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The EU Green Deal Industrial Plan: From regulating to enabling

The EU is stepping up its industrial policy game and changing its playbook. Over the last few years, the EU’s modus operandi has been to compel businesses to become more sustainable through strict regulation. With the publication of the EU Green Deal Industrial Plan, this is about to change. The new plan shifts the EU’s approach to ‘enabling mode’: a more favourable regulatory framework for investment and direct financial support. The key question is: How successful will this approach be in generating green investments? To maximize the impact of the plan, investments from both the large industry players and SMEs/scale-ups are needed. However, especially the latter have historically struggled with the administrative strings attached to EU aid. Therefore, a lot will depend on whether this challenge will be addressed during implementation.

The Green Deal Industrial Plan comes in response to the U.S. Inflation Reduction Act (IRA) – the $400 billion green subsidy package that sparked criticism from EU decision makers. Brussels sees the IRA’s extensive tax breaks and support as causing market distortions, undermining fair competition for EU companies in the US, and ultimately driving industrial activity off the European continent and towards the US. The Green Deal Industrial Plan is the EU’s answer to rebalance the playing field and to boost green technologies in Europe. It contains various instruments that are structured along four pillars: regulatory environment, funding, skills and trade. However, this package of laws, financing reallocations, and guidance frameworks has sparked a fierce debate in Brussels and the EU about ‘winners and losers’. Tensions will intensify as EU leaders begin debating the proposal at upcoming EU summits and as this plan is turned into concrete legislation. Anticipating these frictions, the Commission’s current proposal is far-reaching one, creating space for a compromise landing zone,

Here are our key takeaways:

1. Net zero industries – who is in and out is not yet clearly defined

The EU Commission’s overarching objective is to boost green technologies. But what exactly falls in scope? A clear-cut definition is missing. Most notably, the planned “Net-Zero Industry Act” aims to simplify the regulatory framework for “production capacity of products that are key to meet our climate neutrality goals”. What this exactly means will still be worked out. Key criteria to make this assessment are the strategic importance of and identified needs for manufacturing investment for products. As a starter for ten, the Commission has provided a non-exhaustive list, naming batteries, windmills, heat pumps, solar panels, electrolysers, carbon capture and storage technologies. The fact that this list has significantly changed compared to a leaked version of the plan underlines that this is in a state of flux. And to note: Not all instruments mentioned in the plan apply for the same industries or technologies. A technology can for example qualify to benefit from simplified permitting, but might not be eligible for the new state aid rules. How easy it will be for companies of all sizes to navigate this environment will be crucial for the actual impact of the Industrial Plan.

2. Existing funds being repurposed to crowd-in private investments

The new plan will make more state aid available to a wider range of businesses, however, most of this money will flow from Member States’ own budgets. No fresh EU money will underpin the plan. Rather, existing funds from the €800 billion post-pandemic recovery and resilience fund (RRF), of which large amounts remain untapped by Member States, will be repurposed. The RRF will get €20 billion boost from REPowerEU for industry decarbonization projects and aid to energy-intensive industries. The redirection of RRF money will be accompanied by new guidance to facilitate a broader and faster uptake of the funds by businesses. The only potential source of new EU money will be the suggested “Sovereignty Fund”. This fund is supposed to have a more “strategic dimension” and would be available to an even broader array of sectors, like biotechnology and AI. It will be presented by the Commission in summer 2023 with the goal of adopting it by the end of the year.

3. Willingness to speed up state aid approval

No miracles when it comes to state-aid. The treaties are the treaties. If anything, the persistent backlash from smaller Member States has only strengthened Executive Vice President Margrethe Vestager’s convictions. In 2022, the EU approved € 51bn aid to deploy renewable energy production capacity and decarbonize industrial production. This confirms the Commission’s assessment that the rules per se are not the issue. The process is often just too slow. Sensible tweaks to the current regime have therefore been proposed to speed up state-aid approval. For certain types of net-zero projects, aid will be exempt from state aid notification via a revision of the General Block Exemption Regulation. Other projects such as renewable energy roll-outs or industry decarbonization efforts, will be eligible for rapid approval under the newly created Temporary Crisis and Transition Framework (TCTF). These new rules would apply until the end of 2025.

4. Openness towards OpEx support

A novel addition to the Industrial Plan is the emphasis on support via tax breaks. The Commission seems to acknowledge that providing manufacturing aid might not be enough to restore the level playing field with other jurisdictions. Therefore, it proposes that operating expenditure (OpEx) support should be explored too. It recommends that Member States provide tax breaks or accelerated depreciation for businesses undertaking green, clean-tech investments as part of the modified Recovery and Resilience Plans. The Commission will also develop a common scheme for net zero fiscal incentives Member States can align to.

5. (Some) permits will get approved faster

The EU is starting to recognize that over regulation is setting its competitiveness back vis-à-vis other players. To rectify that, the Industrial Plan will aim to help companies get all necessary permits to roll-out their net-zero friendly projects in Europe easier and faster. The Net-Zero Industry Act is due to be published in mid-March and will support national authorities in setting up single points of contact (‘one-stop-shops’) for permission applications as well as in setting deadlines for processing them. The Critical Raw Materials Act and the new rules for faster roll-out of renewable energy will try to do the same. But again, not all companies will be eligible to claim these benefits. Inevitably, the devil is in the detail, and in this instance, in the eligibility criteria and how the Commission will define these in each strand of the initiative.

6. Don’t say ‘Buy European’ but ‘Introduce EU standards’

With its response to the IRA, and under pressure of exporting Member States, the Commission treading a fine line between open trade and protectionism. While there are no ‘Buy European’ requirements coming any time soon, the Industrial Plan suggests that the Commission will not shy away from using its clout as a standard-setter to strengthen EU’s net-zero industries. In effect, it prepares the ground for using EU standards as a trade instrument, just like it did with the EU Battery Regulation.

All in all, the Industrial Plan is changing the rules of the game with the goal of helping European net-zero industries compete. While there is no doubt about the plan’s objective, the fierce debate about the appropriate instruments between different camps of Member States will continue. So-called ‘frugal’ Member States are weary of the fiscal impacts of the plan, especially any measure that provides fresh money through issued EU debt. Conversely, the fiscally weaker and smaller Member States are opposed to any loosening of state aid rules if they are not accompanied by new EU funds.

Now with a written proposal to scrutinize, EU leaders will discuss the Industrial Plan at an extraordinary European Council on 9-10 February and also at a regular meeting on 24-25 March. In the meantime, the Commission will already start working on the legislative proposals for the Net-Zero Industry Act and Critical Raw Materials Act with the intention of presenting these already by mid-March.