This is Dana Perkins and you're listening to Switched on the Beanna of podcasts, and today we talk about the roles subsidies and tariffs are trying to play in creating world leading industries in clean technology. It's undeniable that the US's Inflation Reduction Act has had far reaching effects on global trade for clean tech manufacturing. This has left the European Union considering the policies they need to keep up.
The EU has historically been a leader in the energy transition, with the world's first emissions trading system and the European Green Deal that dedicated one trillion euros to climate funding. More recently, they responded with the Net Zero Industry Act. However, the EU continues to trail on subsidies and has less aggressive trade barriers than the US. There is six times as much public funding offered to clean tech manufacturers in
the US when compared to the EU. One of the industries benefiting the most is battery manufacturing, with sixty two percent of manufacturing subsidies in the US target battery making. Specifically, other parts of the world are considering how they should adjust their policies in response to which makes sense considering that roughly thirty nine billion dollars of value in twenty twenty three of EU and US clean tech imports could be subject to new tariffs which were proposed the first
half of twenty twenty four. But even in the phase of tariffs, imports from some countries may continue to be cost competitive. So to share what this all means today, I welcome Matthew Hiles from bn EF's Trade and Supply Chains team, and Antoine Wagner Jones, who leads that team. They draw from some of their findings and a recent research report which was titled US Clean Tech Industrial Policy
leaves EU behind for now. Bn EF subscribers can access the full report at BNF go on the Bloomberg terminal, or at BNF dot com. Let's speak with Antoine and Matthew about trade, where we are and where it could all be going andtoon. Welcome back to the show.
Hi, Dana, great to be here.
And matt nice to have you here as well.
Hidana, thank you for having us.
So we've got a theme for today's show. We're going to be talking about on shoring and what we're seeing
in particular in the United States. Although this also involves Mexico and in Europe, and really this story that's starting to unfold over the last couple of years or some real stimulus for some of the industries that we're looking at here at BNEF, whether they're renewables or other low carbon technology like hydrogen, but really where that technology is being built and what companies and countries are allowed to
play in that development. So let's start off with just a quick summary of what the US Inflation Reduction Act is and then we can get to what the EU's response to that is.
So pretty much, the US Inflation Reduction Act launched in twenty twenty two, and really you can think of it as a big job spill, and what it's trying to do is reindustrialized bits of America using new kind of high technology manufacturing areas such as clean tech or electric vehicles and things like that. And there's a bunch of
subsidies that come with it in different forms. And what's really interesting about it is it has a load of money behind it, but it also has what we call local content requirements, which are ways of trying to access this money and trying to limit who can access this money so that it's mostly US firms that get it.
So to what extent, given that the US election is very very near to what extent is the Inflation Reduction Act in these tax codes, have they been written or are we still working our way through them.
So most of the actual detailed legal documents around these tax codes are finalized or very least very close to being finalized, especially Section forty five X, that really important tax credit on the production of all these different clean tech components, and so it'll be really hard for anything to dramatically change in terms of the measure being repealed.
What could happen in an OVEN election, depending on if the Republicans win and depending on how political favor it's after the election, the Republican Party could make the access to these tax credits a bit more tricky, and they could limit other areas of US financing for these solar industries and clean tech industries. But we don't expect to see a big repeal of all of these different bits of legislation that have been put in for now.
And certain aspects of the IRA, like the supplied side incentives for electric vehicles are a lot more prominent and I have been subject to a lot more criticism than some of the manufacturing subsidies, which have behind the scenes been leading to all kinds of investments happening in so called red states where the majority of clean tech factories are actually being cited. So we see things like the
forty five x tax credit. This all gets a bit arcane when you're comparing different types of tax credits, but this particular supply chain incentive subsidy look less vulnerable to any post election targeting of IRA incentives than other incentives, such as ones for purchasing electric vehicles, which have really been front and center of a lot of the Republican criticism of the bill.
Well, now that we've been through the election question at the beginning of the show, we can get on to the rest of the policy stuff, because that one's always on the tip of everyone's tongue. So let's pivot now to the EU. So what's happening in Europe? And you know, before the Inflation Reduction Act even came out, the EU dedicated a trillion euros in this green deal during the decade between twenty twenty and twenty thirty. How is that
getting on? And then really, since the Inflation Reduction Act came out after that commitment, what sort of policies are we seeing in response from the EU.
So the thing about the IRA was that it was trying to reindustrialize a lot of American manufacturing, and the EU's response, the Green Industrial Deal, came a little bit before it, and really its target was to kickstart the economies after the pandemic, and there was a bunch of pandemic related debt that was raised which was used to
finance a lot of these different measures. The kind of exact response to the US's IRA was what the EU is calling the Net Zero Industry Act, and within the Next Zero Industry Act, that EUS targeting a specific amount of annual demand of EU clean tech to be made in the EU by twenty thirty. But what it's not doing is it's not giving different subsidy types or different subsidy pools of funding for clean tech manufacturing like the US's IRA is doing.
What is that target that the Net Zero Industry Act is going for.
So it's going to go for forty percent of clean tech across the board by twenty thirty, but this change is based on what's being manufactured, so it's much higher for areas like batteries, which we're expecting to be about ninety percent by twenty thirty.
And that's the really fascinating thing about the IRAS that has led to all kinds of copycat policies across the world, where politicians have suddenly come under this seeming pressure that they've got to come up with some kind of a
convincing answer to what the US is doing. And we've really seen that in the EU because all of these companies after the passage of the IRA was saying we're going to relocate to the US, and many of them actually did end up leaving Europe and some of them built out some expanded their manufacturing capacity in the US. So the European Commission was under massive pressure to come up with some kind of an answer, and that's something that we've seen not just in the EU, but in many,
many different parts of the world. So actually, this research note that we're going to be drawing from when talking about a lot of the numbers going forwards in this conversation is actually part of a wider project where we're just kind of trying to quantify what's being offered to clean tech manufacturers across all of these different regions of the world that are all sort of starting to think about supply chains differently in the wake of this really seminal US piece of legislation.
Well, and this is all for funding new projects or stimulating certain parts of the economy. The inflation Reduction Acts and these tax codes have really freed up a lot of money from the government, one might say, in order to facilitate this, has the EU and have their targets really also unlocked new funding opportunities.
So the EU has a lot less funding than we're seeing in the US. We're seeing about six times less total public funding go to clean tech manufacturing, and I think one of the key things to take away from this is that the US's subsidies and their incentives offer a lot of visibility for clear tech manufacturers into the future. In the EU this is not the case. So the only part of the EU's funding which we see have a lasting impact was twenty thirty are auction revenues from
the EU's ETS scheme. The other aspect of this is member state funding, and that's funding coming from members eight countries of the EU, that's France, Germany and Italy. Is what we're looking at within the research note that we're referring to, and those are really the ones we focus on because they're the big industrial heavy hitters of Europe.
So I'm going to play devil's advocate here for a second. And I love that you brought up the EU Emissions Trading System because that was established in two thousand and five. In terms of trying to reach climate goals and emissions targets, that actually is a long time ago, even though the
number does start with the two thousand. Do you think that part of the reason that there's lower funding in Europe has something to do with the fact that they had a head start and maybe they've been consistently working on decarbonizing or is it really just that they're not actively pursuing these goals in such an aggressive way as the US is.
So it's really interesting. Is one of the things things that came out after the IRA was this new depiction of what's going on in the EU versus the US and talking about how the US uses more of a carrot, deploying lots of funding but not really having any federal carbon pricing or any kind of a stick when it comes to mandating that companies pursue given course of action, whereas the EU was putting in place aggressive targets that countries were actually trying to strive towards in a more
concrete sense, and putting in place things like a carbon price, which has been quite effective at decarbonizing the power sector in many different areas. Now that's very different, and the emphasis really has been on decarbonizing efficiently and not so much on on shoring supply chains, which is a very
different proposition. When you're making lots of funding available and channeling it towards supply chains, well, that's a good way of getting lots of announcements of the type that we're seeing in the US with over one hundred and ten
billion dollars of clean tech factories being announced. But when you're putting in place the conditions to decarbonize as quickly as possible, that's not necessarily something that's conducive to getting a homegrown solar value chain, because actually it's a lot cheaper to import from wherever that piece of equipment is produced at lowest cost. So different approaches, and the latter
it's got its pros, it's got its cons. But the focus really in the EU hasn't been on nurturing sort of homegoing solar manufacturing, where we're starting to see a bit more of an emphasis now on reviewing that and seeing whether or not the EU wants to get more serious about trying to put in place that production capacity not just for generating clean atricity, but also the equipment that goes behind it.
That's a great and really important distinction to call out, which then brings us to these tariffs. Let's talk about the EU and the US and what the impact has been of the tariffs that are in place. So what's happening in the US, and I guess how much success is it having and what's it targeting? Where where are we no longer seeing imports from these supply chains coming from.
So the US first put tariffs on clean tech related stuff back in twenty twelve, and that's when we can really see this game of cat and mouse kickoff. So what it did is it put tariffs on Chinese solar equipment. Those are solar modules and solar cells. So after this long running game of cat and mouse on solar what we're seeing now is tariff's being imposed on other areas
of clean tech to quite a significant degree. So we're seeing one hundred percent plus on evs, and it is likely to stop a kind of avalanche of cheap Chinese evs coming in which have benefited from just better competition out in China and its advanced market that it has there.
We're also seeing batteries being affected by this, and this is likely going to impact battery energy storage projects from about twenty twenty six when these tariffs will be imposed, and it's still unsure whether China, that's low cost of their equipment produced, will negate these tariffs completely.
And yeah, it's really interesting because right now we've seen this real political prominence of evs as the focus of a lot of tariffs that we're seeing discussed around the world, whether it's in we'll get to the EU, but in Canada and the US, et cetera. But right now, there really aren't that many Chinese evs being exported to the US.
So the fear is exactly has Matt said to stave off future imports given the lack of affordable, low cost competitive models that are being put out by, for example, some the big three manufacturers in the US when it comes to auto making. So it's more of a forward looking thing, whereas with batteries, it's a bit different. The US does import a lot of Chinese batteries, but the tariffs being set are a bit lower than for evs.
And actually, what we've seen is quite interesting is that even though these these are going to be imposed in twenty twenty six, even though they're going to make stationary storage projects more costly, the continued decline in battery prices worldwide, it looks like we'll offset that tariff and will actually continue to make Chinese batteries more cost competitive with US batteries.
But at the end of the day, these batteries are sort of understanding what's happening on the tariffront, it's sort of a moving target. We've seen extremely high blanket tariffs announced by the Trump administration at various levels for the whole world of the world or just focusing on China, and that level of uncertainty makes it very hard to sort of assume what tariffs are going to be two
three years from now. And overall, this situation where we're just generally seeing a rising tide of tariffs, with the Trump tariffs being kept under Biden, with these then expected to be built upon just basically means that there's a stronger business case for building in the US because that's perceived as the one way that you're going to be reliably able to tap into one of the world's fastest growing markets. When it comes to a lot of this clean technology.
How have some of the clean technology manufacturers who are experiencing these very low prices, how have they been able to circumvent some of these tariffs and have they set up production in different countries and really worked around it. How's that unfolded.
So one of the things we've seen is Chinese manufacturers moving to Southeast Asia. And what's really interesting about this is the US extended their tariffs to cover Chinese cells being produced in Southeast Asia and getting exported into the US. What's recently happened is the US is investigating more tariffs on Southeast Asian production of modules themselves.
And I mean this is something that we might end up seeing in other sectors as well. So these US tariffs on SOLO have made SOLO a lot more expensive in the US. They haven't spurred much domestic manufacturing, although there are announcements now with the provision of subsidies under the IRA. But the question is if these tariffs are
then applied to evs. For example, are we going to see the same thing, Are we going to see the likes of BYD or different Chinese manufacturers relocate their production and begin to export from other markets into the US as a way of circumventing those tariffs. It's a complicated picture because of some of those local content rules that we mentioned as well, which specifically restrict the availability of certain subsidies to companies or to certain models of EVS
that are using parts produced by Chinese companies. So it's not that simple. But what we've seen in the US is an enormous amount of cost and complexity for very little apparent benefit when it comes to the key goals that you could conceive of when these tariffs were drawn up.
And the risk is that we might end up seeing a similar trend with these new sectors, whether it's batteries, whether it's evs, of a lot of complexity, a lot of cost, a lot more lawyer fees for example, for some of these for some of these manufacturers who might spend a lot more time in DC talking to policymakers about their priorities at the cost of certain efficiencies that you might hope for when you're thinking about the energy transition and how to make it happen as quickly as possible.
So what sort of tariffs are we seeing in the EU.
So the EU's tariffs are a lot lower across clean tech, and that's really because the EU has had a more liberal approach to trade for a long time. The way the block has been set up kind of incentivizes this. But the big change that's happened recently is that EU has announced additional tariffs on imports of Chinese evs. So the maximum tariff on imports of Chinese EV's was decided earlier in October at forty five point three percent, and the impact this is likely to have will be vastly
different between different firms. So what the EU did is it put this maximum tariff on Chinese production, put specified specific rates for specific companies. One of the really interesting things we see about this is someone like BYD their rates seventeen percent, and actually the margins that they have when importing when exporting cars into Europe will likely mean that this tariff will not have much of an effect on their sales into Europe.
Can you explain why equipment coming from China, in the simplest sense, is so much less expensive.
Enjoying up a lot of these tariffs and the rational behind them. There's been a lot of focus on the provision of subsidies to manufacturers in China, which have exist in a very clear form for demand of evs, for example, in the past, and there's been certain low cost loans, or certain tax deferrals, or various incentives that have been and continue to be given to Chinese manufacturers. But there's
that's really been a big part of the conversation. But what it's done is stop sort of looking at the fact that the picture has evolved a lot since then, and now what we really see is that there are several factors that are contributing to the competitiveness of Chinese evs, and they are things like scale, for example. They are things like supply chains being extremely efficient and clustered in certain Chinese provinces. They are things like an intense level
of competition. As China's EV sales have rocketed, but production has in some cases for batteries or solar exceeded demand, and then that really drives a need to find new markets for this equipment. So there's this extreme level of competition in China, which is really one of the primary drivers for companies like CATL like Bid engaging in price wars against each other to try and get market share
and retain it. And a lot of these companies are sort of still spending a lot on R and D and behaving like scrappy startups where you'd expect them to be resting on their lawrels as incumbents, and that's something that's quite hard to just to and when you look at the fact that actually what they're providing, if it's electric vehicles, for example, are models that are in some
cases quite premium models. When you look at the Neo for example, and what they're offering that compare favorably to some of the Western brands and are far more advanced when it comes to certain bells and whistles with digitalization. Then it becomes quite difficult to make up that lost ground. And I think one of the hard things is that it's about price, but it's not just about price.
So these tariffs, if they are then spurring on domestic manufacturing in the US and do a lesser extent, but also the EU, let's say they become successful, are we going to see global cost competitiveness that's ultimately going to result in the tariffs being removed or will they have to exist forever.
That's a really key question, and actually it's one of the ways that people think if a policy, an industrial policy, has been successful, is if the product can become export competitive. I think it's very fair to say that you use battery and ev making ecosystem has a long way to go before it can become cost competitive with many of
the Chinese producers. But at the same time, a lot of the big EU companies, that especially the German companies, have got a vast number of factories out in China through JVS, which they can learn from people who are at the cutting ends of the industry. So, for example, Volkswagen has forty factories out in China and it's one of the reasons why it was quite heavily against the
imposition of tariffs because its production was affected. But really those factories out in China can tap into, as we said before, one of the most advanced domestic markets and really learned that way.
And I think that's a really key point is just the fact that it's very hard to see a scenario where you managed to scale Western manufacturing to the extent that it becomes suddenly competitive with Chinese manufacturing, the scale
is just not there. And even if you're ring fencing the economy and providing this sort of infant industry protection whatever you want to call it, to provide a mix of subsidies in tarifs and local content rules to then nurture the creation of supply chains across Europe and North America, it's going to be extremely hard to catch up and to reach those economies of scale and that level of innovation that we've seen elsewhere, especially if that protectionism comes
at a cost of shielding firms from the most competitive firms and their technologies. And that means that what we could end up seeing is that, Okay, there's some onshoing that's successfully happening in North America, but actually, when we look at market share and many of the fastest growing economies the world over, and especially in emerging economies, those are regions that will be dominated by Chinese manufacturers for
years to come. And what's really interesting is we're also seeing, you know, BYD has announced car manufacturing facilities in at at least eight countries the world over, This is an opportunity that's already been seized with seeing booms of imports
of solar equipment from China in places like Pakistan. The world is moving really fast, and just looking at okay onshoring regionally and self sufficiency is going to be quite a limited lens through which to appreciate the fact that, actually, yeah, things are looking pretty tough when it comes to catching up.
So you've given some examples of how Chinese companies are responding. You cited c ATLBYD, But give me some examples on where it's going right or potentially wrong in the US and in Europe? Are there some standouts examples there?
We've Europe has had a pretty successful story of scaling as a battery manufacturer. We've seen a lot of investments being made in mainland Europe with facilities coming online, but they've been largely brought online by companies like lg As a South Korean company, or Tesla, an American company, or even Chinese manufacturers. What we haven't seen as much of
is a scaling of manufacturing from European headquartered companies. There's one question in Europe, which is, well, should we be just focusing on scaling manufacturing with companies that know what they have more of a track record, like these South
Korean companies for example. And in the US, is it really a good idea to have this environment where we've made it very hard for Chinese manufacturers to invest, which is the case currently where there's a number of solar and EV and battery manufacturing investments that are being made or have been announced by Chinese manufacturers, but they've be met with a lot of uncertainty and a lot of political pushback and several proposed bills which would limit the
availability of funding to a much wider extent than is the case today. So this is another question is when we look at countries that are industrialized in the past, they've invited the most advanced manufacturers and they've learnt from them. And this is even something that we saw in the
eighties in the US with Japanese carmakers, for example. And the question is is it really possible to not just catch up on this massive lead that China has today, but to also do so while only supporting locally grown manufacturers. And that's a pretty challenging proposition.
Now, we've talked about queen tech as a theme but really the exact samples that we've gone through have really been focused on electric vehicles and solar and I think I'm the one who brought up hydrogen. Can you just give an idea of what the scope is? How wide is that basket of companies within clean tech?
So this is one of the central things that we had to address when we were doing this project. So we're trying to look at the global kind of shifting sands around clean tech, and clean tech is just vast. So the amount of sectors within it, you can broadly break up into eight or so sectors, but the actual components within each of those sectors, the list is incredibly long, and actually you can see this in a lot of the policy documents and a lot of the tariff documents.
When they're talking about what they're trying to target, it's
often covering pages and pages and pages. So the reason why we chose solar, evs and batteries as our initial main ones that we're going to focus on, or that we might actually add more areas in terms of geographic scope and also clean tech scope into the database that we're building, is because there's been a massive push on these three areas and in China they're called the New Industrial Forces, and it's a lot of the political focus and a lot of the economic focus around clean tech
is within these industries.
So this show has largely been a comparison around the US in the EU, and what I'm really hearing here is that in the US things seem to really be humming at a pretty fast speed, and the EU may have a long way to go. What are we seeing in the EU and what do we expect to see in the future.
One of the most interesting things is that on shoring is at the top of the EU's agenda. So as vonder Lyon goes into her second term, we're expecting to see some new policies under what's being called the Clean Industrial Deal, but we're not yet sure as to what those policies are. So one of the things that vonder Lyon did towards the end of her last term was she got Mario Dragio, is the ex ECB president and also Prime Minister of Italy, to look at sweeping structural
reforms needed to make the EU more competitive. His report came out last month. We're expecting to see a lot of policies coming out in the next presidential term, and it's going to be interesting to see how those policies are framed. Are they going to be production linked like we're seeing in America, Are they going to be to do with capital expenditure, which is more traditional EU grant type of funding, or are they going to be something in between that we haven't yet seen.
And what's really interesting about this Mario Dragy report, which was released quite recently still is which really lays these priorities for the European Commission going forwards, is that it really relies on this enormous amount of new funding that is required. So it basically says we're going to need to pursue all of the EU's very strategic priorities eight hundred billion euros per year of funding private and public.
But that is an enormous amount, and it's to be funneled into all kinds of new priorities which are supposed to get a lot more money, such as military pursuits
as well as things like onshore and clean tech. So already that seems pretty challenging, and it's even more challenging for the fact that it really relies on this central premise, which is that your EU member states are going to get together like they did during the pandemic, like we've talked about previously, and are going to raise common debts once more to have this big new packet of funding that's available for channeling into these clean energy supply chains.
And there doesn't really seem to be the political will to do that. There doesn't really seem to be any kind of appetite from the likes of Germany or some of the more fiscally conservative member states to actually engage
in that kind of common raising of debts. So what we're going to end up seeing is probably more the same, and which is basically a very constrained sort of environment where what we've seen to date and what we'll probably continue to see, is a reshuffling of existing pots of money like the Innovation Fund, which are already spread out across lots of different purposes and aren't particularly targeted when it comes to the technologies that the EU is trying
to support. So the US funding extremely targeted. You've got specific tax credits for producing battery cathodes, for example, as in the EU, you've got these different pots of money that are available for doing just about anything, and it's extremely unclear as to what's going to go where, and that pot is a lot smaller and it's made up of many, many more parts, so it's much harder to decipher.
So the EU is really structurally constrained, and it's really interesting to compare the two because basically, going forward, there's a lot of ambition in the EU to make grand pronouncements and do more, but it's tough to do so within the existing environment. In the US, there's this looming sense that the IRA might get challenged, but we might not see it be changed as much as a lot of people are fearing in terms of some of the
incentives that are important to manufacturers. So actually we could see this picture remaining quite stable going forwards. And the one more uncertain element is this question of tariffs, where the EU's really broken away from its approach in the past and is starting to be a bit more assertive when it comes to be putting in place barriers to trade with this new ev tariff that we've just mentioned.
The question is going forwards, does the EU choose to do so for other technologies and batteries would be the really obvious one, and that's already what a lot of lobbying groups and what industry is already calling for in the EU in from many quarters, we're seeing talk of imposition of new battery tariffs that hasn't really become concrete
in any sense. We've already seen a lack of cohesion when it comes to these EV tariffs, for example, But there's still a lot of uncertainty and there's still this big looming question of is the EU, which has just started to change its tune when it comes to protectionism, is this going to be the beginning of a trend that we see going into the future, and that's going to lead to a lot of manufacturers starting to get more serious about setting up in the EU or in
areas where they think they're going to be able to export into the EU in the future.
So, Matt Antwine, thank you very much for keeping an eye on tariffs and subsidies, and we will continue to watch the upcoming elections and what happens with policy makers in both continents as they look to on shore more of their manufacturing across clean tech.
Thanks so much, Dana, great to be here, Thank you very much.
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