Industrial policy returns, but which one, how and for what purpose? This proposed method aims to find the right combination in the interest of the European Union.
Report by Luke Haywood, Policy Manager for Climate and Energy, and Patrick ten Brink, Secretary General of the EEB. This article was originally published on Le Grand Continent, in French and Spanish.
The EU is poised to adopt at breakneck speed a piece of industrial policy – The Net Zero Industry Act (NZIA) – that, if badly designed and implemented, risks jeopardising rather than advancing the EU’s climate, environmental and social agenda.
It is worth taking a step back and considering both the importance of this piece of legislation and the motivation of the EU to reconsider industrial policy now.
A new trajectory
The Net Zero Industry Act (NZIA) is so important because it represents a change of direction. Active industrial policy is back.
In the past few decades, the EU has mainly been trying to increase the level of competition in EU industry, not to selectively support one industry over another. Why the change of heart? Obviously, the massive subsidies handed out by the US federal government via the Inflation Reduction Act (IRA) are the direct cause. But that is only a partial response: rather than creating unfair competition between trading partners, traditional trade economics views subsidies as generous acts of international welfare. This raises the question – Why not just let the US produce subsidised hydrogen and batteries that Europeans can buy on the cheap? If the US wishes to subsidise our green transition, why not let them?
Understanding the motive of the US is not difficult. With a characteristic belief in technological innovation, the US is desperately trying to make climate-friendly technologies cheaper than dirty technologies, within the constraints of the US political system. Explicit regulations on climate and carbon pricing – such as those laid down in the EU climate law – will not pass in Congress, the IRA passed on a whisker with every single Republican in both houses voting against it. If US subsidies bring important climate technologies down the cost curve, the whole world will benefit. Arguably, this is what happened when European countries provided generous feed-in-tariffs for renewable energy – production of solar power (mainly photovoltaics: PV) and wind went through the roof and prices tumbled.
Why then the attachment to avoiding the relocation of certain industries to the US? A sensible rationale for active industrial policy requires more than a desire to compete with the US. It requires the belief that maintaining and growing a strong European clean industry leads to societal benefits. However, this will only be the case under three conditions:
1. Focus on strategic technologies
The correct industries need to be targeted. These are technologies that will be needed across the world, and at scale. Where support today can lead to cheaper prices, establishing a head-start can drive European industries to commercial success in the long run. The net zero challenge affects many sectors, but the most obvious changes will occur in the energy field. The future energy system is going to be electrified and powered by renewables. Renewables, energy storage, and grid technologies – these three industries will drive the energy system. They all work together to ensure energy security, low costs and rapid decarbonization. Beyond that, circular economy solutions and energy efficiency are obvious targets as are continuous efficiency improvements in industrial production and energy use improvements in products. The EU is already a frontrunner in many of these fields, often catalysed by legislation. Further support could encourage the energy efficiency first principle, helping ensure energy security, keeping energy accessible and reaching climate targets.
By contrast, if governments support the wrong technologies, results can be highly problematic. The strategic industries to support are technologies that are definitely part of the decarbonization pathway and needed at scale across the world.
Consider the calls from some vocal voices of the hydrogen industry lobby to support the use of hydrogen in all sectors. While hydrogen is absolutely essential for some industries’ decarbonization (e.g. the chemicals industry), there are better alternatives for other uses. If subsidised hydrogen makes the use of hydrogen in residential heating attractive it may delay the roll-out of much more efficient heat pumps. This may cause problems not only for households in terms of higher energy costs, but also for industry, as more competition for hydrogen will mean higher prices – risking a delay in decarbonisation here too. Targeting the end use of subsidised hydrogen may be difficult, but better targeting will also mean more support for those industries where it is most helpful. There is a real risk that untargeted commitment to hydrogen without sufficient reflection on cost-effectiveness leads to bad investments. Maintaining and upgrading the gas grid for hydrogen in the hope that green hydrogen could replace fossil gas for domestic heating must be avoided, for example. Perversely, investments here could make people worse off, as the reality of the cost of hydrogen hits and much of the public cannot pay and hence face fuel poverty. Calls for the continued use of fossil gas could follow, creating a lose-lose situation with an ongoing lock-in of gas infrastructure on top of wasted public money that could have been better spent elsewhere.
Nuclear energy is another case in point of a technology that is decidedly not strategic. Too slow to build, unreliable to run (especially in times of climate change due to water scarcity needed for cooling), vastly more expensive than renewables, with a long track record of taking much longer and costing much more than promised, often absorbing vast amounts of public subsidies, funding that could have been better used elsewhere. Nuclear fusion, in the press a lot recently, has always been “30 years into the future”, and recent advances are highly unlikely to lead to at-scale solutions by 2040, let alone 2030, or next winter. It also risks distracting political attention and money from existing solutions such as renewable energies, energy saving and circular economy measures. The international market for fission is extremely limited (there is no “market” yet for fusion), as very few countries are willing to invest in projects that are extremely difficult to deliver on time and on budget. Professor Bent Flyvberg of the University of Oxford crunched the numbers on a large number of very big projects, not only in energy. The worst offenders in cost overruns and delays were nuclear storage projects, Olympic games and nuclear power plants. The best performers were solar power, energy transmission and wind power. For a rapid and cost-efficient transition, renewables are the better strategy – industrial policy support for losing technologies is a waste of money. To make matters even less attractive are the risks of leaks and accidents, indeed even being targets of attack by hostile regimes, and of course the costs of managing radioactive waste for thousands of years.
A third technology that does not appear strategic is Carbon Capture and Storage (CCS). True, all scenarios limiting overshooting to 1.5 or 2 degrees foresee significant amounts of negative emissions. However, these scenarios also foresee much greater emissions reductions than we are seeing. So, the important question is: If we are failing on mitigation and we are failing on storing residual emissions that will need to be stored after dealing with mitigation, what to prioritize? In discussions with policy-makers and industry, we have seen again and again how the prospect of CCS hinders the focus on solutions that avoid emissions in the first place e.g. shifting to electrified instead of combustion-based options. As a representative from the Polish Steel Association rejoiced recently in Brussels, with CCS “old steel has a bright future in the US”. With truly decarbonized alternatives to steelmaking readily available, this illustrates the danger of CCS – mitigation is sidelined. As long as industry continues selling fossil-fuel cars, gas boilers, and private jets, it seems absurd to focus efforts on recapturing emissions rather than preventing them in the first place.
2. Ensure exemplary production standards
The respect for the natural environment and employees’ working conditions must be at the centre of the EU industrial policy. This may seem obvious, but the draft NZIA relies on short deadlines for permitting authorities as a tool to promote net zero industries.
In the absence of sufficient administrative capacity, short deadlines may simply translate into bad planning, less engagement of the public in consultations and less concern for the environment, while undermining democratic processes. Natura 2000 areas cover less than one-fifth of the area of the EU with outstanding natural landscapes and biodiversity. There is no need to site even the most strategic net zero industries here. Austerity measures after the 2008 financial crash led to cuts in administrative capacity. It is essential that these capacities are strengthened, and that due assessments and public consultations take place to enable timely permits for good projects in the right places.
Regarding working conditions, it is worth noting that the IRA in the US includes specific provisions to incentivize employers to pay decent wages and employ a significant share of apprentices. EU policy-makers would do well to heed the advice of trade unions and include such provisions in the NZIA. It is legitimate to ask industries that receive special treatment and government help to be exemplary in terms of providing good jobs.
3. Foster social dialogue
Industrial policy should not be determined over the heads of citizens. Democracy is sometimes slow, but boomerang effects loom if projects are decided without local participation.
The danger is particularly manifest in the short-run permitting rules being put forward for net zero industries – it is unclear how the “alternative dispute resolution mechanisms” that figure in the text can provide access to justice. A first step to avoid these democratic deficits is ensuring adequate civil society participation in the consultations over the NZIA itself. The fact that the European Parliament’s leading committee on this file, the Industry, Research and Energy (ITRE) commission heard voices from the fossil fuel and chemicals industries while not hearing any civil society voices is very problematic. Good industrial policy will help new industries challenge the incumbents and allow new businesses to emerge. Bad industrial policy supports existing business models and creates barriers to innovation. Good industrial policy is rarely drafted by the voices of established industry.
Jobs of tomorrow
Under these three conditions, active industrial policy can achieve sustainable long-term jobs in the EU that help the transition to a net zero world. The net-zero industry act can increase certainty as to where the technological journey is going. Industry voices often mobilize the fear of job losses in discussions around industrial policy. While the workforce transition needs to be accompanied, unemployment is not a reasonable concern: The tasks of decarbonizing our economies require vast investments in almost every household and industry in Europe. The demands are so great that the workforce currently bound up in carbon-intense and costly dead-ends will find employment.
Strategic autonomy
The above arguments are mainly economic and jobs-focused complemented by environmental and citizen engagement-related concerns that link to democratic health. There is, of course, a further dimension to consider, the political one, linked to the need for strategic autonomy.
The past paradigm was that through open trade, there was no need to focus on European autonomy. But with the disruption to the supply chain first from COVID and recently from the illegal Russian war in Ukraine (and the EU’s historic dependency on Russian fossil fuels and uranium), fossil fuel and materials independence and strategic economy concerns have gained in force. The concerns of over-dependence on Chinese exports augmented these concerns, as did the experience with the “America First” mantra under the previous Republican president in the US. It is not inconceivable that there will be Chinese trade restrictions that can complicate EU choices in the future, and similarly US policy towards Europe may evolve negatively and create risks for the EU and indeed the European Project itself.
This suggests that to future-proof the EU requires greater strategic autonomy as well as strengthened trade with like-minded countries and regions, factoring in political risk.
Charting the European pathway
Combined with the arguments of jobs in Europe, economic development, clever policies to avoid the traps of the wrong technologies, democracy and the EU project, and climate and environmental impacts and effectiveness, all underline the need for a well-thought-through Net Zero Industry Act.
The limits of public monies make the choice of where to target public support even more relevant; it also requires that industry responsibilities for action (including greenhouse gas and pollution emissions reductions) are clear – as much of the funding needs to come from polluters paying for their pollution or investing to avoid their paying for or the public being exposed to pollution.
Regulation demanding and driving emission reductions remains key, and where subsidies are targeted, they should be linked to conditionalities as free money is less good at changing minds and investment choices. These need to be complemented by market incentives that make polluters pay to ensure the overall decision-making calculus pushes for a fast roll-out of the right zero emissions solutions and supports responsibility. The EU does not have the potential for US-level subsidies, nor is that the best way forward. The EU mix of instruments, with the European Green Deal and the rule of law at the heart, complemented by active industrial policy and incentives linked to conditionalities and rules, R&D, infrastructure support and effective institutions is the right European way.
Creating the right mix of solutions in turn requires careful research and evaluating opportunity costs. EU decision-makers must be aware of the traps and false solutions, and involve citizens and experts in consultations, while taking the diversity and specificity of European countries into account. If industrial policy is back, let it be the one we need to face the formidable challenges ahead.
