Rebooting the European Union’s Net-Zero Industry Act

The EU’s Net-Zero Industry Act aims to boost the competitiveness of Europe’s green industries, but it is seriously flawed. The proposal needs to be reworked before it can fulfil what it sets out to do, write Simone Tagliapietra, Reinhilde Veugelers and Jeronim Zettelmeyer. 

Simone Tagliapietra and Reinhilde Veugelers are Senior Fellows at Bruegel, a Brussels-based economic think tank. Jeronim Zettelmeyer is Director of Bruegel. 

The US Inflation Reduction Act (IRA) has revived Europe’s deep-rooted fears of de-industrialisation. Turning brown industrial jobs into green jobs is essential to maintaining Europe’s economic cohesion and welfare state while also meeting its decarbonisation goals. This is the reason why the EU has adopted the European Green Deal as its “growth strategy”.

The IRA is viewed as threatening that objective, by sucking green industrial jobs from Europe to the United States. At the same time, the EU’s recent experience with overreliance on Russian gas has made the security of clean-energy supply, and more generally resilience to trade disruptions, a central policy objective. 

The Net Zero Industry Act (NZIA) recently proposed by the European Commission lays out a green industrial policy that is supposed to address both fears: the loss of current and prospective green industrial jobs to the US and China, and the “strategic dependence” on China with respect to clean tech imports (concerns about raw material dependence are addressed by the parallel Critical Raw Material Act).

But as we argue in a new Bruegel paper, the NZIA is both misguided in its operational objectives and weak in its instruments, and hence unlikely to deliver meaningful results unless it is fundamentally redesigned.

The proposal has five problematic aspects.

• First, it takes a top-down approach, in which specific technologies are selected for preferential treatment. A technology-neutral approach open to all current and future technologies that help tackle the net-zero challenge would be better.
• Second, it sets a blanket 40% self-sufficiency benchmark for EU domestic cleantech manufacturing by 2030. This is poorly defined, sends a protectionist signal, and does not reflect differences in EU capacity in the cleantech sector.
• Third, it relies on the acceleration of permitting procedures as the main policy instrument, although this is not the main obstacle to cleantech investment in the EU.
• Fourth, while its intention to use public procurement to encourage clean tech is welcome, its specific proposals in this area are likely to be ineffective.
• Fifth and not least, the NZIA lacks a governance structure that would ensure effective implementation. 

In addition, the NZIA does not tackle three critical issues. It does not address investment obstacles related to failures of the single market. It does not tackle the coordination problem at the core of developing an EU green industrial policy. Finally, it does not develop an EU-level funding strategy, but rather relies on state aid by member states, with the related risk of single market fragmentation and intra-EU subsidy races.

The European Parliament and EU countries in the Council of the EU should reboot the proposal and refocus its objectives, sharpening its limited instruments, improving its governance, and adding financial incentives to ensure implementation.

We have several recommendations for this next phase.

First, drop the 40% domestic manufacturing target as key performance indicator. The success of the NZIA should rather be measured on the basis of whether it can mobilise the massive private investments required to meet Europe’s cleantech needs, and whether these make Europe more competitive and more resilient.

Second, adopt a technology-neutral approach instead of cherry-picking specific technologies, in order to include all technologies that today and in the future could contribute to reaching Europe’s climate, competitiveness and resilience goals. 

Third, ensure the NZIA delivers on its key goal of streamlining permitting. While this is not the most important barrier to the development of cleantech manufacturing in Europe, it is likely to remain the core of NZIA. The final version must at least ensure it delivers on this, which is not trivial given that permitting largely is a national competence. A stronger governance is required to deliver on this objective vis-a-vis what is currently proposed. 

Fourth, be bolder on strategic public procurement. The cost-gap safeguard threshold, rather than fixed at an irrelevant 10% level, should be linked to the sustainability and resilience score of a bid, up to some maximum. The EU could also partly co-fund the difference between the costs of the winning bid (taking account of the resilience and sustainability score) and the lowest-cost bid.

Fifth, make sure to have a strong governance to address the key challenge in developing an EU green industrial policy: coordination. This should start with closer coordination between the main relevant Commission directorates for the NZIA: internal market, competition, energy, growth and trade.

Sixth, limited EU financial resources should be used to part-pay for projects that involve pan-European collaboration.

In parallel to this, the EU needs to start advancing a much broader and stronger green industrial policy strategy, resting on three pillars: horizontal single-market reforms, an upgraded steering, monitoring, evaluating and co-ordination body at the EU level, and a strong, central funding strategy, including an EU funding agency in the mould of ARPA-E,  top-ups of national and other EU funding for leveraging clean tech developments at EU scale and funding of programmes to stimulate the intra- and extra- EU mobility of cleantech skills.

Delivering on this strategy should be a priority goal of the new EU institutional cycle from 2024.