Economists generally agree that high taxes on emissions applied around the world would be the cheapest way to combat climate change. But this is politically unrealistic. The European Union and the United Kingdom set a high price for carbon dioxide, although this does not apply to the entire economy. Elsewhere, carbon taxes are low and scattered, like in China, or virtually non-existent, like in the United States. The second best approach is for governments to subsidize the production and consumption of renewable energy. This is exactly what the economic giants of the planet, America, China and the EU are doing. The provision of state aid is problematic. For example, consumers can receive subsidies to buy electric cars they would have bought anyway. Moreover, subsidies increase government spending, and pollution taxes generate revenue.

Subsidies can also operate in a protectionist context and distort the market. That’s the problem with the $369 billion environmental subsidy package the US promised under the Inflation Reduction Act (IRA). Most of the money will go to businesses located overseas or to businesses in countries with which the US has free trade agreements, such as Canada.

Thus, the bill makes it attractive to attract foreign enterprises to the US. Some European companies operating in industries ranging from batteries to specialty chemicals are planning to expand production in the US, raising concerns in the EU. The leaders of its member states are reviewing the Commission’s plan to reallocate funds of almost 270 billion euros, much of which was originally earmarked for pandemic recovery plans. The commission also wants to loosen state aid rules to make it easier for governments to subsidize their green industries. The plan risks undermining the EU single market because none of the funds will come from subsidies. Governments with relatively little debt, such as Germany, will be in a better position to subsidize local companies than highly indebted countries, such as Italy.

Fighting for subsidies from the world’s three major economic blocs will accelerate the development of clean technologies and drive down costs even further. However, as strong countries provide subsidies, there is a danger that they will overwhelm weak countries that rightly want their citizens to have good employment opportunities in the industries of the future and cheap products.