Emerging economies will be nervous about the competitiveness of their manufacturing sectors if this reshoring of clean technologies expands
On March 10, a joint statement by US President Biden and EU Commission President von der Leyen stated that they “intend to immediately begin negotiations on a targeted critical minerals agreement”. Photo: @vonderleyen / Twitter The European Union (EU) announced key new initiatives on March 16, 2023, to boost domestic green manufacturing. This was in response to the United States’ climate bill, the Inflation Reduction Act (IRA), released in August 2022.
The measures are aimed at expanding subsidies to select green industries, speeding up permitting processes, and increasing domestic extraction and processing of critical minerals needed for the green transition.
Two major initiatives announced on March 16 are the Net Zero Industry Act (NZIA) and the Critical Raw Materials Act (CRMA), clubbed under the wider Green Deal Industrial Plan which European Commission President Ursula von der Leyen unveiled on February 1.
The NZIA aims to meet at least 40 per cent of the EU’s green technology needs through domestic manufacturing by 2030. Eight technologies are identified as “strategic net zero technologies”:
It offers a range of industrial policy tools from faster permitting processes for net zero projects, green public procurement, and “regulatory sandboxes” for research in innovative net-zero technologies.
The CRMA aims to reduce dependence on the import of critical raw materials by setting domestic goals of at least 10 per cent of the EU’s annual consumption for extraction, 40 per cent for processing, and 15 per cent for recycling by 2030.
It also sets a goal of having “not more than 65 per cent of the Union’s annual consumption of each strategic raw material at any relevant stage of processing from a single third country”.
These measures are part of a trend among advanced economies to counter China’s dominance of green manufacturing and critical mineral mining and processing, and stake their claim on global green supply chains, as highlighted in my analysis on behalf of the Centre for Science and Environment (CSE) last month, A New Order of Trade.
The IRA offers about $370 billion in subsidies over 10 years, mainly through tax credits, for renewable energy, electric vehicles, energy-efficient appliances, carbon capture and storage and clean hydrogen.
It also applies “domestic content” requirements, where tax credits for electric vehicles are contingent upon certain parts being manufactured or assembled in North America.
Fearing that European companies — particularly automakers — will jump ship and expand only in the US, the EU started voicing concerns about the US’ IRA in late 2022. The EU has strict “state aid rules” which typically do not allow tax breaks of the scale that the US is providing. Smaller EU countries fear that economies like France and Germany can afford larger subsidies and may thereby distort the “single market”.
However, these rules have now been loosened, with the EU announcing two further provisions this month — an amendment to the General Block Exemption Regulation and a new Temporary Crisis and Transition Framework — which will create room for more ‘state aid’ to be invested in clean technology production in the EU.
The US softened its stance in response to protests from the EU and through bilateral meetings agreed to relax its domestic content rules of the IRA and potentially allow EU companies to access its tax credits.
On March 10, a joint statement by US President Biden and EU Commission President von der Leyen stated that they “intend to immediately begin negotiations on a targeted critical minerals agreement for the purpose of enabling relevant critical minerals extracted or processed in the European Union to count toward requirements for clean vehicles in the Section 30D clean vehicle tax credit of the Inflation Reduction Act”.
European civil society groups I spoke to have expressed concern that the various elements of the Green Deal Industrial Plan, including the NZIA, seem more like competition policy than climate policy, with excessive focus on increasing the supply of green tech through manufacturing, and not on reducing demand or pursuing circular models.
In a joint letter, European CSOs call for better targeting of public funds “to support truly transformative green technologies whose deployment will help EU’s decarbonisation efforts, and which align to behavioral change (demand-side management)”, rather than indiscriminate support for private companies.
The EU’s latest measures retreat on its preference for market-oriented climate policy anchored by carbon pricing through its Emissions Trading System. They opt instead for industrial policy tools to keep pace with the US’s big new green tax breaks.
European think tank Bruegel argues that while the regulatory sandboxes for research and streamlining of regulations are positive moves, import substitution on such a massive scale will make the EU energy transition more expensive.
Questions on how the EU’s measures will impact the developing world remain unanswered. Innovation in green technologies through the EU’s investments could lead to spillover benefits for the rest of the world.
Large-scale adoption could over time reduce costs, similar to how Germany’s feed-in tariff led to massive demand for solar PV and catalysed Chinese production for the same.
Emerging economies will however be nervous about the competitiveness of their manufacturing sectors if this reshoring of clean technologies expands.
Domestic subsidies by wealthy nations, coupled with measures like a carbon border tax that the EU also announced late last year, would penalise developing countries with carbon-intensive operations, raise costs for their manufacturers and have adverse implications for their foreign exchange earnings.
Irked by increasing green barriers, India submitted concerns to the WTO this week over the rising trend of countries using environmental processes as “protectionist non-tariff measures”.
Moreover, CSE’s analysis shows that current trade rules prevent developing countries from using local content and technology transfer requirements, or government procurement to stimulate domestic industries — tools that rich countries are now embracing to ensure their economic resilience.
We argue that developing countries must then be allowed to deploy industrial policy tools like subsidies to forge their own equity and green development growth paths, without being subject to over-reaching trade rules.
“A more positive agenda would support developing countries' priorities, additional financing, green technology transfers, capacity building, supporting environmentally sustainable economic diversification, and adequate policy and fiscal space for them to design their own integrated policies to advance towards their climate and developmental goals”, said Katie Gallogly-Swan, economic affairs officer at UNCTAD, speaking on a CSE webinar last month.
UNCTAD’s Technology and Innovation Report 2023 points to the fact that developing countries’ share of the green tech market fell to 33 per cent from 48 per cent between 2018 and 2021.
It calls for coherent policy action to enable developing countries to profit from green tech or risk facing growing economic inequalities, as developed countries reap most of the benefits.
The European Commission’s Executive Vice President Frans Timmerman stated in January a desire to engage with India more for common climate goals and for “developing joint projects, facilitating investments, facilitating the possibility to have technology transfers”.
A common position on viewing China as an adversary likely underpins this renewed engagement, among other things. The EU is India’s second largest trading partner and bilateral trade with the EU rose to $116.36 billion in 2021-22.
The NZIA has a provision for “Net-Zero Industrial partnerships” to help the EU “collaborate with like-minded countries” and “diversify trade and investments in net-zero technologies”.
This signals a shift towards ‘climate clubs’ where geopolitically friendly countries follow mutually agreed upon green standards in manufacturing and engage in trade, such as the EU and US’ Global Arrangement on Sustainable Steel and Aluminum.
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