Executive Summary
The geopolitical context with an incoming tariff-wielding US administration and a sluggish-but-combative China as well as domestic politics in member states require the EU to combine decarbonization with competitiveness and security.
Within 100 days after assuming office on December 1, the European Commission is expected to present a “Clean Industrial Deal” to harmonize current climate and energy policies with competitiveness, industry and growth objectives.
The fragmentation of the single market, high energy prices, the far-right backlash on climate policy, as well as potential tariffs from the US put at risk Europe’s economic model and its current decarbonization path.
Implications for International Business
Several EU measures and investments will incentivize clean tech industries such as offshore wind, semiconductors, electrolysers, electric vehicles (EVs), and heat pumps, and support other sectors to decarbonize like steel, cement and aluminum.
The planned ‘Clean Trade and Investment Partnerships’ to secure supply chains relevant to the green transition, such as for critical raw materials, is likely to include investment opportunities, in particular with producer countries.
Given the prospect of increased US tariffs, European firms should prepare for a more politicized, regionalized and protectionist international market environment. Rather than looking for special deals, they should advocate for an EU response that respects rules-based trade to benefit the overall European economy.
State of Play
From European Green Deal to Clean Industrial Deal
Under the umbrella term of the European Green Deal, the EU passed a number of policy initiatives over the past five years to reach its climate target of “net zero” by 2050. These included the Fitfor55 legislative package, a reform of the Emissions Trading System (ETS), and new emission standards for cars. The EU has also ‘greened’ trade through instruments such as the Carbon Border Adjustment Mechanism (CBAM) and the EU deforestation regulation (EUDR). This approach is here to stay: European climate law is legally binding, and decision-makers at the highest level – including re-elected Commission President Ursula von der Leyen – have vowed to continue the EU’s decarbonization path.
What will change, however, is that EU climate policy will adapt to the geopolitical context and to alleviate current economic woes. Member states governments have little to no appetite for ambitious new initiatives, due to populist pressure, high energy prices driving up the cost of living and decreasing competitiveness, and security issues, especially Russia’s continued war in Ukraine in conjunction with the potential withdrawal of the US security umbrella in Europe. In addition, external climate tools, such as EUDR and CBAM, have been heavily criticized by developing countries for stymying trade with the EU.
Therefore, both the outstanding implementation of existing legislation and any new proposals will focus on making the green transition more compatible with Europe’s global competitiveness and need for “strategic autonomy”. Within the first 100 days, the Commission will present a Competitiveness Compass, to include proposals on boosting innovation to close the gap with the United States, the Clean Industrial Deal, and economic security initiatives, such as international Clean Trade and Investment Partnerships. This package will tackle vulnerabilities in supply chains and rebalance the Green Deal’s initial supply-side tilt. It also aims to deepen the single market and strengthen competitiveness, as suggested in the EU’s most recent reform reports.
Key Issues Finance and market prospects of clean industrial policy
The Clean Industrial Deal is expected to propose a range of policy initiatives, starting with a reform of carbon pricing and energy market design. It will also promote more electrification through a scheme called Carbon Contracts for Difference, a stronger integration of energy markets, and measures to support the clean tech sector. A single market for CO2 should help to decarbonize basic industry sectors like steel and cement. The Commission is further likely to introduce local production requirements in public procurement contracts to incentivize companies to manufacture in Europe. On the funding side, the Clean Industrial Deal is likely to include a new European Competitiveness Fund to complement existing tools such as the European Investment Fund or Important Projects of Common European Interest.
Two main obstacles stand in the way of such a policy: First, member states tend to protect national industries, such as Berlin wanting to produce green steel in Germany, even though this would be more cost efficient in Southern Spain or Sweden. A temporary abrogation of state aid rules during the Covid-19 pandemic mostly benefitted the bigger member states and has led to a detrimental fragmentation of the single market, which the incoming Commission will seek to rectify. It will also overhaul EU competition policy, which primarily focuses on the single market and does not sufficiently consider unfair competition from outside. Instead, it will have to balance support for strategic sectors – e.g. infrastructure, semiconductors, defence, energy and clean tech sectors – while ensuring fair and healthy competition within the single market.
Second, funding will be controversial. The Commission is likely to try to leverage new debt after the successful NextGenerationEU package of 750 bn EUR in 2020, which runs out in 2026. So, national governments have to decide about giving the EU enough fiscal leverage to strategically invest in the European economy. Three elements are to be considered: The upcoming negotiations for the next EU budget (2028-34); increasing the EU’s own resources (despite political standstill over the past two years); and the establishment of the capital markets union in order to raise private capital for the transition. Despite these hurdles, the Competitiveness Compass could prove essential to keep key innovations, technology, industries and jobs in Europe as the continent expects to be ‘squeezed’ by the increasing rivalry between the US and China.
Geopolitical issues and implications
As China heavily subsidises green-tech industries such as wind, solar panels and EVs, the US started to massively invest in its green transition under the Inflation Reduction Act (IRA). These industrial policies have distorted the global level playing field and created unfair advantages for American and Chinese businesses, to which the Clean Industrial Deal aims to provide a commensurate response. Beyond such strategy, however, both China and the US will be less friendly trading partners. Chinese overcapacity is already flooding markets, while the next US President is expected to impose a randomly chosen tariff on EU-made goods, possibly even on specific member states (in disregard of, but with effects for, the single market). Domestically, he promised to extend the tax credits of his first term and to subsidise fossil fuel companies. While foreign-owned companies, including European ones, had access to the IRA until now, the subsidy splurge per se is protectionist in nature and therefore disadvantageous to the European economy. Firms should also be wary of potential pressures from the US administration on data protection and privacy rules in the EU.
In terms of free trade agreements (FTAs), the EU will try to conclude still open negotiations, most importantly with Mercosur, but also with India, Indonesia, or the Philippines. After successfully adding climate concerns to the draft FTAs, it is now domestic populist instrumentalization that risks blocking EU trade deals in the future – as French and Polish opposition to the EU-Mercosur agreement shows. The new Clean Trade and Investment Partnerships will regroup certain existing instruments, for instance on critical raw materials. However, they are not legally binding and have to chime with the EU’s diplomatic and development tools, especially Global Gateway, to secure long-term access to relevant raw materials and technology and to strengthen supply chains.
Lastly, businesses should prepare for the application of the CBAM and the newly reformed ETS, which will include buildings and road and transport in the coming years. Moreover, a simplification of the rules and cutting of red tape is in the offing, without implying deregulation and less standards. In addition, firms are advised to also follow the national implementation, as governments often add administrative burdens to the initial EU legislation, a practice known as ‘gold-plating’. This was the case for funds within the Common Agricultural Policy and the Corporate Sustainability Reporting Directive and is likely to happen again with the Corporate Sustainability Due Diligence Directive.