Biden’s IRA has left Europe blind-sided. And playing catchup could lead to 2 big mistakes

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

The EU has long asked the United States to be more active in climate policy. Biden responded with the Inflation Reduction Act. But it has created competition problems for European businesses – which has upset politicians in the region. Brussels was left to consider how best to respond.

“US legislation will 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 to fight the IRA before it was accepted.”

The American Inflation Reduction Act, also known as the IRA, was passed by US lawmakers in August and includes a record $369 billion in climate and energy policy spending.

Among other things, it gives tax breaks to consumers who buy electric cars made in North America – this could automatically make European electric cars less attractive to buyers, as they are likely to be more expensive.

Some European firms have recently announced investment plans in the US to take advantage of the expected increase in demand. And others could follow.

“Volkswagen has ambitious goals for the North American region. We now have a unique opportunity for profitable growth and for electric growth in the US,” a spokesman for the German company, one of Europe’s largest automakers, told CNBC via email.

Enelan Italian energy firm, is concentrating 85% of its €37 billion ($40.2 billion) investment between 2023 and 2025 in Italy, Spain and the US.

“Specifically in relation to public support policies, the IRA includes unprecedented green technology measures and we think it could act as an incentive for the EU to move forward in this direction to support a substantial expansion of the renewable technologies that are key.” for the energy independence of our continent,” a company spokesperson told CNBC via email.

Luisa Santos, deputy director of BusinessEurope, a trade federation group, told CNBC that “it’s still a little early to say who will invest where.” “But it is very clear that some companies will invest in the US in any case,” she added, referring to the expected increase in investment in the US – at the expense of Europe.

European officials are currently considering relaxing state aid rules to give governments more room to financially support key companies and sectors.

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

But this solution may not be ideal. Countries with bigger budgets will be able to draw on more funds than poorer nations, threatening the integrity of the EU’s much-vaunted single market – where goods and people move freely and which represents more than 440 million consumers.

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

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

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

In a letter released last month seen by CNBC, European competition chief Margrethe Vestager said: “Not all member states have the same fiscal space for state aid. That’s a fact. And a risk to the integrity of Europe.”

In addition to challenges with the release of state support, timing is also a risk.

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

So it is likely to turn into a deep and tense political affair that could drag on for a while.

Paolo Gentiloni, the European economy commissioner, said in Berlin on Tuesday that there were “different views” on the table.

“But I am satisfied with the clear intention to engage in this discussion,” he said after talks with German Finance Minister Christian Lindner, who had previously said he would not support new public loans.