August 31, 2022

Comparing Climate Packages: With the US back in the game, is the EU betting big enough on cleantech ?

Over the summer, after months of strained negotiations, the US Congress passed a landmark climate package, dedicating hundreds of billions of dollars in tax credits for clean technologies over ten years. Just like the Obama-era clean energy tax credits, this new envelope is likely to supercharge the scale-up and adoption of clean technologies in the US. This comes in addition to the Bipartisan Infrastructure Law, passed earlier in the year, which also included significant climate provisions.

The US has long been the world leader in investing in and commercializing clean technologies. In 2021, 53% of global cleantech venture capital went to US companies, compared to 14% for cleantech companies in the European Union. This was nevertheless a strong improvement by the EU, which doubled its share in the last 5 years.

The EU’s increased competitiveness in cleantech came from a growing innovation ecosystem, extensive public support for R&D and increasingly favourable demand policy signals. The EU is currently negotiating its own massive climate packages, including Fit for 55, which spans the entire economy and sets the blueprint for reducing the EU’s emissions by 55% by 2030, and REPowerEU, which increases cleantech ambitions to reduce dependency on Russian fossil fuels.

But with the US back in the climate game, and investing massive sums in the scale-up and deployment of clean technologies, is the EU’s commitment enough to stay a global leader in the space? In this article, we compare the major packages to give a sense of how the competition for the future of global industries might shape up.

Tax credits vs. binding targets

A first take-away from comparing the US and EU packages is that broad ambitions are relatively similar.  The recently declared US Nationally Determined Contributions of 50-52% compared to 2005 brought it very close to the EU’s declared 55% net target (and the corresponding 52.8% reductions target embedded in it).

However, the instruments used to reach those ambitions are quite different. While the US (at the federal level) is primarily using on financial incentives, such as assigned financial envelopes for specific technologies and infrastructure, tax credits and loans, the EU is prioritising carbon pricing, binding targets, performance standards, sectoral regulation, direct technology mandates, grants and financial support.

This is due to a mix of practical and philosophical reasons. On the practical side, the stalemate in the US Senate means only reconciliation bills can be passed, which leaves tax credits as the preferred instrument. On the philosophical side, the US is more comfortable with subsidising rising markets and giving direct signals to investors, rather than with regulating existing industries or introducing a price on carbon. This approach paid off in the Obama era, with a significant drop in clean energy prices, and the rise of next-gen industry giants like Tesla.

A second take-away is that while the US packages are now law, the EU is still negotiating its own packages. This means our analysis may shift as final compromises are reached in the EU.

A third is that producing a like-for-like comparison is extremely difficult, because these major packages are only a part the US and EU’s action on climate innovation, and only focus on the federal level. For instance, member states also provide tax credits to clean technologies, in addition to EU regulation. The EU also plans to dedicate €268 billion of recovery funding to climate objectives in member states, some of which could accelerate cleantech uptake. So take our comparisons with a grain of salt.

Clean Energy


The current energy crisis is increasing the urgency to switch to clean energy, on both sides of the Atlantic. Decarbonisation solutions for transport and industry also rely on electrification, which makes clean power the main enabler of the transition. The magnitude of the US’s financial commitment, amounting to $175b in tax credits, reflects this critical role.

The EU is developing a multi-pronged approach to decarbonising the power sector: it has set a key objective of 45% renewables by 2030, implemented an effective carbon price on electricity generation with a reduction trajectory of 61% emissions reductions by 2030, and is looking to re-invigorate its domestic industry . It is also in the process of setting a sub-target for the deployment of innovative renewables, such as advanced geothermal, floating offshore wind, ocean energy and building-integrated photovoltaics.

Despite lofty targets, both the EU and US struggle to streamline permitting for renewables, which can take several years. Both are introducing measures to reduce this permitting time drastically, but concrete results remain to be seen.

One area where the US is taking the lead over the EU is long-duration energy storage, a set of technologies that are key to offset the intermittency of renewables, and reach energy security. The IRA sets $10 billion to scale up energy storage, while REPowerEU mentions its important, but falls short of proposing a clear action plan.

Conversely, the EU has earmarked €29 billion to improve its electricity grid infrastructure as part of the REPowerEU strategy, while the US has only budgeted a tenth of that ($2.8 billion) in its latest package.

Industrial Decarbonisation


COP26 promised to usher in an era of US-EU collaboration on industrial decarbonisation, to ensure both lead the global competitiveness race. In the industrial decarbonization section of their respective packages, both the EU and US have a strong focus on hydrogen and carbon capture, in addition to encouraging developments of sector-specific solutions. Note the US is betting on “clean” hydrogen, including blue hydrogen from natural gas, while the EU is prioritizing renewable hydrogen only in its latest strategy.

The US also introduced tax credits of up to $ 10 billion for installations reducing their industrial emissions as well as $5.8 billion in direct investments for advanced decarbonization retrofits of industrial facilities.

The EU has taken a somewhat different approach, reforming its carbon market for heavy industry to phase out free allowances by 2032, and use the revenues in an Innovation Fund expected between €40 and €50 billion (depending on carbon price) over the next decade to support the deployment of concrete projects reducing industrial GHG emissions. The Innovation Fund covers both the power sector and heavy industry and awards projects through tender applications. To secure a development pathway for renewable hydrogen, the EU has also awarded 41 renewable hydrogen projects under its Important Projects of Common European Interest (IPCEI) scheme, which amounts to € 5.4 billion.

Transport


The transport sector is a great example of how the US and the EU differ in their approach to climate mitigation, with comparable ambition. While both have introduced strong measures to accelerate the shift to electric mobility, the US allocated direct funding for specific infrastructure development projects, and tax credits for vehicles, whereas the EU opted for an eventual phase-out, with interim targets and incentives to manufacturers.

On charging infrastructure, the EU Green Deal promised 1 million charging points by 2025 while the US directly allocated a significant financial envelope for this sector’s development. The EU approaches this through a grants scheme offered by the Connecting Europe Facility, amounting to €1.5 billion of grants available by the end of 2023 for alternative fuels infrastructure, including electric fast-charging and hydrogen refuelling stations.

The additional interim emission targets on the EU side have a ratchet built-in mid-decade (2024), for both passenger cars and vans and tighten considerably after 2030. The EU has also introduced a super-credits system to count lower carbon vehicles (below 50g COs/KM) several times in the calculation of the average specific emissions of a manufacturer.

In emerging technologies as well, such as sustainable aviation fuels, while the US has dedicated a specific financial envelope for their development, the EU preferred a targets-based approach and provided financial support through Horizon European programmes. The maritime sector has received funding on both sides, in the EU through a fund from the carbon market (Ocean Fund) with an R&D component, and in the US through a direct financial envelope for ports.

Buildings


In buildings as well, the EU is taking the route of mandates and binding targets, proposing binding national targets for energy efficiency, an obligation to renovate public buildings and mandate for all new buildings to be zero-emissions starting 2030. The EU is also developing a Social Climate Fund to help households pay for renovations, something that is also found in theInflation Reduction Act.

The US is taking the lead in building materials innovation, with a$5.4 billion envelope. In comparison, the EU’s Innovation Fund has mostly invested in CCUS for cement, instead of scaling replacement materials like low-clinker cement.

Both packages also have significant targets for developing residential clean energy.


Environmental Justice


A new element in the US Inflation Reduction Act provisions introduced funding for environmental justice, in the form of grants. Provisions were introduced for enabling solar and wind income creation for vulnerable communities, an interesting approach which mirrors some of the early discussions in the EU that have yet to bear fruit.

The EU incorporated a ‘just transition’ mechanism to its EU Green Deal, comprising of both a Fund to directly support economic activities and innovation in the areas most affected by the energy transition, through grants, with an emphasis also on reskilling and retraining. Additionally, a public sector loan facility was created to go alongside it to support Member States in addressing the socio-economic issues in the most affected regions.

In the next few months, we will keep a close look at how these policy packages are driving cleantech competitiveness for the US and EU.
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