A European Response to US IRA: How Europe can use its soft and financial powers to build a successful electric vehicle value chain

The US Inflation Reduction Act (IRA), launched in August 2022, has changed the rules of the industrial game and might make companies re-prioritise the current announcements in Europe towards the US. For EVs and batteries, the risk is that the projects – and therefore Europe’s ambition – gets delayed. For critical metals and their processing, where Europe is only starting to catch up, the risk is that investments would simply go elsewhere. In just a few months since the launch of the US IRA, investments into battery factories, new mines and electric vehicles have mushroomed in North America. This is in response to the requirement that 40% of battery metals need to come from the US and half of all battery components made in North America from 2024 for the full EV tax credit to apply. The battery supply chain of an electric car will receive up to USD 50 of subsidy per each kWh of battery, or over a third of the total battery costs today. The concern with the US IRA is not the electric car (EV) tax credits, since the EU is not expected to export large numbers of electric cars in the foreseeable future (if that changes – higher EV trade tariffs shall be introduced). Instead, the real risk is the long-term and bankable production tax credits, worth hundreds of billions of dollars, given to batteries and the critical metals supply chain until 2032. As the capital requirements to ramp up cleantech at the speed and scale required are enormous, Europe should look at its own funding to make production attractive. That’s why to accelerate the development of truly European green industrial policy, the European Sovereignty Fund (ESF) should be established as a matter of urgency and equipped with financial firepower in the scale of at least EUR 350 billion via joint debt issuance from the European Commission. The ESF should focus on scaling excellence in renewable energy (not fossil fuels!), electromobility and green battery supply chains, i.e. target the sectors directly affected by the US IRA.