Opinion & Analysis

The EU Net Zero Industry Act and the risk of reviving past failures

How the EU might respond to clean teach subsidies, in the form of a leaked draft law entitled the Net Zero Industry Act (NZIA), is deeply worrisome.

The United States Inflation Reduction Act (IRA), and other clean-tech subsidy schemes around the world, provide a competitiveness challenge to the European Union. A glimpse into how the EU might respond, published in the form of a leaked draft law entitled the Net Zero Industry Act (NZIA), is deeply worrisome, both because of its policy objectives and because of the tools that might be deployed to achieve those objectives.

The policy objectives of the leaked draft are unabashedly protectionist. The aim is import substitution of specific manufacturing products, on a rather massive scale. Although the draft argues correctly that the EU is too reliant on China for some of its imports, the aim is not to reduce concentation on a specific trading partner for security or resilience reasons, but rather to protect and expand the EU’s industrial output in clean tech in general.

In terms of the tools, the leaked draft represents a return to industrial planning of the 1960s, such as the Plan Calcul, a failed programme, shut down in 1975, that had sought to promote France’s national computer industry amid growing fears of overdependency on the US. The draft NZIA includes a minumum domestic production target for clean technologies, set at 40% percent of EU deployment by 2030.

This would be a major increase from current levels in technologies such as solar panels, where the EU currently produces domestically only around 10% of the panels it deploys. The goal would be achieved through special treatment of ‘net-zero resilience projects’, clean-tech manufacturing projects identified by the European Commission on the basis of a set of criteria outlined in the NZIA. EU countries would be asked to support these projects via i) streamlined permitting procedures within time limits pre-set by the EU; ii) giving them priority status to ensure rapid treatment of all judicial and dispute resolution procedures relating to them; iii) giving them public interest status, giving authorities discression to override environmental impact concerns; iv) access to finance, including through subsidised off-take agreements and public guarantees.

There are three reasons why this would constitute terrible policy.

First, it will likely set back, rather than accelerate, the EU green transition. Decarbonisation should and does involve renewable energy production targets, which should be reached as quickly and cost-efficiently as possible. International trade in the goods required to produce clean energy helps achieve this. Excess dependence on a specific exporter should be avoided (reliance on Russian gas provides a cautionary tale), justifying industrial policy. But across-the-board import substitution, including from a diversified base of trading partners, makes no sense and will make the EU energy transition more expensive.

Second, efforts to improve EU competitiveness could be hindered. Like the special economic zones sometimes introduced by developing countries with poor business environments, the approach in the draft NZIA distracts from the real challenges. In the EU, these are high energy prices and the lack of a genuine single market, including tepid progress on capital markets union. The draft NZIA would not address these obstacles; it would simply give special treatment to specific projects.

Finally, the approach in the leaked NZIA would send awful signals. To trading partners in the developing world that are seeking to climb the value ladder, it will look just as bad as the US IRA. Like China and the US, the EU would now be making it clear that it is not interested in clean-tech imports, even from partners that might be able to produce at substantially lower cost. EU allies like the US and Japan will not fail to notice that the import substitution aims are as hostile to them as they are to China. From the perspective of EU policymaking, it would send the signal that regulatory even-handedness and market-based outcomes – the pillars of the single market and EU economic strength – could be thrown overboard when an industry is labelled ‘strategic’, even when this is not backed by any assessment of the trade-offs between economic efficiency and geopolitical resilience.

Not all ideas in the leaked draft are bad. Many would be very good if applied broadly. Streamlining regulation is good. Regulatory sandboxes are good. Improving access to finance is good, as is improving skills, especially in clean tech. What is not good is special regimes for clean tech to meet arbitrary production targets.

Europe needs to roll-out renewables faster, and it needs to face up to geoeconomic challenges. This may justify unconventional policies, including subsidies and competition-friendly industrial policy. But it does not justify crude protectionism and dirigisme. We hope that both are at least blunted when the final version of the NZIA appears next week.

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