Impact of the Inflation Reduction Act on EU competitiveness
In August 2022, the US Congress passed the USD 369 billion Inflation Reduction Act (the Act) with the aim to increase the speed of decarbonisation in the US among other things. Over the coming decade, the Act offers billions in tax breaks and subsidies for companies producing renewable energy and green hydrogen, and for consumers purchasing electric vehicles in the US.
The EU has criticised the Act for containing distortionary elements such as requirements for local US or North American contents and production. The concern is that production, investments, and scarce natural resources will flow to the US, and the EU will lose competitiveness in strategic sectors.
Therefore, the Confederation of Swedish Enterprise asked Copenhagen Economics to examine the possible impact of the Act on EU competitiveness.
The main conclusions of our study are
- The US will, all else equal, attract more foreign direct investments in renewable energy, green hydrogen, and battery production for electric vehicles, which could lower investments in the EU and other areas. The Act also provide opportunities for EU businesses in the US in producing renewable energy assets, green hydrogen, and electric vehicles.
- The tax breaks and subsidies introduced by the Act effectively lower US production costs of green hydrogen and refined green electrofuels to a degree that these fuels may compete on a European market, despite relatively large transportation costs.
- Content requirements for US or North American production in the Inflation Reduction Act create barriers for EU businesses when exporting iron, steel, renewable energy components, and private electrical vehicles to the US.
Find the Confederation of Swedish Enterprise’s report, including our analysis here.