(Bloomberg) -- European leaders are willing to start a transatlantic fight over Joe Biden’s climate-friendly tax law, dubbed the Inflation Reduction Act, even though it’s dedicated to boosting green tech and moving toward a carbon-neutral future. They’re upset over the subsidies it will dole out, which they say give American firms an unfair leg up.
“Elements of the IRA risk un-levelling the playing field and discriminating against European companies,” European Commission President Ursula von der Leyen wrote to the European Union’s 27 leaders on Wednesday. She also unveiled a four-point plan for how to fight back against the American law that would give member states more latitude to invest in their own companies and that would possibly redirect EU funds to firms in need.
Here are the key elements of the dispute:
What is Biden trying to achieve with the IRA?
Biden’s Inflation Reduction Act devotes more than $360 billion to climate-related spending, including tax breaks for making and deploying clean-energy infrastructure. The law will provide subsidies for domestic industries, including for electric-vehicle producers, but the American president said earlier this month that it “was never intended to exclude folks who were cooperating with us.”
Why are the Europeans upset about this?
European leaders have been outspoken in their discontent over the law. French Finance Minister Bruno Le Maire accused Washington of pursuing a “Chinese-style” industrial policy that discriminates against non-US companies. The EU has said it may take the US to the World Trade Organization over the law.
Since Russia invaded Ukraine in February, the entire world, but especially Europe, has had to begin the process of reinventing their economies now that they no longer have access to cheap Russian gas. The EU is worried that their companies will be left at a disadvantage if they can’t match the subsidies Washington and Beijing will be providing their industries.
What has been the US response so far?
Even though Biden said that “the US makes no apology” for the law, he did say that he saw room for tweaks to “make it easier for European countries to participate.”
“There’s obviously going to be glitches in it, and a need to reconcile changes in it,” Biden told reporters earlier this month after meeting with French President Emmanuel Macron in Washington.
But it isn’t clear how the law might be revised, as Republicans are unlikely to be willing to amend it after they take control of the House next year.
Why are the Europeans struggling to produce a united response?
So far EU member states haven’t been able to get behind a single strategy for how to counter the American law. Von der Leyen has floated a European Sovereignty Fund to help member states underwrite the green transition. She also suggested rerouting revenue from the bloc’s emissions trading system, saying “it’s clear that not every member state has the fiscal space for state aid, and we need complementary European financing.”
But Germany has advocated streamlining how existing EU funds are distributed and increasing incentives at the national level, pushing back against calls from countries including France for more aggressive bloc-wide measures.
What will this mean for the transatlantic relationship?
The EU’s competition chief, Margrethe Vestager, told reporters in Paris earlier this month that the climate law could be damaging for European businesses, as well as in other major economies, including Japan and South Korea. But she said avoiding a subsidy race is an absolute priority and the EU is working constructively with the US to find solutions as soon as possible.
“One war at a time is what we can master,” Vestager said, noting the energy crisis in Europe sparked by Russia’s invasion of Ukraine. “We have found solutions on very difficult issues before and we should be able to do it again because I don’t think the geopolitical situation we are in allows for big democracies to have a fallout.”
What’s the next thing to watch?
EU leaders will discuss the bloc’s next steps at a summit in Brussels Thursday and they could put new state-aid rules in effect as soon as January. But all eyes are on Washington and what tweaks Biden is willing to make. If the changes are too small to placate European leaders, then it could herald a new transatlantic subsidy race.
--With assistance from Ania Nussbaum, Alonso Soto, Jorge Valero and Alberto Nardelli.
©2022 Bloomberg L.P.
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