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Biden’s IRA has left Europe with blind spots. And playing catchup can lead to 2 big mistakes

US President Joe Biden and European Commission President Ursula von der Leyen.

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The European Union is working against the clock to create a program to compete with President Joe Biden’s unprecedented climate subsidies. But it will face two central problems in the process.

The EU had long asked the US to be more active in climate policy. Biden delivered on that with the Inflation Reduction Act. But it has raised competition concerns for European companies ̵[ads1]1; something that has upset politicians in the region. Brussels has been left to consider how best to respond.

– American legislation does not pass overnight, Emre Peker, director of the consulting group Eurasia, told CNBC, adding that the EU could have acted more quickly.

“The EU was asleep at the wheel … with 28 representations in Washington, Europeans could have done more to counter the IRA before it was passed.”

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

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

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

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

Volkswagen has ambitious goals for the North American region. We now have a unique chance to grow profitably and to grow electric in the U.S.,” a spokesperson for the German company, one of the largest automakers in Europe, told CNBC via email.

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

“Especially related to public support policy, the IRA includes unprecedented measures on green technology, and we believe it can act as a stimulus for the EU to move forward in that direction, to support a significant scale-up of renewable technologies that are key for our continent’s energy independence ,” a company spokesperson told CNBC via email.

Luisa Santos, vice president of BusinessEurope, a group of business associations, told CNBC that “it’s still a little early to say who will invest where.” “But it’s very clear that some companies will invest in the US anyway,” she added, referring to an expected increase in investment towards the US – at the expense of Europe.

Sends others

European officials are currently looking at relaxing rules on state aid so that the authorities have more room for financial support for key companies and sectors.

The European Commission, the executive arm of the EU, will present a proposal in the coming weeks.

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

Biden’s IRA has left Europe with blind spots.  And playing catchup can lead to 2 big mistakes

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

– It is a level playing field [in Europe]. Belgium is a small market, very open economy, Germany is a big market. If this becomes a race to see who has the deepest pockets, we are all going to lose and it will lead to a subsidy war with the US, de Croo said earlier this month.

Several other experts have also expressed concern about relaxing state aid rules. Former Italian Prime Minister Mario Monti told Politico Europe that this is a “dangerous” approach.

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

Slow to answer

In addition to challenges with state aid relief, 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 redistributed to these subsidies. But on the other hand, others claim that the bloc will need to raise new money to carry out such a large project.

Thus, it will probably become a deep and strained political case that may drag on for a while.

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

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

Germany will probably face one

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