Will the EU have enough money to finance its climate industry ambitions?

On 16 March 2023, the European Commission published the Net Zero Industry Act and the Critical Raw Materials Act. Both legal initiatives are part of the EU’s Green Deal Industrial Plan aiming to provide a supportive environment for scaling up EU manufacturing capacity for net-zero technologies required to meet the EU’s ambitious climate targets. What's behind the two initiatives and how important are they for the European Green Deal?

The European Commission expects huge investments driven by global climate goals: whilst the global investments need in key net-zero technologies are estimated at USD 640 billion by 2030, the corresponding investment need of the EU is estimated at EUR 92 billion by 2030. But the European Commission also identified major barriers to these investments, such as volatility in international commodity and asset prices, bottlenecks in supply chains, lengthy permitting procedures, and a lack of skilled workforce. From a geopolitical point of view there are concerns about the EU’s strong dependencies on third countries along the whole value chain, and in particular on China.

Whilst the Fit-for-55 package is focussing on how to provide to right incentives for decarbonisation, energy efficiency and an increase of the share of renewables in the energy mix, the Net Zero Industry Act and the Critical Raw Materials Act want to kick-start a renaissance of the EU’s green industry, from mining the necessary raw earths, to engineering and building renewable assets such as windmills, PV panels and batteries. 

Many initiatives, one target

Whilst the Net Zero Industry Act is supposed to remove administrative and funding bottlenecks, the Critical Raw Materials Act is supposed to ensure sufficient access to the key materials. Together with the proposed reform of the EU’s electricity market design and the proposal for the creation of a European Hydrogen Bank, the proposals aim at strengthening EU’s renewable industries, such as carbon capture and storage projects for the cement industry, industry electrification or hydrogen manufacturing projects and clean tech manufacturing.

Net-Zero Industry Act

The Net-Zero Industry Act applies to “Net Zero Technologies”, “Net-Zero Strategic Technologies” and “Strategic Net Zero Technology Projects”; these will receive the following preferential treatments according to the European Commission’s proposal:

• Net-Zero Technologies will benefit from a simplification of administrative measures, such as a mandatory one-stop shop, online access to information, faster permitting (maximum length: 12 – 18 months), access to regulatory sandboxes and the promotion of competences and skills.
  
  According to the initial proposal by the European Commission Net-Zero Technologies are defined as renewable energy technologies such as electricity and heat storage technologies, heat pumps, grid technologies, renewable fuels of non-biological origin (RFNBO) technologies, sustainable alternative fuels technologies, electrolysers and fuel cells, advanced technologies to produce energy from nuclear processes with minimal waste from the fuel cycle, small modular reactors including related best-in-class fuels, carbon capture, utilisation, and storage (CCUS) technologies and energy-system related energy efficiency technologies. The definition includes the final products, specific components and specific machinery primarily used for the production of those products.
• Net-Zero Strategic Technologies will have facilitated access to public tenders thanks to sustainability and resilience criteria being weighted at 15-30% of the award criteria; furthermore there will be a non-binding benchmark for the manufacturing capacity of Strategic Net-Zero Technologies of at least 40% of the EU's annual deployment needs by 2030. Net-Zero Strategic Technologies will also have the option to become a “Strategic Net-Zero Technology Project” in case they are located in the EU.
  
  According to the initial proposal by the European Commission there are eight Net-Zero Strategic Technologies: solar photovoltaic & thermal, on- & offshore wind, batteries, heat pumps and geothermal, electrolysers and fuel cells, biogas/biomethane, CCS and certain grid technologies.
• Strategic Net Zero Technology Projects receive priority status according to which EU member states must apply faster permitting process to them (maximum length:  9-12 months); they are to be considered of “overriding public interest” in permitting procedures and will receive support from the EU member states and the European Commission to ensure the crowding-in of private investments. Furthermore they are supposed to benefit from privileged access to funding via the “Net-Zero Europe Platform”.
  
  A project would e.g. be qualified as a “Net-Zero Strategic Project” if it contributes to the technological and industrial resilience of the EU energy system by increasing manufacturing capacity of a component in the net-zero technology value chain. 

Other measures to promote Net Zero Technologies include an annual target of 50 Mio. tonnes of injection capacity in strategic carbon storage sites in the EU by 2030, setting up Net-Zero Industry Academies to enhance skills and a Net Zero Europe Platform in order to support investments. 

Main elements of the Critical Raw Materials Act

Together with the Net Zero Investment Act the European Commission presented a proposal for Critical Raw Materials Act. The proposal includes a comprehensive set of actions to ensure the EU’s access to a secure, diversified, affordable and sustainable supply of critical raw materials. To this end, it sets the following priorities for the EU to be reached by 2030:

• Reaching an extraction capacity covering at least 10% of the EU’s annual consumption of raw materials;
• Reaching a processing capacity covering at least 40% of the EU’s annual consumption of raw materials;
• Reaching a recycling capacity covering at least 15% of the EU’s annual consumption of raw materials;
• Allowing not more than 65% of the Union's annual consumption of each strategic raw material at any relevant stage of processing to originate from a single third country.

Furthermore, to reach those targets, the Critical Raw Materials Act is also supposed to simplify the permitting procedures for critical raw materials processes, monitor critical raw materials supply chains, and promote skills relevant to the industry. It will also ensure that the improved security and affordability of raw materials is not detrimental to environmental standards protection and to human rights; this applies both within the EU and to non-EU countries.

Finally, to strengthen international trade with “reliable” partners, the EU will seek mutually beneficial partnerships with emerging markets and developing economies, notably in the framework of a “Critical Raw Materials Club” bringing together all interested countries – including non-EU countries - that use and produce materials for batteries and green technologies in order to strengthen global supply chains.

Low carbon technologies – RES = nuclear?

As with most other files related to the decarbonisation of the EU, the Net Zero Industry Act has also become a victim of the Franco-German spat over the role nuclear power. In one of latest twists in July 2023, the European Parliament’s Committee on Industry, Research and Energy (ITRE) reached a political agreement adding nuclear to the list Net-Zero Strategic Technologies. French liberal and pro-nuclear MEPs Christoph Grudler (RenewEurope) organised enough support to convince the German conservative MEP Christian Ehler (EPP) to consider (conventional) nuclear a Strategic Net-Zero Technology as well. Whether the EU member States will adopt a similar approach and whether nuclear will appear in the final version of the Net Zero Industry Act remains to be seen.

Funding the industry

So far, the funding of the renewables industry has mostly occurred at national level, with EU Member States providing support to their domestic industry; whilst subsidies are illegal in principle in the EU, the European Commission has relaxed the EU’s state aid framework in early 2023 and simplified the industries access to public funding via the EU’s Temporary Crisis and Transition Framework (TCTF). But this approach will not be sustainable in the medium-term since public finances are already in a bad shape following the pandemic and have further deteriorated due to the war in Ukraine. Furthermore extending national subsidies through relaxed state aid rules might benefit larger EU member states with bigger budgets and could thereby lead to market distortions within the EU.

Inevitably the supporters of a stronger financial autonomy of the EU have produced proposals on how to strengthen the EU’s own resources, e.g. via the Strategic Technologies for Europe Platform (STEP). STEP is supposed to finance multi-country projects of European importance for the green transition. The corresponding legal proposal was published by the European Commission on 20 June (“Proposal for a Regulation establishing the Strategic Technologies for Europe Platform - STEP”). STEP, with an additional budget of EUR 10 billion, was triggered by the US Inflation Reduction Act (IRA), a subsidy and tax-break package from the US government to finance the green transition worth 400 billion US-Dollar. Whether the European Sovereignty Fund will be sufficient to counter the EU’s IRA remains to be seen.

An alternative could be an increase of the EU’s own resources, notably via elements of the Fit-for-55 package, such as the EU Emissions Trading System, the new EU Emission Trading System for road transport and real estate and the carbon border adjustment mechanism (CBAM).

Way forward

The law-making process is currently in full swing for both Regulations and has to be finalised by the end of 2023, since the upcoming European elections in June 2024 will bring all legislatives processes to a halt. A formal vote on the Net Zero Industry Act in the European Parliament’s ITRE Committee is scheduled for 12 October, followed by a vote in the Plenary in October or November 2023. Trilog negotiations between the European Parliament and the Council will ensue, once the EU member states have agreed on a common position. A formal vote on the Critical Raw Materials Act in the European Parliament’s ITRE Committee is scheduled for 7 September; the date for the vote in the Plenary has not been set yet. The Council might define its negotiating mandate / General Approach on 25 September 2023 with Trilog negotiations starting thereafter.

Will it become a success?

Ensuring the supply of green technology will be crucial for ensuring the EU climate ambitions are implemented and industrial production will not leave the EU; whether the Net Zero Industry Act, the Critical Raw Material Act and the associated EU funding will do the job, remains to be seen.