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It’s the sort of thing you often find at Davos: a lofty mountain-top manifesto that doesn’t look too impressive on sea-level scrutiny. EU Commission President Ursula von der Leyen said on Tuesday that the European Union’s spending on green technology would itself be a major public investment.
After months of complaining about the US’s anti-inflation law, the European Union has now fully included European carmakers in preferential tax credits offered to the US, Canada and Mexico. Instead, he signaled his own spending to come.
This is, of course, what the US wants: coordination of EU climate targets into a state that prefers to meet them with cash rather than legislation – public spending and tax cuts rather than carbon pricing and regulation.
Washington says it prefers coordination to competition. But none of the transatlantic partners have instituted or are willing to cooperate on green investment, and in the case of the EU there is still controversy over what and how much public money should be invested.
For the US, at least two features of the IRA make international cooperation difficult. First, the law was enacted by Congress, not the administration. The IRA’s congressional bellwether, Senator Joe Manchin, thought more of West Virginia’s interests than Western Europe. It was set to extend EV credits to Canada and Mexico, but no further. Second, much of the cost is structured in the form of tax credits, the final amount of which is dependent on adoption and therefore uncertain.
On the European side, any coordinated response is limited by a familiar issue: the EU was created to regulate competition between member states within a single market rather than between the 27-state bloc and the outside world. In the year During the race for personal protective equipment in the first months of 2020, the EU felt obliged to impose restrictions on the export of medical products from outside the EU to prevent trade within the EU.
Relaxing these rules to allow more national government aid means unleveling the domestic playing field with respect to developed countries. The subsidy skeptic, EU Competition Commissioner Margrethe Vestager, last week sent a letter to member states on state aid. He pointed to a chart showing that 77 percent of the cost of new, relaxed aid laws introduced following Russia’s invasion of Ukraine came from France and Germany.
Not only fairness, but efficiency and incentives are called into question, especially as some of the political-industrial complex becomes impractical. The modern German corporation, for example, has created a formidable manufacturing sector, but few would accuse it of being far-sighted or of a common European interest.
Germany’s car manufacturing lobby has brutally failed to embrace electric vehicle technology in domestic production, opting instead to ditch internal combustion engines, and the country’s emissions watchdog failed to crack down on emissions cheating in the Dieselgate scandal. Part of the EV story that everyone in Europe seems to forget is that China will soon supply the majority of the EU market, no matter how much money Brussels or Berlin throw at the domestic industry. (One consolation: EU industrial policy won’t collapse as badly as the UK’s, when major EV battery maker Britishvolt collapsed into administration this week.)
The logical solution is a pan-European fund, pushed by France and partly embraced by von der Leyen and Vestager. But liberal northern European states like Sweden, which holds the EU’s rotating presidency, are keen to level the playing field in the single market, but are not big on more fiscal centralization.
For targeted and coordinated government assistance in fields such as green goods, a rapidly expanding technological frontier can create first-mover advantage and large positive externalities. But institutional imbalances and unfortunate incentives prevent transatlantic cooperation from becoming what it is supposed to be.
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