The BASF chemical industry company in Schwarzheide, Germany, Nov. 1, 2022.


The Inflation Reduction Act ranks among the most dishonest pieces of legislation ever passed in the U.S. How ironic, then, that the law is causing new rays of truth to burst forth—in Europe.

Europe’s complaint is that the act will work too well. The Continent has been barraged by reports of one company after another shifting investment to the U.S. from Europe in a mad dash to soak up the new law’s generous climate-related subsidies. This week it’s the prospect of a battery manufacturer ditching Scotland in favor of America. The long and growing list of companies diverting green investments to the U.S. includes German auto makers BMW and Volkswagen and Italian energy firm Enel.

This is prompting desperate calls from politicians and industry for European governments to do something. Their first choice is for Europe to expand its own green subsidies to keep up with Washington. The European Commission is making a game attempt with the €250 billion Green Deal Industrial Plan unveiled in February.

But Europe is running out of money for such flights of fancy. The EU plan mostly repurposes unspent pandemic aid, because that’s all the cash that’s available. When British Chancellor Jeremy Hunt says his government will focus on regulatory reforms rather than subsidies to entice green investment, he’s pleading poverty, not free-market virtue. The U.K. can’t afford the government spending it’s already doing, let alone a more aggressive climate-subsidy regime.

Barring that, Europe will start a trade war. The Inflation Reduction Act conditions many of its most generous handouts on local-content rules requiring that goods be manufactured in North America. These probably run afoul of U.S. commitments under global trading rules. Electric-vehicle tax credits, for instance, are contingent on the assembly of cars and important components in the U.S. It’s only a matter of time before Brussels starts hearing and heeding calls to launch litigation at the World Trade Organization, paving the way for retaliatory tariffs.

Once that happens, astute European voters might start to notice the truths this situation accidentally exposes.

If Europe cared about the climate as much as its leaders say it does, the Continent would be enthusiastic about the Biden administration’s pledge to subsidize so much green investment. Climate campaigners have complained for years about the difficulty of mobilizing the vast sums of capital necessary to effect a net-zero transformation of advanced industrial economies. They have finally convinced the issuer of the world’s reserve currency to mobilize. The U.S. can’t afford green subsidies any more than Europe can but can at least borrow in support of the cause.

Air, meanwhile, is fungible. Supposedly we’re trying to manage the total level of carbon dioxide in the atmosphere. To the extent that an expensive and expansive program to decarbonize the world’s largest economy might work (it won’t, but let’s pretend for the sake of argument), it should ease the pressure European governments otherwise would face to eke out their own marginal carbon efficiencies at a time when they increasingly will struggle to do so fiscally and technologically.

If Europe can’t take yes for an answer, it’s a sign that this exercise long ago stopped being about averting climate change. Now the name of the game is delicate navigation between the green enthusiasms the political class has stirred in the electorate and the economic realities those politicians too long ignored.

Many European voters still believe in the zero-carbon agenda. But there is a dawning realization that the high energy costs associated with net-zero goals will deindustrialize the West, either rapidly—Germany’s BASF scaling back its European footprint is a prime example—or slowly via chronically reduced investment. Voters weren’t told this was the economy they would be signing up for and aren’t likely to be thrilled when they find out.

Government subsidies must bridge the economic gap, but they can do so in a politically effective manner only if all governments subsidize in tandem. Washington’s great sin is to engage in competitive handoutery that demonstrates how sensitive to subsidy incentives the green political-industrial complex remains and how much of Europe’s new green industrial base might hollow out if European governments can’t keep opening their checkbooks.

The climate trade war, if and when it comes, will mark the apotheosis of this incoherence. The great worry used to be “carbon leakage”—the idea that stricter emissions rules in Europe would push heavy-emitting manufacturing to China. Such leakage would allow Europeans to consume the same carbon-intensive goods as before, but without the embarrassment of seeing the carbon emissions in their own backyard. The solution was a border tax, in Europe called the Carbon Border Adjustment Mechanism, to punish other countries for their failure to control emissions.

Now, instead, Europe is twitching with anxiety over the prospect of “net-zero leakage”—the fear that someone somewhere else might be subsidizing emissions reductions more than Europe is. It’s enough to make you think that the net-zero journey isn’t about the carbon-free destination, it’s about the checks taxpayers write along the way.