INSIGHT: Climate investment in Europe under threat without adequate response to US IRA

LONDON (ICIS)–The US’ Inflation Reduction Act (IRA) incentives for investment in a lower carbon economy require an adequate and balanced response from the EU.

Battered by the energy crisis and increasingly mired in regulation, companies are looking towards the US now with some envy.

President Joe Biden’s drive to accelerate the energy transition and tackle climate change surges forward from 2023 introducing what he has considered to be much-needed climate action and huge incentives for energy security and climate related, emissions reduction.

The EU’s Green Deal and Fit for ’55 packages, by contrast, already look outdated and designed to punish polluters rather than encourage positive, lasting change.

Countries across Europe have ambitious emissions reduction and net zero targets but lack the supportive, incentive-driven policies that are competitive now with those in the US.

Chemical industry executives have spoken of a need for clearer direction from the EU for the sector, particularly as Europe’s energy crisis bites.

The EU will phase out free carbon dioxide (CO2) allowances in its Emissions Trading System (ETS) and is expected to introduce a much-criticised Carbon Border Adjustment Mechanism (CBAM), for instance.

Such measures, alongside the controversial Chemicals Strategy for Sustainability that advances the regions’ control of chemicals, tilt the international playing field very much against investment in the EU.

By contrast, the IRA will provide subsidies and tax breaks estimated to be worth $370bn for US companies involved in the energy transition, including credits for US consumers who buy electric – battery and hybrid – vehicles.

In an interview with ICIS last week, the director general of Europe’s chemicals trade federation Cefic said the passing of the IRA in August had totally changed the landscape in the global race to decarbonise.

“We’re in a global competitive race, and on top of it we have the challenge to be net zero by 2050 and, for this, we need massive breakthroughs by 2030,” said Marco Mensink.

“Clearly, this is the time to invest in the next generation of industry. And that is where the US is now taking the lead, and China is moving along. The EU needs not to follow, but lead.”

The EU is in a bind competitively because its strict rules on state aid in most cases prohibit direct subsidies or tax breaks.

The US seems ready to direct vast sums towards investment in carbon capture and storage (CCS) and lower carbon technologies, towards electric vehicles (EVs) and towards improving people’s homes to make them more thermally and energy efficient.

The White House said in August that 950m solar panels, 120,000 wind turbines and 2,300 grid-scale battery plants would be installed by 2030.

Developments like these will lift demand for numerous chemicals and polymers as well as encourage investment by chemical firms in newer technologies.

The IRA has increased some tax credits for captured CO2, the price increase being sufficient to incentivise certain carbon capture and storage projects.

Chemical companies are keen to invest in more climate-friendly processes and in solutions such as CCS and hydrogen production and transport to get ahead of the game, but they need, in the EU particularly, greater regulatory certainty to be able to do so.

That point was raised in the UK recently by president of the Chemical Industries Association (CIA), who highlighted the US IRA.

“Where is our equivalent of the US’ IRA? [This is] a piece of regulation that will see a historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40% by 2030 with a total of $369bn in energy security and climate change programmes over the next ten years,” said Tom Crotty.

“Even if we cannot afford such totals, let’s at least give that thinking the strongest push we can.”

The UK chemical industry has huge opportunities coming through the energy transition in technologies such as hydrogen and CCS, Crotty said on 17 November.

“If we want to succeed in these technologies, then now is the time for bold and decisive action from government,” he said.

There have been other calls in Europe for a response to the IRA, which some politicians see as having the potential to suck investment away from the region just when it is needed the most, and particularly in the teeth of what is expected to be an extended energy crisis.

Insight by Nigel Davis