Inflation Reduction Act (IRA) of the US

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    • The European Union has recently expressed its concerns regarding the USA’s new green energy subsidy package.

    What is the U.S. Inflation Reduction Act?

    • It is a $430 billion package of federal spending, tax breaks, credits, and levies that are aimed at fighting climate change and reducing healthcare costs and making large corporations pay their fair share in taxes.
      • It is a scaled-down version of USA’s Build Back Better plan which did not get approval.
    • It aims at bringing down inflation.
      • It is the biggest climate action package in U.S. history for climate-focused funding and investments aimed at cutting emissions by around 40% below 2005 levels by 2030.
    • Healthcare-related provisions: the Act extends expiring Medicare subsidies to 13 million Americans and aims to bring down the cost of prescription drugs for which Americans pay two to three times more than citizens of other countries.
    • Tax code: The Act also aims to make the U.S. tax code fairer and points out that the top 1% of earners are estimated to evade $160 billion in taxes each year. 
      • The IRA imposes a minimum tax of 15% on America’s wealthiest and most profitable corporations.
    • IRA combines climate action goals with industrial policy aiming to transition to clean energy by incentivizing local manufacturing of renewable energy components. 
      • It also seeks to reduce American reliance on China for materials and components for the clean energy industry.
    • Electric Vehicles (EVs): Transportation accounts for a quarter of America’s greenhouse emissions. 
      • To promote the use of electric vehicles and to secure domestic supply chains for their manufacturing, the federal tax incentive policy for EVs has been changed.
        • Now, only passenger EVs assembled in North America (U.S., Canada, and Mexico) are eligible for a $7,500 tax credit incentive. 
    • Renewable energy: It provides a tax credit of 30% of the cost of building or upgrading factories for renewable energy components and gives extended new production and investment credits for renewable energy generation from sources such as solar, wind, hydrogen, and nuclear technologies.
    • Power costs: The package offers 10 years of consumer tax credits to make American homes energy efficient and clean energy dependent, making heat pumps, solar panels, and so on affordable.

    Challenges and Concerns  

    • UN climate targets: Europe’s high energy dependence on Russia led to energy shocks in the wake of the Russia-Ukraine war which is leading to energy shortages, and skyrocketing power prices.
      • EU countries also need to meet their declared UN climate targets.
    • Discriminatory Act: IRA tax credits and subsidies to EVs and other green product makers in North America and free-trade partner countries put European companies at a disadvantage and may push them to move critical parts of their supply chains to America.
    • Components: EU countries are worried their companies will suffer because of U.S. tax breaks for components used in renewable energy technologies like electric cars on condition they are made in North America.
    • Violation of WTO rules: EU countries consider that 200 billion euros of the U.S. subsidies are tied to locally produced content provisions that potentially violate World Trade Organization (WTO) rules.
    • EU state aid rules in their current form prevent member countries from offering similarly generous tax breaks to companies looking to set up factories. 
    • Other markets: South Korea is also concerned that its carmakers will not be eligible for the U.S. tax breaks.

    Conclusion and Way forward

    • Exemptions: The need of the hour is to secure exemptions along the same lines as those already granted to Canada and Mexico.
    • There is a possibility of solutions through the EU-U.S. Trade and Technology Council meeting.
    • Europe can file a complaint at the WTO: But there is resistance from traditionally free-trade-friendly nations such as the Netherlands and Sweden.
    • Recovery fund: There are around 200 billion euros in EU pandemic recovery funds which are available and could be repurposed to support industry.
    • Cross-border projects: European governments can also pool resources to subsidise cross-border projects deemed to be in the broader EU interest. 
    • Fit for 55: The EU’s own new green plan ‘Fit for 55’ is targeting to cut CO2 emissions from cars by 55% and vans by 50% by 2030 and all emissions from cars by 2035. For this, it will need to significantly increase its uptake of electric vehicles. 

    Source: TH