In responding to the aggressive US subsidy approach to lure clean tech companies, Brussels should not ignore that the success of its industrial policy lies in sound regulation and credible carbon pricing, Patrick ten Brink and Luke Haywood report.
This article was originally published in Social Europe.
The great subsidy race for green industry has begun, with the European Union’s Green Deal Industrial Plan endeavouring to respond to the United States’ Inflation Reduction Act.
The leaked draft of the Net Zero Industry Act rightly highlights a need to plan better the necessary industrial transformation of the EU. It considers a host of measures aimed at promoting specific industries, including streamlined permits, access to public and private finance and priority for public procurement.
The reaction from some corners of business to this competitive scenario has been to call for more subsidies. Industry is urging an opening of the floodgates of public money on both sides of the Atlantic, to lure ‘clean’ technology companies.
So far, the EU has steered a broad path to rendering clean technologies competitive—renewables, heat pumps, green hydrogen and so on—compared with those tying us to consumption of fossil fuels. The European institutions have not only formulated ambitious climate targets but introduced regulations for industrial production across many sectors, product standards limiting energy consumption, labelling schemes to inform consumers and businesses and carbon pricing for important industries, as well as supporting the research and development of the new technologies.
This journey has not always been easy. Polluting industries have pushed hard against regulations, product standards and higher carbon prices.
But together these components of EU climate policy have created security of investment for a range of technologies key to rapid decarbonisation. The swift development of renewable energy is an iconic example of the success policy mixes can have in establishing investment security. And no doubt the success will continue, as moving to an entirely renewable-powered economy is a vision most Europeans share.
Array of tools
The current US administration shares the EU goal of environmentally friendly, decarbonised industry. The federal government does not however have the same array of tools to create a business model for clean technologies.
US powers to regulate interstate commerce and provide for clean air cannot replace the explicit mandates enshrined in the EU’s climate law. The aggressive focus on subsidies in America is not because this is considered the most efficient mechanism to embed green technologies: it is merely the most powerful tool the administration has at its disposal. The progressive, climate-aware forces in the US pushed hard for an ambitious Inflation Reduction Act as the only way to drive reduced industrial emissions—not to suck investments away from the EU.
The US focus on subsidies alone is, though, a gamble. As dirty technologies are not priced or regulated out of the market, there is a risk of a ‘business as usual’ landscape, with just expanded outcrops of clean production. In responding, the EU must not ignore the fact that part of the success of its industrial policy lies in its robust regulation and carbon pricing—alongside state aid.
Environmental and social standards
Worse still would be for the EU to react to the US subsidies by weakening or even removing other climate measures. Industry has a responsibility to reduce its emissions and relaxing this as a result of the IRA would be absurd. Yet deregulation is exactly what some industry bodies and their political voices are requesting. A race to the bottom on environmental standards would do no one a favour.
Providing subsidies for purportedly green technologies is only responsible if these technologies are effectively assessed. The EU must provide benchmarks and ensure that subsidised technologies are in line with its targets on climate, renewable energy, a circular economy and zero pollution. For example, the same voices calling for ‘technology neutrality’ are also urging massive subsidies for specific products—such as hydrogen—without regard for the environmental or climate consequences.
Indeed, further environmental and social standards should be applied to ensure taxpayers’ money does not contribute to inequality and environmental destruction. This immediately rules out dangerous and dirty nuclear technology, with its unsolved waste problem. Public support should take into account the special contribution made by socially just business: non-profit enterprises and alternative employment models.
And subsidies must be used wisely—targeted, cost-effective and with clear conditions attached—to avoid taxpayers’ money substituting for due exercise of corporate responsibility. Public monies need to come with clear conditionalities.
Next to subsidies, the plan also tries to encourage faster permits. The way forward should not be to waive environmental assessments but invest in local, regional and national capacity to carry out assessments and deliver permits on time. Capacities were cut in many countries following the 2008 financial crisis as part of austerity measures. It is vital to invest now in assessment and planning capacity across the EU.
Fear of losing competitiveness is also driven by the obsessive commitment of some EU member states to large net exports. Yet on a broader canvas concentration of clean industry in a few global regions could exacerbate uneven development and hamper other economies progressing towards their own ‘strategic autonomy’.
On the one hand, industrial clusters provide hubs of innovation, economies of scale and concentration of skills. On the other hand, the presence of clean industries across the globe reduces transport costs, creates stronger international political support and distributes economic gains more fairly.
The Green Deal Industry Plan acknowledges the importance of a skilled workforce for the transformation of our economies, and reskilling and increased training can offer a lot. But this effort should focus on the utilisation of ‘no-regret’ technologies while promoting gender equality and the inclusion of youth and excluded groups, such as the Roma.
The EU must resist calls from business to drop, delay or dilute regulations that could be the catalyst for innovation and create the industry needed for a resilient future. It should set clear and ambitious criteria for subsidies to make wise use of public funds, avoid supporting the status quo that has fuelled the climate crisis, and encourage rather than erode the responsibility of industry for mitigating emissions.
If the Green Deal Industry Plan adheres to these principles, the US and EU can together take a significant step towards more environmentally-friendly, climate-compatible industry across the globe. A truly comprehensive response would go even further and support an economic paradigm shift—away from short-term profit-maximisation towards industry that is responsible, competitive and sustainable for the long term.