In 2022, the US Congress approved the USD 369 billion Inflation Reduction Act, containing subsidies and tax incentives for producing renewable energy, green hydrogen, and electric vehicles in the US. To qualify for these incentives, companies are required to have a certain share of US-produced inputs both in the construction phase and in their production.
Some EU politicians have raised concerns over the size of the incentives and the potential distortion of competition caused by the requirements. They worry that investments in green technologies will flow to the US instead of the EU, and that the EU will lose competitiveness and trade within these technologies.
We were asked to analyse the competitive situation between the US and the EU before and after the implementation of the Inflation Reduction Act. We used a value-chain approach to consider the role of incentives (and taxes) in different parts of the value chain and to understand the indirect cost implications of producing. We also considered the tradability of the products and the transportation costs to assess the degree to which the products were subject to competition.
Our analysis revealed that both the US and the EU had pre-existing incentives prior to the implementation of the Inflation Reduction Act. However, we discovered that the new incentives introduced by the US are substantial enough to potentially make the US a competitive producer of green hydrogen, even with the relatively high transportation costs of hydrogen to the EU market. As a result, investments are likely to flow towards the US, at least in the short term. In the case of electric vehicles, the competitive risks for the EU are lower due to their reduced tradability.
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