Executive Summary 

• The Inflation Reduction Act (IRA) introduces numerous climate subsidies, including a tax credit up to $7,500 for American consumers who purchase electric vehicles with North American parts and assembly. As a large investor into green energy and electric vehicles in particular, the European Union was upset by the passage of the IRA and its protectionist trade measures. 

• In response to the IRA, the European Commission unveiled a plan titled The Green Deal Industrial Plan (GDIP). The GDIP cuts EU regulations in an attempt to streamline new green infrastructure and manufacturing. It also frees member state aid for national subsidization, but does not authorize significant EU-wide supranational subsidization at the moment. 

• In contrast to the IRA, the GDIP contains a much weaker and less targeted subsidization package. The IRA grants direct credits to particular consumer goods such as electric vehicles, while the GDIP reduces EU-wide regulations and allows member states to subsidize their own national infrastructure. 

Introduction 

On August 16, 2022 President Biden signed into law the Inflation Reduction Act of 2022 (IRA). The IRA included numerous subsidies for corporations and consumers who produce and utilize “green energy.” Among the various product subsidies is a large tax credit for consumers who purchase American-made electric vehicles. The European Union was particularly angered at the EV credit, as several member nations invested heavily into electric vehicle manufacturing. On February 1, 2023, the European Commission unveiled an IRA counterpart in The Green Deal Industrial Plan: putting Europe’s net-zero industry in the lead. The goal of the GDIP is to streamline green infrastructure projects and strengthen global supply chains, while remaining faithful to international trade agreements.  

The IRA – EVs as a Powder Keg 

While its title may give an impression that the bill was meant to tackle inflation, the Inflation Reduction Act is a smorgasbord of left-leaning policies that rose from the ashes of the Build Back Better Act.  Ultimately, the IRA is a green energy and climate change bill masked as a deficit and inflation reduction bill. The bill is the largest piece of climate and energy legislation signed into law in the history of the United States. In addition to massive investments in renewable energy, grid energy storage, and consumer goods, the IRA included a $13 billion tax incentive scheme for electric vehicles. While $13 billion is not a substantial amount within the estimated $499 billion of spending the IRA authorizes, the political implications of its inclusion were immense. The tax credit, up to $7,500 in each instance, is applied during the purchase of new electric vehicles by American consumers. The tax credit is contingent on two requirements: the battery must contain a certain percentage of North American parts, and the final vehicle must be assembled in North America.  

The Green Deal Industrial Plan 

While American sentiment of the IRA was ambivalent, its passage enraged those across the Atlantic. The European community widely admonished the bill and its dissuasion of transatlantic imports of climate technology and inputs, such as electronic vehicles and their components. For decades the European Union has postured itself as the global champion of green energy and at the forefront of the race to net-zero, including the manufacturing of electric vehicles and batteries. The United States’ omission of the EU (and inclusion of Canada and Mexico) in the IRA was interpreted as a slight to the bloc, and its decreasing status as a strategic trade partner and leader in climate policy. 

Six months after the passage of the Inflation Reduction Act, the European Commission President Ursula von der Leyen introduced the European Union’s response to the IRA at the World Economic Forum’s annual summit at Davos. Titled The Green Deal Industrial Plan: putting Europe’s net-zero industry in the lead (GDIP), the plan has four pillars: a predictable and simplified regulatory environment, speeding up access to finance, enhancing skills, and open trade for resilient supply chains.  

The GDIP builds upon the already extensive climate agenda of the European Union set forth by the European Green Deal and other long-term programs: 

• Fit for 55 – plans to reduce greenhouse gas emissions by 55% by 2030 
• Circular Economy Action Plan – agenda to improve sustainability and longevity of inputs 
• REPowerEU – effort to increase energy independence after Russia’s invasion of Ukraine 

The GDIP bolsters each of these programs by reducing regulations on the development and manufacturing of materials and technology crucial to accomplishing these goals. The GDIP is relatively tame compared to the nearly $500 billion in spending of the IRA, with estimates predicting it will invest $270 billion. Most will be through the release of member state’s own funds to fund their own infrastructure, but a small amount will be supplemented by the European Union to the twenty-eight member states. 

Going Forward 

While the GDIP is currently just a proposal from the Commission, it will likely be enacted after debate within the European Parliament. Unless there are unforeseen revisions during the legislative process, the GDIP lacks in intensity and exclusivity of subsidization compared to the IRA. As the plan is currently written, the GDIP lags by $230 billion in total funding and assists general climate infrastructure and goals rather than direct products of interest. Because of this, the GDIP likely aligns with World Trade Organization rules. As the IRA’s compliance with World Trade Organization rules is under fire, the GDIP included a not-so-thinly-veiled message to the United States in its fourth pillar of the proposal: 

“The EU will work with its partners to promote stability in international trade and strengthen legal certainty for investors and companies by continuing to support the World Trade Organization (WTO), including through its reform. The WTO has a role in supporting climate neutrality by providing a forum for deliberations on trade aspects of the green transition, by clarifying how to promote green investments in a manner that minimises [sic] trade distortions, as well as by reinforcing disciplines on subsidies that negatively impact both trade and the climate.” 

The passage of the Inflation Reduction Act and introduction of the Green Deal Industrial Plan is just another unfortunate chapter in a series of escalatory trade measures between the United States and the European Union, beginning years ago in the Boeing/Airbus dispute and continuing in the Trump Administration’s steel and aluminum tariffs and the recent EU CBAM initiative. Despite the great potential of promoting green energy through international cooperation, the current protectionist trade climate has resulted in a fractured global response that negates both economic growth and progress in fighting climate change.