The new US climate policy that forms part of the Inflation Reduction Act has upset European Union officials, who say that it is “discriminatory” and “incompatible with the WTO.” The EU’s Trade Commissioner Valdis Dombrovskis says Brussels is assessing how to respond to this likely violation of trade rules, while other key EU trade policymakers complain of “a new and significant transatlantic trade barrier by the US” and make clear the EU would “take the necessary steps to defend its interests.”
All in all, the new law heralds the best moment for transatlantic climate cooperation in years.
“America Only” Green Subsidies
Wait, what? The disconnect here is between a favorable general environment, with the US Congress having passed the first comprehensive climate law in the nation’s history, and sharp disagreements on specific aspects of US climate policy that are irritating the US’ trading partners in Europe and beyond. These irritants are the “Buy American” provisions in the Inflation Reduction Act, the new US law that will spend nearly $400 billion on energy and climate measures over the next decade. Much of this spending—such as the $37 billion for clean energy manufacturing incentives, or the $36 billion for clean fuel and vehicle tax credits—favors American producers at the expense of Europeans and other foreigners (especially Chinese).
For example, if you set up a wind farm in the US, you will get extra tax credits if you use enough American steel to meet the domestic content threshold. The playing field is especially tilted for electric vehicle producers: in order to qualify for the full $7,500 in tax savings, an EV must be assembled in North America (i.e., in NAFTA member states, the US, Canada, and/or Mexico). Additionally, the legislation requires that (by 2024) 40 percent of the materials in a battery come from North America or a country with which the US has a free trade deal by 2024, with the requirements for homemade components rising over time. These laws are a shock to a trading system built on the principle of non-discrimination between “like” products whether they are built at home, by a close ally, or by a rival who happens to also be a WTO member.
The US’ trading partners are right to point out such violations of global trade principles, which can raise costs for everyone and reduce ties between nations. Sabine Weyand, the director-general of the EU’s trade department, is spot on when she says that a subsidies race on semi-conductors and batteries could be inefficient and “very expensive”: there are risks of a turn toward a beggar-thy-neighbor approach to international trade. And it is true that the EU’s own controversial trade policy meant to protect the climate, its Carbon Border Adjustment Mechanism (CBAM), is on much firmer ground at the WTO than are the US’ green subsidies. The EU wants the US to give tax credits to all electric vehicles, wherever they are produced.
A Close-Run Thing
Yet Brussels must understand how narrow this American climate victory was, how close the US came to wasting two years of Democratic control and failing to pass any climate legislation at all. For much of the summer, it looked like the concerns of Joe Manchin, a conservative Democratic senator from the Republican-supporting, coal mining state of West Virginia, would block any bill. And then all of a sudden, in one chaotic week in August while much of Europe was at the beach, the US Congress approved huge sums for greening the US economy—most modelers now expect US greenhouse gas emissions, which in 2021 were 17 percent lower than their 2005 peak, to fall about 40 percent below 2005 levels by 2030, putting the US within striking distance of its Paris Agreement pledge. Given where transatlantic climate cooperation was just a few months ago, trade disputes about big green subsidies are “first-world problems” or what the Germans call “Luxusprobleme” (luxury problems).
The Inflation Reduction Act just barely squeaked by the US Senate, with Vice President Kamala Harris breaking a tie in its favor. This means that the Democratic Party needed to deploy every useful framing to get this climate bill over the top. The national security framing, the need to produce more key goods at home and not rely so much on China? Check. The national power framing, the need to “strengthen America’s manufacturing base” and “support American workers”? Check. For European leaders currently turning to friendly nations like the US to replace gas from Russia, Europe’s own authoritarian rival to the East, and handing out massive subsidies to keep EU industry going amid an energy crisis, these motivations should be understandable.
Nationalist Motivations to Save the Planet?
Yes, the logic of efficiency (and of the trading order) suggested that the US should have taxed harmful carbon emissions rather than given out subsidies to American workers buying American vehicles running on American batteries. On the other hand, the urgency of the climate crisis and the tricky policy economy of the energy transition in America demanded the US Congress do something right away, and that American workers earn benefits more immediately than mitigating global suffering over coming decades.
There’s a larger question at play here. Can nationalism be a useful motivating force with regard to addressing the climate crisis? Scholars from different traditions disagree. For Geoff Mann and Joel Wainwright, the leftist authors of Climate Leviathan, nationalism cannot animate an effective politics of climate justice as it did in past struggles to change the world, like the anti-colonial movement in India in the 1940s or the anti-apartheid movement in 1980s South Africa; a much larger transnational movement is required. Whereas for Anatol Lieven, the author of Climate Change & The Nation-State: The Realist Case, nationalism is the most important force for motivating people to become invested in the wellbeing of future generations. What is clear is that in the case of the US Inflation Reduction Act, it took a nationalist framing and a challenge from a geopolitical rival to get Washington to pass a serious climate bill.
When challenging “America-first” style climate provisions at forums like the EU-US Trade and Technology Council, the European Union must weigh its legitimate trade interests against global climate goals. Disagreements over green subsidies between two close allies cannot be allowed to further derail the already delayed energy transition. To adapt a Fredric Jameson quote on the end of capitalism, it’s easier to imagine the end of the world than a major revision of global trade rules to permit more green subsidies, and that’s not a good thing.
Noah J. Gordon is a Fellow with the Europe Program of the Carnegie Endowment for International Peace in Washington, DC.
