Summary
- The new European Commission will seek to improve Europe’s capacity to manufacture green technologies.
- Member states agree on this headline aim, but they are divided on how to achieve it and the level of priority to give it.
- Some member states want to double down on building an effective green industrial policy, others place greater priority on keeping down the costs of green technology and so believe that they need to continue to import some green technologies from outside Europe, at least for now.
- The EU can ill afford this diversity of approaches. To benefit from economies of scale, it needs to act as a bloc.
- To move the union beyond national approaches, the European Commission should spearhead a common strategic understanding of the challenge the faces, put in place a credible financial package for research and development for the next green technology wave, and prioritise a limited number of areas for innovation over the next decade.
Catching the wave of green technology
Green industrial policy is now all the rage in the United States, India, and China. These countries seek to dominate the industries that will make the key technologies necessary to decarbonise the global economy. Unfortunately, the European Union risks falling behind in this race to win the future. Certainly, the Chinese situation – control of up to 80 per cent of all the stages of making solar panels and 60 per cent of wind turbines and electric-car batteries – is somewhat disheartening to European policymakers.
Nonetheless, the EU can still compete globally in green technology. But rather than fight yesterday’s battles on products such as solar panels, the EU’s focus should be on the coming waves of innovation. The biggest challenge for the bloc, and one of the main reasons why it has not invested sufficiently in the first waves of green technology, is because of the diversity in European approaches to the green transition. The EU’s competitors in green technology are deploying both their continental-sized markets and their fiscal strength to support the development of green technology. The member states of the EU will need to coordinate and align their efforts if they are to compete with the US and China.
To understand this diversity, we asked ECFR’s national researchers in the 27 member states to carry out a survey in all the EU capitals. We wanted to understand the extent to which member states prioritised the need to develop “Made in Europe” green technology, as opposed to importing it in order to keep the costs of the transition down for consumers, which policy instruments the member states need, and which green technology areas they thought would give Europeans the most return for their investment. We field-tested the findings in May 2024 with a closed group of policymakers from the EU institutions and member states, as well as analysts and thinkers on the subject, to help contextualise the member states responses.
This paper draws on the findings of this project. It will briefly map the thinking across the different EU member states, highlighting points of difference and tension. It will then look at the strategic outlook for the EU in different areas of green industrial policy – including innovation policy and barriers to green technology – drawing on not only the member states’ positions, but also open source data to discuss how the EU ranks against the global competition and how it works with global partners to shore up its supply chains.
The paper will then look at the toolkit for green industrial policy – finance, skills, and administration and regulation – and how Europeans should invest in each. Finally, we will draw this together into a set of proposals on a green industrial policy for the new European Commission that will take office in 2024. We will look to foster a policy that can not only drive the green transformation of EU economies, but also underpin the success of European companies in a global economy that is decarbonising.
Disadvantaged by diversity
The Biden administration’s introduction of the Inflation Reduction Act (IRA) in 2022, caused much consternation in European capitals. European policymakers worried that European companies would never be able to compete with subsidised green technology from US firms and that EU companies would be lured to invest in the US, rather than Europe. Ursula von der Leyen claimed that the IRA, like Chinese subsidies, represented unfair competition for European firms since it distorted the playing field. Indeed, European authorities often framed the IRA as an affront to the basic WTO principles of free trade and non-discrimination. From a US perspective, the IRA represented an answer – albeit almost a decade after the fact – to the Made in China 2025 policy that Beijing has pursued since 2015 to subsidise the development of Chinese electric vehicles and green technology more broadly.
From a European perspective, however, our national researcher survey, and our expert workshop, suggest that the challenge that the IRA has thrown up for Europeans is that they do not agree on how to respond to it. They disagree on the extent to which American actions were fair, whether they can or should put themselves in a position to emulate it, or whether they should rather focus on keeping the green transition as cheap as possible for consumers, even if that means delaying investment in indigenous EU green technology.
The EU member states broadly break down into four groups in their thinking about green industrial policy: the Enthusiastic Subsidisers, the Guilty Subsidisers, the Green Importers, and the Green Agnostics.
Enthusiastic Subsidisers
The phrases that came up most frequently in the response to the question about which green industrial policy interventions from the EU would be most important were ‘’funding’’, ‘’support’’, ‘’invest’’ and ‘’research, development, and innovation’’(RDI). These words point towards the most powerful group of member states around the European Council table, the Enthusiastic Subsidisers, who see green technology subsidies as essential to future European growth and competitiveness. Germany leads this group which comprises many of the larger member states, including France, Spain, and Italy.
Germany has the financial capacity to invest in green subsidies and is a major donor of state aid to companies. It has a high level of investment in electric vehicles, though dependence on China for key parts of the production process remains a concern. Spain, for whom the automotive industry is also important, is providing significant public support as well and thus increasing electric vehicle production every year. Renault, Ford, Mercedes, and Nissan all have production factories in Spain for hybrid or fully electric cars. Poland has also been relatively successful in attracting foreign investment through special economic zones and tax incentives.
Other larger member states such as Italy are less well advanced in electrification. Italy in particular is threatened by international competition from the US and China because its leading car company Fiat has been slow to develop capacity in electric vehicles and political incentives have been weak.
However, despite the significant amounts of support being invested in building up green technology in these states, there is still concern in national debates in the Czech Republic, Finland, France, Ireland, and Romania, among others, that governments are not subsidising enough to be competitive. Many of the national researchers described a lack of financing for development and commercialisation of green technology as one of the main obstacles to their member state taking advantage of the business opportunities of the green transition. This theme also came through strongly in our closed-door workshop from private and public sector representatives. Both groups saw a critical gap in the provision of investment at the earlier, riskier stages of green tech projects.
Guilty Subsidisers
Several small- or medium-size member states, however, such as the Netherlands, Denmark, and Sweden are critical about the lack of a level-playing field when it comes to national state aid, and adovoate for a more traditional free-trade approach. (This criticism does not imply that they are not also subsidising their own industries in sectors, such as battery production, in which they have leading companies.) Our researchers found that these policymakers were keen to develop more of a level-playing field within the EU. They are particularly concerned that few member states can match German government investment in German companies. This concern is broader than electric vehicles and also emerges with regard to hydrogen-based steel making and other innovative low-carbon technologies.
The Guilty Subsidisers are not only concerned about fragmentation of the internal market within the EU. Our researchers in these states also reported concerns about the impact that too much reliance on subsidisation and tariffs could have on the EU’s ability to champion free and fair trade in the international system. The debate over electric vehicles is an illustrative case. Enthusiastic Subsidisers, such as France have been pushing the European Commission to introduce higher tariffs on Chinese electric vehicles that benefit from government subsidies in order to protect the growth of French electric vehicle development. But our researchers in the Guilty Subsidiser countries such as Sweden highlighted concern in their capitals about the French view prevailing at the EU level. The commission’s decision on tariffs in response to the US decision to impose 100 per cent duties on Chinese EVs in May 2024 is more closely in line with French than Nordic thinking.
Green Importers
A further important dividing line between member states is on the extent to which they believe in using the limited resources available for investing in the green transition. There are many competing demands on budgets, from doubling down on defence spending to supporting Ukraine, sustaining the cost of enlargement, and supporting vulnerable citizens facing high living costs in many EU countries. We asked the national researchers to explore whether policymakers in their capitals felt that governments should spend these finite resources on supporting the growth of green technology at home or focus firmly on keeping the costs of the transition down for consumers. In practice, given the greater availability and lower costs of solar panels, electric vehicles, batteries, and critical materials in Asia, and particularly China, keeping costs down implies importing these goods.
A majority of member states responded that the priority should be keeping costs down, while continuing to rely on importing if necessary. This group – Green Importers – includes a broad range of states in terms of size, geography, and approach to fiscal discipline, from Austria, to Estonia, Greece, Luxembourg, Portugal, and Slovenia.
Clearly, the choice between importing in the near term and investing for the long term in building up innovation and capacity is to some extent a false one. A successful European approach to innovation will need to involve co-development and partnerships with partners beyond the EU. However, the distinction remains helpful when building an EU-wide green industrial policy strategy. Such a strategy will need to answer to the instincts of these different groups of member states and to allocate limited finances in such a way as to maintain the political will of all parts of the union.
Green Agnostics
A final, small group of member states presents a different challenge to developing a green industrial policy. They remain unconvinced that the green transition is a priority at all. Hungary spearheads this group and is, at least to judge by the media coverage, the most sceptical member state of the need for a green transition. Hungarian officials, in interviews with our researcher, characterised the European Green Deal as “unnecessarily ambitious’’ and “not in touch with real world developments.” They focus on actively promoting Chinese investment and are therefore strongly against any competitive measures that could compromise China’s willingness to invest.
Hungary is not alone. In the Czech Republic, for example, the right-wing political elite (the “Yes” party led by Andrej Babis) fears that thanks to the European Green Deal, Czech heavy industry is dying.
Moreover, this research took place before the June European Parliament election which saw a rightward shift among voter concerns, in part, about the cost of living and a desire from parts of the electorate to focus more on the everyday reality of voters. This political movement may have further entrenched Green Agnosticsin various member states since our research took place.
In any case, EU efforts to build a consensus on a green industrial policy will need to incorporate an effort to make the case to these “agnostic’’ national governments as to how a green industrial policy can be helpful with international competitiveness and long-term wealth creation in a way that all parts of the EU can benefit from.
About the author:
Susi Dennison is Senior Director for Strategy and Transformation & Senior Policy Fellow at ECFR
Mats Engström is Senior Policy Fellow at ECFR