Biden’s IRA left Europe blind. And playing catch-up could lead to 2 big mistakes

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

The EU had long asked the United States to be more active in climate policy. Biden delivered that with the Cut Inflation Act. But it has raised competition concerns for European companies – which has upset politicians in the region. Brussels had to think about the best way to react.

“US legislation does not pass overnight,” Emre Peker, director of 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, the Europeans could have done more to counter the IRA before it passed.”

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

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

Some European companies have recently announced investment plans in the United States to benefit from an anticipated recovery in demand. And others may follow.

“Volkswagen has ambitious goals for the North American region. We now have a unique chance to grow profitably and expand electrically in the United States,” a spokesperson for the German company, one of Europe’s largest automakers, told CNBC via email.

Enelan Italian energy company concentrates 85% of its 37 billion euros ($40.2 billion) of investments between 2023 and 2025 in Italy, Spain, and the United States

“In terms of public support policies specifically, the ERI includes unprecedented action on green technologies and we believe it could spur the EU to move forward in this direction, to support the substantial scale of renewable technologies that are critical to our continent’s energy independence,” a company spokesperson told CNBC via email.

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

European officials are currently considering relaxing state aid rules so that governments have more leeway to financially support key companies and sectors.

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

But this solution may not be ideal. Countries with larger budgets will be able to deploy more funds than poorer countries, threatening 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.

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

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

Several other experts have also raised concerns about the relaxation of state aid rules. Former Italian Prime Minister Mario Monti told Politico Europe 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 fiscal space for state aid. It’s done. And a risk to the integrity of Europe.”

In addition to the challenges of easing 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 the current European investment programs should be redeployed towards these subsidies. But on the other hand, others argue that the bloc will have to raise fresh money to implement such a huge project.

So, this will likely turn into a deep and tense political affair that could drag on for quite some time.

Paolo Gentiloni, European Commissioner for the Economy, said in Berlin on Tuesday that there were “different points of view” on the table.

“But I am convinced that there is a clear intention to start this discussion,” he said following conversations with German Finance Minister Christian Lindner, who had previously said he would support no new public borrowing.