The IRA challenges the European climate model

ARTICLE – The United States’ rejection of the Kyoto Agreement in 2001 and President Donald Trump’s withdrawal from the Paris Climate Accords in 2020 gave many Europeans a sense of superiority to the United States with regard to climate change. But now, Europeans are starting to realize their leadership in the energy transition is not as secure as previously believed. They are seeing the profound competition posed by the Inflation Reduction Act (IRA)—and the economic forces it unleashes.

The IRA as a response to climate change differs fundamentally from the European Union (EU)’s Green Deal. The EU quantifies numerous climate targets to set strict limits on greenhouse gas emissions. But the United States aims to make new technologies that mitigate climate change more competitive than conventional ones.

In the IRA, tax credits are the primary instrument of climate policy. Renewables and climate-friendly technologies are the main beneficiaries of the IRA, but they are stimulated through market incentives, without paternalism, managerialism, or micromanagement.

While the EU holds a binding, bureaucratic grip on the regulation of climate technology, the IRA harnesses creative market power in support of both renewables and other energy sources. In striving to turbocharge its economy by decarbonizing the energy sector, the United States could achieve climate neutrality before Europe.

In the IRA, climate neutrality takes precedence. Unlike in Europe, the United States does not pick winners and losers among competing climate technologies. The legislation’s success largely stems from the wide range of technologies that receive tax credits.

These credits do not narrow America’s energy supply base. Nuclear and hydrogen are both included in the legislative scope of the IRA. For instance, the IRA facilitates the carbon-neutral production of blue hydrogen, from natural gas with carbon capture and storage technology (CCS). Green hydrogen—produced from renewables—benefits most from the IRA’s tax code, but this does not come at the expense of CCS and blue hydrogen, which also receive tax credits in the legislation.

In contrast to the United States, subsidies persist as the main form of European energy policy, often creating inefficiency in the strive for climate neutrality. For example, Germany‘s Renewable Energy Sources Act, passed in 2000, created immense subsidies but left ambivalent climate results after two decades.


Read the full article written by Dr. Friedbert Pflüger on Atlantic Council.