The story so far:

French President Emmanuel Macron during his two-day visit to the U.S. questioned Joe Biden about clean energy subsidies in the new Inflation Reduction Act (IRA), which European countries believe are discriminatory to non-American companies. Addressing lawmakers at the Library of Congress, Mr. Macron described the IRA as “super aggressive” toward European companies. The EU has asked for a resolution of its concerns before the Act kicks in on January 1 next year.

Signed into law on August 16, the IRA is a $430 billion package of federal spending, tax breaks, credits, and levies, aimed at fighting climate change, reducing healthcare costs, and making large corporations pay their “fair share” in taxes. The Act is a scaled-down version of Mr. Biden’s ambitious Build Back Better plan that did not get the Senate’s approval in 2021. Besides its goal of bringing down inflation, the Act is the biggest climate action package in U.S. history — earmarking $370 billion for climate-focused funding and investments aimed at cutting emissions by around 40% below 2005 levels by 2030. The IRA combines climate action goals with industrial policy, aiming to transition to clean energy by incentivising local manufacturing of renewable energy components. It also seeks to reduce American reliance on China for materials and components for the clean energy industry.

In order to bolster clean energy development in the U.S., the IRA provides consumer and industry-side incentives. To promote the use of electric vehicles (EV) and to secure domestic supply chains for their manufacturing, the federal tax incentive policy for EVs has been changed. Now, only passenger EVs assembled in North America are eligible for a $7,500 tax credit incentive. Those who buy used EVs will be eligible for a $4,000 tax credit if 40% of the critical minerals used in the car batteries are extracted, processed and recycled in North America or a country having a free-trade agreement with Washington.

Additionally, the Act offers $10 billion investment tax credit to build clean technology manufacturing facilities, two billion dollars in grants for refurbishing existing auto manufacturing facilities to make zero-emission vehicles, and up to $20 billion in loans to build new EV manufacturing facilities across the country. It also offers billions in federal procurement to American-made clean technologies.

Europe’s high energy dependence on Russia led to energy shocks in the wake of the Russia-Ukraine war, leading to energy shortages, skyrocketing power prices, and a harsh winter. The 27 member countries of the EU fear that the IRA tax credits and subsidies to EVs and other green product makers in North America and free-trade partner countries put European companies at a disadvantage and may push these companies to move critical parts of their supply chains to America. The EU’s own new green plan ‘Fit for 55’ is targeting to cut CO2 emissions from cars by 55% and vans by 50% by 2030 and all emissions from cars by 2035. For this, it will need to significantly increase its uptake of EVs. Although China dominates the EV purchasing market, Europe has also been posting high growth in EV demand vis-a-vis the total auto demand, even faster than the U.S. According to the International Energy Agency (IEA), nine of the top 10 countries by share of EVs in the total car stock are in Europe. To meet its emissions targets, the EU will benefit from its local automakers ramping up manufacturing, but the IRA raises fears of automakers moving to the U.S. Mr. Macron in November hosted several European CEOs of energy, auto, and pharma companies to convince them to not move manufacturing to America. Europe’s fears may not be unfounded as several automakers, battery makers and energy companies have already made announcements or shown interest in setting up shop in America. South Korea and Japan have also raised similar concerns. For instance, Reuters reported that Swedish battery maker Northvolt was set to establish a lithium-ion battery factory in Germany, Europe’s top car manufacturer, but after the IRA, the company’s CEO Peter Carlsson said that it could get up to 800 million euros ($836 million) in U.S. state subsidies, which was nearly four times what the German government was offering. EU members claim that around 200 billion euros of the subsidies are for locally produced content provisions, which they say potentially violates the World Trade Organization (WTO) rules.

At a joint press conference during Mr. Macron’s visit, President Joe Biden said that there was room for “tweaks” in the IRA to “make it easier for European countries to participate” and that it was “never intended” to exclude cooperating countries. However, he stressed that the “U.S. makes no apology” for promoting American manufacturing and would continue to create jobs for its people.