Europe Grapples with Balancing Free Trade Principles and Clean Energy Ambitions

By Haley Zaremba - Feb 20, 2024

• Protectionist policies driven by the US and China's dominance in clean energy markets are prompting a shift away from free trade towards subsidy-driven industrial strategies worldwide.
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• Europe faces a dilemma between upholding principles of free trade and competing in the increasingly subsidized clean energy sector, with fears of falling behind if it doesn't join the subsidy race.
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• While some European policymakers advocate for cautious subsidy approaches to avoid wasteful spending, others warn that failing to participate in the subsidy push could jeopardize Europe's clean energy ambitions and economic competitiveness.

Global policy around clean energy is shifting rapidly away from free trade and toward an era of protectionism as nations around the world race to gain a foothold in the burgeoning decarbonization sector. Anxiety about being left behind and rendered unable to compete on the global clean energy market has kicked off a global subsidy push. And as a result, it seems like Europe might be in trouble.

After decades of global emphasis on liberalizing trade, we’re seeing a sea change in industrial policy across the world as “nations are offering a mosaic of favorable regulations and public subsidies to try to attract green industries like electric vehicles and storage, solar and hydrogen” according to recent reporting from the New York Times. 

This transition phase was largely kicked off by the one-two punch of the Trump and Biden administrations in the United States. President Trump bucked global trade agreements by introducing a slew of heavy tariffs on a wide range of products and countries, including a number of European allies. Then President Biden introduced the subsidizing juggernaut that is the Inflation Reduction Act. While the Act does nothing to reduce inflation, it introduced a whopping $500 billion in new spending and tax breaks, much of which is designed to boost the domestic clean energy sector. 

The move has caused much hand-wringing over in Europe, where free and open trade is seen as “critical to its project of European integration,” in the words of the New York Times. The massive scale of the Inflation Reduction Act flies in the face of this approach, and has kicked off reactionary tax credit policy measures in many other countries (such as Canada and India) that feel that they have no choice but to follow suit or be locked out of the clean energy market. 

While the global policy shift can be traced back to the United States, however, the Inflation Reduction Act itself came in response to China’s aggressive expansion of its own clean energy manufacturing and production capacities. China holds no qualms about open, free, and fair trade, and has employed every strategy in its arsenal to command global clean energy supply chains. And it’s been massively successful. 

China alone was responsible for nearly half of global spending in the renewable energy sector in 2022 at a whopping $546 billion, according to analysis from BloombergNEF. That’s nearly quadruple the $141 billion that the U.S. spent, and triple the European Union’s $180 billion. Beijing has also been busily establishing its presence in clean energy supply chains around the world. As a result, China has near-monopolies on a number of key clean energy supply chains. China produces approximately 80% of the world’s solar panels, 60% of electric vehicles, and over 80% of EV batteries. It also produces 60% and processes nearly 90% of the world’s rare earth minerals, which are key components in clean energy manufacturing.

That’s why countries like the U.S. have decided to respond to China’s dominance in clean energy markets by adopting protectionist policies. Many see it as the only viable option for getting a foot in the door at this late stage when China has already blown away the competition and chances for competition are increasingly slim. This puts Europe in an extremely tough position, choosing between abandoning their political principles – which have been adopted for very good reasons – and getting left behind.

Jumping into the subsidies race comes with its own risks. While U.S. subsidies provide as much as 200% of a company’s investment costs, in Europe, that figure is more like 20-40%. Many European politicians and economists would like to keep it that way, lest they wastefully throw money at fledgling companies that are never able to function profitably on their own. “The market decides which of the projects that will make it, our ambition as a government is to mobilize as much private capital as possible,” Anne Marit Bjornflaten, the Norwegian state secretary to the minister of trade and industry, was quoted by the New York Times. 

Others feel that failing to join the global subsidies push could be a fatal error for Europe. The stakes are high for countries like Norway, which had previously hoped to be a clean energy world power. Instead, they’re watching their investors move westward and looking at the very real possibility that they will continue to be dependent on domestic oil and gas instead. 

By Haley Zaremba for Oilprice.com