One of the European Union’s strongest critics of a massive U.S. climate law is warning that Washington’s subsidies and China’s policies are drawing billions of dollars of clean-tech investments away from the bloc.

The EU’s internal market authority said that the American law will build a “new industrial ecosystem” and poses a danger to Europe’s competitiveness — and identifies more than $25 billion of company spending heading to the U.S. and China — in its initial assessment of the law seen by Bloomberg.

The EU is still working through how to respond to Biden’s huge climate law, the Inflation Reduction Act (IRA), which will offer as much as $369 billion in handouts and tax credits over the next decade for clean energy programs in North America. The assessment mentions companies such as Tesla Inc. and Volkswagen AG, which are prioritizing investment in the U.S. due to the IRA.

“Europe’s competitiveness and resilience is in danger,” according to the document. It also warns that the subsidies the U.S. distributes to the industry “dangerously distort competition” and investment decisions.

The possible divestments from the EU to North America and China are mostly based on publicly available information, as well as bilateral discussions with the industry. It acknowledges that though many of the announcements have been made since the adoption of the IRA, not all of them are necessarily a direct consequence of the legislation or will come to fruition. In some cases, it’s not clear that increased investments will lead to lower engagement in the EU, the document also says.

The EU’s tough stance on the IRA has ebbed in recent weeks, with other officials suggesting that the EU’s own incentives are equal or greater than some of the benefits offered in the U.S. law.

“The IRA is an opportunity to green the U.S. economy, but we have some advantages vis-a-vis the U.S. that we need to emphasize,” Frans Timmermans, the EU’s green deal chief, told reporters in February in Strasbourg, France. The EU provides an amount that “is at least comparable to the amount of money that the Americans are putting on the table,” he said.

Much of the EU’s response is now mostly focused on better use of existing pots of money, easing regulations and extending the financing frameworks that had been put in place to tackle the energy crisis provoked by Russia’s war in Ukraine.

 
Tesla said last month that while it has started assembling battery systems at its Model Y plant outside Berlin, it is focusing on the U.S. for cell manufacturing because of the IRA’s tax incentives. Europe’s top car producer Volkswagen warned in December that soaring energy costs are making battery-cell production “practically unviable,” and that investment will go elsewhere.

European Commission President Ursula von der Leyen is also expected to announce an agreement that would see the U.S. and EU work together on access to minerals and critical raw materials used in batteries and electric vehicles when she meets Biden March 10. The aim of the agreement would be to allow European firms to access some of the IRA’s benefits.

The assessment was drafted early last month by a team run by the EU’s internal market commissioner, Thierry Breton, an outspoken critic of the law. The document cites the findings of a survey of top European industry executives that showed that in the second half of 2022 the level of confidence is at record lows and below what was observed at the beginning of the COVID pandemic.