The EU’s new industrial agenda: A deal for the few?

In her candidature speech, the newly re-elected EU Commission President von der Leyen declared strengthening the competitiveness of the EU to be the guiding principle for the new legislative period. The strategic core element is to be a ‘Clean Industrial Deal’ for competitive industries and high-quality jobs in Europe, which will be presented within the first 100 days of the mandate. Neither the prominence nor the title of the strategy come as a surprise, as numerous industry associations had called for competitiveness to be strengthened as a missing component of the Green Deal in the run-up to the election. At the very least, the simultaneous announcement of plans for a new EU competitiveness fund and a proposal for a decarbonization acceleration law suggests that the President is aiming for a serious economic impact.

Old wine in new bottles?

In contrast to the direction of the policy, however, the specific means remain vague. In particular, it is unclear to what extent new proposals can and will go beyond the instruments of existing decarbonization initiatives. This applies above all to the relationship with the ‘Green Deal Industrial Plan’ published just last year. It was announced with similar vigor as Europe’s response to the blatant US subsidy practices for green technologies – a hope that could only be dashed given the EU’s much more limited political capacity. Whether the Clean Industrial Deal will be more successful depends less on its ambitious goals and more on the focus and effectiveness of its means.

It’s economics, stupid!

To this end, the Member States must first resolve their differences over additional EU funding. The insight must spread that a significant expansion of the EU budget used to support investments in climate-neutral technologies is inevitable sooner or later. Newly created European production capacities for key technologies like batteries or solar modules will be exposed to tough price competition on global markets, which will require at least a partial compensation of economic losses during the growth stage. Alternatively, giving Member States even more room for maneuver by relaxing state aid rules would detonate the internal market or, in the case of new technologies, prevent it from being created in the first place.

At the same time, the budget debate must not distract from the need of designing targeted incentive policies. The core objectives of all measures must center on establishing and securing globally competitive European supply chains for low-emission technologies. To achieve this, there is no need to shield domestic production against market mechanisms but, on the contrary, to utilize those mechanisms for market-driven selection processes.

A race on different tracks

The visions sketched by von der Leyen in her speech show that there is still much to learn in this respect. She correctly states that the world is in a race of implementing the green and digital technologies of the future. However, she neglects to say that this race is partly run on different tracks. Countries such as the US and China are pursuing completely different strategies as the EU to reduce emissions, both technologically and economically, without being considered less ambitious in climate perspective. As a consequence, the EU with its technology-centered support policy may be able to achieve leadership in a few politically accepted green technologies, but it will be cut off from the further development of other climate-neutral production methods. A strong focus on individual technologies is also risky due to the one-sided dependencies on certain raw materials that it produces. Consequently, in the course of turning away from fossil energy sources, Europe is in danger of going from bad to worse.

Thinking far instead of thinking big

In other respects, the affinity to China’s strategy is rather too strong. This applies above all to the increasing tendency to ‘think big’. Mario Draghi sees the creation of new European industrial giants as the answer to the growing market dominance of large Chinese state-owned companies in many key green technologies. Ursula von der Leyen appears to share this view. She has announced a new approach to competition policy to make it easier for companies competing globally to scale up, including a more tolerant view of mergers. Scaling up undoubtedly brings efficiency benefits, particularly for young green technologies, both on the production side and in terms of financing conditions. However, a focus of state support on individual global champions would not only jeopardize competition on the internal market, but would also further intensify Europe’s technology gamble. Moreover, the tendency to focus funding on a few high-profile flagship projects often entails long-term decisions on the design of future supply chains (e.g. spatial location and capacities of suppliers and infrastructure facilities), which might bypass the needs of the broad mass of companies and impair competitiveness of European production as a whole.

Turning decarbonization policies upside down

Sustainable growth should be seen as a result of competitive supply chains, not vice versa. Translating this principle into practical policy requires decarbonization to be turned on its head. Instead of setting tight technology targets for downstream industries and consumers, the promotion of green technologies should start at the very beginning of supply chains, with the essential raw materials and enabling technologies as well as the necessary transport and energy infrastructure. The consistent development of resilient and competitively priced supply channels for rare metals and green energy generation technologies is a crucial prerequisite, not only for efficiently decarbonizing existing industries, but also for an innovation-friendly level playing field between different climate-neutral technologies. Supported by the proven tool of emissions trading, these supply channels create the basis for establishing alternative pathways to climate neutrality, and thus enable each industry to implement its individual decarbonization strategy at minimum cost.

A three-pillar strategy for upstream-driven market growth

Such an overhaul of the existing EU regulatory framework is undoubtedly a Herculean task. However, approaches to this can already be found in the last legislative period, for example in the Critical Raw Materials Act, the Net-Zero Industry Act and the new legislation on the internal gas market. Three types of measures are required to deepen this new approach. Firstly, the support instruments contained in the aforementioned laws must be strengthened through fiscal incentives. The recently introduced model of the European Hydrogen Bank can serve as a blueprint. Promoting the capacity build-up of infant technologies through production premiums is an effective means of compensating temporary cost disadvantages and generating long-term efficiency gains through learning effects. This is particularly true if, as in the case of the hydrogen bank, the premiums are determined as the result of a competitive tendering process. Supported by the resources of the planned Competitiveness Fund, such tenders should be significantly expanded in the future and designed to be as technology-neutral as possible within the limits of the climate targets.

Secondly, the existing regulatory framework should be cleared of unnecessarily narrow technology requirements. Thirdly, the development of a cross-border transport infrastructure for renewable energy sources must be accelerated. This also requires additional support from EU funds as well as a high degree of EU-wide information exchange and coordination. In this way, the funding stimuli at the upstream level create the basis for new and diverse green markets at the downstream level, and thus for a smart approach to decarbonization for the many, not the few.