John Kerry is right
The World Economic Forum took place last week in Davos, Switzerland. From the United States, Senator Joe Manchin was in attendance. Senator Manchin was the architect of the Inflation Reduction Act (IRA), which contained hundreds of billions in subsidies for green energy projects in the U.S. and now has European leaders scrambling to decide how to respond. It is my opinion the EU should respond in kind, with all the incentives needed to speed up the transition from fossil fuels while also protecting European industry.
Reports from Davos said that the Senator was surprised that the IRA had been such a newsworthy event in Europe. He even admitted to journalists that he hadn't been aware the U.S. and EU don't have a free trade agreement, thus cutting EU countries out of the benefits of the IRA.
French President Emmanuel Macron confronted Sen. Manchin in Washington last year and told him he was hurting his country. He has continued to be vocal about the need for Europe to counter the U.S. stimulus or risk losing European industry to North America. While I think Macron should understand that there was never malicious intent behind the crafting of the IRA, this is a pivotal moment that the continent should take advantage of. Take U.S. envoy John Kerry’s advice and match U.S. spending.
The European economy has proven to be much more resilient than many feared last fall. Germany and France are no longer expecting to go into recession, and the worst of the energy crisis appears to be behind us, with gas storage levels remaining high. However, the war in Ukraine will not be ending anytime soon. The Netherlands is still going forward with plans to shut down Europe's largest gas field by October. Also, Qatar's expanded production capacity is not expected to come online before 2026. Meaning the LNG market will be very tight for the foreseeable future; thus, while Europe has learned how to make do without Russian gas, it will be costly.
It is these conditions that may call for unprecedented state aid. The market for electric heat pumps to replace natural gas boilers is expanding rapidly. In Germany, there was a 53% increase in sales to 236,000 units in 2022. Sounds great, but millions of homes across Europe need to make this change in the coming years. Electric induction cooktops are in 36% of homes across Europe. Every home that no longer relies on gas for heating or cooking reduces Europe's demand for LNG.
Additionally, Bloomberg reported that renewable energy sources saved the EU at least 11 billion euros between March and September 2022. The EU has already doubled the amount of renewable power it has in the last 18 years, but now is no time to get complacent. The fundamental reason European political leaders are so upset about the IRA is that the combination of Europe's high energy costs and the American subsidies could make EU industry uncompetitive. The best way to mitigate that is with cheap and limitless green electricity.
