29 March 2023

The United States’ passage of the Inflation Reduction Act (IRA) in 2022 had two significant impacts on the transatlantic relationship. The first was the clear signal to the European Union that when it comes to climate action, the US is back. The estimated $369 billion of climate investments over the next decade was a relief to countries around the world, and especially the EU, after the four years of climate inaction, if not climate obstruction, under the previous administration. The IRA showed the world that climate policy was finally a priority on both sides of the Atlantic.

Second, the IRA triggered immense transatlantic trade tensions, as the significant funding opportunities and the ease with which they could be accessed sparked fears across the EU that companies key to the bloc’s green transition would flock to more lucrative shores in the US. Particularly the IRA’s domestic content requirements led many in the EU to accuse its longtime trading ally of engaging in protectionist measures not in line with international trade law. These provisions, combined with the lack of a spending cap in the bill and soaring energy prices in Europe, raised concerns of deindustrialization across the EU.

On Thursday March 23rd, the Transatlantic Climate Bridge and the Heinrich-Böll-Stiftung hosted a roundtable event to discuss exactly these transatlantic dynamics as well as their impacts on international climate policy. Panelists included Mike Williams, Senior Fellow at the Center for American Progress; Sam Pieters, Trade Officer at the Representation of the European Commission in Germany; and Jesse Scott, Visiting Research Fellow at the Deutsches Institut für Wirtschaftsforschung and Adjunct Faculty at the Hertie School. Jan Philipp Albrecht, President of the Heinrich-Böll-Stiftung, moderated the discussion.

Creating the IRA and the GDIP

Critical to understanding the IRA and American climate policy more broadly is the intersection between the labor and environmental movements in the US. American support for climate action depends on these policies leading to well-paying, union jobs, in addition to the achievement of climate targets. Thus, the inclusion of domestic content and labor provisions in the IRA were critical to the legislation’s passage; without them, there would be no climate bill in the US.

The US is, however, aware of the impact of such provisions on its valued trade partners, and the country is willing to pull out many diplomatic stops to heal tensions with the EU. “The US wants to see the EU thrive here too,” emphasized Williams, who added that, in the US, the international business case for the green transition is not seen as a zero-sum game.

We have already seen manifestations of some of these diplomatic efforts, with the US Treasury Department relaxing the electric vehicle domestic content requirements for leased cars and providing potential further concessions due to be announced this Friday when the department releases its implementation guidance for the IRA. Importantly, Treasury could be posed to follow an expansive interpretation of the term “free trade agreement” to allow the EU to benefit from various funding provisions in the bill that currently can only be enjoyed by countries with such an agreement with the US, which the EU does not have.

Regardless of any leeway granted to the EU during the implementation of the IRA, a new approach to industrial policy on both sides of the Atlantic is here to stay. The EU is moving ahead at record speed with its Green Deal Industrial Plan (GDIP), along with its accompanying Net-Zero Industry Act and Critical Raw Materials Act.

Interpreted by many is a direct response to the IRA, this legislation is designed to keep European industry competitive in light of green subsidies around the world. An important pillar of the GDIP is the goal to simplify and speed up regulatory processes to get clean projects off the ground and facilitate access to funds for the same. It’s not just the amount of money in the IRA that has caught European business’ eyes – it’s also the ease and simplicity of accessing it.

The case for workers is also worth building up in Europe. The grassroots support for the IRA, especially among those communities who will become the frontline workers of the green transition, was not only necessary to securing the bill’s passage, but it is also critical to ensuring a just and rapid clean transition for the entire US population. The EU could benefit from similarly emphasizing the connection between climate action and jobs that are good for all Europeans.

Industrial policy & international trade overhaul

Now that the US and EU have, or are developing, robust industrial plans, how do both sides move forward from here? Cooperation around trade is one critical next step. “International trade is key to underpinning the green transition,” said Pieters. Transatlantic trade is momentous and can serve as a significant motor for climate protection, but these efforts will be more effective when mutually reinforcing.

There are positive signs indicating potential for transatlantic cooperation around these issues. The Clean Energy Incentives Dialogue under the US-EU Trade and Technology Council as well as conversations between top policymakers around a critical minerals club are a few such examples. However, different positions on the international trade regime continue to be a thorn in the side of the transatlantic relationship, and it risks jeopardizing future cooperation on these topics.

The EU and US have diverging opinions on the World Trade Organization (WTO) and the current rules-based system of international trade. The WTO needs reform if it’s to be wielded to combat the climate crisis, and while the EU is in favor, accomplishing this goal will be difficult without the US on board. “There is no appetite for WTO reform in the US,” Williams explained, which will make achieving an agreement on a joint transatlantic path forward on issues of trade and industrial policy difficult.

Regardless, both sides need to find a path forward on how to link trade and industrial policy, whether through the existing frameworks of international trade or not, as the market and free trade alone are insufficient to bring about the necessary emissions reductions. “Markets don’t get to fixed destinations at a fixed time, which is what climate targets are,” said Scott.

Post-IRA transatlanticism: diplomacy for third countries

While significant focus has been paid to Europe’s reaction to the IRA and its concerns over the well-being of its green industries, less attention has been given to the same reaction in third countries. The US and EU have more possibilities to rapidly and prosperously decarbonize their economies than, for example, Global South countries. As such, the transatlantic space bears a responsibility to ensure that their respective industrial policies and any trade agreements born of them – whether formal or informal – bring third countries along in their transitions, too.

“Europe and the US need to be more generous within the world,” Scott concluded, emphasizing that both sides need to onboard emerging economies into any trade agreement they develop as well as into the lead markets they create for green products. Green industrial diplomacy will be critical to developing clean economies around the world and avoiding extractivist trade policies that could leave many countries behind in the green transition.