Clean Energy Components Wrinkle US-EU Relations

Over $200 billion of the $369 billion in energy and climate investments promised by the US Inflation Reduction Act (IRA), passed in August 2022, is set to incentivize renewables produced domestically. The policies meant to encourage the fledging renewables industry in the US have been attacked by European Union (EU) countries as protectionist and in violation of World Trade Organization rules. EU chief of industry Thierry Breton has warned that the subsidies passed under the IRA pose an “existential challenge” to the bloc’s industrial base. While tensions are unlikely to reach critical levels, real consequences are already being felt, with manufacturers pausing their EU-based expansions and exploring plans to build greenfield component factories in the US. Facing an exodus of clean energy component manufacturers, the EU needs to take swift action in coordination with the US to shore up its energy supply chain and secure the materials needed for the energy transition.

Is an EU IRA Possible?

Since the passing of the IRA, opinions have diverged in the EU about how the bloc should respond to its recent supply chain woes. As demonstrated recently by the unintended interaction between French EV subsidies and wider EU markets, national incentives will be a difficult means to drive the transformational change required to fulfill EU-wide decarbonization goals. Notably, France and Germany, both with hundreds of thousands of direct automotive manufacturing jobs at stake, have represented differing sides of the incentive debate. French finance minister Bruno Le Maire has suggested that domestic-only EV subsidies should be considered, and EU Commission president Ursula von der Leyen has proposed a large-scale domestic renewable stimulus like that passed across the Atlantic. Meanwhile, German finance minister Christian Lindner has called raising EU debt “a threat for competitiveness and stability.”

The EU is left at a seeming impasse: either directly subsidize industry at the risk of upsetting debt-carrying member states and increasing inflation, or jeopardize its critical component manufacturing capacity. To remain competitive during the energy transition, the EU must find a balance between taking a unified approach to preserve its internal markets and continuing to cooperate with the US, one of its closest partners.

EU Component Supply Largely Depends on Imports

Clean technology components are in high demand in the EU, and countries are still largely reliant on manufacturing and materials supplied from China. According to the International Energy Agency, in 2021 Europe accounted for roughly 17% of overall solar PV demand and at most manufactured only 8% of any given critical solar component. China’s scale of production has enabled price reductions in solar PV that have helped make the technology viable. However, the concentration of resource mining and processing in China has also led to polysilicon bottlenecks and highlighted human rights abuses in production processes. In addition, the recent spotlight on Russia’s willingness to weaponize energy in the Ukrainian conflict has raised concerns about China’s increasing control of clean technology manufacturing. Clean technologies have become a matter of national security; investments are required in Europe to avert black swan events in which supply could be threatened.

The energy transition is a global issue that won’t be solved in one country alone; international cooperation is essential to avoid a looming trade conflict and to counter the influence wielded by China. On a December 2022 visit to the White House, French president Emmanuel Macron reaffirmed the “shared goal of accelerating the global green energy transition” through the US-EU task force on the IRA. Europe should not, however, stop at close cooperation with the US; direct and unified expansion of the support available to domestic component manufacturers is critical to securing an energy-independent future.

For further analysis of how the IRA may affect the energy transition, check out Guidehouse Insights’ white paper The Inflation Reduction Act: A Boon for American Clean Energy—But When?