How should Europe react to the IRA?

Publishing date
13 February 2023
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 The US Inflation Reduction Act (IRA) is a milestone in US climate policy. Unfortunately, it also contains protectionist elements, such as linking green subsidies to local content requirements (LCRs). This is prohibited under WTO rules. Legislating such LCRs is a first for the United States, and a blow to the multilateral trading system.

The EU needs to react to the IRA, but with aims broader than just protecting its competitiveness vis a vis the US. These include its competitiveness more generally, a well-functioning single market, speedy decarbonisation and its foreign and development policy interests.

Responding to the IRA by imposing LCRs in the EU and loosening state aid rules would undermine those broader objectives. The EU should also avoid mimicking the IRA’s approach to manufacturing subsidies. The latter would be a waste of public money, as it would mostly subsidise production that is not in the EU’s comparative advantage.

Instead, the EU should prioritise green procurement rules, faster renewables roll-out to lower energy costs and the capital markets union. There should also be an EU-level industrial policy that makes the EU more resilient to trade disruptions. In addition, the EU should seek both WTO remedies against prohibited IRA subsidies and reform of the international subsidies regime. The latter should help avoid trade policy getting in the way of climate policy.

This question was discussed in more depth with two eminent experts, LA-based Kim Clausing and Paris-based Sebastien Jean, along with Jeromin Zettelmeyer in Bruegel’s podcast The Sound of Economics. Next week, Bruegel will publish a policy brief on the issue.

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About the authors

  • Jeromin Zettelmeyer

    Jeromin Zettelmeyer has been Director of Bruegel since September 2022. Born in Madrid in 1964, Jeromin was previously a Deputy Director of the Strategy and Policy Review Department of the International Monetary Fund (IMF). Prior to that, he was Dennis Weatherstone Senior Fellow (2019) and Senior Fellow (2016-19) at the Peterson Institute for International Economics, Director-General for Economic Policy at the German Federal Ministry for Economic Affairs and Energy (2014-16); Director of Research and Deputy Chief Economist at the European Bank for Reconstruction and Development (2008-2014), and an IMF staff member, where he worked in the Research, Western Hemisphere, and European II Departments (1994-2008).

    Jeromin holds a Ph.D. in economics from MIT (1995) and an economics degree from the University of Bonn (1990). He is a Research Fellow in the International Macroeconomics Programme of the Centre for Economic Policy Research (CEPR), and a member of the CEPR’s Research and Policy Network on European economic architecture, which he helped found. He is also a member of CESIfo. He has published widely on topics including financial crises, sovereign debt, economic growth, transition to market, and Europe’s monetary union. His recent research interests include EMU economic architecture, sovereign debt, debt and climate, and the return of economic nationalism in advanced and emerging market countries.    

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