23 May 2023

UK and EU's Jurkovic: Energy security and industrial strategy: UK and EU divergence

Jurkovic examines the UK and EU’s divergent approaches to energy security and investment in green technologies since the US Inflation Reduction Act was signed into law, looking at whether it’s too late for the UK to develop its own industrial strategy.

Peter Jurkovic examines the UK and EU’s divergent approaches to energy security and investment in green technologies since the US Inflation Reduction Act was signed into law, looking at whether it’s too late for the UK to develop its own industrial strategy.

In August 2022, US President Biden signed the Inflation Reduction Act (IRA) into law. Through an estimated $396bn of subsidies, the legislation aims to drive investment in clean energy technologies.

In Europe, politicians and business leaders have largely seen the IRA as a commercial threat, which could have damaging effects on the EU and UK economies, because the tax credits it offers are conditional on a high proportion of production and final assembly taking place in the US.

There are fears businesses will relocate operations to the US to benefit from the subsidies.

The decisions taken by Tesla and Volkswagen to halt plans to build electric vehicle (EV) battery plants in Europe and instead expand production in the US, were seen as early indications of the losses that could occur without prompt intervention.

Yet it is also important to recognise the IRA as an attempt to tackle a second issue: energy dependence. The legislation aims to boost domestic production of green energy so that the US is less reliant on foreign energy imports.

This has prompted Europe to take action, as it is here where the costs of energy dependence have been particularly heavy – energy bills dramatically spiked after Russia’s invasion of Ukraine due to the EU’s reliance on Russian natural gas imports.

Despite this shared challenge, the UK and EU have responded in very different ways. Our latest divergence tracker shows how the EU has developed heavyweight regulation to tackle these issues, while the UK has been much slower to act.

The EU has launched its landmark Net-Zero Industry Act to rival the IRA, setting the ambition for 40% of the bloc’s net-zero technology to be manufactured within the EU by 2030. In aid of this, it has relaxed permitting procedures and state subsidy rules related to sustainable technologies, including a provision allowing member states to match subsidies on offer in a third country if there is a risk of investment being diverted away from Europe.

Meanwhile, a ‘Critical Raw Materials Act’ (CRMA) aims to boost EU-based extraction and processing of strategic materials (those metals and minerals which are key components of many green technologies such as wind turbines, solar panels, and EV batteries). A dramatic increase in demand is expected as renewable energy production booms globally, and the EU wants to reduce dependence on third countries like China, as 90% of its supplies of critical raw materials often come from a single country.

By contrast, on the UK side, the new climate and energy policies announced on ‘Energy Security Day’ have faced widespread criticism for failing to introduce new public investment or provide concrete regulation to incentivise private sector investment into clean energy technologies.

Some of the regulation also confirms that the UK will continue increasing fossil fuel production, as it maintains some tax relief for new oil and gas development that is not offered to renewable energy projects. This helps highlight how the pursuit of energy security may sometimes be at odds with investment in clean energy sectors.

The UK published its own Critical Raw Materials Strategy and a Refresh before the EU’s CRMA. However, it lacks the specific targets set in the EU’s strategy and, according to experts, the more stringent permitting process compared to the EU will make the UK less attractive for investment in mining and processing.

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