Europe bears brunt of US inflation law

Customers shop at a Costco store in Foster City, the United States, Jan 12, 2023. [Photo/Xinhua]

Measures promoting environmental protection come at high cost to others

One year after US President Joe Biden signed the Inflation Reduction Act into law, Europe is counting the cost to its economy.

The act, aimed at accelerating the US' transition to a low-carbon economy and creating jobs in green industries, includes about $370 billion in subsidies for green energy, as well as tax incentives for US-made electric cars and batteries.

Cleantech for Europe, a group that represents those developing and investing in clean energy, says European clean technology startups have lagged behind their US counterparts in attracting funding since the act came into force. While EU startups in areas such as carbon storage, electric vehicles and clean power received a total of $8.7 billion worth of investment, more than $21.7 billion has been committed to similar projects in the US.

A new study suggests that the United Kingdom may fall behind in green electricity production, despite once being regarded as a leader in energy transition. The advisory firm Oxford Economics forecasts that the UK will have the slowest growth in low-carbon electricity generation among the world's eight largest economies by 2030.

International competition, such as that posed by the US Inflation Reduction Act, has also played a contributing role, said Emma Pinchbeck, chief executive of the trade association Energy UK.

Chen Fengying, an economist and former director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations in Beijing, said the US aims to revive its economy through legislation such as the Inflation Reduction Act and the CHIPS and Science Act. "However, these laws are exclusive and clearly practice protectionism."

The EU used to lead other countries in developing renewable energy development and a low-carbon economy, but the Inflation Reduction Act has led many companies to invest in the US, hindering the EU's progress in energy transition and weakening its leadership in renewable energy, she said. "In the foreseeable future, the US is likely to make great advances in renewable energy and in the low-carbon economy, and competition between the US and the EU in the field of renewable energy and key technologies will undoubtedly escalate."

At a White House ceremony commemorating the first anniversary of the signature of the Inflation Reduction Act on Wednesday, President Joe Biden said the legislation had created 170,000 clean-energy jobs.

Asian countries affected

Some European and Asian countries are still grappling with the protectionist economic policies embedded in the law. The EU has implemented tax reduction measures to encourage investment in zero-carbon technologies, and Australia and Japan have introduced similar legislation to support emissions reduction technologies.

The US moves again demonstrate that first and foremost the US always looks after its own interests, Chen said.

"It also wants all other countries to serve its interests, and its allies are no exception."

He Yun, an associate professor in the School of Public Administration at Hunan University in Changsha, said that even though the US legislation bears the name the Inflation Reduction Act, it seems to have had limited impact on bringing down high inflation in the US over the past year.

There are several reasons for this, the first being that many of the act's provisions are supposed to be phased in between this year and next year, so the full effects have yet to be seen. "While the act reduces costs in some areas such as Medicare drug prices, these account for a small portion of the overall inflation basket. Currently, US inflation is more driven by supply chain issues and rising food and energy costs caused by the Russia-Ukraine conflict, which are areas the act actually does not directly address."

Over the past year, Europe has expressed dissatisfaction with the Inflation Reduction Act because, it says, some of its provisions run counter to the continent's economic interests. For example, subsidies for US-made electric vehicles could hurt European motor vehicle exports, and subsidies for US clean-energy companies put European clean-energy equipment makers in the US market at a disadvantage.

"These subsidies could trigger subsidy wars that would damage global trade," Chen said.

Agencies contributed to this story.