EU and US eye way ahead on green subsidies tiff

It has been the bone of contention in trans-Atlantic relations for months: The Inflation Reduction Act (IRA) was hailed as a turning point in US climate policy, offering hundreds of billions of dollars in subsidies and support for clean technology made in the United States.

But the European Union was not impressed. In Brussels, the legislation is seen as anti-competitive, driving fears that EU tech firms and automakers could be lured across the Atlantic by the promise of lucrative tax breaks.

Now, the EU and US are said to be eyeing a deal to ease some of the tension. The agreement under discussion is being kept closely under wraps, but reports suggest that it may allow EU exporters to qualify for US subsidies in certain areas such as battery components and critical minerals. This could bypass the need for the EU to have a free trade agreement with the US in order to secure such access.

European Commission President Ursula von der Leyen is on a visit to the United States, where she will meet with President Joe Biden at the White House on Friday. The pair are expected to address the press together after talks — and this could be the moment for the announcement of what's expected to be an "agreement in principle" rather than a formal accord.

"We want to achieve as much nondiscriminatory treatment for EU products and companies as possible, avoiding distortions of the level playing field," Miriam Garcia Ferrer, the European Commission's spokesperson for trade and agriculture, told DW.

Garcia Ferrer would not confirm any details of the potential deal, but said: "We appreciate that the US has signaled the intention to treat the EU equally to US free trade agreement partners for the supply of critical minerals, in the context of the Inflation Reduction Act."

The EU and US set up a body aimed at ironing out details of the dispute in October. "Discussions are ongoing in the dedicated task force on the grounds on which the US will grant the EU that status," Garcia Ferrer said.

Though the disagreement about green subsidies has tested trans-Atlantic ties, the EU and US have been keen to stress unity given their bid to forge a common response to the ongoing war in Ukraine.

"We have to say that investments in the clean tech sector in the US are good, because they are good for combating climate change," von der Leyen told officials from the German government on Sunday.

"But they also present us with some difficulties," she said. "Firstly, negotiations with the US on the interpretation of the act are important. Secondly, we need to invest more ourselves."

'Protectionist' US policy?

David Kleimann, a visiting fellow at the Bruegel think tank who focuses on international trade, told DW that it is "unclear" whether this possible new agreement on critical raw materials would truly benefit EU firms or be compliant with World Trade Organization rules.

Far from being a major exporter of the raw materials needed to power the green transition — such as lithium and rare earth metals — the EU is dependent on imports. There are mineral deposits in Europe, but several planned mining projects have been met with local opposition because of environmental concerns.

Kleimann said the potential new arrangement with the US was likely more about scoring a "political" win for the EU. The exemption would not represent a U-turn on existing US rules: more like a loophole to be explored.

As it stands, the US legislation is "protectionist," Kleimann said. He added that a new agreement between von der Leyen and Biden could force the European Union to consider whether it is simply "making concessions."

US officials have pledged to "work together” to address the EU's concerns. At the last meeting of the US-EU Trade and Technology Council, in December, Secretary of State Antony Blinken insisted that Washington's green investment would "be to the benefit of people in the United States and Europe — indeed around the world — as it sees fruition.”

New EU plan

Von der Leyen's trans-Atlantic trip isn't the only trick up her sleeve in the effort to keep EU companies on side. The European Commission is expected to unveil legislation seen as a direct response to US subsidies on Tuesday.

The Net-Zero Industry Act will propose a rewrite of some EU rules on state aid to allow governments to pump more money into key sectors such as solar power. The plans are also expected to cut red tape so clean technology projects can secure quicker access to permits.

This may come in the nick of time as companies weigh up whether to maintain production in the European Union in light of the Inflation Reduction Act. "Today, the battery business is led by Asian companies. And, while the United States are catching up thanks to the Inflation Reduction Act, Europe is more and more lagging behind," Thomas Schmall, CEO of German carmaker Volkswagen's components division wrote in a recent LinkedIn post.

"The conditions of the IRA are so attractive," Schmall wrote, "that Europe risks to lose the race for billions of investments that will be decided in the coming months and years."

The European Commission is also expected to lay out details of its Critical Raw Materials Act next week, aimed at shoring up  supplies of crucial minerals to power the green transition and diversifying supply chains to reduce dependence on Beijing.

Edited by: M Gagnon