When the United States Congress passed the Inflation Reduction Act (IRA) earlier this year, climate hawks around the world had every reason to celebrate.
Sure, the deal didn’t go as far as many hoped, but the bill represented a $369 billion jolt for American climate tech and marked the end of the United States’ tenure as a climate pariah on the world stage.
But in the intervening months, leaders in Europe have become increasingly vocal about their displeasure with the IRA, and the law may have set the stage for a trade war between the United States and its closest allies in the European Union.
French President Emmanuel Macron and UK Business Secretary Grant Shapps have argued that the bill’s generous subsidies to American industries will unfairly impact European industries, making them uncompetitive with American climate tech and shutting European industry out of the lucrative American market.
The main dispute is over electric cars. The IRA passed after Senator Joe Manchin tied EV credits to several made-in-America requirements that would force producers to onshore production to the U.S. That means European automakers would have to move their operations to the United States to sell their cars there, to the detriment of their workers and investors back home.
Needless to say, that hasn’t gone down well among European leaders, and this week they made moves to even the playing field.
The first salvo came last week when the European Union announced that it would introduce a Carbon Border Adjustment tax (or Measure) for carbon-intensive products imported into the EU. That means imported products such as steel, cement fertilizers and hydrogen will be taxed upon entering the EU according to the carbon that went into making them.
The idea is to protect European industries, many of which currently have to pay for their carbon emissions under the European Union’s cap-and-trade system.
If European companies are the only ones paying for their emissions, foreign producers that make the same products could sell them in Europe without the cost of carbon, thus undermining European industries.
When asked about how trade partners would respond to the measure, the EU Parliament’s environment committee made no bones about the intent of the law, saying “Of course CBAM will have an impact on our trade partners, because it’s designed to.”
The United States is the EU’s second-largest trade partner after China, and stands to be directly impacted by the CBAM when it goes into force in 2023.
But this week, European leaders intimated they were looking to take further steps. Heads of state across Europe met on Friday to discuss an additional stimulus package that would match the kinds of support given to American industries in the IRA.
No specifics have come forward yet, but it’s clear that European leaders see the competition with the United States in nearly existential terms. Belgian Prime Minister Alexander de Croo said that without equitable clean tech investment across the EU that “we are in Europe, really, at the point where we risk to be de-industrialized.”
The intersection of trade and climate policy poses a dilemma for policymakers.
But policymakers can only gain support for their climate action proposals if they can prove to their constituents that those investments will end up back in their pockets through new jobs and tax benefits.
The problems is that, in the short term, those jobs may come at the cost of jobs and investments in countries that have agreed to cooperate openly on economic development. South Korea and Japan have also threatened to lodge formal complaints at the World Trade Organization over provisions in the IRA that would force them to move their operations to the U.S. That’s a highly unusual step for countries with formal free trade deals, which are meant to avoid exactly these kinds of conflicts.
This could have unforeseen political consequences.
In earlier periods of history trade wars often precipitated real wars, although that isn’t the concern these days. The United States and the European Union are locked in a tight competition to keep track with economic growth in China and India, and a new trade war could complicate their alliance as their economies decarbonize.
To complicate matters further, both Europe and the United States are eager to ease their dependence on China for materials critical to clean technologies.
China dominates the supply chain for lithium. Just this week, a pollution scare in Yichun led to the closure of a facility that supplies no less than a quarter of China's lithium.
The spill didn’t appear to have an immediate impact on lithium prices, but it’s another reminder of why the United States and Europe are so eager to get access to critical minerals on their own turf. The question now is how to do it without stepping on each other’s toes at every step of the way.
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