What is the best way to change corporate behavior around sustainability and ESG? The answer depends on who you ask and, increasingly, what part of the world they live in.
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For years, lawmakers and regulators around the world have been urged to chart a path toward a greener, more sustainable future. The list of potential solutions is long and reads like a who’s who of the ghost of past, present and future policies. From carbon taxes to cap-and-trade and everything in between, many ideas have been put forward, and some countries have recently made huge investments in choosing their preferred routes. This includes the United States, which – with the introduction last year of the Inflation Reduction Act (IRA) – has opted for the tax subsidy route.
The United States believes it can encourage its transition to a cleaner energy economy, “powered by American innovators, American workers and American manufacturers,” according to the White House. The first returns show that they may be right. But this approach differs considerably from that of other countries. , the European Union and its Green Deal being the most obvious example. The question is not so much which approach is right, but how will these different approaches affect the management and compliance strategies of multinational companies?
A boon in terms of subsidies
When the IRA became law in 2022, the Biden administration had a clear mission: to support green industry on American soil by providing billions of dollars in federal grants, loans and grants. So far, the results have been encouraging.
The subsidies provided for in the IRA have already generated $275 billion in private investment in everything from U.S. battery manufacturing to battery recycling to solar and wind projects. Battery the incentives alone are hugeand as a result, 62 projects have been announced with total planned private funding of $53 billion just for electric vehicle and battery projects since the IRA took effect, as tallied in a tracker led by Jay Turner, energy researcher at Wellesley College.
Additionally, these incentives appear to be working as intended. A Princeton the research team found The IRA will significantly reduce U.S. carbon emissions, with economy-wide emissions reductions between 43 and 48 percent below 2005 levels by 2035, which is close, but not quite, from the goal of 50% below maximum levels by 2030 that the United States has committed to.
This is a very good start and a real testament to how a Government can help move forward an issue of such importance. But some stakeholders, notably those based in the European Union, have expressed concerns that the promise of investment alone may not be enough.
The EU behavioral approach
The EU Green Deal certainly relies more on concrete legislative changes. It expands the provisions of existing legislation and adds a significant number of new regulatory instruments with the aim of rapidly changing behavior by offering fewer financial carrots but evoking a stick approach to non-compliance. The law includes provisions that change the climate lawhelp make transport more efficient, transition to clean energyand impose tight deadlines on businesses to make changes to comply with these executive orders.
“We want to compete on quality, not on subsidies,” said a European Commission spokesperson when asked about the Green Deal versus the IRA.
But the EU knows that the promise of subsidies can be enticing, especially when compared to significant legislative changes. Some officials worry that the IRA will lead the manufacturing sector to leave European shores and head to the United States to benefit from IRA tax credits. This attitude is reflected in a recent survey of Finnish companies, according to which, of the companies surveyed, 65% of companies Finnish companies expect the IRA program to have an effect on their operationswhile almost half believe that exporting to the United States will become even more difficult.
This may have been one of the driving forces behind the introduction in February of the Green Deal industrial plan. The plan is seen as a less compliance-focused approach based on four key pillars, which the European Commission (EC) describes as: “a predictable and simplified regulatory environment, accelerating access to finance, improving skills and trade open for resilient supply.” Channels.” At its launch, EC President Ursula Von der Leyen said it would also allow “better access to finance”.
There is no doubt that subsidies create many opportunities for a company’s sustainability strategy in the short term, but when the rubber meets the road, will it be the right decision for the global community in the long term? And will it really have an impact on global emissions?
Several paths to follow
The best news for businesses trying to analyze the best path forward is that there is no one-size-fits-all approach. The divergent strategies of the United States and the European Union provide companies with the opportunity to adopt individualized strategies, whether incentives, compliance, or a hybrid approach. One manufacturing company may choose to capitalize on the US offer, while another may decide that it is easier or more profitable to simply comply with the various elements of the EU Green Deal and access part now more accessible financing that is offered there.
Companies that decide to opt for incentives, regardless of which government offers them, could gain doubly, however. By accessing money that some businesses view as essentially free, they can make major investments in their future and gain the goodwill that comes with innovation while taking advantage of government green subsidies. In the short term, it’s certainly attractive. As for what impact these measures will have on declared climate goals in a decade or two? Time will ultimately tell.
