A new paper, Green Alert: Why the EU should avoid a trade conflict with the US, by the Center for Political Studies (CEPOS) and EPICENTER urges EU decision makers to avoid entering a tit-for-tat subsidy battle with the Unites States in response to the US Inflation Reduction Act (IRA).

EU state subsidies far exceed those in the United States, even after the passing of the IRA. The experts of this paper outline why direct state aid is not the most cost-effective method for realizing a green transition and instead recommend that the EU focus on creating a level playing field in trade policy, which could help lower the costs of green transition.

Key findings:

• Around 1 per cent of the EU’s total GDP is spent on national state aid, more than half of which goes to the green sector.


• In 2020, EU countries spent €81 billion in national state aid for renewable energy, which corresponds to 0.57 per cent of the EU’s GDP.


• With the IRA, the US will provide the equivalent of 0.15 per cent of US annual GDP over 10 years as state aid for the green transition.


• The 2020 EU recovery plan and other key EU programmes allocated the equivalent of 0.38 per cent of the GDP to green aid per year over seven years; the recovery plan alone represents 0.25 per cent of the EU GDP per year.


• The EU Commission’s proposal for a response calls for expenses that are estimated to correspond to a further 0.10 per cent of the EU’s GDP per year.


• Direct state aid is not a cost-effective method for realising a green transition. Furthermore, the costs incurred mainly affect the countries that provide the aid.


• When it comes to trade policy, the EU’s protectionism is on par with that of the United States. So, there is no justification for the EU to respond to the IRA.  Doing so would make the green transition in Europe unnecessarily expensive and could also escalate the trade conflict across the Atlantic.

Otto Brøns-Petersen, co-author of the report & the Director for Analysis at CEPOS said:

“The EU has already decided to spend more than twice as much in green subsidies as the US is going to thanks to its Inflation Reduction Act. If EU policy makers were to follow the proposal from the Commission, EU subsidies would be three times as much as the American subsidies.
 
“The EU should not escalate the transatlantic trade war of subsidies even further. Policy makers should not forget that higher EU subsidies will hurt the EU more than the US, just as US taxpayers carry the main burden of the American subsidies.”

Notes to Editors

To arrange an interview, please contact: Adam Bartha at abartha@epicenternetwork.eu.

To download the full report, please click here.

About EPICENTER
EPICENTER, the European Policy Information Center, is a network of ten leading think tanks from across Europe. It seeks to inform the European policy debate and promote the principles of a free society by bringing together the expertise of its members.

EPICENTER is formed by the Center for Political Studies (Denmark), Civil Development Forum (Poland), the Institut Economique Molinari (France), the Institute of Economic Affairs (UK), Institute of Economic and Social Studies (Slovakia), Instituto Bruno Leoni (Italy), KEFiM (Greece), the Lithuanian Free Market Institute, Prometheus (Germany), and Timbro (Sweden). Like its members, EPICENTER is politically independent and does not accept taxpayer funding.

About CEPOS
CEPOS is an independent Danish think tank promoting a society based on freedom, responsibility, private initiative, and limited government.

CEPOS wishes to contribute to more personal and economic freedom, rule of law and democracy as well as a limited government sustained by healthy civil institutions, such as family, civil associations, and cultural life. CEPOS encourages competition, supports free markets, global free trade and opposes government subsidies to businesses.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.