China’s clash with the U.S. over the latter’s clean energy subsidies under the Inflation Reduction Act (IRA) has taken a formal turn, with the World Trade Organization (WTO) setting up a panel to resolve the dispute.

Agreeing to China’s second request, the WTO’s Dispute Resolution Body (DSB) will determine whether certain tax credits under the IRA align with the rules of the multilateral trading system. Eighteen countries, including the European Union, Russia, United Kingdom, Japan, and Australia, have reserved their third-party rights to participate in the proceedings.

China has argued that subsidies for clean energy projects available under the IRA favor U.S. goods and discriminate against imports in violation of WTO rules.

At the time of the first request, the U.S. had opposed the dispute resolution panel, justifying its actions under the IRA as necessary to combat climate change. It has now expressed disappointment over China’s decision to pursue a panel request for the second time.

At the time of its first request, China said its consultations with the U.S. had failed to resolve the dispute. The IRA, it said, was probably the single largest subsidy measure ever enacted, with official estimates of the IRA’s climate-related provisions put at $393 billion while others had estimated the value to exceed $1 trillion.

While many of the IRA subsidy provisions were deeply problematic, China said its WTO challenge was limited to those subsidy provisions under the IRA that are prohibited under WTO rules: those that are contingent upon the use of domestic over imported goods or that otherwise discriminate against goods of Chinese origin.

These provisions are the Clean Vehicle Credit and Renewable Energy Tax Credits (including the Investment Tax Credit for Energy Property, Clean Electricity Investment Tax Credit, Production Tax Credit for Electricity from Renewables, and Clean Electricity Production Tax Credit).

China said that while it recognizes that members have an interest in seeing their economies benefit from the clean energy transition, “this is not a time to abandon the core principle of non-discrimination that is the bedrock of the multilateral trading system.” Increased protectionism is not a solution to this climate crisis.

The U.S. argued that China’s plea for a DSB undermines its efforts to address the global climate crisis and build a more resilient clean energy supply chain. “China’s complaint is a regrettable attempt to prevent progress on these critical issues, to entrench reliance on China’s non-market excess capacity, and to undermine the broader interests of all WTO members.”

The two countries are locked in a bitter trade war over clean energy dominance. Earlier this month, the U.S. announced stiff tariff hikes on imports of solar cells, electric vehicles (EV), batteries, and critical minerals originating from China. The new tariff regime will take effect from September 27, 2024. China-manufactured EVs would carry a 100% tariff, and solar cells a 50% tariff. A 25% tariff will apply to EV batteries, critical minerals, aluminum, and steel. A tariff of 50% has also been proposed for polysilicon used in solar panels starting in 2025.