EU to counter US climate plan with new green industry law, clean tech funding

The European Union is to propose a suite of regulatory interventions and funding mechanisms to boost clean technologies and combat potential market distortions created by the US Inflation Reduction Act, European Commission President Ursula von der Leyen said Jan. 17.

The commission's Green Deal Industrial Plan includes a Net-Zero Industry Act to help expedite permitting for wind, solar, heat pumps, hydrogen and other green industries, as well as tax breaks and subsidies for European production facilities operating across the clean-tech value chain.

The strategy will make Europe "the home of clean tech and industrial innovation" and help fend off "aggressive attempts" by countries to lure production capacity away from the EU, von der Leyen said in a speech at the World Economic Forum in Davos, Switzerland.

China already dominates the production of electric vehicles and solar panels, while the US is offering financial incentives for domestic manufacturing via the Inflation Reduction Act, or IRA, its $369 billion climate and energy plan that was signed into law in August 2022.

US President Joe Biden described the IRA as "the biggest step forward on climate ever," and a host of European energy companies have applauded the positive signals it sends to the market.

However, the law has also come under fire from policymakers in Europe for having potentially adverse effects on competition.

The IRA "raised a number of concerns in terms of some of the targeted incentives for companies," von der Leyen said. "This is why we have been working with the US to find solutions, for example so that EU companies and EU-made electric cars can also benefit from the IRA."

The commission president said the discussions are aimed at avoiding "disruptions in transatlantic trade and investment," and added that incentive programs in the US and the EU should be "fair and mutually reinforcing."

"[We] should set out how we can jointly benefit from this massive investment, for example by creating economies of scale across the Atlantic or setting common standards," von der Leyen said.

The president's eagerness to collaborate with the US is "very promising" and a relief to those worried about a potential trade dispute, according to Mary Hellmich, an analyst on international climate policy and transatlantic climate cooperation at European think tank Adelphi.

"Not only is their cooperation good news from a geopolitical perspective, but a transatlantic harmonization of definitions and standards for hard-to-abate sectors could help put the world on a fast track to industrial decarbonization," Hellmich said in an email.

Leveling the playing field

As part of the Green Deal Industrial Plan, the commission will temporarily adapt its rules around state aid -- the concept of companies gaining advantages due to government funding -- to make calculations easier, procedures simpler and approvals faster, von der Leyen said, adding, "for example, with simple tax-break models. And with targeted aid for production facilities in strategic clean-tech value chains, to counter relocation risks from foreign subsidies."

A simplification of the EU's state-aid rules was first mooted in December 2022. Reforms "could help level the playing field between Europe and the US," according to Sarah Jackson, policy adviser for transatlantic diplomacy in think tank E3G's Berlin office.

"The big fear is deindustrialization and the EU not being seen as a leader in the clean energy future," Jackson said in a Jan. 13 interview prior to von der Leyen's announcement.

For the commission's plan to not fall short of greening the EU's economy, there needs to be a strong European strategy for decarbonizing heavy industries like metals and chemicals, Jackson said Jan. 17 after the president's speech.

This needs to be "paired with a fiscal plan that ensures a relaxation of state-aid rules [does] not only benefit wealthy member states who are able to heavily subsidize, but rather gives all member states fiscal space through new EU money," Jackson said in an email.

The commission will prepare a European Sovereignty Fund later this year, which will boost funding resources for upstream research, innovation and strategic industrial projects that are critical for net-zero. It will also undertake work to meet the "huge growth in skills and skilled workers" required in the transition, and is developing an "ambitious" international trade agenda, von der Leyen said.

In all, the president's announcement "underscores that policy signals from the EU and [member states] and the market alone are not enough for the bloc to embark on an economically prosperous green transition," according to Hellmich.

"Regardless of the leeway granted to the EU from the US Treasury Department on IRA implementation, it's clear the EU will move forward on increasing its funding for sectors critical to transition its economy," Hellmich said.