Europe’s efforts to foster the investment needed to build a sustainable economy and fend off challenges from the US and China are still in the very early stages.
(Bloomberg) —
Europe’s efforts to foster the investment needed to build a sustainable economy and fend off challenges from the US and China are still in the very early stages.
While the European Union has made an initial push to respond to a massive US green subsidies program, it’s only starting to wake up to the challenges involved in turning its bold vision for a climate-neutral trading bloc into reality.
Faced with losing investors to President Joe Biden’s $369 billion package of tax breaks, regulators in Brussels proposed a mix of measures this week including domestic production targets and quicker permitting for key clean-tech projects. But the response lacks the simple framework of the US’s Inflation Reduction Act and only addresses part of the problem.
On top of the race to attract investment, secure key raw materials and develop technology, the 27-nation EU has to contend with an unprecedented energy crisis, which pushed power and natural gas prices to all-time highs last year. Even as they’ve fallen dramatically, Europe’s new reliance on liquefied natural gas — including from the US — locks in higher costs.
“The EU response has good and bad parts,” said Juergen Matthes, head of markets research at the IW German Economic Institute in Cologne. “What it doesn’t solve is the impact of high energy prices, which for energy-intensive industries are much more important in terms of location for new investments than IRA subsidies.”
In contrast to a framework of tax incentives offered by the US, the EU unveiled the Net-Zero Industry Act, which calls for the bloc to produce at least 40% of its clean-tech needs in sectors such as those that produce solar cells, wind turbines and batteries. Critics described the approach as reminiscent of a planned economy rather than a free-market response.
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“The proposal for the Net-Zero Industry Act reads more like a Zero Industry Act,” said Marco Mensink, director general of European chemical industry association Cefic. “It is very unlikely to become a game changer for the EU industry’s competitiveness as it does not look at the problem from a business and investor perspective.”
Cefic criticized the EU’s plan for failing to match the IRA’s incentives to cut day-to-day operational expenses. It also argues their customers — from battery to renewable energy producers — will rely on chemicals produced at a lower cost in the US.
For Italy’s largest utility Enel SpA, the commission’s proposal is a ”fundamental” step toward increasing the clarity and speed of permitting processes, which have been slowing down the energy transition.
“Much work remains to be done and the industry must work closely with the European institutions on the measures that follow this first milestone,” said the company’s Chief Executive Officer Francesco Starace
An accompanying measure seeks to secure ample supplies of raw materials vital to the energy transition. Lithium — critical for modern battery cells — is dominated by China, which controls up to 70% of the world’s processing for the mineral, according to the International Energy Agency.
The White House is offering huge commercial incentives to boost domestic processing of critical raw materials. Since the tax credits and rebates were announced in August, miners, refiners and battery makers have announced a flurry of investments in the US. The lack of equivalent support under the EU measures could leave the bloc at a disadvantage.
The experience of Rock Tech Lithium Inc., a startup building Europe’s first lithium refinery in a small German town at the Polish border, underscored the deficiencies of the EU approach. The startup is looking to build its second plant and will “very likely” opt for North America due to the subsidy schemes, Chief Executive Officer Dirk Harbecke said.
Under current EU state-aid regulations, approximately €50 million ($53 million) will be spent to support the site in eastern Germany, while “on paper, for the same plant I could get $200 million in the US,” he said.
Reducing industrial greenhouse gas emissions remains one of the biggest challenges for the EU. The bloc has a binding goal to cut pollution by at least 55% by 2030 and reach climate neutrality by 2050. Europe already has measures in place such as pricing carbon to prod efficiency measures. But the transition involves massive investment.
“What is striking about the proposal? It doesn’t throw new money around,” said Peter Vis, senior adviser at Rud Pedersen Public Affairs in Brussels. “Most of the emphasis to ensure that clean technologies will be ramped up focuses on specifics on how to remove bottlenecks slowing clean-technology deployment.”
By its own estimates, the EU is going to need roughly €400 billion of additional investment in energy infrastructure a year to hit its 2050 net-zero targets, and critics of the new legislation say more generous incentives are needed to make the bloc more competitive. The proposal still needs approval by member states and the European Parliament, who may also suggest amendments.
Meanwhile, there are growing expectations that Beijing will respond by authorizing a flurry of new initiatives to secure raw materials overseas, meaning that the country could well extend its dominance in materials like cobalt and lithium in the coming years.
Even if the EU has already spent billions of euros on its Green Deal and earmarked more in future budgets, it’s mainly relying on private capital for the implementation. The latest measures underscore the existing funding programs and relaxed state-aid rules. A new financing instrument is mentioned, but will be established in the future.
“It’s long on buzzwords and short on details as to how they’re actually going to hit these targets,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets.
–With assistance from Petra Sorge, Oliver Crook and Alberto Brambilla.
(Adds comments from Enel CEO after eighth paragraph)
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