Superpowering the EU Green Deal: Can the EU’s NZIA compete with the USA’s IRA?

José Arroyo and Jakub Hodek navigate the Net-Zero Industry Act (NZIA), the EU’s answer to the Inflation Reduction Act (IRA)

The von der Leyen European Commission has a lofty goal for Europe to the world’s first climate neutral continent by 2050. The 2019 European Green Deal, and raft of legislative and policy measures that followed, aimed to reach that objective.

Across the pond in the USA the Biden Administration’s Inflation Reduction Act (IRA), designed to boost US manufacturing with $369bn for a clean energy related project. This has threatened European investment and green energy plans, potentially incentivising European companies to move their investments in manufacturing to the US.

The EU has not been totally agreed on how to respond with some states fearing France and Germany could support their industries significantly more than the others. However, the European Commission announced the Net-Zero Industry Act (NZIA) aimed at simplifying and fast-tracking European strategic projects.

Analysis

The Net-Zero Industry Act is designed to allow the EU to gain an edge over other markets in the development of the green technologies. Companies with relevant products stand to benefit from this proposal and the subsidies and advantages that it creates.

The Act acknowledges the importance of net-zero technologies for a transition to a climate neutral economy and recognises that the EU is heavily dependent on China and other countries for the manufacturing of net zero technologies. This is particularly the case for solar energy, heat pumps, wind energy, and batteries. It also acknowledges that third countries, namely the US, Japan, China, and India are already providing significant subsidies for their net-zero industries.

The Act aims to get the EU’s overall manufacturing capacity of strategic net-zero technologies to close to 40% of the Union’s deployment needs by 2030.

The Act identifies eight “Strategic net-zero technologies” that will make a significant contribution to decarbonisation. These are:

1. Solar photovoltaic and solar thermal technologies
2. Onshore wind and offshore renewable energy
3. Batteries and storage
4. Heat pumps and geothermal energy
5. Electrolysers and fuel cells
6. Sustainable biogas/Biomethane technologies
7. Carbon capture, utilisation, and storage
8. Grid technologies

Unlike other territories (the UK designated nuclear energy as environmentally sustainable in its 2023 Budget), the EU doesn’t count nuclear as part of the mix for reaching the 40% goal. The Act intends to accelerate CO₂ capture, setting an objective of an annual 50Mt injection capacity in strategic CO₂ storage sites in the EU by 2030. It also aims to u unlock private investment in hydrogen in the EU and in third countries.

To achieve the Act’s goals, the Commission will support so-called Net Zero Strategic Projects, projects that will boost the EU’s net-zero technology manufacturing. Companies will be able to apply for this label for their projects. When they receive it, these will be entitled to priority status at national level, which should ensure rapid administrative and urgent treatment in all judicial and dispute resolution procedures relating to them.

The Commission will work with the European Investment Bank and others to scale up support to investment. Where private financing is insufficient, Member states may support net-zero industry projects via state aid. A “European Sovereignty Fund” is set to be presented before the summer with the goal of providing structural answers to the investment needs of net-zero projects and ensuring funding reaches all member states, allaying small countries’ fears that they will be left behind.

Risks and delay

It will take time for the NZIA to go through the EU legislative process. The Council and the European Parliament need to take a position on it and then agree on a common amended text. There is potential for fierce disagreements in the EP and Council, particularly over issues such as funding and the inclusion of nuclear energy and sustainable alternative fuels into the list. The Commission will certainly want to get it approved before the European Parliament goes into election mode in 2024 as a way to secure President von der Leyen’s legacy.

As ever in the EU, good intention doesn’t mean delivery.  While the Act promises to reduce bureaucracy and limit the time needed to obtain a permit for net-zero projects, keeping those promises will in the end be up to the member states and their capacity to manage applications. This could lead to a fragmentation of the single market between jurisdictions with better and worse capacities to manage the NZIA.

A risk that often comes with state aid is a subsidy war with the US and other countries. This could undermine the NZIA’s goal of supporting innovative net-zero industries and more generally the EU’s competition policies.

Next steps

The European Commission has presented the proposal for an EU Regulation on NZIA, along with the Critical Raw Materials Act. The Council and the European Parliament will now adopt their respective positions and negotiate a common text in a so-called “trilogue” between the two institutions and the European Commission.

As an industry file, it will most likely be taken up by the ITRE committee (Industry, Research and Energy) led by Cristian-Silviu Busoi (EPP, Romania). There will be considerable disagreements over what is considered “net-zero” including whether nuclear or sustainable alternative fuels should be included.

The current Swedish presidency may be reluctant to prioritise a file that goes against their long-standing opposition to state subsidies in the EU. However, neither the Spanish nor the Belgian governments, who will succeed the Swedes at the helm of the Council seem to have strong objections.

Delay would not be the friend of the Commission.  Companies such as Volkswagen are already prioritising investment in the US where subsidies are available and relatively easy to obtain. Industry leaders have also indicated difficulties in understanding what the EU offers.

The big question is,  can the EU step up and deliver in time?