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Explained: Biden's green subsidies law stirs tensions in the EU

  • 5 Dec 2022

EU lashes out at Washington DC's new green subsidies law asserting that it discriminates against the bloc, raising concerns that the law could trigger fragmentations in the West.

Since any major revision by the US Congress is out of the picture, European officials say their best hope is to secure exemptions. ( AP Archive )

Top European Union officials will use a trade meeting with US counterparts on Monday to press concerns about Washington's huge new green energy subsidy package.

While EU countries welcome the new commitment to energy transition, they fear the $430 billion Inflation Reduction Act (IRA) will unfairly disadvantage their companies relative to rivals in the United States.

Why is Europe angry?

The 27 EU countries are worried their companies will be cut off from US tax credits for components used in renewable energy technologies like electric cars, offered under the new law on condition they are made in North America.

EU countries consider that some $207 billion (200 billion euros) of the US subsidies are tied to locally produced content provisions that potentially violate World Trade Organisation (WTO) rules.

European Commission President Ursula von der Leyen said on Sunday that while competition was a good thing, there should be a level playing field.

Not only do the tax breaks put European companies at a disadvantage to US rivals, but EU state aid rules in their current form prevent member countries from offering similarly generous tax breaks to companies looking to set up factories.

The EU is not Washington's only ally up in arms about the package, with South Korea also concerned its carmakers will not be eligible for the US tax breaks.

READ MORE: Senate Democrats pass $740B 'Inflation Reduction Act' package in US

What does Europe want?

Since any major revision by the US Congress is out of the picture, European officials say their best hope is to secure exemptions along the same lines as those already granted to Canada and Mexico.

After French President Emmanuel Macron raised concerns last week during a state visit to Washington, US President Joe Biden opened the door to making "tweaks" to the package.

EU governments want a solution quickly, possibly with an arrangement agreed at an EU-US Trade and Technology Council meeting on December 5. A draft joint statement said ahead of the talks the package was on the agenda.

Although neither side wants to rekindle trade tensions that damaged transatlantic relations during the Trump administration, the head of the European Parliament's trade committee Bernd Lange said a negotiated settlement would only yield small changes, and that Europe should file a complaint at the WTO.

But such a riposte from Europe would be likely to face resistance from traditionally free-trade-friendly nations such as the Netherlands and Sweden.

READ MORE: 'Super aggressive': Macron slams Biden's subsidies policy during US visit

Can Europe also support its companies?

France has led calls for Europe to respond with state support of its own for European companies, including through a "'Buy European' act" and large-scale subsidies.

While not as vocal about the possibility for a massive subsidy programme, Germany has shown interest in supporting European industry, although its coalition-led government is far from united about how to do so.

European governments can also pool resources to subsidise cross-border projects deemed to be in the broader EU interest, but getting such initiatives approved by the European Commission can often prove long and complicated.

With a number of big projects in the pipeline, French Economy Minister Bruno Le Maire and his German counterpart Robert Habeck last month called on the Commission to streamline and speed up the approval process.

Von der Leyen said that the EU's state aid rules should be adapted in response to the US green subsidy push.

READ MORE: Biden, Macron vow to work closely to help Ukraine, pressurise Russia

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