US Inflation Reduction Act
In August 2022, US President Joe Biden signed the Inflation Reduction Act (IRA). This law includes measures to counter the high inflation on the one hand and to press forward with climate protection in the USA on the other. The focus is on investments in low- and zero-emissions technologies, in green electricity generation and transmission, and in low-emissions means of transportation. According to the plans of the US Department of Energy (DOE), this should pave the way for a 40 per cent reduction in US greenhouse gas emissions by 2030, compared to 2005. To achieve this, around USD 370 billion is being made available, representing the largest investment in the fight against climate change in US history. The law also provides for additional spending of around USD 64 billion for the Affordable Care Act (“Obamacare”). These measures are to be financed with a combination of new corporate taxes, stricter tax enforcement, and a reform of the price-setting system for prescription medicines. In total, this is expected to generate revenues of USD 740 billion for the government. With these additional funds, the US government hopes to be able to reduce the budget deficit by around USD 300 billion over the coming ten years.
EU Green Deal Industrial Plan
Although the Inflation Reduction Act represents a key measures in the fight against climate change and is thus clearly a welcome development, it has caused considerable consternation in Europe. There are worries that these subsidies will lead to market distortion and create incentives for companies to move to the USA, due to the generous supports.
Consequently, this makes the EU’s recently presented set of measures, the Green Deal Industrial Plan, even more important. The goal of this plan is to make Europe’s industry more competitive and accelerate the transition to climate neutrality.
The EU Green Deal Industrial Plan is based on the following four pillars:
What does this mean in detail?
Predictable, simplified regulatory environment
The first pillar is intended to create a legal framework that is easy to implement, functions effectively, and offers reliable planning security. This includes the 'Net Zero Industry Act (NIZA)', which aims to promote investment and improve conditions for green technologies in Europe. By 2030, the EU should be able to cover at least 40 per cent of its annual needs in green technologies by itself. These efforts are focused on areas such as photovoltaics, wind energy, hydrogen, storage technologies, geothermal power, and network technologies. Additionally, the Critical Raw Materials Act (CRMA) is intended to ensure more secure and sustainable access to materials such as rare earths, which are vital for key manufacturing technologies. This will help the EU make its supply chain more robust and reduce its dependence on certain countries. Finally, the reform of the electricity market is also part of this pillar. The goal of the reform is to accelerate the expansion of renewables and the phase-out of fossil fuels, making the EU’s industry greener and more competitive. The much-discussed “merit order principle” which bases the price of electricity on the power station with the highest generation cost, will be retained, but will be supplemented with additional mechanisms which ensure longer-term price plannability both for consumers and companies. First and foremost, these include long-term purchase agreements between private customers and generators, known as power purchase agreements (PPAs) or long-term contracts for difference concluded between states and generators.
Faster access to funding
The second pillar aims to speed up investments and financing for green technologies in Europe. To this end, a level playing field is to be created within the single market, while making it easier for EU Member States to grant the necessary aid to fast-track the green transition. The use of existing EU funds is to be facilitated, with a focus on REPowerEU, InvestEU, and the Innovation Fund.
Enhancing skills
The green transition can only succeed with the suitable development of the necessary skills and skilled workers. The Commission proposes to establish 'Net-Zero Industry Academies' to facilitate up-skilling and re-skilling programmes in strategic industries. It will also consider to what degree the access of third-country nationals to the EU labour markets can be facilitated, as well as how public and private funding can be made available for the training of skilled workers
Open trade for resilient supply chains
The fourth pillar is about developing free trade agreements and other forms of cooperation with trading partners to support the green transition. At the same time, the Commission also wants to protect the single market from foreign subsidies in the clean-tech sector which could distort competition.
In a nutshell, the Green Deal Industrial Plan aims to promote the EU’s industry more effectively and create a level playing field for competition. It thus represents a badly needed response to initiatives by other major economic powers such as China and the USA in the competition for clean technologies. The success of such measures is extremely important for Europe as a business location and thus also for the capital market. Consequently, Raiffeisen Capital Management is carefully monitoring developments in these areas.
Andreas Perauer
Fondsmanager at Raiffeisen KAG