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Commentary

How the US Is Running Away with Green Investment

In the race to net zero, Victoria Judd, Counsel at Pillsbury Winthrop Shaw Pittman, explains how the US is lapping the UK and EU in stimulating its green economy.

With the looming Paris Agreement goal of reducing greenhouse gas emissions by at least 43% by 2030, nations are adopting different approaches to stimulating their green economy and encouraging sustainable investment.

Indeed, data provided by the International Energy Agency and the Organisation for Economic Co-operation and Development (OECD) indicate that up to US$6.9 trillion of annual global investments may be required to achieve the emissions reduction aims for 2030, with possibly 70% coming from the private sector.

Despite its lauded Green Taxonomy, which should position the EU to rival the US, limited State aid, ambiguity of the legislation, and a lack of incentives and legal obligations imposed on companies, has resulted in limited uptake from investors in Europe and delays in tangible action. The UK, meanwhile, is trailing behind in terms of green investment. Amidst government back-pedalling, recent figures have revealed that the UK’s renewable capacity has fallen to an average increase of 4.45% in the last three years, compared with 9.67% globally.

Conversely, the robust US Inflation Reduction Act (IRA) has provided significant and immediate opportunities to invest in renewables. In fact, since the unveiling of Washington’s landmark US$391 billion package of climate subsidies and tax credits last year, American clean technology start-ups have attracted over double the amount of investment when compared to their European counterparts. With IRA measures significantly enhancing the allure of the country to investors, could there be an exodus of developers across the Pond and out of Europe?

The European approach

Since adopting the EU taxonomy rules three years ago, it is safe to say that the taxonomy alone will not yield the desired impact originally envisioned by the European Commission (EC).

While it was hoped that the taxonomy would encourage funding via State aid, continued ambiguity around the laws and bureaucratic red tape has led to a slow uptake in Europe. For example, although hydrogen was one of the first initiatives covered by the EU taxonomy, it took two years before 13 out of the 27 EU member states finally approved State aid. Consequently, the potential for investment during those initial years was lost.

A lack of legal obligations and readily apparent financial benefits for companies being taxonomy-aligned is also holding investment back. In a landscape where compliance with the EU taxonomy is, for the most part, voluntary, and where financial benefits are not readily apparent, it is not surprising that Europe is finding it hard to incentivise green investment.

A good example of this is sustainable aviation fuels (SAFs) investment.  While the aviation industry contributes around 3% of global emissions, a figure projected to triple by 2050, without appropriate incentives or subsidies companies and asset owners are unlikely to invest in the more environmentally friendly SAF for one simple reason: it comes at roughly twice the production cost of traditional fuels.

Since 2021, the EC has been deliberating whether SAF should be incorporated into the EU taxonomy. Even if it does get included, it is likely to be several years before the benefits of this decision materialise in the form of State aid. Nonetheless, EU legislation stipulates that aircraft operators in Europe must incorporate at least 2% SAF into their refuelling processes by 2025, with this percentage increasing until 2050. While non-compliance with SAF usage will be unlawful, companies will still need to seek alternative avenues for funding to ensure that SAF production remains financially viable.

From words to action

In contrast to the EU’s approach, the US Inflation Reduction Act set out US$391 billion in short-term expenditure for domestic renewable energy production, which is predicted to spur US$3 trillion of investment in renewable energy.

Offering far more support and clarity than the EU taxonomy, alongside substantial incentives, grants, and tax credits for renewable energy production,

Biden’s IRA has been far more effective in laying the groundwork for greener economic growth.

In terms of SAF production, California has been providing credits to producers since 2019, and there is a federal grant worth US$1 billion to boost production that will remain available until 2026. Meanwhile for hydrogen investment, there are government incentives spanning millions of US dollars available at state and federal level, alongside numerous tax credits for hydrogen fuel cell projects. For example, Washington is awarding tax credits of up to US$3 per kilogramme of clean hydrogen.

While perhaps not a long-term solution, these credits and incentives are having a direct and positive impact. In the first quarter of 2022, US venture capital investments in clean hydrogen made up only a third of the equivalent funding in the EU and in every quarter since investments in the US have consistently exceeded those in Europe. Clearly, the US is doing a better job at turning words into action.

While the EU sets its sights on long-term legislation to reduce emissions, it seems that what is needed to meet the Paris Agreement goals is aggressive, immediate investment in more sustainable alternatives. While the US is perhaps not considering long-term implications, its impressive commitments to tax credits and subsidies are the reason it is pulling ahead of the EU. Short to medium term investments remain far more attractive.

Another point of distinction between US and EU approaches is the level of corporate support for energy efficient projects. In the US, financial institutions are proactively encouraging investments in eco-friendly alternatives – for example, Bank of America intends to finance one billion gallons of SAF by 2030.

On the other hand, while European financial institutions have strong green strategies in place, there is a lack of clarity and scope for creativity when interpreting these sustainable strategies.

Lessons from across the pond?

The UK government has recently stipulated that Britain is not about to adopt Washington’s “subsidy bowl” approach to economic policy but it should remain wary of falling into a similar bureaucratic spiral to the EU.

In 2022, the UK published a hydrogen investment roadmap to attract investment in Britian’s hydrogen economy, indicating that there would be £4 billion (US$4.9 billion) of investment unveiled by 2030. While in principle this sounds impressive, in one year the US directed US$400 billion towards the energy transition, whereas it is taking the UK seven years to unlock a meagre 1% of this for hydrogen. Lagging behind in funding and speed of execution, Britain is becoming increasingly unattractive to asset owners and investors.

Greater incentives

The EU and UK need to create greater incentives for investment if they want to match the US in terms of their influence on the green economy. Until then, asset owners and stakeholders should carefully consider these dynamics when shaping their strategies and investments in the evolving landscape of climate action.

This article was co-authored by Max Griffin, Associate in the Finance practice at Pillsbury Winthrop Shaw Pittman.

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