(Bloomberg) -- It has dominated the headlines out of Davos this week, prompted diplomatic grumblings from Germany and put European lawmakers in a bind. Passed last year, a historic US climate bill has opened up a new era in geopolitics, one of unprecedented global competition to develop planet-saving technologies.The US ranks top when it comes to the cumulative greenhouse gases added to the atmosphere since the industrial revolution, but remains behind in reducing its reliance on the fossil fuels that are heating up the planet. Despite its name, President Joe Biden’s Inflation Reduction Act, which became law last summer, is aimed at rapidly changing that status as laggard.The size of the US economy and the unprecedented scale of the subsidies the IRA offers to develop green industries are, however, forcing European lawmakers to respond as businesses warn that the continent could lose investments.As the US numbers have sunk in, officials from European Commission President Ursula von der Leyen to the leaders of France and Germany have called for Europe-wide and country-specific industrial bills aimed at matching the incentives being dangled by their greatest ally.

“To keep European industry attractive, there is a need to be competitive with offers and incentives,” von der Leyen said in a speech at Davos. “We must also step up EU funding.”

The developments have created a marked shift in climate geopolitics, a realm in which Europeans had long held the crown as leaders in environmental action and regulation. While discussions at the United Nations annual COP meetings continue to require all countries to collaborate on global strategies, targets and financing, US investments in climate technologies are forcing global powers to compete when it comes to devising and scaling solutions aimed at tempering humanity’s impact on the Earth.

“We’re on the cusp of a clean tech arms race,” said David Victor, professor of innovation and public policy at the University of California San Diego.Sometimes an arms race can be a zero-sum game, where US investments mean Europe loses out, but it doesn’t have to be so. If the US and Europe can work together to allow their industries access to each other’s markets, Victor said, then investments made in technologies will be able to deliver greater good. That kind of cooperation is in Europe’s interests.

The US already has the advantage when it comes to climate tech. The US is a bigger market with more regulatory consistency and offers fewer barriers to entry and scaling new industries — as well as more funding opportunities. The European Union, on the other hand, is made up of 27 independent countries.

“The European market is fragmented,” said Hans Kobler, founder and managing partner of Energy Impact Partners, a venture capital fund that invests in clean-energy startups. That’s why “there’s a big sucking sound for global climate technologies coming to the US.”

Even as the US and the EU figure out how to manage this new competition, they both share a bigger rival in China. On almost every green technology, China has the lead. It is the world’s largest maker of solar panels, batteries, electric cars and even hydrogen-producing electrolyzers.The incentives contained in the IRA are designed to minimize China’s role in the clean tech pipeline and try to break its hold, for instance, on the electric vehicle battery supply chain.

For emerging players in climate tech industries that also want to become export powerhouses — like India — there are other challenges on the horizon.“I am worried about islands of regulation,” said Arunabha Ghosh, chief executive officer of the Indian think tank Council on Energy, Environment and Water. If each region has incentives for green technologies tied to its own standards, companies will struggle to scale quickly, he said.

LISTEN: How Climate Change Broke Through to the World’s Elite in Davos

As climate solutions attract larger sums of money, touch ever expanding areas of the world economy and lure more and more people, they’re bound to create friction among major powers. What’s clear is that most of those powers see a big opportunity. That’s why, despite the challenges that an era of competition will bring, the rich and powerful at the Davos meeting welcomed increased investment in a green future.

“Having a competition to drive things faster, and bigger scale is not a bad thing,” Jennifer Morgan, Germany’s climate envoy, said in an interview at the World Economic Forum in Davos this week. “It’s kind of like: Game On.”

Akshat Rathi writes the Zero newsletter, which examines the world’s race to cut emissions. You can email him with feedback.

--With assistance from Laura Millan Lombrana, Oscar Boyd, Christine Driscoll, John Ainger, Petra Sorge and Olivia Rudgard.

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