(CN) — Ever since Congress passed the Inflation Reduction Act last August, European Union leaders have been seething.
In the U.S., the legislation was hailed as a massive breakthrough for efforts to tackle global warming because it provides $369 billion in funds for climate and energy.
With this funding, the U.S. is hoping to reduce its carbon emissions by as much as 40% by 2030 by subsidizing the manufacturing of green technologies and providing tax breaks for buying electric vehicles, solar panels and heat pumps.
But in Europe, the bill's passage was seen as a stab in the back by its ally because the law stipulates companies can receive the massive tax breaks and subsidies only if they source their materials almost entirely in the U.S. – the “buy American” component in the legislation.
The EU argues this provision is unfair and violates World Trade Organization rules that say products can't be barred based on their origin. A WTO challenge, though, is not being discussed in Europe.
The problems for European governments are grave: They now face watching their companies move to the U.S. to take advantage of American subsidies.
On Wednesday, the European Commission proposed an EU response to counter the U.S. subsidies and at its core are plans to allow EU governments to shore up their own green technology companies with big handouts.
The easing of so-called state aid rules is a contentious matter in the 27-member bloc because it could allow richer countries to outspend poorer ones and give their companies an unfair advantage. Limits on state subsidies are a core tenet to the EU's single market based on a so-called level playing field with open and fair competition in a borderless market.
EU leaders will take up the commission's proposals at a summit at the end of next week.
The European Commission, the EU's executive branch, said its proposal to lift restrictions on states would lead to “a faster roll-out of renewable energies” and speed up the move away from fossil fuels.
The commission said EU countries should be allowed to subsidize companies making batteries, solar panels, wind turbines, heat pumps, electrolyzers for creating hydrogen power and technologies to capture and store carbon. It also favors subsidies going to “critical raw materials necessary for the production of such equipment.”
It said easing state aid is necessary because the EU faces the “threat of new investments” in the green sector “being diverted in favor of third countries outside Europe.”
The EU accuses China as well as the U.S. of unfairly subsidizing their companies in a global race to develop green technologies. The bloc's move to cultivate its own interventionist industrial policy can be seen as an outgrowth of the power struggle and decoupling taking place between the U.S. and China.
The commission proposed easing state aid restrictions until December 2025.
Critics, though, worry subsidies are becoming the norm in the EU. Since 2020, the EU has lifted restrictions on subsidies to allow its member states to deal with the coronavirus pandemic and energy crisis caused by the Russia-Ukraine war.
EU leaders are worried European companies may be tempted to move to the U.S. not just because of the generous subsidies in the Inflation Reduction Act but also because of lower energy costs in America.
The EU is dealing with the prospect of high energy costs for years to come following the Russian invasion of Ukraine and its decision to cut off Russian oil and natural gas.
France and Germany, the EU's two largest economies, are leading the push for an easing of state aid rules while smaller and less wealthy nations are wary because they would be unable to spend as lavishly on their companies as the bigger countries could.
To offset the concerns of countries like Italy and Spain, the commission is expected this summer to propose that the bloc set up a massive EU subsidy fund that all nations could tap into to support their domestic companies.
The EU's biggest free trade champions, such as Sweden and the Netherlands, are likely to oppose easing state aid rules. They are calling the EU's plans dangerously protectionist.
“The idea of jumping to a sort of race to the bottom on state aid is not to our liking, because one of the most successful things in the European Union since 1957 is the internal market,” Mark Rutte, the Dutch prime minister, told the Financial Times. “If we make the wrong decisions, it really could have long-term impact.”
Courthouse News reporter Cain Burdeau is based in the European Union.
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