Leaders of the European Union agreed on a set of measures to keep the EU competitive in manufacturing green tech products this week, bringing the EU nations one step closer to countering the U.S. Inflation Reduction Act (IRA).

The measures include loosening rules on state aid for investment in clean energy industries, as well as providing tax credits and funds for sectors that are crucial for the green transition.

The IRA enacted last August offers a wide range of tax breaks and subsidies to companies investing in clean and green products, including electric cars and renewable energy parts – as long as they are manufactured in North America.

The act creates some fear in Europe. Leaders are worrying that Europe manufacturers will be put at a disadvantage, as the continent is still grappling with the energy crisis caused by the Ukraine conflict.

"When we are looking at our competitiveness, we need to do our own homework and do everything to ensure that we do not have an international subsidy race," said German Chancellor Olaf Scholz during a news conference on February 10.

Brewing tensions across the Atlantic

The IRA contains $369 billion subsidies to encourage investments in its domestic green energy production, and stipulates that the subsidies will only be offered to companies mostly or wholly in the U.S.

The EU nations think that it will make the U.S. a more attractive place to invest in green technologies, luring more Europe-based companies to relocate or prioritize their investment across the Atlantic.

In response to that, the EU Commission unveiled its "Green Deal Industrial Plan" at the beginning of February to tackle challenges confronting European industry.

"Europe is determined to lead the clean tech revolution," said Ursula von der Leyen, President of the European Commission in a statement.

The plan is expected to keep the European industries competitive in manufacturing clean tech products, including strengthening public funding for the green transition of the EU's industry.

"This kind of plan is a good thing. It shows the EU is setting the direction," said Dr Fawaz Al-Bitar, General Secretary of Edora, a Brussels-based renewable energy business association.

"We have to promote the energy transition and accelerate the development of renewable energy across the bloc," said Al-Bitar, adding that it is crucial because member states have not perfected their own strategies.

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The EU's renewable industry plan 'setting direction' for Europe's green revolution

The IRA was described as a new law that would "unleash a new era of clean-energy-powered economic growth", according to the remarks by President Biden at the UN's COP27 climate summit last November.

He said that the investment will "spark a cycle of innovation" that reduces the cost of clean energy technology, which will be "available to nations worldwide, not just the United States."

However, the EU argues that the IRA's conditions on tax credits go against the World Trade Organization principle of non-discrimination. Also, some of the green subsidy plans are protectionist and will harm businesses overseas.

"Countries cannot introduce protectionist measures without getting hurt in return. That's why the Joe Biden administration's so-called Inflation Reduction Act was bad news for America and to a lesser extent bad news for the rest of the world," wrote Jonathan Arnott, a former member of the European Parliament.

He also expressed doubts about its effect as the U.S. portraits the act as a solution to inflation.

"Drawing on a long tradition of American laws, it's unclear whether a protectionist public spending package would reduce inflation. If there weren't already some downward pressures on inflation, which could cool it down in 2023, inflation might have surged much higher, " he wrote.

A wait-and-see situation

Germany and France, two of Europe's industrial heavyweights, are especially concerned about the IRA, which may leave many factories deserted and thousands of workers unemployed. The economy ministers of two countries have made a joint visit to the U.S. on February 7.

During the visit, French Minister for Economy, Finance, Industry and Digital Security Bruno Le Maire stressed that there would be no fair competition unless public subsidies and public tax credits granted to private companies are fully transparent.

German Economy Minister Robert Habeck said the IRA is still in the implementation phase, implying that there is still time for both sides to reach a consensus.

Meanwhile, the U.S. has signaled a willingness to compromise on the issue but didn't make it specified.

The next phase will be in late March when the European Council holds its next session to present more concrete proposals for the new industrial plan.