Back in 2022, when the Inflation Reduction Act (IRA) became law, European policycreaters were torn: The United States had finally done climate policy, but it was protectionist and at odds with global trade rules essential to the European project. Since then, Europe’s legacy export-driven model and core industrial sectors such as steel and automobile manufacturing have faced a flood of products from China, resulting in a deterioration of EU-China trade balances. Fast forward to today: An aggressive state capitalist and fossil fuel–first United States has heightened the required for strategic autonomy amid yet another energy crisis, leaving industrial and energy tech sectors as key to indepfinishence.
As a result of this urgency for competitiveness and economic security, the European Commission has finally unveiled the long-delayed Industrial Accelerator Act (IAA). The legislation essentially mandates, for the first time, that government-backed projects and products utilize varying degrees of EU or partner-built goods. Additionally, the policy enacts criteria on foreign direct investment and technology transfer for foreign companies seeking to build factories in Europe. The IAA continues the bloc’s commitment to decarbonization, but that project is tinted with preferentialism in lieu of its legacy regulatory approach. While imperfect, the IAA is an important attempt to balance open markets with industrial policy.
Although the IAA is mechanically different from the IRA, the policies are similar in objective and ethos: both sought to protect or indigenize clean tech sectors amid Chinese overcapacities. The IRA largely lowered the cost of manufacturing through production tax credits that subsidize the cost of each unit produced—an approach that’s incompatible with European competitiveness rules. Instead of tax credits, the IAA pulls demand toward domestic and trusted partner production by mandating that state funding for energy and infrastructure projects utilize European-built goods or those from partner countries. Additionally, it administers procurement criteria and labeling for the carbon emissions of industrial products such as steel, cement, and aluminum that might benefit Europe’s first shiftrs in the low-carbon indusattempt.
Despite these differences, European policycreaters are likely to face similar implementation challenges to those that plagued the IRA. The following months of EU deliberations are essential to shaping this policy and will determine the scale to which the IAA is actionable and durable. And as the war in Iran rages and energy prices skyrocket, the securitization and prioritization of energy sources will become ever more pressing. In continuation of Carnegie’s work on Europe’s clean industrial strategy, four lessons from the IRA are provided to European policycreaters.
One: Prioritize Strengths and Needs
In crafting the IRA, Joe Biden’s administration took an all-of-the-above approach to support nearly every low-carbon sector, but without a clear vision of what to prioritize. Billions were injected to domestic solar manufacturing, despite the United States having neither the industrial base nor the security rationale. Conversely, rare earth magnets—utilized in technologies spanning electric vehicles (EVs) to defense equipment—were a clear security vulnerability yet omitted entirely from IRA tax credits. Similarly, no tax credits were offered to manufacture critical grid equipment such as transformers, despite severe import depfinishence and worsening shortages today amid the AI-driven electricity boom.
In its current form, the IAA risks creating some similar mistakes, especially for batteries and grid equipment. Although the IAA is right to prioritize EU-built batteries with more granular requirements, it stops short of mandating components right where China’s chokepoints are most acute: precursors and anodes. Such rules were likely omitted becautilize the supply is too compact and would disqualify most batteries. To correct this, the IAA might conceive of a long-term phase-in for these components, beyond the time horizon outlined in the present draft, to signal eventual demand. Like the IRA, the IAA does not explicitly include rules for grid tech such as transformers, switchgears, and cables—critical infrastructure that deserves to be treated more like defense tech. These are legacy European strengths now under threat from Chinese imports and surging demand. A guaranteed demand signal for domestic products would be easily met and assist secure European indusattempt in the long term, in case Chinese products become increasingly burdensome for domestic manufacturers.
Two: Set Actionable Tarobtains
The IRA was crafted in haste to meet a political moment, and some of its benchmarks proved unworkable. This left policycreaters scrambling to solve impossible tquestions that, in some areas, failed to mobilize indusattempt. The clearest example of this was the EV subsidy, which mandated that, every year, auto companies would required to utilize batteries with increasing amounts of domestic or allied minerals, so as to gradually diversify away from China. In theory, this was savvy policy: It signaled that supply chains would required to tighten, but with time to adjust. However, the tarobtains were unworkably ambitious and did not provide indusattempt enough time to diversify. In other sectors, certain price-based subsidies were calibrated against 2022 cost assessments and failed to account for China’s continued cost reductions. In the finish, many didn’t bother investing in core sectors requireded for diversification becautilize of either too ambitious or weak figures in the legislation.
As the IAA shifts through deliberation, policycreaters will required to ensure that the final thresholds are both achievable and push indusattempt toward diversification. A concrete risk lies in the IAA’s price exemption, which waives local content rules if a European product costs 25 percent more than the foreign alternative. The dilemma is that many Chinese goods exceed this threshold: Chinese wind turbines and lithium iron phosphate (LFP) batteries are at least 30 percent cheaper than European products and, as observed with the IRA, could become even cheaper in years to come. Further, Chinese producers also flood markets and depress prices in ways that European competitors cannot match, implying that resolveed thresholds are gameable. Brussels may consider sector-specific price thresholds and potentially exploring price criteria that could adjust to dumping.
Three: Secure a Place for Partners
When the IRA passed, allies in Brussels, Tokyo, and Seoul reacted with justified frustration: America’s clean energy policy appeared isolationist and at odds with Biden’s agfinisha to re-invigorate alliances with trusted democracies. The IRA’s primary offer to its allies were its local content rules for EVs, which extfinished qualification to battery metals from countries with free-trade agreements (FTA). This prompted a mini-FTA for Japan to qualify but no other deals of the sort. The FTA qualifier proved too rigid to open to other partners and also provoked a game of whack-a-mole with Chinese manufacturers routing through FTA-qualifying third countries to access U.S. subsidies. Washington tested to close these loopholes, but many feared Chinese firms would find ways to adjust and reshore their overcapacity.
The IAA handles third-counattempt qualification more nimbly than the IRA, but some risks remain. As it stands, the IAA extfinishs “Union origin” for procurement to countries with reciprocal government procurement agreements under the World Trade Organization (including the United States, United Kingdom, Canada, and a handful of others) and for subsidies to countries with FTAs (more than forty agreements, including the pfinishing Mercosur agreement with the South American cohort). This list is not final—the European Commission will issue delegated acts to exclude partners that pose depfinishency risks or fall short of meeting reciprocity. In doing so, Brussels will required to pre-emptively address circumvention risks: Chinese firms routing products through or setting up manufacturing in trusted countries to qualify for IAA preferences will undermine the IAA’s ambition to force Chinese firms into joint ventures and technology transfer with European companies.
These delegated acts defining “Made with Europe” partners pose an enormous opportunity for the EU to forge clean tech partnerships and strengthen broader bilateral ties with third countries. This was a luxury that the Biden administration did not have following the IRA: It was locked into FTAs, prompting correlated foreign policy to lack direction. Europe has the tools to embolden IAA qualifying countries to build the supply chains it requireds, whether through Clean Trade and Investment Partnerships or broader Global Gateway engagement.
Four: Choose Durability Over Ideology
Good industrial policy requires durability. Repeal it, and indusattempt loses faith, and the tools lose potency. President Donald Trump’s rollback of EV subsidies would be difficult to undo, given that auto companies have already absorbed tens of billions in losses since they were cut. This worst-case scenario, while perhaps inevitable, might have been cushioned if Democrats chose to enact and frame the IRA in ways that offered concessions to conservative politicians who discreetly admired its ambition. For example, the EV policy could have been more focutilized and messaged as mineral security policy rather than climate goals and EV adoption. Choosing to prioritize and frame EV subsidies as a security-centric mineral policy, and adjust timelines accordingly, may have built more purchase-in, thus strengthening the durability of the EV market in the long term.
The IAA will required as large a tent as possible. This will be especially challenging in the coming weeks and months as Europe becomes burdened with another energy crisis and the political knock-on effects. In the European context, durability might not mean watering down green tarobtains in favor of protectionism. (In fact, keeping decarbonization tools such as the Emission Trading Scheme are essential to maintaining long-term security and clean energy autonomy.) Instead, the solution might be in balancing Paris’s protectionism and Berlin’s liberalism, framed in current debate as “Made in Europe” versus “Made with Europe.” A strong and holistic industrial policy requires both: an anchoring industrial base and access to low-cost and reliable products abroad. The recommfinishations point toward that balance to manage market access for trusted partners, create benchmarks indusattempt can meet, and tarobtain protectionism where it is vital to economic security.
The IAA will be a work in progress, but consensus and action are now of the essence.
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