EU Green Deal Industrial Plan [Gas in Transition]

European Commission president Ursula Von der Leyen first announced the European Green Deal Industrial Plan (GDIP) at the World Economic Forum in Davos in January 2023. The European Commission (EC) published a draft on February 1. It outlines how Europe will become more resilient and competitive as it moves closer towards a zero-emission industry and climate neutrality. It seeks to use national and EU instruments to improve conditions for investment and enable the expansion of manufacturing capacity for net-zero technologies and products.

On March 16, the EC followed this by publishing two Acts: the Net-Zero Industry Act and the European Critical Raw Materials Act. These are part of the GDIP, and aim to define a clear European framework to reduce EU’s reliance on highly concentrated imports, as is EU’s Electricity Market Design, published on March 14.

Through these, the EU aims to strengthen its competitive edge through clean-tech investment and to continue leading on the path to climate neutrality. But it also hopes to stem the ongoing threat of European deindustrialisation.

A key aim of the NZIA is the scaling up of “clean technology manufacturing in the EU with a target to provide at least 40% of the EU’s annual deployment needs for strategic net-zero technologies by 2030.” The NZIA will also identify further goals for net-zero industrial capacity.

These strategic net-zero technologies include solar, wind, batteries and storage, heat pumps and geothermal energy, electrolysers and fuel cells, biogas/biomethane, carbon capture and storage, and grid technologies. The EC estimates the EU will need €400bn of investment/year to decarbonise and meet its target of net-zero emissions by 2050.

The NZIA aims that investment is channelled “to promote the use of clean technologies within the EU and equip it for the clean-energy transition. The regulation will ensure better conditions to set up net-zero projects in Europe and attract investments.”

The European Critical Raw Materials Act introduces “measures to guarantee the EU’s access to critical raw materials. This is vital for the net-zero industry, the digital industry, aerospace, and defence sectors.”

Von der Leyen said: “We have a once in a generation opportunity to show the way with speed, ambition and a sense of purpose to secure the EU's industrial lead in the fast-growing net-zero technology sector. Europe is determined to lead the clean tech revolution. For our companies and people, it means turning skills into quality jobs and innovation into mass production, thanks to a simpler and faster framework. Better access to finance will allow our key cleantech industries to scale up quickly.”

One cannot fail to notice, though, that GDIP came as a reaction to the US IRA and China’s dominance of green technology markets. Given the nature of its far-reaching proposals, it still needs bottom-up public participation, something that it currently lacks.

Net-Zero Industry Act

The NZIA is based on four pillars:

• Predictable and simplified regulatory environment.
• Speeding up access to finance.
• Enhancing skills.
• Open trade for resilient supply chains.

The plan is to build on efforts already in progress under the EU's Green Deal and REPowerEU.

The regulatory framework will ensure quick deployment through simplified and fast-track permitting, promote European strategic projects, and include development of standards to support the scale-up of technologies across the Single Market.

The Act aims to ensure 40% of Europe’s annual clean technology needs should be met by domestic production by 2030. It is a target companies bidding for public tenders or subsidies will need to meet.

The NZIA requires “national Governments to apply non-price criteria in their renewables auctions.” It defines these criteria as: environmental sustainability, energy system integration, and contribution to resilience of clean tech supply chains.

It will speed up investment and financing for clean tech production in Europe. Public financing, in conjunction with further progress on the European Capital Markets Union, can unlock the huge amounts of private financing required for the green transition. In addition, the EC plans to guarantee a level playing field within the Single Market under the competition policy, while making it easier for the member states to grant state aid – through more flexible state aid rules - to fast-track the green energy transition.

The EC will also facilitate the use of existing EU funds for financing clean tech innovation, manufacturing and deployment. These include the €225bn loans and €20bn grants remaining from the EU's post-pandemic recovery fund.

It is also exploring avenues to achieve greater common financing at EU level to support investments in manufacturing of net-zero technologies. A more controversial proposal is the setting up of a European Sovereignty Fund to invest in emerging technologies – detailed proposals will be announced by June.

The EC estimates that as many as 35% to 40% of all jobs will be affected by the energy transition. The EC has made the development of replacement jobs a priority. This will include establishment of ‘Net-Zero Industry Academies’ to roll out up-skilling and re-skilling programmes in strategic industries.

The NZIA targets “global cooperation and making trade work for the green transition, under the principles of fair competition and open trade, building on the engagements with the EU's partners and the work of the World Trade Organization.” But it also plans to protect the Single Market from unfair trade in the clean tech sector, such as China, by using its instruments to ensure that foreign subsidies do not distort competition in the Single Market.

All noble aspirations, but turning them into reality will be challenging. As is often pointed out, “the EU dropped the ball on its industrial competitiveness years ago, losing manufacturing and control of supply chains at the turn of the century.”

Von der Leyen said the GDIP is expected to turn “skills into quality jobs and innovation into mass production, thanks to a simpler and faster framework”. In addition, clean tech firms could benefit from simpler rules and fast-tracked permits to build production facilities in Europe.

European Critical Raw Materials Act

NZIA’s framework will be complemented by the Critical Raw Materials Act (CRMA), to ensure sufficient access to resource and refine critical materials and minerals, like rare earths, that are vital for manufacturing key green technologies, and the reform of the electricity market design, to make consumers benefit from the lower costs of renewables. But also, by avoiding over-dependence on any one single country for the import of critical commodities. China currently dominates the critical materials market.

It will also place emphasis on supply security by ensuring a resilient supply chain. This will be achieved through stronger international engagements, facilitating extraction, recycling and reusing materials, and continuing to invest in research and innovation. Under the CRMA, by 2050 15% of the EU’s annual consumption of raw materials would need to be recycled.

The EC will explore the creation of a ‘Critical Raw Materials Club’, with like-minded partners, to bring together raw material 'consumers' and resource-rich countries to ensure global security of supply through a competitive and diversified industrial base.

Nevertheless, building-up the required mining, refining, and recycling of critical raw materials in time to meet 2030 targets will be a challenge.

Reactions

The Green Deal Industrial Plan is the EU's response to initiatives, such as the US ‘Inflation Reduction Act’ (IRA), to promote net-zero industrial opportunities. The IRA was signed into law by President Biden in August 2022 and despite its misleading name, it is the single largest action ever taken by the US to combat climate change. Through this, $369bn is dedicated to energy security, climate change and clean energy investments over the next decade, through a package of tax credits and subsidies. It also includes investments in hydrocarbons, supported also by the G7, that the EC shuns. But the EC is concerned that US subsidies will put companies in Europe at a disadvantage.

The GDIP will incentivize and support decarbonization and innovation through EU’s already existing multibillion euro subsidy schemes. It is a framework for the transformation of the EU’s industry for the net-zero age. Ultimately, through GDIP the EU does not want to lose ground in the green tech race and aims to counter massive subsidies and green industry competition from the US and China. But will it succeed?

The GDIP has attracted mixed reactions across the entire European political, industrial and NGO spectrum. The biggest criticism is that it arrived too late. But it has also been criticised for lacking clarity over new funding opportunities for the industry to transition successfully. It is strong on ambition but less clear on effective action.

It may also encourage big state intervention loathed by the more liberal member states, who are also objecting to distortions of free trade and open markets through the inclusion of green production targets and barriers to imports of raw materials.

One of the criticisms is that the sources of public funding highlighted in GDIP mostly recycle existing instruments but fall short of creating additional EU funding. Repurposing loans to clean industrial sectors can bring impact only if complemented by significant grant funding for operations which will not necessarily yield returns on investments. GDIP acknowledges that the greater part of the investments needed for the energy transition will have to come from private funding, but more clarity is needed.

There is also concern that the green subsidies introduced by the US and EU will result in a significant increase in demand for critical minerals. The IEA has warned that 40 times more lithium, and around 20 to 25 times more graphite, cobalt and nickel will be needed to meet the requirements for clean energy technologies by 2040.

There is a risk that EU-made products may be more expensive because they do not benefit from US or Chinese subsidies, market scale, and cheaper materials, labour and energy. That would place Europe in an uncompetitive situation. Mapping such risks across supply chains will be important in deciding which green tech supply chains are strategic to the EU, justifying support, while avoiding protectionism and the risk of going into a costly and inefficient subsidy race.

The EU measures are structured very differently to the US ones. Many argue that the IRA framework is simpler, wider and easier to access and navigate. The GDIP policy framework is complex and more difficult to navigate – it lacks clarity and funding.

Leading industrialists have warned that, as it stands, GDIP will not be sufficient to compete with the US IRA. “The US has adopted a simple strategy that immediately incentivises businesses to invest while the EU is coming with a political framework that lacks precise elements and misses simple, clear-cut reasons for businesses to invest.” The IRA has already led to more than $90bn new green investment in the US.

The FT states that TotalEnergies CEO Patrick Pouyanne said France's economy minister had recently asked him if he planned to invest in hydrogen. He replied that Total did plan to invest in hydrogen, but in the US. "He was not so happy with my answer, but that's the reality. I mean, you have [a clear subsidy of] $3/kg."

In a Business Europe survey, 90% of those surveyed said “global firms believe the EU is a less attractive investment location than it was three years ago. They blamed high energy prices and increased regulation.” More needs to be done to reform the EU's energy market and bring prices down.

There is criticism that the EU had failed to understand the fundamental attraction of the US IRA. “They don’t fund the building of a plant. They fund the day you start operating through tax breaks, so you actually make a profit…the US has a business case and Europe makes a law.”

But what is positive about GDIP is that it includes quicker permitting that could boost Europe’s competitiveness and provide a wider focus on clean technology beyond green hydrogen.

Whatever the short-term shortcomings are, there is a belief that in the longer-term the GDIP and the IRA will increase competition between the three major world economies that could, eventually, lead to a reduction in the cost of green technologies. The challenge will be how to get there.

Europe needs an industrial policy and the GDIP is a step in the right direction, but it has come quite late. More work is needed for the Plan to deliver the clean tech expansion Europe needs and to turn ambition into effective action.