France, Germany test water on US green subsidies

BERLIN, Feb 2 (Reuters) – Germany’s Economy Minister Robert Habeck and France’s Finance Minister Bruno Le Maire are due to travel to Washington next week to raise concerns about US climate subsidies and urge favorable treatment for European companies.

While European leaders are welcoming the new impetus for the green energy transition provided by the Biden administration’s Inflation Reduction Act, they also fear that the $369 billion in subsidies, which are mainly targeting North American manufacturers could attract companies from Europe.

Some in Europe argue that the subsidies break World Trade Organization rules, but there is no appetite for a trade war with the United States and a recognition that Europe’s best hope is to influence the practical application of the system.

“From the point of view of German industry, it is important that the implementation guidelines of the US authorities now avoid discrimination as far as possible,” said Tanja Gönner, CEO of the German industry association BDI.

Habeck and Le Maire will meet with Americans on Tuesday, two days before an EU summit where leaders will examine plans to increase state aid and other measures to help Europe become a hub for electric vehicles and other green vehicles products can compete.

“The special summit in February is intended to signal that the European response to the US IRA will be a European IRA that is comparable in terms of instruments, scope and measures,” said a Volkswagen spokesman.

SEARCH FOR SIMILAR TREATMENT

The discussion around IRAs in Germany focuses on possible downsides for a local auto industry, which for decades was the backbone of Germany’s export success but now faces an unprecedented challenge from the move away from fossil fuels.

Under IRA, new electric vehicle tax credits apply to those with final assembly and key inputs from North America, which includes Canada and Mexico — countries that have free trade agreements with the United States.

One focus of the Franco-German trip is to seek treatment for Europe comparable to that of Mexico and Canada, a senior EU official said.

“If Ministers Habeck and Le Maire were to succeed, it would be a great success,” said the Mercedes-Benz external officer (MBGn.DE).

The US Treasury Department said in December that consumer-leased electric vehicles could qualify for up to $7,500 in clean commercial vehicle tax credits, a decision that would make those assembled outside of North America eligible. One purpose of the Washington visit is to confirm that this is indeed the case.

The potential for leased European vehicles to be covered by the subsidy, while welcome, would only apply to part of Europe’s vehicle exports, said Hildegard Mueller, president of the German automobile association VDA.

Experts estimate that around half of the German electric vehicles registered in the USA are leased.

While the level of US subsidies has attracted most attention, the EU has great potential resources of its own. A German government source said initial analysis showed they might even be comparable to those available under IRA.

Chancellor Olaf Scholz said last month nearly €180 billion would be available for 2023-2026 under Germany’s climate and transition fund, a supplementary budget to spur green investment, while the IRA’s $369 billion covers 10 years.

THE REAL PROBLEM

“The level of subsidies in Europe is equal to or higher than in the United States, that’s not the problem,” said a senior EU official.

“The real problems are the incentives to get companies to move their production to the United States,” the official said, citing local content requirements.

Still, Europe’s automakers insist there is a risk of business shifting to the United States as US regulations, along with other factors of production, make Europe less attractive.

“Due to the IRA and the very high electricity and energy prices, especially in Germany, Europe is becoming less and less competitive,” said a Volkswagen spokesman.

To ensure Europe can compete with the United States, the European Commission on Wednesday proposed measures including relaxing EU state aid rules and reallocating existing EU funds.

According to Mueller from the VDA, it is crucial that the “EU Green Deal Industrial Plan” can be “implemented quickly and unbureaucratically”.

Reporting by Christian Kraemer and Victoria Waldersee; Additional reporting by Ilona Wissenbach and Philip Blenkinsop in Brussels; writing from Maria Martinez; Adaptation by Mark John and Bernadette Baum

Our standards: The Thomson Reuters Trust Principles.