The Inflation Reduction Act: How an American Law is Rattling the European Union

By Morgan Elmore

Introduction

United States President Joe Biden signed the most significant action taken by Congress to support clean energy and climate change in August 2022, the Inflation Reduction Act. [I] The Act includes many provisions that aim to tackle health care affordability, fair taxing of corporations, and placing America on track with global climate change initiatives. [II] As the name suggests the goal of the Act is to help curb growing inflation rates in the United States and to provide economic relief for American families. [III] However, the name of the act could prove to be misleading as estimates on the impact of the bill suggest that it could have little effect in curbing inflation, and any effects it could have will take time. [IV] The real hallmark of this Act will be the $370 billion of investments in clean energy to lower energy costs for Americans. [V] The passage of the Act has put the U.S. on track to reach its contribution goals under the Paris Agreement. [VI] The Paris Agreement is an international treaty that sets long-term goals for nations to collectively strive to reduce and limit greenhouse gas emissions, currently 194 parties have signed. [VII] A part of the Act’s investments in clean energy will include improved tax credits for electric vehicles and, despite only being one small piece of the Act, the repercussions have potentially significant international effects. [VIII]

Global Impact

While the Inflation Reduction Act is a domestic American law it will have global repercussions that have already put the world on alert. [IX] Specifically, the European Union (EU) has major concerns about international competition. [X] A major provision in the Inflation Reduction Act will eliminate a tax credit for electric vehicles manufactured outside North America. Instead, the electric vehicle tax credit will only be eligible for electric vehicles that were manufactured with at least forty percent of all their materials from either the United States, U.S. free trade agreement partners (Mexico and Canada), or with recycled materials from the United States. [XI] The Act more or less cuts out all electric vehicles manufactured somewhere other than in North America from U.S. tax credits. [XII] This means for European producers of electric vehicle materials and components; manufacturers will be looking to purchase parts from North American producers rather than Europeans in order to maintain tax credit eligibility.

European Commission President Ursula von der Leyen shortly after the signing of the Inflation Reduction Act expressed concerns that both Europe and the U.S. will suffer harm from the trade implications of the electric vehicle tax credits. [XIII] She expressed concerns over a Chinese monopoly on materials used in clean energy that could lead to a trade war. [XIV] EU members are calling the tax credits unfair and discriminatory world trade practice and are calling for all foreign products to be placed on a level playing field. [XV] EU members are further concerned that companies will leave the EU opting to set up shop in North America citing the tax credits as a final push in conjunction with the war in Russia and increasing energy prices in Europe. [XVI] While the EU is certainly the most vocal in their concerns other current trade partners including South Korea have also voiced their concerns on the electric vehicle tax credits and the potential loss of trade relations. [XVII]

Loss of potential electric vehicle tax credits while potentially detrimental for the EU would prove beneficial for the American electric vehicle industry. The money previously spent globally would instead be spent in North America keeping U.S. money in the American economy. This is precisely the purpose of the Inflation Reduction Act. As for European concerns of industries leaving the EU for the United States, again the United States benefits. More domestic industry means more jobs for Americans and a bolster to the struggling economy. President Biden is now faced with outcry from the EU for a bill he believes will benefit the American people and he has received feedback from both sides. [XVIII]

European Response

In response to the Inflation Reduction Act, the EU has formed a task force with U.S. officials to express their concerns regarding the potential loss of trade and in order to maintain close relations with each other. [XIX] Currently, led by French President Macron the EU is asking that the U.S. grant an exception to the tax for EU member states. That is, they are asking to still receive tax credits for electric vehicles with parts manufactured in the EU. [XX] This would be the best-case scenario for the EU, however, other options are being presented. These include bringing the issue to the World Trade Organization or imposing regulatory tariffs. [XXI] While the outcry against the Inflation Reduction Act is loud not all share the same level of concern.

The EU in actuality produces only a small fraction of electric vehicles in the U.S. currently and they themselves have imposed tariffs much higher than the U. S’s on electric vehicle imports. [XXII] Furthermore, the EU also provides incentives for EU materials for electric vehicle components. [XXIII] Considering these facts, it would seem the EU is being sanctimonious calling out the U.S. for practices they already engage in themselves. Why then is the EU so concerned over the electric vehicle tax credits when the actual effects could be quite minimal?

The timing of the Inflation Reduction Act is likely playing into the potentially overblown concerns and outcry of the EU. The war in the Ukraine has now been waged for over a year and the European economy has suffered. [XXIV] The EU was previously dependent on Russian oil and gas imports and following embargos on Russia in response to their war on the Ukraine, Europe has faced significant energy price increases. [XXV] Europe is now facing long-term challenges of energy security. This has likely fueled much of the outcry. Outside their conversations with the U.S., EU member countries are discussing possible ways to combat the potential loss of trade internally within the EU. These conversations have led to some EU divisions as some countries have different ideas on how to approach the issue internally. [XXVI]

Conclusion

Back in the U.S., Biden has been sympathetic to the EU and has listened to their concerns, however, not all in the U.S. share this sentiment. Five U.S. groups have sent letters to President Biden asking for him to not make any changes to the electric vehicle tax credits on behalf of the EU. These groups include Public Citizen, the United Steelworkers, the United Auto Workers, the International Association of Machinists and Aerospace Workers and the Sierra Club. [XXVII] These groups would all benefit from increased manufacturing jobs created from European industries moving to the U.S.

The future of the electric vehicle tax credits is unclear but presently no formal changes have been made to the Inflation Reduction Act. The EU continues domestic conversations alongside its international conversations with the U.S. The electric vehicle tax credits created by the Inflation Reduction Act are set to begin in 2024. [XXVIII].

I. Sobczyk , N. (2022). Democrats take climate victory lap as Congress leaves town. Environment and Energy Daily.

II. Smith, K. A. (2022, August 23). The inflation reduction act is now law-here’s what it means for you. Forbes. Retrieved March 4, 2023, from https://www.forbes.com/advisor/personal-finance/inflation-reduction-act/.

III. Kim, J. (2022, August 13). What the inflation reduction act does and doesn’t do about rising prices. NPR. Retrieved March 4, 2023, from https://www.npr.org/2022/08/11/1116229743/inflation-reduction-act-questions-answered.

IV. Voegele, H., & Ugalde, A. (2022, August 24). What’s in the Inflation Reduction Act? The National Law Review. Retrieved March 4, 2023, from https://www.natlawreview.com/article/what-s-inflation-reduction-act.

V. The United States Government. (2023, February 14). Inflation reduction act guidebook. The White House. Retrieved March 4, 2023, from https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/.

VI. Jackson, S., & Hellmich, M. (2023, February 8). The inflation reduction act (IRA) and the EU . E3G. Retrieved March 4, 2023, from https://www.e3g.org/publications/the-inflation-reduction-act-ira-and-the-eu/.

VII. United Nations. (n.d.). The Paris Agreement. United Nations. Retrieved March 4, 2023, from https://www.un.org/en/climatechange/paris-agreement.

VIII. Bray, S. (2022, November 30). How the inflation reduction act and pillar two could shape the future of EU competitiveness. Tax Foundation. Retrieved March 4, 2023, from https://taxfoundation.org/macron-biden-eu-subsidies/.

IX. Id.

X. Guerry, M. (2022). EU Chief Calls On US To Fix Tax Law’s ‘Distortions’. Law360, 339(101).

XI. Portuondo, N. (2022). Manchin warns Treasury about EV credit implementation. Environment and Energy Daily, 10(9).

XII. 17, F., & Singh, K. (2023, February 17). U.S. trade official Tai discussed inflation reduction act with EU’s Dombrovskis. Nasdaq. Retrieved March 4, 2023, from https://www.nasdaq.com/articles/u.s.-trade-official-tai-discussed-inflation-reduction-act-with-eus-dombrovskis.

XIII. Buell, T. (2022). EU Wants Simplified Aid Rules To Counter US Tax Law. Law360, 348(15).

XIV. Id.

XV. Blenkinsop, P., Thomas, L., & Rinke, A. (2023, February 1). Explainer: Why the U.S. Inflation Reduction Act has rattled Europe. Reuters. Retrieved March 4, 2023, from https://www.reuters.com/markets/why-us-inflation-reduction-act-has-rattled-europe-2023-02-01/.

XVI. Bray, S. (2022, November 30). How the inflation reduction act and pillar two could shape the future of EU competitiveness. Tax Foundation.

XVII. Id.

XVIII. Lyskawa, M. (2023). Groups Tell Biden Not To Back Down To EU Trade Threats. Law 360.

XIX. Launch of the US-EU Task Force on the Inflation Reduction Act. European Commission – European Commission. (2022, October 26). Retrieved March 4, 2023, from https://ec.europa.eu/commission/presscorner/detail/en/statement_22_6402.

XX. Bray, S. (2022, November 30). How the inflation reduction act and pillar two could shape the future of EU competitiveness. Tax Foundation.

XXI. Jackson, S., & Hellmich, M. (2023, February 8). The inflation reduction act (IRA) and the EU, E3G.

XXII. Meyers, Z. (2023, January 30). Europe needs to dial down its anxiety over the Inflation Reduction Act. POLITICO. Retrieved March 4, 2023, from https://www.politico.eu/article/us-europe-electric-car-needs-to-dial-down-its-anxiety-over-the-inflation-reduction-act/.

XXIII. Id.

XXIV. Casey, R. (2023). HOW THE RUSSIAN INVASION OF UKRAINE IS TESTING THE MIGHT OF INTERNATIONAL LAW. Global Litigator, 49(13).

XXV. Katser-Buchkovska, N. (2022, April 29). The consequences of the war in Ukraine will be far-reaching. World Economic Forum. Retrieved March 4, 2023, from https://www.weforum.org/agenda/2022/04/an-unfair-war-economic-social-and-security-consequences-of-the-russian-invasion-into-ukraine/.

XXVI. Nussbaum, A., Rosskopf, K., & Nienaber, M. (2022, December 15). Inflation reduction act: Macron calling for EU to match US green subsidy package. Bloomberg.com. Retrieved March 4, 2023, from https://www.bloomberg.com/news/articles/2022-12-15/macron-implores-europe-to-match-biden-s-green-subsidy-package?leadSource=uverify+wall.

XXVII. Lyskawa, M. (2023). Groups Tell Biden Not To Back Down To EU Trade Threats. Law 360.

XXVIII. “H.R.5376 – 117th Congress (2021-2022): Inflation Reduction Act of 2022.” Congress.gov, Library of Congress, 16 August 2022, https://www.congress.gov/bill/117th-congress/house-bill/5376.