EU 2050 Net Zero: Competitiveness and decarbonisation

The European Green Deal was launched in December 2019 and was revolutionary in more than one way: it contained a path to decarbonize the whole European economy to reach Net Zero by 2050, while creating economic growth and prosperity for the continent and all its citizens.

More recently, on 9 September 2024, the so-called Draghi Report on competitiveness highlighted how ‘Decarbonisation could be an opportunity for Europe, both to take the lead in new clean technologies and circularity solutions, and to shift power generation towards secure, low-cost clean energy sources in which the EU has generous natural endowments’, suggesting the need for tying more firmly decarbonisation and competitiveness planning.

Between the launch of the Green Deal and the Draghi Report nearly 5 years have passed and a global pandemic has hit worldwide economies. While Europe was debating the details of the legislative measures (Fit for 55) to turn the Green Deal into an actionable plan, international competitors further rushed in to stake a claim of the international market for green technologies, which the IEA estimates to be worth around $650 billion per year by 2030. The United States inaugurated the IRA, a scheme which, through targeted tax credits, provides concrete and reliable support to critical industries based in the US, creating a real incentive towards delocalisation for parts of the EU value chains. China is pursuing an aggressive international industrial policy and has built a significant competitiveness lead in many green technologies such as solar panels and batteries, which will be difficult to contend with. India, Japan, the UK and Canada all have also launched green technology plans.

In the midst of all this, the EU is still locked up in two key debates on what an industrial strategy coherent with decarbonisation should look like for the EU and how to finance it, two issues that feature prominently in the Draghi Report. However, the new international context, as the Report itself also makes clear, now means that the decarbonisation is no longer a ‘nice to have’, but it is an integral part of competitiveness, without which the EU risks missing the boat of the second industrial revolution it has helped to kickstart.

Time is of the essence. Investment decisions need to be made and the uncertainty surrounding the EU plans for industrial decarbonisation can either make the option to delocalise seem attractive, or paralise companies. This is especially true for SMEs with fewer options to invest outside Europe, forcing them to delay investment decisions in decarbonisation or green technologies until is too late.

Ursula von der Leyen seems to be aware of this urgency and put a priority package of industrial and decarbonisation measures at the heart of her announced program for the upcoming legislative cycle. This is an important signal to industry: Brussels is committed to a plan of prosperity through decarbonisation, the European Green Deal. Nonetheless, in order to prove its effectiveness, the package will have to face issues that have been historically challenging among Member States.

The first is the difficulty of creating a unified European industrial strategy. The idea in the past has always crashed against the unwillingness of Member States to face the trade-offs that planning at EU level will inevitably create. Certain national industries will need to take a hit to avoid duplication of efforts at EU level. Value chains will need to be streamlined, creating challenges and potentially closures, as well as new business opportunities. The current fragmentation of industrial policies, however, is unsustainable as it leads to inefficiencies and competition between Member States which weight down the overall European competitiveness, as Draghi also highlighted in his Report.

Draghi also suggests that not all green and critical industries can be treated in the same way. His Report highlights how a mixed strategy that combines different policy tools is needed. On the one end of the spectrum, certain critical industries will need to be supported, nurtured and protected with financial and trade tools in order to ensure EU leadership in the world. On the other end of the spectrum, lie industries where the competitiveness and technological gap with other nations such as China is too wide, often due to heavy subsidies of their national industries. In this latter case it might be better not to try and defend EU-based productions, but rather take advantage of the low prices of imported products to reduce decarbonisation costs for other European industries.

Another challenge for the Commission will be to ensure that support for green technologies is well integrated with decarbonisation of traditional industries. On the competitiveness side, this is important in order to create domestic markets for green technologies and to ensure that traditional industries can regain competitiveness by reducing energy consumption and costs. On the decarbonisation side, this is crucial in order to meet the industrial emissions targets. All this however will not be possible without a clear-eyed view of the bottlenecks that need to be removed, from investment to energy costs, from market creation to international competition.

Last, but certainly not least, there is the ever-present challenge of how to finance this transformation.

In this context, the publication of the promised industrial package next year will be crucial. What is already clear is that, however difficult, the road of industrial competitiveness through decarbonisation is the only one that can save the EU’s economy from a slow but sure slide into international irrelevance.