Analysis: US Inflation Law and European Decarbonization Policy - A Financial Expert's View

Analysis: US Inflation Law and European Decarbonization Policy - A Financial Expert's View

According to a report by www.merkur.de, US President Joe Biden has passed the so-called Inflation Reduction Act (IRA), with which he wants to provide billions in subsidies for renewable energy in order to convert the US economy to renewable energy and thereby fight against climate change. Prof. Dr. However, Stefan Kooths, Vice President of the Kiel Institute for the World Economy, emphasizes that the current European proposal for decarbonization policy is not sufficient and does not make a real contribution to the fight against climate change. He argues that the special feature of decarbonization policy lies in the global coordination problem and does not require comprehensive state control of economic activity.

The analysis by Prof. Dr. Kooths points out that decarbonizing the economy does not require a new allocation process, but rather that global coordination of emissions pathways is crucial. He argues that subsidies for zero-emission production processes influence the CO₂ price and thus balance two instruments of decarbonization policy against each other. This means that transformative industrial policy makes the global coordination of emissions pathways more difficult rather than easier.

Finally, Prof. Dr. Kooths points out that a policy that attempts to control the economic consequences of decarbonization through industrial policy interventions promises little success. He highlights the benefits of a price-based approach to decarbonization compared to an industrial policy approach. This analysis shows that the EU's planned actions on decarbonization policy may not be sufficient to achieve the desired goals and that alternative approaches should be considered.