US and EU 'IRA': Made in China?
The EU’s efforts to catch up with the US’s massive move to support strategic green industries, jobs and clean technology signal a new era, writes Jupiter’s Environmental Solutions team.
Last summer, new legislation providing the greatest support for environmental solutions1 in the history of the United States passed into law. Yet you would hardly have known it from the name.
The Inflation Reduction Act of 2022 (IRA), signed into law by President Joe Biden on 16 August 2022, was originally billed as the Build Back Better Act, but neither name reflects the true intentions behind the law – combating climate change and reinvigorating US industrial and strategic policy in the process.
Not only does the IRA give the US a meaningful chance of meeting its greenhouse gas2 reduction targets of 40% below 2005 levels by 2030, but it also presents an unprecedented catalyst for companies in the environmental solutions space.
This could, therefore, be a good time for investors to be considering investment trusts as a buying opportunity.
‘AN UNPRECEDENTED CATALYST FOR COMPANIES IN THE ENVIRONMENTAL SOLUTIONS SPACE’
The IRA provides $369 billion of spending over ten years, including $158bn on clean energy, $13bn on electric vehicle incentives, $14bn in home energy efficiency upgrades, and $22bn in home energy supply improvements.
Moreover, there is upwards of $37bn for simple, effective advanced manufacturing incentives that have already begun to shift the corporate investment landscape.
These incentives go a step further by squarely aiming tax credits at drawing corporate and investment capital to the US. ‘American taxpayer dollars ought to go to American investments and American jobs,’ was how John Podesta, senior advisor to President Joe Biden, recently put it.
In response, the EU’s Net-Zero Industry Act and European Critical Raw Materials Act, both part of a Green Deal Industrial Plan and dubbed the ‘EU IRA’, are designed to prevent the bloc falling further behind.
The proposed EU legislation sets a headline benchmark of ensuring that at least 40% of low-carbon technology needs are met by manufacturing within the EU by 2030. What stands out to us is that while the debate rages about whether this is feasible, buried in the documents is an about-turn in the European approach.
Recognising the US policy is more carrot than stick, the EU drafts make reference to a largely overlooked framework that offers ‘matching aid’ to companies “where there is a real risk of investments being diverted away from Europe”4.
This ‘Temporary Crisis and Transition Framework’ (TCTF), announced on 9 March, came two days after Volkswagen put the brakes on its plans for a European battery plant, citing up to €10bn of tax incentives available in the US over the lifetime of a similar factory.
‘LESSONS LEARNED’
It would be easy to think that an increasingly protectionist3 mindset will ease over time, but we think this is less likely to happen in clean technology markets.
Both the US IRA and its European equivalent refer explicitly to ‘lessons learned’.
The European drafts highlight the risk of replacing an over-reliance on Russian fossil fuels ‘with other strategic dependencies that could impede our access to key technologies and inputs for the green transition.’5 Without doubt, these strategic dependencies already exist.
‘CHINA ACCOUNTING FOR 90% OF GLOBAL INVESTMENTS IN NET ZERO MANUFACTURING FACILITIES’
The Net-Zero Industry Act refers directly to China accounting for 90% of global investments in net zero manufacturing facilities.6
This remarkable statistic can be traced back to a phenomenally successful Chinese policy decision over a decade ago. On October 10, 2010, China issued the State Council’s Decision to Accelerate the Development of Strategic Emerging Industries, later incorporated into China’s 12th 5-year plan in 2011.
In amongst the seven strategic emerging industries are five that the US and Europe are now directly aiming to nurture and protect.7
Fast forward to today, China dominates several environmental technology supply chains, boasting the largest global manufacturers and suppliers of critical components such as batteries and solar PV modules. Having started earlier, China has also built sufficient momentum to relax government support for such sectors. For example, electric vehicle (EV) subsidies introduced in 2010 have been reduced over time and ended completely on 1 January 2023, yet the EV market in China is expected to keep growing.
EMBRACING CHANGE
We see three implications of this changing landscape. The first is that this is further evidence of what we believe is a watershed moment where environmental solutions are no longer deemed peripheral, but instead integral, to future economies and markets. The second implication is that a more protectionist landscape doesn’t signal the start of a slow-down in the rate of growth for environmental solutions in real-world markets.
‘ENVIRONMENTAL SOLUTIONS ARE NO LONGER DEEMED PERIPHERAL, BUT INSTEAD INTEGRAL, TO FUTURE ECONOMIES AND MARKETS’
‘ENABLING TECHNOLOGIES AND SOLUTIONS ARE STRATEGIC GROWTH INDUSTRIES IN A CHANGING WORLD’
Instead, the US IRA represents a recognition that the pace needs to accelerate dramatically to meet long-term climate goals, and that the enabling technologies and solutions are strategic growth industries in a changing world.
In the same way that companies drive competitive forces that accelerate change in market sectors, competition amongst the US, EU and China for leadership in environmental solutions has the potential to give a much-needed boost to the rate of growth across clean energy, green buildings & industry, and green mobility solutions, for example.
The third implication is that there will be winners and losers in this more fragmented – even confrontational – competitive backdrop. Establishing a leading position across the US, EU and Asian markets is becoming more challenging for environmental solutions companies, and so identifying companies positioned to benefit from the opportunities of changing policy landscape, while navigating the risks, is paramount for long-term outperformance. Thematic investment is an acceptance of, and appetite for, the future to be different to the past.
By capturing structural growth opportunities through economic cycles, thematic investing provides investors with an opportunity to seek above-market returns over the long-term. While the structural growth opportunity is accelerating, so too is its complexity, and we believe this gives specialist active managers an advantage.
1. Environmental solutions include technologies such as clean energy (e.g. wind and solar power), reusable products, energy saving in buildings and transport, replacements for plastics, etc.
2. Greenhouse gases include carbon dioxide, methane and nitrous oxide. They contribute to the warming of the earth’s atmosphere.
3. Protectionism is a government policy of protecting domestic industries, for example through tariffs on imports. Its opposite is free trade.
4. Temporary Crisis and Transition Framework (europa.eu)
5. EUR-Lex - 52023PC0161 - EN - EUR-Lex (europa.eu)
6. Factsheet: Net Zero Industry Act (europa.eu)
7. USCBC Recommendations on China’s Strategic Emerging Industries (uschina.org). The seven strategic emerging industries were: (1) new-generation information technology, (2) energy-saving and environment protection, (3) new energy, (4) life science, (5) high-end equipment manufacturing, (6) new materials, and (7) new-energy cars.
Jupiter Green Investment Trust PLC >
This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.
Past performance is not a guide to future returns. The views expressed are those of the author at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.
Jupiter Asset Management Limited (JAM) - The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, authorised and regulated by the Financial Conduct Authority. Jupiter Asset Management International S.A.
(JAMI, the Management Company) - 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg, authorised and regulated by the Commission de Surveillance du Secteur Financier.
No part of this document may be reproduced in any manner without the prior permission of JAM or JAMI.
Read the latest edition of DIY Investor Magazine
DIY Investor Magazine
The views and opinions expressed by the author, DIY Investor Magazine or associated third parties may not necessarily represent views expressed or reflected by EQi.
The content in DIY Investor Magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.
The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.
DIY Investor Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA.