EVOLUTION, CHALLENGES AND STRATEGIES FOR EU’S GREEN INDUSTRIAL POLICY

EU’s road into industrial policymaking is not a new one. As Professor Simone Tagliapietra — Senior Fellow at Bruegel and Professor of EU climate and energy policy at the Johns Hopkins University and author of many publications on EU energy and climate policy, and Cecilia Trasi, Research Analyst at Bruegel — point out, even the roots of the EU, with the establishment of the European Coal and Steel Community, can be considered an industrial policy initiative. But unlike in the past, when the main policy driver was economic growth, the EU’s new industrial policy ambitions seem to require a multilane highway where the various objectives — greening EU’s industry, safeguarding economic security, enhancing EU’s competitiveness while respecting EU’s social and governance values — need to be addressed at the same time. And fast too because the clock is ticking. The authors argue that this requires a more collaborative process at EU level than ever before offering a good mix between regulation and targeted financial support.

By Professor Simone Tagliapietra, Bruegel and the Johns Hopkins University — School of Advanced International Studies (SAIS) Europe, and Cecilia Trasi, Bruegel

EU’s ability to maintain its competitive edge

The transition from brown to green economies stands as a critical socio economic shift, akin to an industrial revolution under a pressing deadline¹ . The European Green Deal spearheads this transformation, committing the European Union to achieve climate neutrality by 2050. A cornerstone of this commitment is the ‘Fit for 55’ legislative package, targeting a 55 % reduction in greenhouse gas emissions by 2030. However, the effectiveness of climate targets hinges on seamless adaptation by businesses and citizens alike. Balancing environmental objectives with economic and social sustainability is paramount, exemplified by the indispensable role of green industrial policy. This framework not only advances the European Green Deal’s objectives but also addresses social challenges posed by the transition away from carbon intensive industries, such as automotive manufacturing.

As we embark on the path towards a greener and more sustainable future, the European Green Deal introduces unprecedented goals for renewable energy deployment, energy efficiency, and sustainable transportation. Nonetheless, it also presents fresh challenges to economic security, necessitating a robust and nuanced response. As Europe positions itself as a leader in the global race for clean technologies, adherence to the Green Deal becomes more than a mere policy; it becomes a litmus test of the EU’s ability to maintain its competitive edge on the global stage. The importance accorded to green industrial policy further underscores the urgency, providing industries with the requisite stability for long term planning while reducing dependencies on external actors. Energy transition and climate protection have evolved beyond environmental concerns; they are now integral components of our security policies, safeguarding against supply chain vulnerabilities and ensuring strategic sovereignty in critical sectors.

However, navigating the multi dimensional objectives of green industrial policy presents a formidable challenge, especially in reconciling these imperatives with the pursuit of strategic autonomy. While competitiveness and economic security are rightfully prioritized, it is crucial that these priorities complement rather than detract from the energy transition. In an era marked by escalating conflicts and unforeseen shocks, the EU must pursue strategies that not only mitigate risks but also enhance economic resilience and technological leadership, with decarbonization at the forefront of priorities.

Innovation and collaboration emerge as paramount, transcending fragmented approaches and fostering collective action, particularly in addressing the existential threat of climate change. Recognizing the imperative for a more cohesive European industrial policy, as underscored in Enrico Letta’s report, emphasizes the pivotal role of public funding in steering Europe through the green and digital transitions. It underscores the need for innovation driven development, highlighting that the EU’s future productivity growth hinges on its ability to foster technological advancements and innovation adoption across the Union.

The past of European industrial policy

European industrial policy’s evolution mirrors the continent’s journey through various economic and political eras. Post World War II, amidst reconstruction, European industrial policy prioritized strategic sectors like coal, steel, electricity, and railways. Notable initiatives included France’s ‘Plan Calcul’ and the establishment of the European Coal and Steel Community (ECSC) in 1952, which modernized coal production and fostered inter state coordination. This period saw proactive interventionist policies nurturing industries crucial for future growth. The Davignon Plan of 1977 sought European wide solutions for ‘sunset’ industries while retaining national control over ‘sunrise’ industries, such as computers. The Airbus consortium exemplified European industrial cooperation in this era.

The 1980s heralded market oriented industrial policies, emphasizing liberalization and horizontal frameworks. Initiatives like the Single European Act (1986) fostered collaborative research and innovation projects such as ESPRIT. Despite fostering cooperation, these initiatives faced challenges in bridging Europe’s technological gap. At European level, the inefficiencies of uncoordinated national industrial policies became clear, leading to the development of two important instruments at EU level: the internal market and competition policy, including state aid.

The 1990s and early 2000s saw further liberalization, epitomized by the Lisbon Strategy of 2000 striving to transform the EU into a competitive, knowledge based economy. However, the 2008 Great Recession marked a shift towards interventionist policies, emphasizing reindustrialization and competitiveness enhancement, as with like the European Commission’s 2012 communication, ‘A Stronger European Industry for Growth and Economic Recovery’. This evolutionary journey culminates in renewed focus on green industrialization, as with national initiatives like the German Energiewende, reflecting Europe’s commitment to tackling climate change and economic security.

Economic security and green industrial policy

The COVID 19 pandemic and subsequent crises have propelled economic security to the forefront of Europe’s policy agenda, prompting a strategic reevaluation. In response, the EU championed ‘open strategic autonomy,’ aimed at mitigating risks of supply disruptions and reducing dependence on external actors, particularly in critical sectors like health, green technologies, and digital infrastructure. Efforts to navigate these challenges are evident in initiatives such as the European Economic Security Strategy and the Net Zero Industry Act (NZIA). However, while the NZIA’s emphasis on domestic manufacturing of clean technologies is commendable, it also raises concerns about potential over reliance on import substitution, potentially signaling protectionist tendencies. A nuanced approach is imperative; isolationist tendencies risk undermining Europe’s resilience against diverse threats. Collaborative actions, exemplified by past responses to oil shocks, yield greater benefits through international cooperation in enhancing economic security².

Furthermore, the transition to green industrialization presents both unique opportunities and challenges for economic security. Europe must adopt a forward thinking approach that aligns economic security with climate objectives, recognizing the dual challenge of transitioning to a green economy while safeguarding economic resilience and security³. Blindly supporting declining industries or attempting to win a race that has already been lost in specific technologies may ultimately undermine efforts to strengthen economic resilience. The EU’s dilemma regarding solar photovoltaic (PV) manufacturing epitomizes this challenge, requiring careful consideration of import substitution strategies while avoiding potential pitfalls such as increased costs and over reliance on subsidies.

To illustrate, consider that the European Green Deal underscores the EU’s commitment to decarbonization and accelerating solar deployment is crucial for meeting renewable energy targets. However, the reliance on concentrated supply chains, such as the case for solar panels, particularly from China, poses significant economic security risks. Strategic measures, such as diversifying import sources and promoting sustainable industrial development, are the right steps to take. However, policy recommendations must prioritize innovation. Subsidies for solar manufacturing should be justified not solely based on European production criteria but on innovation grounds, fostering the development of sustainable industries that contribute to climate objectives⁴.

Ultimately, achieving both climate objectives and economic security necessitates a comprehensive policy framework that embraces transformation and fosters adaptable economic systems. By prioritizing global engagement, innovation, and resilience building measures, the EU can navigate the complexities of the modern geopolitical landscape while advancing towards a green and secure future.

Principles for the future of EU industrial policy

Europe’s green industrial policy represents more than just a policy shift; it symbolizes a profound paradigmatic transformation, intertwining environmental sustainability with imperatives of economic growth. Rooted in the principles of sustainability, equity, and resilience, it signifies a departure from conventional industrial strategies, embracing a holistic vision that seamlessly integrates ecological considerations into the fabric of industrial planning.

While akin to standard industrial policy in its selection of tools and projects based on diverging private and public returns, green industrial policy extends beyond mere industry competitiveness to encompass broader societal objectives. However, despite strides in this direction, Europe finds itself still distant from achieving a fully integrated EU green industrial policy. Instead, it grapples with a patchwork of initiatives at both the EU and member state levels, often lacking coordination and sometimes even conflicting. This fragmentation poses a significant challenge, as divergent policies across member states risk fracturing the EU single market, thereby squandering opportunities for economies of scale and synergies at the EU level.

Recent developments such as the NZIA have done little to alleviate the fragmented state of clean energy industrial policy making in the EU, and in some instances, may have exacerbated it. Beyond the realm of member state coordination, there exists a notable absence of an overarching systemic strategy for clean tech manufacturing at the EU level. This oversight neglects to leverage some of the EU’s most potent policy instruments, including its Single Market, green regulation, and the EU ETS scheme.

As we navigate the complexities of EU industrial policy, it becomes imperative to uphold key principles moving forward. Central to the success of green industrial policy is its alignment with climate policy, employing a diverse array of instruments to address the multifaceted challenges posed by climate change. Carbon pricing emerges as a critical tool, synergizing with other measures to facilitate the transition to a low carbon economy.

Acknowledging the inherent uncertainties and risks associated with green technologies, a proactive approach to experimentation and innovation becomes paramount. Drawing inspiration from successful models such as the US Defense Advanced Research Project Agency (DARPA), coupled with strategic venture capital funding, Europe can cultivate an environment conducive to fostering technological breakthroughs and maintaining global competitiveness.

Despite uncertainties, green technologies have advanced significantly, with investments flowing into the sector. Renewable energy technologies, notably solar, have become cost effective and competitive, challenging traditional energy sources. However, transitioning to green technologies necessitates efforts to overcome market distortions and path dependencies associated with fossil fuel based technologies. Directing investments towards green technologies is crucial to counter hidden support mechanisms favoring fossil fuels.

Furthermore, involving diverse stakeholders, including the private sector and civil society, is indispensable in shaping and implementing green industrial policy. Collaborative efforts through public private partnerships and civil society engagement will not only drive innovation but also address societal concerns associated with climate change. Effective governance mechanisms, characterized by transparency, accountability, and stakeholder coordination, are paramount for the successful implementation of green industrial policy.

Innovation guided by policy to realise a green transition…in a competitive way

In conclusion, the significance of green industrial policy in achieving climate goals while safeguarding economic security cannot be overstated. By fostering innovation, promoting sustainable industrial development, and embracing strategic measures, policymakers can effectively navigate the dual imperatives of decarbonization and resilience building.

As we strive for simultaneous decarbonization, economic growth, job creation, and resilience, it becomes imperative to identify and support strategic technologies and projects capable of delivering on these objectives. At the same time, minimizing trade offs necessitates the promotion of technological innovation to substitute critical inputs. An innovation driven approach can mitigate the need for costly import substitutions and enhance domestic capacity for sustainable production, serving as a stronghold for global competitiveness. Targeted policymaking should be a collaborative process among the public sector, the private sector, and society, eschewing the conventional top down fund allocation approach that favours only a select few beneficiaries. This calls for a good mix between vertical and horizontal instruments, with a carbon price and environmental regulations as strong horizontal instruments complementing targeted financial support.

Ultimately, innovations can serve as the cornerstone of a successful transition that reconciles decarbonization, competitive value creation, job preservation, and strategic autonomy on a global scale, provided that the innovation machine is effectively guided by policy. Thus, as we move forward, there is a pressing need for a holistic approach that considers both environmental and economic factors. Policymakers must prioritize global engagement, innovation, and collaboration to ensure a sustainable and secure future for all.

1. Tagliapietra, S., and Veugelers, R, Sparking Europe’s New Industrial Revolution: A Policy for Net Zero, Growth and Resilience, Brussels 2023, available at https://www.bruegel.org/book/sparking-europes-new-industrial-revolution-policy-net-zero-growth-and-resilience [accessed 27 July 2023].
2. Tagliapietra, S., and Trasi, C, How Should Europe Think About Economic Security? in: Intereconomics, 2024:2, 88–91.
3. Tagliapietra, S., Veugelers, R, and Zettelmeyer, J (2023) Rebooting the European Union’s Net Zero Industry Act, Bruegel, June 2023, available at https://econpapers.repec.org/paper/brepolbrf/node_5f9177.htm [accessed 29 November 2023].
4. Tagliapietra, S., McWilliams, B, and Trasi, C, Smarter European Union Industrial Policy for Solar Panels, 19 April 2024 , available at https://www.bruegel.org/policy-brief/smarter-european-union-industrial-policy-solar-panels [accessed 7 May 2024].