The Inflation Reduction Act is the single largest piece of climate legislation in human history. It also employs a different philosophy to prior European attempts at climate policy. This fundamentally different epistemology is primarily responsible for the policy's success while European attempts have languished behind. Dr Friedbert Pflüger writes. 

Climate policy poses an epistemic question. It asks us what we can know about the future—and whether we are in a position to make a judgment about it. How do we govern and regulate businesses given the inherent uncertainties of the energy transition? How can we know which technologies will allow us to effectively and efficiently fight climate change twenty years down the line?

The United States and Europe provide two competing responses to these questions. In comparing America’s Inflation Reduction Act (IRA) with the past two decades of European climate policy, we can gain a better sense of how to meet our future economic and climate goals. Europe’s subsidy approach and the United States’ tax credit approach demonstrate a fundamental disagreement about epistemology, where market knowledge arises, and the limitations of policymakers.

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Given Germany’s former dependence on Russian gas, the importance of supporting a wide variety of energy technologies has never been more apparent.

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 Direct subsidies characterize much of Europe’s climate policy. However, wealthier European nations can doll out massive subsidies while poorer ones can barely fund any substantial climate policy. The EU’s recent relaxation of state aid regulations will only amplify this effect. In doing so, the EU fragments the European single market, which undermines the uniformity prized by green investors in Europe.

To evaluate European climate policies, we ought to look back to the creation of Germany’s Renewable Energy Sources Act (EEG) in 2000. The EEG was a bold, admirable, and visionary idea for the energy transition. Its subsidy provisions kickstarted a worldwide revolution in solar energy. But, when more than €200 billion in subsidies are on the table, we must always ask—could we do better?

The EEG did not fully utilize finance to extend its reach, which limited its leverage and ultimately the scope of the program. Considering the vast extent of the subsidies, the reduction in carbon emissions were a comparative pittance. By relying on subsidies to distribute funds, the EEG had to predict what technologies would be most viable in the distant future. Furthermore, once these decisions were made, they were locked in, limiting maneuverability in the wake of future developments. And in its subsidies, the EEG did not bet on all the right technologies. For instance, it predicted that geothermal energy would be more effective it has been, and it under subsidized offshore wind. It did not predict the extent to which the cost of solar energy would drop over the past two decades. These shortcomings combine to show both the extent and scope of our policies were inadequate. We should strive for ways to incentivize the energy transition without narrowing our potential sources of energy.

Moreover, if we only subsidize a small set of renewable technologies, there can be grave geopolitical consequences. Energy security is a vital element of national security and geopolitical self-sufficiency. Given Germany’s former dependence on Russian gas, the importance of supporting a wide variety of energy technologies has never been more apparent.

Ultimately, ad hoc subsidies do not provide an effective framework for energy policy. This is a lesson Europe should have only had to learn once. Now, with the United States’ Inflation Reduction Act, Europe is having to learn it twice.

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