The US Inflation Reduction Act of 2022 (IRA), after being welcomed initially, has created some irritation in Europe. The IRA’s aim was appreciated, but the instruments were confusing. The difference in approach between transatlantic partners forced the EU to seek a counterbalance. The European Commission has come forward with a proposal for a Green Deal Industrial Plan, which is considered an immediate response to the American legislation. Is this game positive for climate? Or will it be a zero-sum game, resulting in different implementation on either side of the Atlantic and with competing instruments, less positive for the climate?
The EU is a leader in climate policies and has the most effective mechanisms to promote a green transition. The energy sector and highly emitting industries are covered by the Emission Trading System, and must buy CO2 permits which have been reaching ever higher prices. In order to shelter these companies from the competition of imported, CO2-intensive products, the EU has introduced the Carbon Border Adjustment Mechanism. In principle, the system is complete. Other countries are incentivised to introduce a carbon price, which if paid would count within the EU. If EU policies are reciprocated universally, then the reduction of harmful emissions globally would be most efficiently addressed.
Climate was always an area of some frictions in transatlantic relations. The EU was at the forefront of climate actions. The US was an indispensable, but difficult partner in international climate discussions. One needs only to remember the beginning of UNFCCC negotiations and the Kyoto Protocol. But Europeans have been surprised by the fact that recent positive climate measures in the US have taken forms which contrast EU efforts. The American approach incorporated in the IRA is based on subsidising the uptake of climate-friendly technologies and production. This approach is linked – in some cases – to local content requirements, or LCRs. And this difference between the US and the EU is difficult to ignore. European companies are asked to pay punitive CO2 charges, and could only evade these payments by investing in clean technologies. Like in the US, there are public subsidies in the EU to help them. Obviously, the ETS revenue should be at least partially used to embark on the green transformation, but who receives it, how much and for what, depends mostly on member state governments. Thus, those who receive public aid are not necessarily the most significant to the green transformation in Europe.
In the US, the IRA enables support for interested companies in green investments and production. Paying for emissions is limited to only a few states. This difference can have an impact on business decisions. European businesses are free to consider where to invest in some promising new technologies. The IRA framework makes the use of public funds uncomplicated, provides more clarity, already at an early stage, and it happens in the investment-friendly environment of the US.
The European Green Deal has not placed a focus on these aspects at its early stage. This resulted, at the beginning of 2023, in the rushed European response to the American IRA in the form of an EC Communication on the Green Deal Industrial Plan, containing reference to important components, i.e., the Net Zero Industry Act (NZIA) and the Critical Raw Materials Act (CRM Act). The overall package provides a framework addressing issues exposed by the different approaches on either side of the Atlantic.
Is the European reaction adequate or should it counter American measures more aggressively? Are all the elements of the Green Deal Industrial Act a sufficient reaction to changed rules of the game? The “tit-for-tat”, according to game theory, might be an optimal reaction in some cases. It can pay off if one of the sides reciprocates with what the other has done. In the prominent book “The Evolution of Cooperation”, Robert Axelrod underlines the importance of taking into account an iterative nature of the game. Transatlantic relations between two of the most closely linked democracies will continue, and reciprocal measures should be considered with this in mind. Axelrod underlines that a successful strategy, even if based on retaliation, should be non-envious. In this particular game, the EU retaliates with respect to measures that have upset European industry, but it should also think about what its next moves should be to avoid a negative outcome.
Transatlantic cooperation must also be seen in the global context of rivalry, including with China, for raw materials and control of important components of global value chains. First of all, the EU should not shoot itself in the foot by doing things which would negatively affect its own economy. Distorting the EU Single Market would be one such negativity. The European response to the American IRA does not yet include new money. Therefore, it is criticised by business as insufficiently impactful. Fortunately, Europe is not accelerating the subsidy race. If others are introducing suboptimal policies, Europe should not necessarily imitate them. Some measures in American industrial policies can easily be considered inefficient and the EU should not simply mimic them, but instead concentrate on how to do better. Ambitious European thresholds of self-sufficiency, in relation to major critical raw materials, can be considered as analogous to LCRs of the American IRA, however they are targets without strong mechanisms of implementation.
The public aid within the American IRA must be seen in the context of overall simpler conditions of investing in the US. The EU has rightly avoided mobilising new funds. Public aid is already offered in various forms by the EU and its member states in amounts exceeding what the IRA provides. Measures to speed permissions and approvals, focus on new skills, the flexibility of changing jobs, and up-skilling, i.e., changing the investment environment in Europe, should help to avoid a zero-sum as an outcome of this regulatory game.Jarosław Pietras Climate Change Regulation Transatlantic
Avoiding a Net-Zero Sum Game in Transatlantic Relations
05 Apr 2023
Dimitar Lilkov Digital Regulation Technology
The EU’s Failure to Protect Our Online Privacy and Data Rights, with Dr. Johnny Ryan
Brussels Bytes - Multimedia
21 Oct 2021
Digital Regulation Technology
EIF21 Panel 3 – Europe’s Digital Decade: Regulate and Chill?
Live-streams - Multimedia
30 Jun 2021
The EU takes the challenge of digital transformation very seriously. We have decided to make it, along with the Green Deal, the main driver for economic recovery and long-term growth.
The EU has a profound and well-established reputation as a standard-setter. It is moving rather quickly toward a modern legal framework for its Digital Single Market, establishing a regulatory space that would be conducive both to the growth of digital business and protective of the fundamental rights of users.
This is particularly important now when there seems to be no doubt that the world’s future is digital, that digital technology is of general-purpose, and that it cuts across business activities, people’s lives, and societal transformation. It does not recognise borders between national jurisdictions but also has a strong geopolitical dimension.
Although the EU has been already for a while moving forward with the implementation of its plan to create a regulatory framework for the digital transformation of its Single Market, and that a series of legislative proposals have been already issued, there is still time for the EU and the US to move toward a common regulatory space for the digital transformation.
Our relations’ history clearly demonstrates that aiming for the alignment of already existing and well-established standards to make them conducive to business activity, citizens’ preferences, and security has always been difficult and costly.
However, in the case of the digital transformation, we have a situation comparable to a greenfield investment. We are basically starting from scratch. Many choices are still to be made. Providing a shared regulatory framework for an emerging global common good can be a win-win move.
In a time when China, currently the only large economy experiencing growth, has been aiming for technological self-sufficiency and pouring enormous subsidies into high-tech, AI, electric vehicles, and the semiconductor industry, the EU is lagging behind in the global technological race, and the US is hardly benefitting from the trade and tech war. Choosing a cooperative approach for the digital transformation seems to be a good path for the EU and the US. When 5G will shape the near future of the digital economy, the EU and the US could be partners in creating a new vision for going beyond 5G.
COVID-related challenges open new areas for digital cooperation. Data sharing is crucial, also in the context of combatting the pandemic now and other potential global health hazards that will affect us in the future. European and American global resilience will be reinforced if we work together through digital sovereignty, which already seems to be a buzzword on both sides of the Atlantic.
Europe will spare no effort on the path toward making itself a centre of digital innovation. There is, indeed, no reason that we should lag behind. There is a market of 450 million people, there are great standard-setting capabilities, and there is knowledge and experience on how to ensure the integrity of digitalisation in terms of privacy protection and ethical dimensions. There are millions of small companies that, with some incentives, can spread their wings to capture the advantages of the digital transformation. The EU is all set to become an attractive strategic partner for the US in the digital world. Working together would allow us to reduce existing threats to the Open Internet. Europe knows how to tear down dividing walls, and it understands well the risk of raising digital walls and the benefits of a global mindset. It also knows the cost for the business community of operating in different regulatory regimes.
My concern is that, given the disparities in standards and protocols, the global race for digital leadership based on digital sovereignty might not produce a win-win situation for all. We have to resist the temptation to go alone in this area.
Choosing to work together as leaders on standards and behaviour in the digital world and putting the digital economy at the heart of transatlantic relations can bring benefits to citizens and businesses on both sides of the Atlantic and help find globally accepted solutions to existing inadequacies.
We have a chance that must not be missed. It is a perfect area for a transatlantic reset. Frustration with largely dysfunctional economic relations with the US for some years now leads us to sometimes thinking in terms of the need to balance against the US. But it matters today that our bonds have grown from shared values. In that regard, China is on the other bank of the river. If we feel left behind globally, we should aim at taking back control, like the Brexit dreamers, or use our huge regulatory power in the service of Western values.Danuta Maria Hübner Digital Regulation Transatlantic
Danuta Maria Hübner
A Transatlantic Agenda for Digital Transformation
13 Nov 2020
In the 1990s Bill Gates said: ‘As we look ahead into the next century, leaders will be those who empower others.’ He has been proven right. Over the last two decades intermediaries have emerged that empower, among others, writers and other content creators, innovators, traders, programmers, businesses and start-ups. These intermediaries are private businesses technologically enabled by digital platforms. They are the cyberspace counterparts of, for example, newsletters, pinboards, bazaars, public squares, roads and toolboxes. A new kind of digital economic ecosystem has emerged and needs to be addressed by regulation. The relevant laws are about to be changed in the US and in the EU.
The regulation of this ecosystem needs to preserve and possibly enhance the dynamism of innovation and remain open and competitive. On private platforms existing national laws and human rights must be observed. The enforcement of the law should in principle be carried out by the government and in principle the responsibility to comply with the law lies with each of the actors involved. Platforms may voluntarily assist in law enforcement on their platforms. Moreover, platforms are free to set their own rules on who may use them and what can be done on them.
However, some of these platforms play a pivotal and sometimes unique role which, naturally, gives rise to calls for them to be subject to regulatory oversight that would place constraints on their ability to set their own rules. Such oversight is needed to ensure that platforms are open to all users who would make lawful use of their services. It is also needed to help ensure that any rules set by the platform operators are fair and are applied in a manner that ensures free and fair competition. Regulations that attempted to stifle innovation or limit freedom of expression would be harmful. The same holds for regulations that simply tried to prevent the shift towards the platform economy for the sake of protecting the old ways of connecting customers and providers.Digital Economy Regulation
Digital Economy: Regulating Digital Platforms and Intermediaries
24 Feb 2021