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A Green-Subsidy Arms Race Helps No One

Solar panels stand on a large scale photovoltaic power plant operated by FP Lux Solar GmbH in Marienfliess, near Berlin, Germany, on Tuesday, April 21, 2015. In one of the most ambitious political undertakings of a modern industrial economy, Germany is shutting down all its nuclear power plants by 2022. (Photographer: Bloomberg/Bloomberg)

President Joe Biden’s Inflation Reduction Act has caused consternation in Europe. Alarmed that its generous new incentives for green-energy projects will shift investment and production toward the US, European Union governments are working on how to respond. Giving member states freer rein to subsidize their own clean-tech manufacturers has moved on to the agenda.

Greater public support for green investment makes sense for the US and EU alike — but such efforts need to be well-designed and, above all, cooperative. An uncoordinated subsidy race will prove needlessly expensive and thus less effective.

The IRA, enacted last summer, commits about $370 billion in loans, grants and tax credits to support renewable energy and other green initiatives. Prudent public spending to drive adoption of electric vehicles, solar panels, batteries, carbon capture and clean hydrogen is eminently worthwhile. Unfortunately, aspects of the US plan are brazenly protectionist: Strict domestic-content requirements exclude EU producers, among others. Limiting competition in this way will raise the costs of fighting climate change — and risks provoking an equally self-defeating response from the EU.

The European Commission has been working on its own Green Deal Industrial Plan. The latest version of this ever-evolving bundle of goals and initiatives (which will need to be approved by member governments and might therefore shift again) has met with a mixed response. The newest component, the Net-Zero Industry Act, calls for EU producers to meet 40% of the bloc’s clean-technology needs by 2030.

Many of Europe’s industry groups are complaining that the plan manages to be both unduly complicated and short on hard cash. The IRA shovels new money at eligible companies, which the US can do thanks to its enormous federal budget (and current mood of fiscal indiscipline). EU budgetary resources often have to be eked out of existing programs. Establishing new fiscal outlays sets member governments against each other, with some looking for help and others reluctant to oblige. When it comes to tax credits and subsidies, Brussels can’t compete with Washington.

More resources to support an EU-wide climate policy are certainly needed. But it’s crucial, as well, that funds are directed to their most cost-effective uses. Making domestic production the principal goal of the Net-Zero Industry Act is a formula for wasting money, no less than the IRA’s ill-conceived local-content rules.

Rather than emulating the US preference for domestic sourcing over sound climate policy, the EU should recall its initial reaction to the IRA — and make the case for liberal trade. The Biden administration has said it’s willing to tweak the terms of its subsidies to allow imports from more countries (not just those with which the US has a free-trade agreement). The EU would be in a better position to make that case if it practiced what it preaches.

Europe’s latest green plan also neglects what should be another top priority. Unlike the US, where energy remains relatively cheap, Europe lacks secure supplies and is wrestling with high prices. Rather than distorting trade by trying to replace imports of clean-tech products with domestic alternatives, it should speed the development of clean-energy generation, invest in EU-wide energy infrastructure, and subsidize spending on insulation and other forms of efficiency.

The overriding goal for the US and the EU shouldn’t be to claim the biggest share of the global green economy. It should be to develop and deploy carbon-reducing technologies as quickly and cheaply as possible.

More From Bloomberg Opinion:

• Europe’s Green Protectionism Will Worsen its Energy Security: David Fickling

• Coal’s False Comeback Flashes a Warning Signal on Climate: Lara Williams

• Go Ahead, America, Give European Companies Billions: Chris Bryant

The Editors are members of the Bloomberg Opinion editorial board.

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