Peter Jurkovic examines the UK and EU’s divergent approaches to energy security and investment in green technologies since the US Inflation Reduction Act was signed into law, looking at whether it’s too late for the UK to develop its own industrial strategy.
In August 2022, US President Biden signed the Inflation Reduction Act (IRA) into law. Through an estimated $396bn of subsidies, the legislation aims to drive investment in clean energy technologies.
In Europe, politicians and business leaders have largely seen the IRA as a commercial threat, which could have damaging effects on the EU and UK economies, because the tax credits it offers are conditional on a high proportion of production and final assembly taking place in the US.
There are fears businesses will relocate operations to the US to benefit from the subsidies.
The decisions taken by Tesla and Volkswagen to halt plans to build electric vehicle (EV) battery plants in Europe and instead expand production in the US, were seen as early indications of the losses that could occur without prompt intervention.
Yet it is also important to recognise the IRA as an attempt to tackle a second issue: energy dependence. The legislation aims to boost domestic production of green energy so that the US is less reliant on foreign energy imports.
This has prompted Europe to take action, as it is here where the costs of energy dependence have been particularly heavy – energy bills dramatically spiked after Russia’s invasion of Ukraine due to the EU’s reliance on Russian natural gas imports.
Despite this shared challenge, the UK and EU have responded in very different ways. Our latest divergence tracker shows how the EU has developed heavyweight regulation to tackle these issues, while the UK has been much slower to act.
The EU has launched its landmark Net-Zero Industry Act to rival the IRA, setting the ambition for 40% of the bloc’s net-zero technology to be manufactured within the EU by 2030. In aid of this, it has relaxed permitting procedures and state subsidy rules related to sustainable technologies, including a provision allowing member states to match subsidies on offer in a third country if there is a risk of investment being diverted away from Europe.
Meanwhile, a ‘Critical Raw Materials Act’ (CRMA) aims to boost EU-based extraction and processing of strategic materials (those metals and minerals which are key components of many green technologies such as wind turbines, solar panels, and EV batteries). A dramatic increase in demand is expected as renewable energy production booms globally, and the EU wants to reduce dependence on third countries like China, as 90% of its supplies of critical raw materials often come from a single country.
By contrast, on the UK side, the new climate and energy policies announced on ‘Energy Security Day’ have faced widespread criticism for failing to introduce new public investment or provide concrete regulation to incentivise private sector investment into clean energy technologies.
Some of the regulation also confirms that the UK will continue increasing fossil fuel production, as it maintains some tax relief for new oil and gas development that is not offered to renewable energy projects. This helps highlight how the pursuit of energy security may sometimes be at odds with investment in clean energy sectors.
The UK published its own Critical Raw Materials Strategy and a Refresh before the EU’s CRMA. However, it lacks the specific targets set in the EU’s strategy and, according to experts, the more stringent permitting process compared to the EU will make the UK less attractive for investment in mining and processing.
This all seems to suggest the UK is falling far behind in the race for investment in green technologies and energy security. Yet, in spite of this long list of new EU regulation, the impact on the UK may not be so significant.
First, a closer look at the EU’s regulation suggests that the extent of the divergence is not as great as it initially appears. This is due to the fact that many of the targets set out are voluntary or include exemptions allowing states to circumvent them if they would lead to significant price increases.
There is already evidence of the ineffectiveness of the EU’s voluntary targets. Despite an agreement last year among member states to reduce their gas and electricity demand, one-third did not adopt any reduction measures.
Furthermore, the structure of the subsidies offered by the EU is more of a patchwork and lacks the clarity of the IRA subsidies. As a result, businesses are struggling to discern what subsidies are actually on offer to them, limiting their incentive to invest more in the EU.
Second, the slower UK response may not be as damaging to the UK’s green transition prospects as is often suggested. Some have pointed out that the idea of a ‘race’ for green investment implicitly assumes that there is a fixed supply of green capital. In reality, investments by net-zero technology companies into the US and the EU does not rule out investment in the UK despite fewer incentives on offer so far.
Finally, the UK may actually be in a better position to achieve clean energy security after having resisted the urge to immediately offer its own widespread subsidies. Due to financial and geographic reasons, energy self-sufficiency is extremely hard for most states to achieve. As a result, many states will prefer to try and achieve energy security without protectionist policies and import substitution in net-zero technology or critical minerals.
Indeed, some economists have argued that the EU’s attempt to drastically boost domestic production will be counterproductive. They suggest that the widespread subsidies and domestic production targets are a much slower and more costly way of boosting green energy production than necessary.
Another option to pursue clean energy security for the UK would be a multilateral approach, which promotes ‘strategic interdependence’ with other countries. Here the emphasis is on maintaining international trade but through diversifying its trading partners to avoid excessive dependence on any exporter.
Instead of the EU’s more wide-ranging subsidies on domestic green technologies and mining projects, this approach implies that the UK concentrates support to narrow areas where it already specialises in or to where it can fill gaps in the supply chain. Some areas that have been suggested for the UK to focus on include offshore wind, lithium, and semiconductor design.
The UK government has stated that it will release its response to the IRA in the autumn. Only when this is published will it become clear whether the delay in the UK’s response is due to the development of a careful and considered strategy, or merely a result of dithering.
By Peter Jurkovic, researcher, UK in a Changing Europe.