Why a successful European response to the IRA needs to build on the EU Green Deal

The largest climate bill in the US history, the Inflation Reduction Act (IRA) sends a welcome political signal that the Americans are re-joining the fight against the climate crisis. It has spurred similar initiatives by Japan, Germany, and France. The EU Commission is expected to propose a “Net Zero Industry Act” tomorrow and a new “EU Sovereignty Fund” before the end of the summer.

The key challenge for the EU is to ensure the resilience of industrial value chains for key clean technologies. While the US proposes generous subsidies, the EU has the advantage that it can rely on the already established Green Deal policy framework which is significantly stronger than the IRA when it comes to long-term demand creation for green technologies through targets, green standards, and public funding. 

Rather than seeking to out-subsidise the US, Europe should build on the Green Deal framework by setting sectoral objectives for domestic manufacturing of clean lead technologies that are complemented by well-calibrated EU and national funding, and a strategic approach to enhancing the resilience of clean tech industrial value chains, including through international partnerships. The announced EU sovereignty fund must set a new standard for transparency and accessibility of EU funding.

Below, we outline four key areas that the EU’s green industrial policy should focus on, in line with the priorities for the industrial transformation we have set out in our “A Clean Industry Package for the EU” study.

Targets: To provide a clear direction of travel, the EU should set sectoral objectives for the domestic manufacturing of priority technologies such as solar panels, wind turbines, industrial heat pumps, battery technologies and electrolysers. Different technologies or products will need a different level of support: a mature technology exposed to intense global competition, such as wind turbines, will need a different approach than a nascent technology, such as green cement.

Member state funding: To fast-track public support for green technologies, adjusting the state aid framework by moving from prior approval to notification will be key. The relaxed state aid rules should, however, be limited in time and subject to specific conditions, to avoid distortion in the single market. In addition, maximum thresholds should be set for the levels of subsidy to a given company and per member state.

EU funding: Given the uneven financial capacity of EU member states, the announced sovereignty fund should help to level the playing field within Europe and must set a new standard for transparency and accessibility of EU funding. The fund should also put additional emphasis on early-stage development of green lead technologies.

Industrial alliances: As a cornerstone of strategic partnerships, the EU should develop a solid approach to assessing industrial value chains, to allocate financial resources and balance competing objectives such as resilience, competitiveness, cost effectiveness and innovation.

Maintaining principles of good policy design is key to Europe’s success

The benefits of the EU’s “policy package” approach are evident: setting sectoral manufacturing targets, mobilising private investment via regulation, banning investments that risk a carbon lock-in and making polluters pay in combination with targeted allocation of public funds create a robust, long-term demand pull for investments into green technologies.

Such a multi-faceted approach potentially grants the EU an advantage for example on certain technologies for industrial heat electrification (PtH), advanced material recycling and circularity, and low-carbon processes for energy-intensive sectors such as cement, steel, plastics, and chemicals.

If Europe now seizes the political opportunity provided by the IRA by expanding on the EU Green Deal, the continent has the chance of getting to the forefront of the industry sector’s sustainable transition to climate neutrality.