US, EU Spar Over Tax Breaks in Climate Legislation

Image Credit: Tesla

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The Inflation Reduction Act passed by the US Congress last August has been heralded as one of the most significant pieces of green legislation in a generation, but its impact on diplomatic relations has been as toxic as nitrogen dioxide.

On Sunday, the European Union’s top competition enforcer Margrethe Vestager told the Financial Times the bloc is urging its biggest ally to reconsider the law’s generous tax incentives for domestic producers, which it says could lead European companies to earning a lot less green.

The Friends Don’t Justify the Means

Global cooperation isn’t always easy, even if there’s an agreed-upon goal — like, say, the Paris Agreement target of net-zero carbon emissions by 2050. One country’s proposed solution for saving the planet is another one’s trade barrier. Washington has already voiced displeasure over the EU’s carbon border adjustment mechanism, which imposes tariffs on imports from countries with no carbon emissions tax (a bucket the US falls into at the federal level). Now, EU officials are pushing back against a $7,500 tax credit included in the IRA for electric vehicles produced in North America. While the White House says it’s a disincentive for sourcing critical parts and materials from China, the EU counters that it could lead to job losses if companies move across the Atlantic to compete with American manufacturers.

“As a matter of principle, you should not put this up against friends,” Vestager told the FT. “You have what we see as an unbalanced subsidy.” The Europeans are now weighing different avenues to address the dispute before any domestic EV producers can shift gears and speed overseas:

  • According to a source who spoke to the FT, Brussels is surveying the European EV industry to identify how many companies are considering even partial relocations abroad. The bloc then intends to do some “damage control” at a December meeting of the transatlantic Trade and Technology Council to tweak some of the language in the law.
  • If the negotiations at the TTC fail, the group believes the tax credits could be in breach of World Trade Order rules and will pursue legal action. “The WTO is the stick, but the TTC is the carrot,” the source told the FT.

The Plot Heard Around the World: The EU isn’t the only ally rankled by the EV credits. After a visit from Joe Biden earlier this year and after Hyundai announced a $5.5 billion EV plant in Georgia, leaders in South Korea believed EVs manufactured in their nation by Hyundai would be eligible for the tax credits — and are reportedly furious having learned otherwise. As they say, all is fair in love and trade wars.