IPOL | Policy Department for Economic, Scientific and Quality of Life Policies
6 PE 740.087
A Hertie School study by Jansen, Jäger and Redeker warns that USD 370 billion for security and climate
change programs for the next ten years - a number based on an estimate from the Congressional Budget
Office (CBO) - may be too conservative. Should industries request more than the CBO calculated, then the
amounts would increase in a dramatic way. In a Brookings study, Bristline, Mehrota and Wolfram
warn that
up to USD 1.200 billion dollar could be reached because of non-capped tax relieves, as incentives in the
energy markets span the entire energy sector, from producers of raw materials to end-use consumers, and
will set considerable new forces in motion.
Another danger to the IRA programme is political. First, through Republican opposition to additional debt
expressed during the bi-annual debt ceiling negotiations
. It was only in May 2023 that an agreement was
reached. Failure to agree on a higher debt ceiling, the US would have defaulted on its debt, with potentially
deep consequences on the IRA. Second, an electoral defeat by the incumbent president would also impact
IRA in a major way. In view of the fundamental divergences of views on climate change, it should be
expected that a Republican administration sets new priorities and discontinues Biden’s climate
programmes, or at least cuts them to size. IRA’s long term future cannot be taken for granted.
A possible Achilles heel in the EU programmes stems from trying to establish permanent funds that are
using a temporary source of income. The RRF is planned to dry up at the end of 2026, when the last RRF
disbursements will be made. The RRF was established as an instrument that is exceptional, capped, time-
limited, and a one-off. There is also cognitive dissonance at work, as the RRF was specifically established to
soften the blow to the economy due to the COVID-19 pandemic and its lock-downs, which occurred in the
2020-2021 period, while the RRF subsequently morphed into something different, trying to satisfy further
goals, such as digitalisation and combating climate change, where the time horizon goes well into the
medium and long term. Strictly speaking, the RRF made its first disbursements when the COVID-19 induced
economic downturn it was meant to counter was already over.
An Achilles heel common to the US, the EU and the Member States’ programmes is inflation and the
increase in interest rates, which make the taking up and servicing of debt more difficult for high-debt
countries, and more expensive for all countries. When the RRF was launched in 2020, interest rates were near
zero and the mantra of ‘low for long’ was prevailing. Nearly unlimited access to cheap capital seemed to be
certain. Despite warnings
, many EU governments felt that there was no limit to increasing debt, mainly due
to the ease by which sovereign bonds could be monetised through the central banks’ quantitative easing
(QE) programmes, as well as near-zero costs for servicing that debt. Now, three years later, rates are
expected
to stay ‘high for long’. Servicing debt is getting substantially more expensive. Already, high debt countries
are being downgraded by credit rating agencies, most visibly France in April 2023, which Fitch
justified by
citing amongst others its relatively large fiscal deficits and only modest progress with fiscal consolidation.
How do the US and EU programmes compare in numbers and quality?
It should be borne in mind that an exact comparison of numbers is more than difficult, almost impossible.
This is not only due to the divergences in time horizons and instruments, especially tax brakes as opposed
to debt financed funds, but also to open issues such as the known unknowns of the uncapped uptake of tax
brakes. Further, there are the unknown unknowns of the political struggle in the US concerning the recurring
debt ceiling negotiations, as well as possible changes of administration following elections, which may put
an abrupt end to some key instruments, especially those involving taxation and subsidies. In the EU, the
unresolved issue of large scale financing of funds beyond 2026, thus the ability to create or not permanent
funds, provides for another unknown. In addition, even if the financial aspect may be solved, there might
not be a consensus amongst Member States for creating these funds in the first place.
It has been argued
that new funds, such as a European Sovereignty Fund, would need to draw from existing
EU funds for clean-tech industries, by unifying existing funds. This would make bureaucratic sense, but will
fall short of what the Commission initially promised.