Europe could produce parts for the supply chain, in exchange for importing US energy
Heated trade tensions between the United States and the European Union could cool if both make concessions on hydrogen. Washington’s Inflation Reduction Act (IRA) includes subsidies that could slash the cost of the green, sustainably produced version of the item by 2030. If the EU can negotiate better access to the US supply chain, while attractively managing its future import needs, could help defuse a broader transatlantic dispute.
EU leaders vowed on Friday to act but are not much closer to delivering a forceful response to the IRA. They pledged to ease state aid rules, offer tax breaks and investigate a solidarity fund to provide “timely and targeted” aid to key industries, as part of their response to the IRA. New proposals are expected for their next meeting, on March 23 and 24.
Financing is the most contentious issue in the EU debates. German Chancellor Olaf Scholz said that Europe must avoid a subsidy race. The president of the European Commission, Ursula von der Leyen, declared that Europe must respond to subsidies granted by China, as well as new programs from the US. IRA includes a wide range of tax breaks and subsidies to encourage the switch to hydrogen produced without fossil fuels.
In any case, both the US and the EU want to boost local production of green hydrogen to reduce future emissions and prevent China from dominating an increasingly important global market, as it has done with solar panels.
99% of the almost 100 million tons of commercial hydrogen production per year comes from antiquated fossil energy sources. By 2030, the International Energy Agency forecasts a global production of more than 175 million tons, of which 35% will come from green hydrogen. This uses zero-carbon, renewable electricity to split water through electrolysis, producing the same element but without harmful emissions.
Both Europe and the United States are aware of the role that green hydrogen can play in decarbonizing sectors as complicated as heavy industry and the steel industry. That’s why Europe has made it a centerpiece of a new range of grants for Major Projects of Common European Interest. Thus, it will boost production, transit and storage infrastructures.
However, Europe needs to import the same amount as the 10 million tons it intends to produce domestically by 2030. This opens the door to haggling: if the United States helps EU manufacturers to provide a wider range of parts and machinery to the supply chain, Europe could reciprocate by providing a ready market for the final product.
Europe needs a solution to stop its big companies simply moving factories and capital across the Atlantic to take full advantage of the US. The future market for electrolysers and other green equipment will be huge, given the anticipated demand.
The US incentive to cooperate is more strategic. Easing tensions with Brussels would soften diplomatic relations and prepare a rich market full of customers. Since hydrogen is an industry for the future rather than a current source of jobs and growth, both sides can make concessions and claim victory at the same time.
With the war in Ukraine and the rise of China as a global competitor, the US and the EU have more incentive than ever to maintain friendly economic relations. A hydrogen deal could be the breath of fresh air that strained trade relations need.
