Nils Redeker: “We need one common industrial policy in the EU and not 27”

The director of EsadeGeo, Angel Saz-Carranza, and the Deputy Director of the Jacques Delors Centre, Nils Redeker, discuss the main ideas around the European strategic response to the IRA.


This podcast is an initiative of the Observatorio EsadeGeo Fundación Repsol de Geopolítica de la Transición Energética.

The Inflation Reduction Act (IRA) is the most significant piece of climate legislation the US has ever seen. Although it will give a major boost to the green transition, its focus on subsidies raises concerns about the impact on the EU’s competitiveness. The director of EsadeGeo, Angel Saz-Carranza, discusses with Nils Redeker the implications of the IRA from the European perspective. Together, they explore how an EU industrial policy for the energy transition should look like and its main challenges. 

Nils Redeker is Deputy Director of the Jacques Delors Centre of the Hertie School in Berlin and one of the top voices regarding industrial policy in Europe. His academic work focuses on European fiscal and economic policy, reforms of the EU's economic governance, and the role of Germany in the EU.  

This article offers a briefed version of the interview, which you can listen to in full here

How would you describe the IRA in a nutshell?  

There is an ambivalence that has characterized the reception of the IRA in Europe. First and foremost, it is a climate package designed to decarbonize the US grid and industry and to onshore key clean tech industries. In this sense, it is very good news for the world because it has the potential to bring down US emissions quite substantially over the next 10 to 20 years. Second, it is a subsidy package for a big industrial policy push designed to onshore production and for the US to become competitive in key sectors of the green economy. This industrial policy push has raised concerns in Europe regarding how it will affect EU competitiveness and its ability to grow and innovate in the future.  

Why would a climate policy in the US affect European competitiveness?   

There are three reasons. The first is due to the easiness subsidies are readily available for companies in clean tech sectors, including batteries, solar, hydrogen, etc. A concern for Europe is that it's very easy for companies to get this money. It's mainly a tax credit system in which you can move to the US, open up a factory there and be sure that you will get a certain amount of subsidies per unit you produce over the next ten years. That makes it much more attractive than any green subsidies currently available in Europe. This has raised concerns that it would lead companies to move away from Europe. The second reason is that it's partly protectionist. That means that the IRA subsidies are especially generous to companies producing in the US or in North America. Therefore, there is a concern that this discriminates against European producers. Again, it's another incentive to move away from Europe. The third one is the sheer size of the package. It is at least 400 billion, but most of these subsidies come in the form of uncapped tax credits. That means that the size of the overall handouts is going to depend on uptake. So, how much are companies, households and consumers willing to take on these subsidies? Estimates say it can go up to 1.2 trillion. This size effect contributes to some European policymakers being afraid that the IRA will pull away investment from Europe.  

You usually emphasize that the EU should not mimic the IRA. Why so?  

For two reasons. The first is that the EU has a climate policy that works very differently. It incentivizes investments in clean technologies more with sticks than with carrots. We have carbon prices and regulatory measures aiming to make it less attractive to invest in brown sectors and, by doing so, pull investments into green sectors. From an economic perspective, one could argue this is the more efficient approach. So, the first answer is that the EU shouldn't mimic the IRA because it doesn't need it since we have a different system that, to a certain extent, is superior from an economic perspective. The second reason is that the EU cannot design this kind of big subsidy package in a way that doesn't undermine the single market. The US has really opened up its fiscal taps when it comes to green subsidies. Some countries in the EU could do this, but most will have an issue with fiscal space. At the same time, we lack the common European resources to do this at the EU level. So, simply for the reason that we are institutionally unable to replicate the IRA, we shouldn't try to do it but design a more targeted European response.  

You propose a targeted response based on sector or technologies. Can you explain what that is?  

When designing industrial policies, it is important to be conscious about what you're doing, why you're doing it, and what you're trying to achieve. There are different goals that the green industrial policies currently pursue. Some relate to economic resilience, some relate to competitiveness, and some relate to bringing future jobs into Europe. Mixing these goals can lead you to design wrong responses. The responses need to be conscious of the goals and sectors they're trying to address.  

What sectoral responses should be the priority of the EU industrial policy response to the IRA?  

There are areas where it's really about resilience, where the goal of industrial policy is to be protected against sudden import stops from outside of Europe. One main example is the solar panel industry. Currently, the EU imports most of its solar panels from China, and there is an economic risk that, at some point, China will stop exporting them for political or economic reasons. The question is how to deal with this risk because, at the same time, solar panels are highly commoditized goods. It's not a very fancy product, and there's not a lot of value added in the production process. Being locally competitive, given that labour costs are much higher in the EU than in China, will be difficult for Europe, if not impossible. It makes more sense to focus on trade diversification and try to reduce dependency on single importers by reaching out to other countries. Rather than onshoring the entire industry, it can make sense to have a small base production here simply to be able to scale this up in the case of an emergency.  

And what about the sectors with important economic clout that are relevant for competitiveness?  

The goal here is a bit different. It's not about having a certain production share here but about technological leadership, competitiveness, and the ability to secure future innovation and growth in Europe. It makes sense to invest in these areas, especially because Europe has an edge in many green technologies built up over the last years and should try to preserve and expand them. This is the case with hydrogen, batteries, or wind equipment. In all these sectors, it makes sense to have an industrial policy that addresses market failures and helps these industries to build up, stay competitive and innovate. But that's a temporary thing; the goal is to build up industries that can stand on their own in the medium term. Here, instruments are much more geared towards temporary subsidies that are handed out competitively, ensuring that you get to the technologies with an edge.  

Imagine we could reach a political agreement to create a collective fund at the EU level to hand out these temporary subsidies. What economic governance reforms are necessary to make that a valid option to all European EU countries?  

We need a couple of preconditions. First, we currently lack the staff and analytical capacity to find and target the industries of the future and identify market failures that are worth addressing. For example, the US Chips Act has a staff of around 100 people in the White House; it tells you a bit about how much staff and knowledge you need to do industrial policy right. At the moment we don’t have that in the EU. We also lack a bit of data, and we lack a governance infrastructure that combines a forward-looking approach on growth and also focuses on competition. So, we need to build something that addresses both at the same time. And third, we need more funding for the right kinds of instruments. We really need to develop these at an EU level because if we do 27 different industrial policies in our tiny economies, we won't be able to compete with the huge markets of the US and China. 

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