Briefing

Why is Europe mad about Biden's IRA?

The Inflation Reduction Act was a hit with U.S. environmentalists. Europeans? Not so much.

The global clean technology competition has begun. European Commission President Ursula von der Leyen this week unveiled a "Net-Zero Industry Act" designed to subsidize climate-friendly industries as the continent pushes to become carbon-neutral by 2050. "We know that we have a small window to invest in clean tech and innovation to gain leadership before the fossil fuel economy becomes obsolete," said von der Leyen.

The EU's new policy isn't just a climate measure  — it's a response to the U.S. Inflation Reduction Act, which subsidizes green American industries and sparked worries about a potential U.S.-Europe trade war. Why are Europeans worried about the IRA? And what does their new policy do? Here's everything you need to know:

Why are Europeans distressed about the IRA?

They're worried about unfair competition. The Inflation Reduction Act offers tax breaks and subsidies for companies that make and use renewable energy technologies — everything from electric cars to heat pumps to electric induction stoves — but only if those products are made in North America. EU officials say those incentives "put European companies at a disadvantage to U.S. rivals," Reuters reports, and worry that they might lose both jobs and manufacturing plants to America. (Indeed, the battery maker Northvolt is delaying its plans for a new plant in Germany, and looking to the U.S.) "Competition is good," European Commission President Ursula von der Leyen said in December. "But this competition must respect a level playing field." 

Doesn't Europe already subsidize its own industries?

Sometimes! Perhaps most notably, Germany, Spain, and France have long subsidized Airbus, the maker of airline jets, with loans that let the company develop new aircraft models — and with payment required only if the new product becomes commercially successful. Those subsidies have been challenged by the United States, Politico reported in 2021. "Since 2019, Europe and the United States have slapped heavy tariffs on each other in their conflict over state support for Boeing and Airbus." The two sides agreed to a five-year "ceasefire" in June 2021, but that debate demonstrates that trade disputes between America and Europe are nothing new.

What will Europe's new policy do, then?

The details are still a little fuzzy. The Hill reports that "both carrots and sticks [are] on the table. But the plan appears to have two main thrusts. One part streamlines EU regulations "to speed up and simplify permitting for clean energy production." The second part involves the new subsidies, also known as the European Sovereignty Fund. "It's not clear yet how much money will be given for the new clean energy subsidies — that will be part of the budget review later this year." But the money is expected to be substantial, and to fund a wide array of projects "along the entire supply chain."

Is there any opposition to new subsidies? 

The EU has been slow to embrace a counterplan to the IRA. Euractiv reports that it "is unclear how the EU would finance its own subsidy scheme that could rival the U.S. model" — remember that the IRA commits a whopping $369 billion to climate and energy programs — and there are fears of an "escalating subsidy race" with the United States. "I don't think massive new state aid models do anything good for Europe," said Danish Economy Minister Troels Lund Poulsen. Germany, in particular, has warned against the EU taking on new debt to aid its industries. But EU officials are concerned that if the European Union doesn't offer a solution, individual member countries might undermine the continent's common market by throwing cash at their own industries. "We think any intervention must be taken at the European level, preserving the integrity of the single market,"  said Italian Economy Minister Giancarlo Giorgetti.

Will America make any concessions to Europe?

Not many, in all likelihood. President Biden clearly wants to avoid undermining European allies, particularly while the Russo-Ukrainian war is underway. He promised to "work out" some differences during a recent summit with French President Emmanuel Macron. "We're going to continue to create manufacturing jobs in America but not at the expense of Europe," Biden told reporters. But it's unlikely that the U.S. Congress will make any large-scale revisions to the IRA to accommodate the complaints, Reuters explains. That means the best hope for the EU may be to work for some of the same exemptions to the "Buy American" provisions in the law that are already granted to Canada and Mexico. That may only go so far: Foreign Policy reports that American manufacturers "will push back against an overly generous interpretation of the law."

What's next?

Leaders from across the EU are expected to discuss the "Made in Europe" industrial policy at a 27-nation summit at Brussels in February. Reuters points out the new policy isn't a done deal. The sovereignty fund "does not yet have the support of all EU governments, notably Germany."

Update Jan. 17, 2023: This piece has been updated throughout to account for the "Net-Zero Industry Act."

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