Will a green industrial arms race with the US spur EU’s energy transition?

Will a green industrial arms race with the US spur EU’s energy transition?

In August, after being held up by one coal industry-beholden senator for months, the US launched its Inflation Reduction Act (IRA).

The IRA is a massive package which contains $369bn in subsidies and tax breaks for renewables and electric vehicles. One of the key objectives is to counter Chinese dominance in clean energy and critical resources.

China controls some 75 per cent of global battery cell production; 85 percent of all solar photovoltaic cells, and seven of the top ten wind turbine producers are also Chinese.

In November, Chinese trade representatives threatened to sue the US in the World Trade Organization (WTO), a strategy unlikely to yield results given the US has blocked and ignored the body’s appellate body for years. But it’s not just the Chinese who are angry. French finance minister Bruno le Maire, fearing entire industries might move to the US, accused Washington of pursuing a “Chinese-style” industrial policy.

Initially, the EU response to the IRA has focused on seeking exemptions from the discriminatory tax clauses which favour US-made products. “We already have a war. The last thing we need is a trade war on top,” sighed commissioner for competition Margrethe Verstager after meeting with her US counterpart in December.

But French president Emmanuel Macron and German chancellor Olaf Scholz, in a joint paper published in December, pledged to unleash a competing ‘European green industrial policy’.

Its core aim is to retain industrial power and energy security, which it seeks to achieve through a package of counter-subsidies for clean technology. On a deeper level it signals a move away from international rules and norms, with carbon prices as the preferred mode of decarbonisation, towards regional competition and innovation through national green industrialism.

Race to the top?

The question is whether ‘a clean energy race’ is the best way to imagine the politics of green industrial transition: An industrial arms race “is the last thing Europe needs,” historian Adam Tooze recently wrote in the Financial Times. “We need cooperation, not conflict.”

Other experts have warned a bonanza of competing subsidies could result in a “race to the bottom” as companies could threaten to move overseas unless they receive ever higher subsidies. But others believe the planet may benefit from green competition as states try to overtake each other in embracing cleaner, cheaper energy.

“It’s finally happening,” the economist Max Jerneck tweeted. “The US and the EU are doing green industrial policy to compete against each other.”

“It’s still early days and hard to predict how it will play out,” he told EUobserver, but “friendly competition increases investments in clean energy.”

By forcing Europe’s hand, US competition has what could become a “race to the top,” political economist Max Krahé told EUobserver, which would be “absolutely excellent” because the alternative would be “to stand by and watch how industries will depart to the US.'”

Competing with US, Chinese and European industrial policies could drive “over-subsidising in some areas, which isn’t very efficient, but I think we shouldn’t worry too much about that,” said Krahé.

“We have to focus on what is effective, not what is efficient,” he added. “We want to create a situation where we rapidly deploy clean technologies, and a subsidies-driven approach is effective.”

Lack of clarity

But “for industrial policy to be successful, you need three things,” Krahé said: “Political will, clarity of goals, and the capacity to achieve them.”

“The Inflation Reduction Act did a lot to create the political will in Europe to embrace a more assertive green industrial policy,” said Krahé, but there is a lack of clarity on how domestic issues such as housing and agriculture—important drivers of climate change and biodiversity loss—fit into the narrative of a global clean tech race, which prioritises access to energy and rare earth metals.

“Everybody’s focused on developing clean industries and increase access to critical resources and renewables,” said Frank Vanaerschot, director of Counterbalance, a Brussels-based NGO. “But how are subsidised clean tech companies going to share the wealth with the rest of society? How will we renovate tens of millions of homes in Europe?”

“We do not have a plan that even begins to adequately address the scale of the challenge,” he added.

Veraerschot suggests EU’s cohesion funds, through its “more inclusive” national or regional programmes, could be used as an EU-wide tool to implement a comprehensive green industrial policy that includes sectors like housing and local communities.

But to bring together different layers of government requires a resource that is often lacking: state capacity.

Rebuilding state capacity

“State capacity is probably the part I’m most worried about,” Krahé said. “European countries haven’t done serious industrial policy for decades. So it’s going to take a while to relearn how to do it.”

Capacity is “knowing what to do and where to spend money.” But when the energy crisis hit Germany, Krahé said, it quickly became clear Robert Habeck’s ministry of the economy “really didn’t know what the effects would be for individual industries and which sectors needed support the most.”

In a similar vein: the pandemic reconstruction funds in Italy were meant to bridge the gap between the wealthy north and the less developed south. But since its launch funds have predominantly been allocated to the richer north because the program was essentially based on competition. This disadvantaged southern municipalities that often lack of human capacity or face financial difficulties which limits commercial co-financing options which are often required.

“One detrimental result of this is that all proposals for irrigation in Sicily, a region with a strong risk of desertification, were refused,” Vanaerschot wrote in an email to EUobserver.

Indicative planning

For decades, the EU and its members have been reluctant to wield state financing and planning to strategically prioritise clean technology and energy, believing markets and price signals the most efficient means of allocating resources (and a better help to hold the complex structure of the EU with its 27 member states together).

In an article written in December last year, Krahé cited mid-century French indicative planning under the Monnet Plan as guidance for a modern day green industrial policy.

Introduced in France in 1946, its goal was to restore the nation’s pre-war production and surpass it by 50 percent by 1950. The planning process was led by a task-force of about a hundred and prioritised investment in six strategic industries: electricity, steel, coal mining, transport, cement, and agricultural machinery.

“The lesson for today is obvious,” he wrote. “Focus on the five sectors driving climate change, land use and biodiversity loss: energy, transport, industry, housing, and agriculture.”

There was talk in the spring to set up a ‘task force’ not unlike Monnet’s core staff to help deal with the energy crisis in Germany, but this idea died in the German chancellery.

Issues of commonplace public organisation–the how, rather than the what—may not speak to the imagination as much as a ‘global tech race’.

But “getting the administration right is essential,” Krahé said. By giving direction to public and private investment, industrial planning can promote “bold and rapid experimentation, and coherent and effective action—precisely what is required today.”

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