The green industrial race between the EU and the U.S. has just intensified.
Tesla announced plans last week to scale back German electric car production to benefit from U.S. subsidies. The car giant decided to curtail expansion plans to its battery production facility in Grüneheide, Germany, and reorientate production to America to benefit from generous tax subsidies announced by the Biden administration under the Inflation Reduction Act (IRA).
The news comes as German auto manufacturer Audi says it is considering a similar move as a growing rift emerges between Washington and Brussels over green industrial policy. The dominance of the European electric car manufacturing industry is being challenged by Washington’s $380 billion green subsidy scheme, which some critics see as a form of modern protectionism to undermine foreign competitors.
Tesla’s first manufacturing site in Europe, the 9,000 employee Grüneheide plant, was only opened in March 2022 and specialises in battery production and the assembly of Tesla Model Y vehicles. In a statement to the German press, Tesla confirmed that the IRA had influenced their decision, but that production would continue in Germany.
The move is seen as embarrassing for the German government, which fast-tracked the Tesla facility and is under mounting pressure for perceived failures with its energy and industrial policy. The sale of German electric cars has plummeted in the past two months following the end of a government scheme as experts question their viability due to rising energy prices.
The news from Tesla was worsened when Audi CEO Markus Duesmann confirmed that his company is considering opening its first factory in America—to benefit from the IRA. Duesmann said that a final decision has not yet been made but that the Act made operations in the U.S. far more attractive.
Volkswagen and Hyundai have recently announced intentions to ramp-up electric car production in the U.S., with the American government promising a $7,500 subsidy for cars assembled in North America.
Experts have warned of the risk of a trade war between America and Europe as White House energy tsar John Podesta defended the use of protectionist policies at the expense of Europe. The EU has responded to the IRA with its own Green Deal Industrial Plan, which earmarks €250 billion for net-zero industries.
Last month the head of the German car industry association criticised EU leaders for hampering car production due to restrictive regulations and overly ambitious emissions targets.
The European Parliament voted this month to prohibit the sale of fossil-fuel power vehicles by 2035 as French and German officials travelled to Washington to seek exemptions for European cars.