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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