How well does the EU’s green deal industrial plan hold up to the US’s IRA?
It’s been nearly six months since President Biden signed the USA’s Inflation Reduction Act, setting aside about $370 billion in available funding for climate change and clean energy. Now, the European Union has caught up, announcing the new Green Deal Industrial Plan (GDIP). With this plan, the European Commission promises to enhance Europe’s net-zero industry, supporting the transition to climate neutrality.
For those of us in the climate tech industry, it’s hard to look at the EU’s new GDIP and not see it as a direct response to the IRA. The announcement of the GDIP now is likely meant to stop EU’s climate tech companies from migrating to the US in search of “greener” pastures, and to enhance the development of green technologies among the EU’s own member states.
But how does the GDIP hold up in comparison to the IRA? Is it enough to stop green companies from packing their bags?
The short answer is: it’s complicated.
On the Surface: The GDIP vs. the IRA
Before getting into the fine details about who wins between the two plans, the obvious thing to note is that kicking off a climate “space race” between the EU and the US is only going to benefit the climate system.
Regardless of which plan is better, two powerhouses setting aside billions to develop clean energy is going to result in these technologies being developed and launched faster, which means they can be out there reducing emissions, removing carbon dioxide from the atmosphere, and yes, making money faster than would occur without competition. We can already see the effect that sort of pressure has on the market, based on how quickly the EU launched its response to the IRA.
So whatever happens, this is a big win for the climate.
But what about for climate companies? Now that the GDIP has been announced, is it worth it for European climate companies to remain in the EU, or should they consider migrating to the US? What about new companies? Under which plan should they establish themselves?
Unfortunately, simply looking at the plans, that answer is not immediately clear.
The IRA has been in effect for half a year now, which means that from a development standpoint, it’s in a different spot from the up-and-coming GDIP. And the IRA’s benefits for climate companies are concrete and extensive, directly calling out climate technologies like sustainable aviation fuel and green hydrogen. The IRA offers tax incentives to close the price gap between carbon-intensive and low-carbon technologies, getting rid of the so-called “green premium” that can make working in the clean technology space prohibitively expensive.
In contrast, while the GDIP does offer some support for those industries, its initial capacity to help is quite limited. Only green hydrogen is mentioned specifically in the GDIP, and then with initial aid totaling only €800 million. Other climate industries like carbon capture and removal (industries that are critical to reducing climate change’s worst effects) are supported in the IRA but not mentioned in the GDIP at all.
In fact, it doesn’t take much more than a glance through the IRA’s terms and the GDIP as-written to see that the IRA has a much more structured approach to helping climate companies, with funds distributed by industry in a way that directly ensures support across more than one aspect of the green technology space. The language in the IRA clearly states which funds are available for which industries, something currently lacking in the GDIP.
Of course, prior to the implementation of the IRA and the GDIP, the US and the EU were positioned at completely different starting lines when it comes to green legislation. The IRA established green subsidies for the US that were already present in the EU, such as tax rebates for the purchase of electric cars or for green technologies in private households. But many of these advantages are for private consumers, not for green technology companies. The tax rebates promised in the IRA greatly reduce production costs for these companies, making the idea of moving production to the US that much more tempting.
The IRA commits $370 billion to climate change, of which $216 billion goes directly to companies in the form of tax credits. The GDIP offers about €270 billion, mainly through its REPowerEU recovery and resilience plans, or RRPs. The GDIP’s fact sheet makes a point of stating that €372 billion can be mobilized through InvestEU, that €250 billion was already available through the RRP, and that an additional €40 billion in funding will be available through the Innovation Fund in the next decade, so the total amount of funding promised by the GDIP surpasses that promised by the IRA. But because it’s unclear how those funds will be distributed and how soon many of them can be made available, in the short term, the prize seems to go to the IRA.
But what about in the long-term?
To answer that, we should take a direct look at the terms listed in the GDIP.
What Does the GDIP Actually Promise?
The GDIP is structured around four pillars:
- A simplified regulatory environment
- Faster access to funding
- Enhancing skills
- Open trade for resilient supply chains
These pillars have been oft-quoted and used for many an infographic, but the unifying idea behind them is that the GDIP aims to make it easier for the climate industry to bring vital technologies from the lab and into the market, making funding easier to find and more available, keeping supply chains resilient to change, ensuring training and skills development for climate system employees and making the burden of bureaucracy faster and more streamlined. And to be fair to the Plan, it does detail how it would do many of these things.
For example, in the area of regulation, the GDIP promises to identify net-zero goals and provide a regulatory framework that would allow tech that meets those goals to be quickly deployed. The GDIP also promises a Critical Raw Materials Act, to make sure that companies have sufficient access to rare earths and other materials needed to create electronic components. And the EU mentions reforms of the electricity, to bring the benefits of clean energy directly home to the customer. For enhancing skills, the EU wants to set up academies to train skills necessary for strategic industries, and to protect supply chains, the EU promises to incorporate the green transition into its Free Trade Agreements and into trade agreements with other countries.
In the area of funding, likely the most relevant for companies already working in the climate sector, the GDIP promises to make sure its aims are reflected in the General Block Exemption Regulation (GBER), so that EU governments can give public money to the climate sector without having to request for permission from the Commission. The Commission also states that a draft proposal has been sent to member states to boost investments for a faster roll-out of renewable energy. While it’s worth noting that this is still a proposal, and hasn’t been approved by member states at time of writing, this would certainly incentivise emission-reducing investments.
The GDIP is also giving member states the opportunity to revise their RRPs to get additional funding, and has released new guidelines which explain how member states can do this. The Commission has set a deadline of 31 August (ideally, 31 April) for member states to submit their plans, and states their intention to grant loans by the end of the year (31st December). This is a rather long timeline, a fact acknowledged by the Commission, and so the guidelines come with the possibility for about 20% of the agreed funds to be pre-financed, meaning member states could see that money sooner.
But at the moment, the EU’s plan is focused on member states, which means that the amount of money received by individual climate companies (and the speed at which they receive their funding) will be largely dependent on which member state they operate in. Companies offering technologies that are almost ready to be deployed will likely see funds first, because the guidelines state that member states should focus on measures in the revised plan whose implementation is already underway, to meet their 2026 targets.
None of these changes are likely to occur instantly, so pre-financing promises aside, the GDIP’s rollout is not likely to be particularly fast. But while the GDIP falls short of the IRA in promising concrete action, the changes outlined in the GDIP would result in a much more supportive landscape for climate companies overall.
So Does the GDIP Win in the Long Term?
This depends entirely on whether the EU meets the goals set out in the GDIP this year.
Much of the GDIP is focused on the future, things that the Commission will do or plans to do. Unlike the IRA, which specifically points out how much funding is available and where that funding can go, the language in the GDIP is focused more on planned changes and the future availability of funding.
Which means that time will be the GDIP’s true test. In particular, the speed at which the GDIP can unlock and release funding for climate companies will likely determine how well it stands up against the IRA in the mid- and long-term.
And when it comes to the long-term, we have to discuss the elephant in the room, which is that US climate policy is incredibly dependent on its political climate and current administration. Companies considering a move to the US should consider what they would do if the IRA were overturned by a future administration, or if the funds set aside for the IRA are not renewed once they are depleted.
Obviously, this is also true for the GDIP, but we think that the structural changes proposed in the GDIP might be better equipped to stand the test of time (assuming, of course, that they are actually implemented). And given that the EU has historically shown more willingness than the US to invest large sums into climate policy, any changes made may be more secure in the long-term.
Our Verdict
The GDIP in its current form falls short of the IRA in outlining concrete, actionable steps to get funds to the climate industry sectors that most need it. But, assuming the GDIP meets its goals with cooperation from the EU’s member states, the GDIP has the potential to bring about lasting change to the climate sector over a long period of time, so the GDIP certainly shouldn’t be considered out of the running in the mid- and long-term.
We will likely see the first effects of the GDIP on the EU’s climate markets this year, hopefully in Q2 or Q3 (at the very least, we will see by then if the GDIP is likely to make changes immediately or if it will be delayed). By then, we will be better equipped to judge the GDIP’s impact.
In the meantime, EU companies might consider opening daughter companies in the US to take advantage of the IRA’s short-term advantage.
But is it worth moving the whole company to the US? At this time, it would be wise to wait and see.
