February 21. 2024. 8:28

The Daily

Read the World Today

The EU response to US IR Act cannot be just a blank cheque to green tech investors


Europe has the capacity and the financial means for a green industrial strategy, but it needs to up its social game. Swapping green investment for new austerity policies will jeopardise the Green Deal and social cohesion. Let’s learn from the US IR Act instead! Raise social standards, invest in quality jobs and training.

The US Inflation Reduction Act (IR Act) is the latest initiative from Joe Biden, aiming to deliver his election campaign promises of a worker-oriented industrial plan. This policy package is made of financial support to green technologies with local content requirements to ensure that aggressive emission reduction and “Made in America” work together. But it’s more than just a green recovery strategy. The IR Act is also aiming to enhance social justice with a series of conditionalities to create quality jobs and with a massive tax reform.

Making the fate of working-class families and communities a priority while decarbonising the economy is the distinguishing mark of Biden’s Presidency. Moreover, the way in which tax credits are dependent on employing and training apprentices is also an investment in young Americans that might rebalance the poor demographic pyramids that afflict our industries on both sides of the pond.

This refreshing change of policy compass contrasts with the old recipes being touted in Europe in response. Fundamentally, wealth distribution is also critical in the EU’s response to the US IR Act. In Washington, industrial strategy, emission reduction and social justice are entwined, whereas in Europe, the Commission’s response, set out by President von der Leyen, relies on less regulation, more subsidies, more trade, and more skills. ’Skills’ being the only social aspect allowed in the mix.

Social cohesion at serious risk

The lack of social balance becomes more sinister in European Council debates. Some European leaders seem desperate to repeat the mistakes of the past, arguing that additional public investment should go hand in hand with deeper cuts to public budgets and labour market deregulation, e.g. through pension reforms. The ‘green’ repackaging of austerity recipes is the exact opposite of the analysis that has inspired Joe Biden. And we believe it will put not just the EU’s Green Deal, but fundamentally our social cohesion at serious risk.

Today’s social landscape is marked by waves of strikes and collective action. Workers are withdrawing their labour and protesting in the context of historic inflation, fuelled by energy prices, a deep cost of living crisis and the impoverishment it entails for many workers across Europe. More than half of European households cannot make their ends meet and Europe’s lowest paid workers saw the value of their wages fall by up to 19% in 2022. But there is a deeper feeling of social injustice in society. Decades of labour flexibilisation has made precarious work a reality for millions of Europeans.

This daily insecurity of life hits female, young, migrant, low-paid and low-qualified workers hardest. In many industries, COVID-19 era short-time working arrangements are being used as a more permanent tool to manage production (due to shortages or energy prices), with no requirement to use downtime to upskill or retrain workers despite the deep transformation underway in these same industries – effectively a public labour subsidy without conditionality or a Just Transition for the workers impacted. Ironically, labour and skills shortages are crippling our industrial green ambitions, with the number of apprenticeships in the doldrums.

In contrast, tax avoidance and evasion through aggressive tax planning by multinationals are depriving public authorities of the crucial financial resources needed to balance budgets and invest in public services. According to the yearly Allianz Global Investors report in 2022, €382bn of dividends were paid out by European companies, a year-on-year increase of 23%. Austerity policies following the financial crisis, compounded by the unequal impact of the pandemic, as well as the many tax breaks and reduced social contributions that have benefitted private companies, have broken the social contract.

Yet over recent months, high energy prices and the IR Act’s arrival have generated calls for new subsidies to outbid the $369bn of public money on the table in the US, to avoid investment leakage as companies chase subsidies. Turning on the European money taps is seen as the key answer without really considering the innovative elements of the IR Act and how to ensure that public investment enriches society at large and not footloose investors.

Finance is only part of an industrial strategy

As recognised by the European Commission there is already a lot of cash on the table in Europe. Competition Commissioner and Executive Vice-President Margrethe Vestager recently reported that no less than €672bn of national funding for companies was notified to the European Commission in the context of the state aid Temporary Crisis Framework, with 90% of state aids granted to companies without pre-notification.

Additionally, €51bn of aid was also made available in 2022 thanks to the state aids guidelines for cost-effective clean energy projects. In the same way, current IPCEIs allow Member States to provide €18bn of public support to trigger investment in microelectronics, batteries, or clean hydrogen. Regional state aid programmes, and research programmes complement the picture.

The auctioning revenues from the EU emissions trading system (ETS) are also on the rise and should provide additional resources to Member States to invest in green technologies, at least those having the budgetary margins to do so. Alongside state aid, clean tech investors also have access to the EU Innovation Fund: one of the world’s largest low-carbon funds, according to the Commission. It was expected to provide around €38bn (2020-2030) but it will be turbocharged with the recent ETS reform.

The European Commission has also announced the establishment of a new EU “Sovereignty Fund”. The scale, scope and eligibility criteria of this new funding mechanism are unknown at this stage, but the expectation is that this will be a game-changer. Putting all these pots together and comparing them to the size of the IR Act (and Japanese equivalent) is the subject of many boardroom investment discussions and policy analysis. Arguably the IR Act is an easier business case than the EU’s offer, finance is only part of an industrial strategy.

From a workers’ perspective, the issue is not only the subsidy asymmetry between the EU and US, but also the rising asymmetry in conditionality. Trade unions have long called for an industrial strategy alongside the EU’s climate targets. The IR Act has been a game-changer in the debate and it is positive after decades of “target and market” approaches.

However, this industrial policy response will fail if it is simply a “Black Friday” subsidy race for clean tech investors, while workers are forced to work longer and harder, in more precarious employment conditions, and public services are weakened continually, making the access to basic services such as health, justice, transport, even more difficult for hundreds of millions of European citizens.

We urgently need European measures that attach strong social and environmental conditionalities to the financial support provided to companies. Europe has the means to set up a green industrial strategy that benefits all. It’s time to act. Let’s learn from the US IRA and up our game socially.