By Somit Dasgupta & Diya Dasgupta
When it comes to global warming (elevated to global boiling, a recent coinage by the secretary general of the UN), it is not only the scientists, economists, regulators who are busy trying to find solutions. It is also the law makers, across the world, who are burning the midnight oil. While several countries (including Canada, Japan, South Korea, New Zealand, UK, Ireland, and many others in the European Union) have passed legislations for becoming net-zero around 2050 or so, specific laws for undertaking investments for transformation from a fossil-fuel based system to one based on renewable energy has been passed over the last two years. Some of the major legislations include the EU Fit for 55 Package (55 package) of July 2021, the US’s Inflation Reduction Act (IRA) of August 2022, EU Net Zero Industry Act (NZIA) of March 2023, Australian National Reconstruction Fund (ANRF), also of March 2023 and finally, the Japan Green Transformation Act (JGTA) of May 2023.
All these laws try to incentivise adoption of renewable energy and moving away from fossil fuels. The technologies which these laws will promote include carbon capture, utilisation and storage (CCUS), battery storage, electrolysers for green hydrogen, electric vehicles, etc. The 55 package is called so because the aim is to reduce carbon emissions by 55% by 2030 when compared to the 1990 level. In order to do this, the 55 package endeavours to make the European Union Emissions Trading Scheme (EU-ETS) more stringent along with stricter imposition of national limits on greenhouse gas (GHG) emissions on sectors like surface transport, buildings, agriculture and waste. Additionally, the package also sets rigorous emission norms for cars and aims to increase the share of renewable generation to 40% by 2030. The controversial carbon border adjustment mechanism (CBAM) is also a part of this package wherein taxes would be imposed from January 2026 on the import of products from countries which do not levy a carbon price and put the domestic manufacturers in the EU at a disadvantage. The products to be covered include electricity, iron and steel, aluminium, cement, fertilisers, as well as hydrogen.
While the 55 package relies on strengthening laws, the US’s IRA is more about subsidies by way of tax credits. The IRA has a mammoth budget of about $750 billion out of which about 53% would be spent on energy security and climate change. The Act provides tax credits for certain activities—for instance, $2,000 per year consumer credit for the purchase of heat pump water heaters and biomass stoves, $15 per kilowatt per hour for power produced at qualifying nuclear facility, $7,500 and $4,000 per vehicle consumer tax credit for new and used electric vehicles respectively, $3 per kg for the production of qualified clean hydrogen, etc. The revenue will be raised through a 15% corporate minimum tax, prescription drug pricing reform, IRS tax enforcement, and more. There is, however, a big catch in the subsidy programme as these tax credits will only be given if the
purchases are made from companies based in the United States. Incidentally, the name of this Act is a complete misnomer and it actually has little to do with inflation, at least directly. While it is meant for reducing carbon emissions, it also deals with lowering health costs, providing internal revenue service, and improving taxpayer compliance.
The IRA has been viewed in the EU as a protectionist measure as it fears that it would lead to a relocation of industries from the EU to the US. This is primarily based on the understanding that the EU consists of about 27 countries, and not all are economically strong to match the subsidies proposed under the IRA. As a retaliatory measure, the EU has enacted the NZIA which makes an attempt to promote industries based in the EU, and it states that at least 40% of the clean energy technology should be produced within the region by 2030. The Act specifically identifies carbon capture, utilisation and storage as one of the eight strategic net-zero technologies for scaling up manufacturing capacity. The other technologies which have been identified include solar PV and solar thermal, onshore and offshore renewable technologies, battery/storage technologies, electrolysers and fuel cells, sustainable biogas and methane technologies. The Act, however, is not solely about subsidies as there is a talk of streamlining administrative requirements, ensuring access to information, facilitating access to markets in public procurement procedures etc. The Act will also provide dedicated training centres (called net zero academies) for upgradation of skills.
Finally, the ANRF and the JGRA, with their proposed budgets ($150 billion and $15 billion, respectively) are relatively small, especially the latter, which is a mere fraction of the budget of the IRA. However, both these Acts try to promote their national industries, similar to what is being done in the case of IRA and NZIA. In the case of the JGTA, the emphasis is on the production of green hydrogen in countries like Australia, but the subsidies will be payable only to that portion which is exported to Japan. As for ANRF, out of the total budget of $15 billion, $3 billion will be spent on renewables and electrolysers but the government support (through equity, loans, and guarantees) will be limited to companies based in Australia.
The point being made is that while climate change does not recognise borders, the solutions which we are working on unfortunately do. Divisions in the form of developed vis-à-vis developing nations are not the only problem, as is evident from the tensions within the developed world that are emerging as well. The moral of the story is that the global community needs to work together for energy transition, and there is a dire need to segregate bona fide decarbonisation measures from pure economic agenda pandering to the respective local communities. Trying to address multiple issues simultaneously is likely to result in conflict.
Somit Dasgupta & Diya Dasgupta, Respectively, senior visiting fellow, and research associate, ICRIER. Views expressed are personal.