US and EU Commit to Making Deal on Electric Vehicle Subsidies; Unveil more Cooperation on Green Energy and Economic Security
8 min read
The US and EU announced a range of commitments on green energy and economic security cooperation on March 10, 2023, in a meeting between European Commission President Ursula von der Leyen and US President Joe Biden. The most significant outcome was a preliminary commitment by the Biden Administration to treat EU-extracted and processed minerals as covered by the Inflation Reduction Act’s ("IRA") Section 30D clean vehicle tax credits.
The EU has been expressing its concerns about the IRA subsidies over the past months, claiming subsidies were discriminatory and warning that they would divert investment away from Europe. France and German leaders flew to the US to address the issue, and EU negotiators were in touch with US lawmakers. The leaders’ Joint Statement included commitments on several other climate change and economic security initiatives, suggesting this new electric vehicles agreement may be facilitating discussions and commitments on other issues as well.
Electric Vehicle Subsidies and other Green Economy Measures
The primary outcome of the March 10 leaders’ meeting was a commitment by the US and EU to start negotiations for a "targeted critical minerals agreement for the purpose of enabling relevant critical minerals extracted or processed in the European Union to count toward requirements for clean vehicles in the Section 30D clean vehicle tax credit of the Inflation Reduction Act." The leaders’ statement said this critical minerals agreement would expand "access to sources of critical minerals that are sustainable, trusted, and free of labor abuses" and "reduce unwanted strategic dependencies in these supply chains, and to ensure that they are diversified and developed with trusted partners." Importantly, the critical minerals agreement may mitigate some of the concerns raised by the EU over the past months, as it would enable companies in the EU to benefit from certain IRA subsidies: critical minerals extracted or processed in the EU would be considered to meet the requirements for clean vehicles eligible for tax credits pursuant to Section 30D of the IRA.
Now that the parties have a commitment, work will turn to actually negotiating the critical minerals agreement. It has been reported that the focus would be on getting the critical mineral agreement in a legally binding format, suggesting the text could be brief and may only take a few weeks to be concluded. Ratification may take longer, given that it would be subject to approval from the EU Member States. For the US, it appears that the Biden Administration will treat this as an executive agreement and implement it by executive order instead of by an act of Congress. Even though no official details on what else may be covered in the agreement, it is expected to also include commitments on labor and environmental standards, in addition to the core commitments on critical minerals trade.
In the next few weeks, US Treasury and the Internal Revenue Service ("IRS") will release guidance on what qualifies for the electric vehicle subsidies. The IRA says that the US must have a "free trade agreement in effect" with a country for that country’s industry to qualify for the subsidies related to minerals and batteries. The IRA, however, does not define "free trade agreement," nor is it defined anywhere else in US law. That leaves Treasury to decide what kind of trade agreements will be included. With billions of dollars in subsidies on the line, the potential definitions have seen months of debate. In principle, for an EU-US critical minerals agreement to qualify, Treasury’s guidance will have to define "free trade agreement" more broadly than many in Washington expected when the IRA was written.
Some in Congress seem to have been thinking about the term similarly to the GATT 1994 Article XXIV definition of a comprehensive "Free Trade Area," which has to cover substantially all trade and does not create new trade barriers with non-members. This would cover countries like Canada, Mexico, and South Korea that have comprehensive, congressionally approved FTAs with the United States. However, it would also exclude key allies, including the EU, UK, and Japan, raising protests from their governments and industry.
The US Treasury Department is leading the Executive Branch to adopt an alternative, less strict, definition than that of the GATT 1994 so that smaller non-comprehensive trade arrangements can count as "free trade agreements." This would theoretically allow the Executive Branch to negotiate short agreements with allies that could still count as free trade agreements for the IRA. US Treasury first officially laid out this position in a December 2022 white paper about the anticipated direction of the guidance, available here. In addition to these newly announced talks with the EU, the Executive Branch is exploring similar arrangements with the UK and Japan.
US Treasury’s plan has attracted opposition from some members of Congress. US Treasury Secretary Janet Yellen faced pushback from members of both parties during testimony in the House of Representatives on March 10. Members of the House of Representatives expressed frustration with both the Administration’s intent to adopt an unusually broad definition of "free trade agreement" and the process of treating the potential agreement on critical minerals as an executive agreement, which would side-line Congress from its traditional role in overseeing and approving free trade agreements. Senate Finance Committee Chair Ron Wyden (D-OR) also criticized the move in a statement on March 13. He expressed concern about the Administration’s "decision to ignore Congress and go it alone when it comes to trade deals." Secretary Yellen expressed a willingness to consult more closely with Congress on the negotiations during her testimony, but did not indicate any change in policy.
In order for EU companies to receive the subsidies, the EU and Biden administration must both conclude this promised critical minerals agreement and secure a definition of "free trade agreement" from Treasury that would cover it. Furthermore, if this is settled as an executive agreement without the full support of Congress, there will remain a risk that Congress will pass new legislation creating a legal definition for "free trade agreement" or blocking the critical minerals arrangement. The next President may also simply terminate an executive agreement. The Biden Administration appears to believe that they can at least outmaneuver the opposition in Congress.
Clean Energy Incentives Dialogue
In addition to announcing the plan for resolving this dispute over the IRA, the leaders also announced the launch of the Clean Energy Incentives Dialogue, which will be part of the EU-US Trade and Technology Council ("TTC"). The purpose is to help the allies coordinate their investment incentives and make them mutually reinforcing. Now that the EU is set to announce investment incentives itself under the Green Deal Industrial Plan, it is becoming more important to the governments to prevent subsidy bidding wars. The Dialogue will also coordinate action and advocacy on third country non-market policies that may distort the green energy industry, "such as those employed by the People's Republic of China," as highlighted in the EU-US Joint Statement. A recent BloombergNEF study, available here, estimated that half of global spending on low carbon energy technology is happening in China, totaling more than the EU and US’ spending combined.
Steel and aluminum
Their statement also recommitted the leaders to completing negotiations on the Global Arrangement on Sustainable Steel and Aluminum by October 2023. The EU agreed to the metals trade arrangement in exchange for the US dropping its Section 232 tariffs on EU steel and aluminum in 2021. The statement said the arrangement would "ensure the long-term viability of our industries, encourage low-carbon intensity steel and aluminum production and trade, and restore market-oriented conditions." They also reinforced that the arrangement would be open to all partners with similar levels of engagement for addressing overcapacities and carbon-intensity in these sectors. The US has explored making similar arrangements with Japan in recent months.
Russia sanctions and economic security
The Joint Statement also reinforced EU and US support for Ukraine, their commitment to their Russia sanctions coalition, and to a broader economic security agenda. The leaders' statement highlighted their united support for Ukraine, engagement in adopting economic sanctions for as long as necessary, and commitment to strengthening sanctions enforcement. Both the US and EU have begun increasing pressure in recent months on third-country actors that are involved in sanctions circumvention and backfill.
On broader economic security cooperation, the parties said they are strengthening their cooperation on "our essential security interests and the resilience of our economies." They also added that this cooperation would be rooted in the rules-based system. The most significant upcoming action from this cooperation will likely be new economic security recommendations that the TTC and G7 will issue later this summer. The leaders' statement suggests these will include measures to diversify supply chains, deter non-market policies, and confront economic coercion, which have all been recently discussed in the TTC.
The statement then turns to export controls, promising increased cooperation on preventing leakage of dual-use and emerging technologies to "destinations of concern that operate civil-military fusion strategies." The statement highlights the importance of coordinating actions so one economy's controls are not backfilled by the others' industry. It also raises outbound investment restrictions as a potential new element of export controls. The pledges are unusually strong for an EU statement and may indicate the EU is shifting to a position more closely aligned with the increasingly assertive export controls regime that is developing in the US.
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The March 10, 2023, Joint Statement by President Biden and President von der Leyen can be found here.
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