The battle for green supremacy
The US and Europe are engaged in a battle for clean tech supremacy. Each is introducing new incentives to develop home-grown clean energy and climate tech industries under proposals that have the potential to unleash trillions of dollars in new public and private investment.
One aim is to make next-generation technologies more affordable and thereby accelerate the sustainable transition.
Yet the economic stakes are high, too. The global clean energy industry is positively booming. It is on course to surpass USD2 trillion by 2030.1
In a bid to secure a sufficiently large slice of that market, the US and Europe have each set out to build their own supply chains for solar panels, wind turbines, electric cars and efficient batteries. But they are not just battling one another.
Their most powerful competitor is China, whose generous decade-long subsidy programme has propelled it to the top spot in the environmental tech industry.
The US is certainly ratcheting up the pressure.
In August 2022, the Biden Administration won approval for the landmark Inflation Reduction Act (IRA), which will provide USD370 billion in federal subsidies for electric vehicles and other clean technologies and offer new incentives to lure renewable businesses and investment to US shores. This complements another piece of legislation from November 2021 which contained similar environmental measures.
In response to this onslaught, the European Union is setting out a plan that will also pump hundreds of billions of euros into its domestic low-carbon industries to increase the share of manufacturing and attract investment.
Government intervention, such as subsidies, can hamper competition and cause market distortions. But targeted incentives as part of a strategic industrial policy – such as achieving net zero – could help improve manufacturing facilities, lower costs and achieve economies of scale.
Environmental incentives within the IRA alone are projected to trigger at least USD4 trillion of cumulative capital investing over the next decade in green energy infrastructure, such as renewable, transmission and distribution grids, batteries, hydrogen as well as energy efficiency.2
A European version of IRA has potential to generate similar amounts of new investment.3
Triple climate whammy
According to Michael Gerrard, Professor at the Sabin Center for Climate Change at Columbia Law School, the US measures are nothing short of revolutionary for both the country's carbon footprint and economy.
“The United States is embarking on a path to an unprecedented renewable transformation,” he says. “These efforts should deliver considerable benefits.”
Take emissions. The IRA alone is expected to reduce US greenhouse gas emissions by around 40 per cent compared with 2005 levels, bringing the country closer to meeting the Paris target. It is also projected to reduce air pollution and premature death, and to lower average household energy bills.
The impact on the economy, meanwhile, is hard to overstate. The reduced air pollution is forecast to avoid over 35,000 premature deaths over the decade from 2023. It should also increase crop yields, worth USD4 billion to US farmers, and boost GDP by about 0.86 percentage points over the next eight years.4
The IRA comes at a crucial time for the US renewable industry. This is because the expansion of domestic clean electricity had begun to stall as tax credits which had propelled growth in wind and solar over the past decade – were starting to expire.
The Act contains a 10-year extension in fiscal incentives. Gerrard says the new green legislation is a significant boost in the longer term for US manufacturers of solar, wind, battery and electric vehicle components and assembly as well as critical minerals processing.
At the same time, he explains, it promises to create new opportunities in nascent clean technologies such as hydrogen, carbon capture and geothermal energy.
Alarmed by the US's aggressive approach, European leaders are scrambling to set out their own world-beating green programme.
Under the proposed Green Deal Industrial Plan, the EU will redirect some EUR250 billion from existing funds to develop onshore clean tech production.
The transition plan is built on four pillars – simplified regulation, faster access to funding, workforce development and promotion of open trade – and is expected to generate new investments of around EUR4 trillion by 2032, encompassing capital from both government and private sectors.
Within this, privately-funded investments in clean energy – including renewables, transmission and distribution grids, batteries and carbon capture storage – are expected to total around EUR2.4 trillion.5
Hitting those targets will be crucial – not only for the region’s climate goals but for its economic ones too, as the EU is keen to maintain its status as one of the leading innovation hubs for renewable energy.
Greener and cheaper
Whichever way you look at it, the IRA is likely to prove a game-changer for some of the next-generation technologies, including not only wind and solar but also battery and carbon capture and storage, all of which could become economically competitive in less than a decade.
Post-IRA, the levelised cost of energy (LCOE) for both wind and solar – the average lifetime cost of electricity generation for a particular power system – is expected to drop to or below USD30/MWh by 2030, outperforming that for nuclear and coal.6
The LCOE of hydrogen in power generation, meanwhile, is estimated to more than halve to USD60-120/megawatt hour, becoming nearly competitive with gas.
Green hydrogen, produced from renewables and thus generating zero emissions, stands to benefit the most. Some estimates show the cost for green hydrogen could go negative on a per kg basis by the end of this decade as producers can stack different subsidies for greater cost savings.7
Growth in renewable sources is likely to be accompanied by an expansion in electricity transmission infrastructure.
This is also an area that is likely to attract more investment in the coming years. As countries around the world intensify the fight against climate change, the global clean tech race is sure to gather pace.
“This has potential to create a virtuous cycle where fresh investment helps slash the cost of innovative renewable technologies, generate higher demand and turbocharge growth in low-carbon industries,” Gerrard says.