The Inflation Reduction Act - Developments and Opportunities for the Transatlantic Community

This overview provides a short summary on the ripple effects of the Inflation Reduction Act (IRA) within the context of transatlantic relations. Adopted in August 2022, the IRA has especially been a source of debate beyond national borders within transatlantic circles due to its potential repercussions for trade partners. However, by taking this legislation as an example, there are reasons to be optimistic about the transatlantic partners being open to dialogue to find beneficial solutions and cooperation initiatives. After all, although they are using different strategies, they are striving for similar goals.
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The Inflation Reduction Act (IRA) was signed by U.S. President Biden in August 2022. The act includes significant funding for climate action and energy security over the next ten years. While the public and political debate have largely focused on the IRA's sustainable energy provisions, the act also includes a corporate minimum tax and stronger regulations in pharmaceutical pricing. The IRA has received both support and criticism from the European Union (EU). While the EU acknowledges the importance of climate protection, representatives have expressed concerns that the IRA may discriminate against European companies and distort competition. In October 2022, the EU and the U.S. established a task force to address these concerns. The partners have made some progress (i.e. tax incentives for the leasing of e-vehicles) however, no agreement has been reached yet on the bigger issue of domestic content provisions for batteries. Furthermore, a meeting between Commission President von der Leyen and President Biden in Washington, D.C. in March 2023, initiated the Clean Energy Incentives Dialogue, a forum under the umbrella of the EU-U.S. Trade and Technology Council (T.T.C). to share information on incentive programs and ultimately implement them in a way that mutually reinforces their effects.

In February 2023, the EU Commission presented the Green Deal Industrial Plan, which aims to enhance the EU's industrial manufacturing capabilities in key technologies related to the net-zero target. The plan includes targets for specific production capacities, removal of legal hurdles for innovative technologies, increased government subsidies for green technologies. The Green Deal Industrial Plan is accompanied by the Net-Zero Industry Act that aims to ensure that at least 40% of the technologies needed to meet climate and energy targets by 2030 are produced in the EU.

An aspect to highlight within these developments is thesurging debate on critical raw materials as both the U.S. and Europe face challenges in meeting local content requirements and securing critical raw materials for the development and success of green technologies. This lack of supply security stands in direct incongruence when taking other players, especially China’s resourcefulness into account. The EU has recognized the need to secure supplies of critical raw materials and has proposed the Critical Raw Materials Act (CRMA). Moreover, the CRMA was introduced which aims to secure supply by developing deposits, sharing data, and accelerating approval procedures for strategic raw materials. As of April 2023, a response from the EU Parliament and EU Council has not been delivered to the EU Commission’s draft. A time frame for this is not yet known. Only after approval by the EU Parliament and EU Council can the CRMA enter into force. The EU Commission has also proposed the global association of commodity trading partners to form a Critical Raw Materials Club to counter China's dominance.

Whereas these developments are regarded as a direct response to the IRA counterpart, measures from the European perspective to strengthen the region’s economic resilience, competitiveness and sustainability efforts have already been in place in the recent years. In connection to a potential transatlantic agreement between the U.S. and the EU regarding critical raw materials – in this case for automobile businesses eligible for U.S. electric vehicle tax credits, this POLITICO article emphasizes the influential role of national political dynamics, as well as the semantic connotations complicating the negotiations.

One major obstacle is that the IRA requires any minerals deal to be labeled as a "free trade agreement." Usually, such agreements require approval from the U.S. Congress and the member countries of the EU. To avoid this lengthy process, the EU suggests opting for a "non-binding instrument" or an "executive" agreement. However, the U.S. insists on binding commitments for the agreement to be considered a free trade agreement under the terms of the IRA. While countries like Australia, Canada, and South Korea had already established official free trade agreements with the United States, granting them eligibility for certain credits, major auto-producing nations such as, Germany, France, and other members of the European Union (EU) do not profit from the same status.

In conclusion, the IRA and its implications have sparked a series of actions and discussions between the U.S. and the EU. While the IRA focuses on climate action and energy security, concerns have been raised regarding its impact on European companies and competition. The EU has responded by developing its own plans, including the Green Deal Industrial Plan and the Critical Raw Materials Act, to strengthen Europe's economic resilience and reduce dependencies on critical raw materials. Nevertheless, this process has shown two willing partners open to negotiations, coordination, and potential adjustments to ensure a mutually beneficial outcome for both the U.S. and the EU. More developments will follow at the EU-U.S. Trade and Technology Council Summit in Sweden on May 31, 2023.

Information provided as of May 26, 2023

For more detailed information please contact:

Thomas Henneberg

Manager, Head of Membership Engagement & Events