(Bloomberg) -- Brussels is coming under pressure from European business to respond to the US’s multi-billion dollar clean energy subsidy plan or risk losing investment and falling behind in the green energy revolution.

The region’s reaction to the Inflation Reduction Act has become the key issue in meetings between industry leaders and politicians at the World Economic Forum’s annual gathering in Davos this week. It includes billions in financial aid that Europe fears will unfairly benefit US businesses.

One key concern raised by executives is the European Union’s fragmented market, which hinders the type of growth the bloc needs to improve its ability to compete.

Martin Lundstedt, chief executive of Swedish truckmaker Volvo AB, said the US is “creating a movement from a brown fossil-based platform to a green platform,” and Europe needs to take inspiration from that. 

The US legislation is aimed at subsidizing the energies of the future, from hydrogen to batteries, wind and solar, building manufacturing self-reliance and ensuring the country isn’t dependent on China or other nations. If Europe doesn’t go big too, it risks being left behind in the green energy revolution that’s become one of the dominant global themes.

The EU has been seeking changes to Biden’s plan but meaningful amendments looked unlikely. The view from business suggests the bloc would be better off focusing its energy on fixing its own issues rather than seeking concessions.

“There’s a big sucking sound for global climate technologies coming to the US,” said Hans Kobler, founder and managing partner of Energy Impact Partners, which invests in clean-energy startups. There is great technological innovation in Europe, he said, but those startups have a harder time scaling because of the European market is fragmented.

According to Rich Nuzum, global chief investment strategist at Mercer, the US push is a positive because financial aid is going to be key to driving progress in this area.

“The more countries that provide incentives for early-stage green tech and green-tech investment, even if a particular entrepreneur or scientific venture fails, the learning from that is available to the next person that tries and the people involved get more valuable,” he said.

The IRA was part of a broader package of measures, including incentives for chip manufacturing, to ensure the US has the home-grown industries of the future.

But it’s sparked a backlash in Europe, which fears domestic industry will divert investment to take advantage of the generous tax credits and other subsidies, estimated to be worth around $370 billion.

“I didn’t expect to talk about this at all, and it’s all everyone’s talking about,” Tim Adams, chief executive of the Institute of International Finance, said Wednesday on the sidelines of the Davos conference. “What I’m hearing is that Europe needs to do the same thing with a green deal that’s as transformative as the American one. IRA was clearly a catalyst for action in Europe.”

On Tuesday, European Commission President Ursula von der Leyen said the bloc will respond with its own plans to redress the balance.

“To keep European industry attractive, there is a need to be competitive with offers and incentives that are currently available outside the European Union,” she said.

The threat has sparked fears of a tit-for-tat subsidy war and a new protectionism that splits the global economy and drives up prices for consumers. With world growth already on uncertain ground, that’s something that businesses desperately want to avoid.

German Chancellor Olaf Scholz said Tuesday he’s convinced that such a scenario can be avoided. He also said he supports the climate ambitions behind Biden’s plans, but added that the question for the US is “how to deal with your friends in the world.”

But this is far from just a US-EU issue, and geopolitical tensions on multiple fronts are feeding into the new green technology race.

Kobler is concerned that governments on both sides of the Atlantic Ocean haven’t quite grasped how dependent clean-energy technologies are on a supply chain tied to China, the world’s largest producer of solar panels, batteries, electric cars, and hydrogen-producing electrolyzers.

“We are going into a dependency on critical minerals, solar panels, batteries on China that is almost worse than German dependency on Russian gas,” he said. “To overcome years of advantage that China has, a little bit of government help is needed.”

For the EU, one option is to loosen the rules on state aid to bring industries up to speed. But as ever in the bloc, political differences and national interests are getting in the way of a uniform response. 

Some countries are worried that bigger economies with more fiscal firepower will gain more from any relaxation of restrictions.

Different groups are also angling to attach some of their traditional campaigns to the debate. A number of nations see it as a way to push for fresh borrowing, while others argue for top-down interventions and national industry champions or more government aid.

EU Trade Commissioner Valdis Dombrovskis acknowledged some of those concerns on Bloomberg TV on Wednesday.

“We’re looking at how to adjust our state aid framework while keeping the integrity of single market and level playing field among EU member states,” he said.

According to Nick Stern, professor of economics at the London School of Economics, the starting point for countries is “what are we going to need in the future and ensure robustness of supply.”

“Friendshoring,” US Treasury Secretary Janet Yellen’s idea that only allies can be trusted suppliers, goes too far, he said. Instead, there should be four core producer regions – in the US, China, Europe and India.

To get there, countries will need to accept a “reasonably liberal interpretation of the global trading rules” as state subsidies are used to get industries up to speed.

“We need to make sure that there is not a key single commodity that China can strangle,” he said.

--With assistance from Philip Aldrick, Rachel Morison and Jacqueline Simmons.

(Updates with Mercer comment in seventh paragraph)

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