The challenge for making the EU Green Deal industrial plan as effective as possible

In the race to avoid climate breakdown, talk of a subsidy race with the United States is misplaced. EU leaders would be better off focusing on making the Green Deal Industrial Plan as effective as possible to ensure win-wins, write Jakob Hafele and Jonathan Barth, co-founders of the ZOE Institute for Future-fit Economies, in an article on the EURACTIV website.

How to design Europe’s net-zero industry plan

EU leaders appear to be stuck in a race mentality on industrial policy. The most recent Council conclusions smack of playing catch-up with the US Inflation Reduction Act with language around sectors “adversely impacted by foreign subsidies”.

This one-upmanship approach to the Green Deal Industrial Plan is misplaced; the global race to avert climate breakdown will not be won by any one actor alone.

The markets for green technologies are huge. Solar, heat pumps, hydrogen, and electric vehicles will need many times the additional production capacity in the next decades. In solar alone, only 109 GW is currently installed globally, and by 2050, this amount must increase to 6000 GW. We are just at the beginning, and there is more than enough to go around.

When heads of state meet again later this month, they will do better to look at how to design industrial strategy and where to target. Done right, it can greatly contribute to the EU’s emission reduction efforts and European cohesion.

Carrots and sticks

The US Inflation Reduction Act relies on lots of carrots rather than sticks because US political economy does not allow for anything else. CO2 prices and other market-based instruments are not politically feasible on a broad scale in the States. In contrast, the EU’s approach to the green transition relies primarily on sticks: regulation, binding national targets and the Emissions Trading System.

Instead of trying to win a race against the US, EU governments should learn from the American approach and take the opportunity to finally rethink the EU’s market fetishism and consider how to make the industrial policy effective and efficient, how to ensure that additional European subsidies – the carrots to complement its sticks – do not simply flow into higher profits or disincentivise private investment.

Asian nations have had significant success in combining carrots and sticks and making industrial policy efficient by tying substantial tax breaks and subsidies to performance. In the latter half of the 20th Century, this policy stimulated a surge of innovative economic ventures while cutting-off subsidies to unproductive firms (which were allowed to die out).

This approach has been proven effective in preventing the abuse of subsidies for profit-seeking purposes, and it can be replicated today. The subsidies envisioned for green sectors, like e-mobility, green hydrogen, and renewable energy storage and production can be tied to performance goals.

Two types of support

For this to work, it won’t be enough to rely solely on fostering innovations in green sectors, as the EU currently does through its Innovation Projects of Common European Interest (IPCEIs). Instead, the crucial question is how subsidies can support the scaling-up of production facilities, namely new manufacturing sites, to rapidly accelerate the production of heat pumps, solar panels, wind turbines, electric vehicles, batteries or electrolysers.

When subsidised projects are not about ramping-up new sectors but about transforming the business model of existing sectors, for example, in the automotive industry, the subsidies could be accompanied by company-specific binding transformation plans. These would define the timelines for decarbonising products to ensure subsidies are effectively channeled. This would also create the necessary planning and certainty repeatedly called for by finance stakeholders.

The next challenge: Without access to the same information, policymakers have to take industry representatives at their word about the needs for subsidies. This is why it is important to plug knowledge gaps in public institutions, which gives industry the upper hand over policymakers. Negotiations on the scope of industry support programmes could be conducted in a more transparent, collective forum. What is needed is an extensive multi-stakeholder dialogue with multiple players from the same industry as well as other experts from civil society and science who can assess lobbyists’ claims.

Focus on regions left behind

The where is also an important part of the how of industrial policy.

The European Council has recognised that net-zero industry plans should not negatively affect Cohesion Policy objectives. However, current state aid rules already lead to imbalance in Europe because of the lack of sufficient industrial support in economically weaker countries. Germany and France top the list for most state aid support.

For Europe’s future strength and unity, the key question is where new industries emerge. In the ongoing revision of state aid rules, an asymmetrical relaxation of the rules can go a long way. Allowing regions currently experiencing weak economic development and high unemployment more state aid can enable them to catch up. Attracting green industries to ‘left behind’ regions that would particularly benefit from them would be a win-win.

So, let’s stop drop this misplaced transatlantic race mindset and instead focus on how industrial policy can best help deliver the green transition. This is what should be on the agenda of the next European Council.

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