As the EU aims for net-zero carbon emissions by 2050, the next frontier for decarbonisation is in energy-intensive industries. This ties the EU’s climate ambitions to the need to preserve its industrial competitiveness. At the same time, both the US, with the Inflation Reduction Act (IRA), and China, with its endless state support, have been funding green industries, from renewables to electric vehicles (EVs). While the Trump administration is now rolling back the IRA, European leaders have realised that the world’s two largest economies have long employed subsidies as their main industrial policy tool – an approach that differs significantly from the EU’s focus on carbon pricing and regulation.
Furthermore, industrial policy in the EU has so far been a predominantly national affair – with the risk of it becoming the prerogative of few fiscally capable countries home to large, well-established industries. At the same time, Europe moved faster than the US on climate policy. This has meant that markets for clean technologies, and associated production have emerged earlier and on a larger scale in Europe. The EU has real strengths in some of the technologies that are key for the energy transition, from wind turbines to electrolysers – for brevity, we refer to these transition-related technologies throughout the paper as ‘clean tech’.
The geopolitical context is changing in ways that the EU should be quick to exploit. While large parts of the IRA support schemes have already reached the economy, Donald Trump will undo as much of the IRA as he can, removing subsidies that greatly boosted investments in clean technologies in the US during Joe Biden’s mandate. Trump is also reversing some of the few federal regulations that encouraged decarbonisation, such as the mandate for electric vehicles. The EU should seize the occasion and focus on strengthening its industrial base and building the foundation for stronger clean tech manufacturing.
On the other hand, however, the EU is exposed to the second China shock. China is shrinking its imports while directing investment into expanding domestic production in the automotive, machine-building and clean tech sectors – chief among them, electric vehicles. China’s internal demand remains too weak to absorb the resulting production. As a result, China’s exports have surged, its trade surplus has now ballooned to $1 trillion and its export-based growth is cutting into both the European market and the EU’s global export markets. Further, Europe’s reliance on imported fossil fuels keeps its energy prices stubbornly higher than those of the US, creating added costs for European energy-intensive industries.
So while European industry is leading in a range of clean tech sectors, there are challenges that business alone cannot overcome. The report by former Italian prime-minister Mario Draghi has made it clear that the EU needs a strategy for its industrial policy to maintain primacy in its strongest manufacturing sectors, and to build leadership in the clean tech sectors that will be crucial in a decarbonised economy. But a fragmented approach focused on individual member-states is a dead end: the IMF recently showed that state aid from EU member-states has tripled over the past decade, increasing from 0.5 per cent of GDP in 2012 to around 1.5 per cent in 2022. However, overreliance on state aid can create an uneven playing field within the bloc, weakening both the single market and creating political tensions.
Addressing this requires a new set of tools to allow for an EU-wide industrial policy, and a change in mindset in terms of both the type and amounts of funding devoted to this objective. So far, EU-level tools favouring clean innovation were predominantly horizontal in nature, meaning generic rather than sector-specific: this is driven by the EU’s will to stay technology-neutral, allowing market players to identify appropriate technologies instead of picking them itself. But the technology neutrality mantra may need to be revised: in a context where other powers are heavily subsidising key sectors to conquer market share, the EU may need to consider targeted support for strategic sectors, as suggested in the Draghi report. Clearly, not acting could be highly risky, but acting is not risk-free either. When authorities engage in industrial policy in a given sector, or give support to a single firm, they risk wasting money on firms that do not need funds or that turn out to be unviable.
An effective industrial policy requires an adequate pot of cash. In her political priorities, Ursula von der Leyen has promised a new European Competitiveness Fund to invest in strategic technologies to be manufactured in the EU, “from AI to space, clean tech to biotech” by leveraging and de-risking private investment. This paper considers the policy tools and funds – both horizontal and sector-specific – the EU already has to support its clean tech industry, the gaps in this area, and the additional instruments that are necessary to address them.
About the Authors
Sander Tordoir is chief economist at the Centre for European Reform.
Elisabetta Cornago is a senior research fellow at the Centre for European Reform.