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A US Inflation Reduction Act for Europe

While some European policymakers are ambivalent about the US Democrats’ signature climate-change legislation, the American plan’s targeted, government-centered approach is far more credible than the market-based approach guiding the EU’s current green agenda. Instead of fighting the IRA, Europe should embrace its pro-worker bent.

MANNHEIM – The United States’ recently enacted Inflation Reduction Act (IRA), which includes hundreds of billions in federal subsidies for green technologies and renewable energies, marks a long-overdue shift in US climate policy. But while the US decision to join the global fight against climate change has been well received in the European Union, some leaders have voiced concerns that the bill focuses too much on domestic production and might discriminate against EU-based companies.

In a recent policy paper, I argue that Europe should not resist the new US approach to climate policy. Instead, European countries should welcome it and develop a better version of their own.

One reason Europeans should embrace the IRA is that it goes beyond the somewhat simplistic approach to climate change that often dominates policy discussions. The EU’s current approach, exemplified by its Fit for 55 initiative, adheres to a market-based paradigm that relies on carbon pricing to ensure self-regulation by emitters. The IRA, by contrast, assumes that a forward-looking government can accelerate the transition to a green economy through targeted investment subsidies to people and companies. Moreover, the IRA has a clear pro-worker bent, focusing on domestic employment and attempting to boost wages by making some tax credits conditional on companies’ commitment to pay prevailing wages.