(Bloomberg) — Europe’s efforts to boost the investment needed to build a sustainable economy and counter challenges from the U.S. and China are still in their very early stages.
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Although the European Union has made an initial push to respond to the US’s massive green subsidy program, it is only beginning to wake up to the challenges of making its bold vision of a climate-neutral trading bloc a reality.
Faced with losing investors to President Joe Biden’s $369 billion package of tax cuts, regulators in Brussels proposed a mix of measures this week, including targets for domestic production and faster permitting for key clean-tech projects. But the answer lacks the simple framework of the US Deflation Act and only addresses part of the problem.
In addition to the race to attract investment, secure key raw materials and develop technology, the 27-member EU must contend with an unprecedented energy crisis that pushed electricity and natural gas prices to record highs last year. Despite their drastic decline, Europe’s new dependence on liquefied natural gas – including from the US – is leading to higher costs.
“The EU’s response has both good and bad sides,” said Jürgen Mattes, head of market research at the German economic institute IW in Cologne. “What it doesn’t address is the impact of high energy prices, which for energy-intensive industries are far more important in terms of location for new investment than IRA subsidies.”
In contrast to the framework of tax breaks offered by the US, the EU unveiled the Net-Zero Industry Act, which calls for the bloc to produce at least 40% of its clean-tech needs in sectors such as those that make solar cells, wind turbines and batteries. Critics have described the approach as reminiscent of a planned economy rather than a response to the free market.
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“The proposal for the Net Zero Industry Act looks more like a Net Zero Industry Act,” said Marco Mensink, director general of the European chemical industry association Cefic. “It is highly unlikely to be a game-changer for the competitiveness of EU industry as it does not address the issue from a business and investor perspective.”
Cefic criticized the EU plan for failing to meet the IRA’s incentives to reduce day-to-day operating costs. He also argued that their customers – from batteries to renewable energy producers – will rely on chemicals made at a lower cost in the US.
An accompanying measure aims to ensure sufficient supplies of raw materials vital to the energy transition. Lithium – critical to modern battery cells – is dominated by China, which controls up to 70% of the world’s processing of the mineral, according to the International Energy Agency.
The White House is offering huge trade incentives to encourage domestic processing of critical raw materials. Since the tax credits and rebates were announced in August, miners, refiners and battery makers have announced a wave of investment in the US. A lack of equivalent support under EU measures could put the bloc at a disadvantage.
The experience of Rock Tech Lithium Inc., a startup building Europe’s first lithium refinery in a small German town on the Polish border, highlighted the flaws in the EU’s approach. The startup is looking to build its second plant and will “very likely” choose North America because of the subsidy schemes, CEO Dirk Harbecke said.
Under current EU state aid regulations, roughly 50 million euros ($53 million) will be spent on maintaining the East German site, while “on paper for the same plant I can get $200 million in the US,” he said.
Reducing industrial greenhouse gas emissions remains one of the biggest challenges for the EU. The bloc has a binding target to reduce pollution by at least 55% by 2030 and achieve climate neutrality by 2050. Europe already has measures in place, such as carbon pricing, to meet performance measures. But the transition involves huge investments.
“What is striking about the proposal? It’s not throwing new money around,” said Peter Vis, senior adviser at Rud Pedersen Public Affairs in Brussels. “Most of the emphasis to ensure that clean technologies will be scaled up has focused on the specifics of how to remove the obstacles delaying the deployment of clean technologies.”
According to its own estimates, the EU will need roughly €400 billion of additional investment in energy infrastructure annually to reach its net-zero targets by 2050, and critics of the new legislation say more generous incentives are needed to make the bloc more competitive. The proposal still needs approval from member states and the European Parliament, which can also propose amendments.
Meanwhile, there are growing expectations that Beijing will respond by authorizing a wave of new initiatives to secure raw materials overseas, meaning the country could expand its dominance in materials such as cobalt and lithium in the coming years.
Even if the EU has already spent billions of euros on its Green Deal and has earmarked more in future budgets, it relies mainly on private capital for implementation. The latest measures highlight existing funding programs and relaxed state aid rules. A new financing instrument to be created in the future is mentioned.
“It’s long on buzzwords and short on the details of how they’re actually going to achieve those goals,” said Colin Hamilton, managing director of commodity research at BMO Capital Markets.
–With help from Petra Sorge and Oliver Crook.
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