Biden’s IRA left Europe blindsided. And the game of catch can lead to 2 big mistakes

US President Joe Biden, front, and Ursula von der Leyen, President of the European Commission.

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The European Union is racing against the clock to create a program to rival President Joe Biden’s unprecedented climate subsidies. But he will face two main problems in the process.

The EU has long called for the United States to be more active in climate policy. Biden delivered this with the De-Inflation Act. But it has raised competition concerns for European businesses – which have worried politicians across the region. Brussels is left wondering how best to respond.

“US legislation does not pass overnight,” Emre Peker, director of the Eurasia consultancy group, told CNBC, adding that the EU could have acted more quickly.

“The EU was asleep at the wheel… With 28 representations in Washington, the Europeans could have done more against the IRA before it was accepted.”

The US Inflation Reduction Act, also known as the IRA, was approved by US lawmakers in August, spending a record $369 billion on climate and energy policies.

Among other aspects, it provides tax credits to consumers who buy electric vehicles made in North America – which could automatically make European-made EVs less attractive to buyers because they are more expensive.

We will continue to invest further in the region to achieve significant growth.

Some European firms have recently announced plans to invest in the US to take advantage of the expected growth in demand. And many more can fit into it.

Volkswagen It has ambitious targets for the North American region. We now have a unique opportunity to profitably grow and produce electricity in the United States,” a spokeswoman for the German company, one of Europe’s largest automakers, told CNBC in an email.

EnelThe Italian energy company is concentrating 85% of its €37 billion ($40.2 billion) investment in Italy, Spain and the United States between 2023 and 2025.

“Especially with regard to public support policies, the IRA includes unprecedented measures on green technology and we think that this can be an incentive for the EU to move forward in this direction to support a significant scale of renewable technologies, which are key for the energy independence of our continent,” he said. a company spokesperson told CNBC via email.

Luisa Santos, deputy director of BusinessEurope, a group of business federations, told CNBC that “it is too early to say who will invest where.” “But it’s very clear that some companies will invest in the US anyway,” he added, referring to the expected increase in investment in the US – at the expense of Europe.

Spending others

European officials are currently looking at easing state aid rules to give governments more room to financially support key companies and sectors.

The European Commission, the EU’s executive arm, is due to present a proposal in the coming weeks.

However, this solution may not be ideal. Countries with bigger budgets will be able to deploy more funds than poorer countries, risking the integrity of the EU’s much-vaunted single market, which allows free movement of goods and people and has more than 440 million consumers.

Belgian Prime Minister Alexander de Croo told CNBC that more state aid is “not a good answer.”

“There are equal conditions there [in Europe]. Belgium is a small market, a very open economy, Germany is a big market. If it becomes a race of who has the deepest pockets, we will all lose and it will lead to a subsidy war with the United States,” de Croo said earlier this month.

A number of other experts have also expressed their concerns about the easing of state aid rules. Former Italian Prime Minister Mario Monti told Politico Europe that this was a “dangerous” approach.

In a letter published last month and seen by CNBC, Europe’s Competition chief Margrethe Vestager said: “Not all member states have the same financial space for State Aid. This is a fact. It is a risk for the integrity of Europe.”

Slow to respond

Along with the challenges of reducing state aid, timing is also a risk.

European officials will discuss and decide how to provide more green incentives in the medium and long term. On the one hand, some argue that current European investment programs should focus on these subsidies. On the other hand, others argue that the bloc will have to raise fresh money to carry out such a huge project.

So this is likely to become a deep and intense political issue that will drag on for some time.

Paolo Gentiloni, Europe’s economic commissioner, said in Berlin on Tuesday that there were “different views” on the table.

“However, I agree that there is a clear intention to engage in this discussion,” he said after a conversation with German Finance Minister Christian Lindner.

Finance Minister Christian Lindner says Germany will face a very mild recession this year

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