Subsidy wars: who is winning the battle for renewable energy markets?

The United States has pledged around $390 billion towards climate programs, the majority of which will be delivered in the form of subsidies for both individual consumers and businesses. 

It’s a significant about-turn from the country responsible for emitting 4.4 billion tonnes of C02 (second only to China, with 9.9 billion tonnes). When Donald Trump withdrew from the Paris Agreement on climate change mitigation in 2017, he was lauded by many of his fellow politicians. It was a move consistent with the reluctance of the US to commit to green technologies or transition to a carbon-neutral economy. 

Cornering the green market 

But it was a short-sighted decision. While the US threw its weight behind fossil fuels, China was racing ahead in the renewable energy industry. An investment of $100 billion over the last decade has seen its market share grow from 16 per cent in 2005 to 28 per cent in 2021.  

Now, Biden’s green-friendly administration is scrambling to catch up. After the Covid pandemic and Russia’s invasion of Ukraine, the importance of diversifying supply chains to reduce a reliance on fossil fuels and their volatile pricing has been laid bare. 

The green subsidies, provided for by the Inflation Reduction Act (IRA) of 2022, are an attempt to do just that. And, while individual consumers will receive incentives to go green, manufacturers are the big winners.  

Historic legislation 

Major companies including Audi, Mercedes-Benz Group, Volkswagen and BMW have announced plans to move production to the US to take advantage of the IRA subsidies. Tesla has withdrawn an application for over €1 billion of German state aid in favor of moving its EU battery plant to the US. And the EU has lost out to California in the fight for Ecocem’s business — the Irish low-carbon cement producer has doubled its investment in the American state. 

“The IRA is the most significant piece of climate legislation the US has ever seen,” Samantha Gross, US-based director of energy security and climate initiative at the Brookings Institute, explained during an Esade Do Better podcast.  

“It’s quite different to what the European Union is doing, and the reasons are primarily political. It's not possible in the US to do a European-style climate policy focused on regulation and the EU Emissions Trading System. We don't have the votes to pass something like that in the US; the only tools available to us are subsidies.” 

Frustrating the markets 

But despite the green benefits on a global scale, not everyone is happy.  

“Both the EU and Asia have been very frustrated by the IRA,” says Gross. “These complaints are primarily twofold. First, they're about the level of subsidies, and that industries will come to the United States instead of Europe or Asia because we have such high subsidies that will attract all these industries.  

“Second, parts of the IRA are quite protectionist as they focus on buying US products. The subsidies are only available to products produced or refined in the United States or in countries with which we have free trade agreements — which notably do not include the EU.” 

And according to Pedro Aznar, a professor in Esade’s Department of Economics, the ability of some countries to offer higher incentives than others will create a very unlevel playing field in the energy markets. 

Finding a balance 

“The granting of subsidies by countries that have different capacities to increase public spending implies that there may be situations where subsidies by more generous countries artificially affect the competition of companies that participate in the EU single market,” he explains. 

“We need to find a balance between the importance of supply diversity in strategic industries such as energy, the solidarity efforts between countries and the individual needs of each country.” 

In an attempt to find this balance, the EU has introduced a series of its own measures, not least of which is the Green Deal Industrial Plan (GDIP), a central aspect of the European Green Deal. 

The EU response 

“Understandably, EU policymakers became anxious after the announcement of the IRA last August,” say Joan Villoslada Camps and Angel Saz-Carranza, research fellow and director (respectively) at the EsadeGeo Center for Global Economy and Geopolitics. 

“While the GDIP was a direct response to the IRA, both industrial plans have similar subsidies for electric vehicle purchases and clean-tech manufacturing, with EU renewable energy subsidies being significantly larger than the American counterparts.” 

And, they point out, “The EU cannot claim to be innocent in its trade practices either, as it imposes a 10% tariff on all imported cars (including EVs) and this offers an unfair advantage for European manufacturers.” 

But who will win the fight for renewable energy markets? According to Villoslada Camps and Saz-Carranza, we all will. 

“In the grand scheme of things, both the IRA and the GDIP are positive developments in the fight against climate change,” they say. “Although a few companies will inevitably relocate to the US after the IRA, the EU remains a well-developed and well-funded market for clean energy.”