCES

• Amighini, A. et al.: Global value chains:

• Potential synergies between external trade policy and internal economic initiatives to address

the strategic dependencies of the EU, European Parliament, Policy Department for External

Relations, March 2023.

• Boehm, L. and Scalamandrè, C.: EU-US climate and energy relations in light of the Inflation

Reduction Act., EPRS, European Parliament, January 2023.

• Bristline, J., Mehrota, N. and Wolfram, C.: Economic implications of the climate provisions of

the Inflation Reduction Act, Brookings, 29 March 2023.

• Council of the European Union: Strategic autonomy, strategic choices, Analysis and research

team (ART), Issue paper, 5 February 2021.

• Crawford, N.: The Energy Transition, Protectionism and Transatlantic Relations, International

Institute for Strategic Studies, 28 March 2023.

• Jansen, J., Jäger, P., Redeker, N.: For climate, profits, or resilience? Why, where and how the EU

should respond to the Inflation Reduction Act, Policy Brief, Hertie School, Jacques Delors

Centre, 5 May 2025.

• Kleinmann, D. et al.: How Europe should answer the US Inflation Reduction Act, Bruegel, 23

February 2023.

• Leino-Sandberg, P. and Ruffet, M.: Next Generation EU and its constitutional ramifications: a

critical assessment, 2022.

Disclaimer and copyright. The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the

official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is

2023.

Administrator responsible: Christian SCHEINERT Editorial assistant: Marleen LEMMENS

Contact: Poldep-Economy-Scienc[email protected]ropa.eu

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