E.U. enters clean-energy arms race against the U.S.

By Sara Schonhardt | 03/17/2023 06:35 AM EDT

The European Commission is responding to what it calls protectionist policies in the U.S. with ambitious plans to expand domestic production of clean energy technologies.

European Commission President Ursula von der Leyen.

European Commission President Ursula von der Leyen delivering a speech Wednesday. Jean-Francois Badias/AP Photo

The European Commission unveiled a series of proposals on Thursday aimed at injecting life into Europe’s clean energy industries and securing the minerals that are critical for a global transition away from fossil fuels.

The initiatives come as the E.U. tries to rapidly cut its carbon emissions without denting its ability to compete with the United States and other countries that are doubling down on their own clean tech transformations.

“The race is on,” European Commission President Ursula von der Leyen said in an address to the European Parliament on Wednesday.


“We must get our act together if we want to stay frontrunners,” she added. “We must nurture our own clean-tech industrial base, both to create good jobs, well-paying jobs, here in Europe and, of course, to ensure access to the clean solutions we so urgently need.”

The race for clean tech manufacturing has accelerated since the United States approved $369 billion in clean energy incentives through the Inflation Reduction Act in August. Parts of the law have rankled Europe, particularly provisions that encourage companies to use American parts and labor when making electric vehicles. The European Union says those incentives are protectionist and has pushed for flexibility so its producers can qualify for them.

Now, the Inflation Reduction Act is driving Europe to put its own industrial policy into place, dubbed the Green Deal Industrial Plan.

At its center is the Net-Zero Industry Act, which sets a target for the 27-nation bloc to produce at least 40 percent of its clean energy needs domestically by 2030.

“Of course, we will continue to trade with our partners. Not everything will be made in Europe, but more should be made in Europe,” said Frans Timmermans, who leads the commission’s climate work.

The European Union would fund some of those investments through tax breaks and “the flexible use of E.U. funds,” von der Leyen said. But the package itself doesn’t provide specific subsidies or financial incentives.

Those are likely to come from other measures, such as rule changes to allow E.U. nations to put forward additional subsidies, or the establishment of a sovereignty fund seeded in part with leftover money from a pandemic recovery program. Revenue from the bloc’s emissions trading system could also be used.

“Private investment by companies and financial investors will be essential,” says a commission fact sheet.

The proposal mostly creates the regulatory conditions for gearing up investments — making it much different from the Inflation Reduction Act, said David Kleimann, a visiting fellow at Bruegel, a Brussels-based think tank.

“It does not amount to the sort of cross-border toxicity that the IRA has caused,” he added.

The proposal focuses largely on accelerating permitting for clean energy manufacturing, such as solar panels, batteries and wind turbines. It also sets a target of scaling up carbon capture capacity to 50 million metric tons by 2030 and offers support for workforce trainings.

“If [businesses] had concerns about stuff like the permitting is too slow, or there’s not enough responses from the E.U. in terms of availability of workforce or skills, or there’s too much red tape … this definitely sort of answers those concerns,” said Ignacio Arróniz Velasco, a trade and climate researcher at E3G.

Still, some companies say the proposal offers more sticks than carrots.

“If we don’t want to risk slowing solar deployment, we need a bigger carrot, especially in terms of financing solar plants in Europe,” Dries Acke, policy director at industry group SolarPower Europe, said in a statement. “Last week’s subsidy rule revision doesn’t include support for running solar factories, when European manufacturers face some of the highest energy prices in the world.”

A critical minerals ‘club’

Along with the Net-Zero Industry Act, the commission is proposing a Critical Raw Materials Act aimed at reducing E.U. dependence on certain countries — primarily China — for lithium, rare earths and other minerals that go into everything from batteries to wind turbines to solar panels.

It sets production targets for at least 10 percent of mineral extraction, 40 percent of processing and 15 percent of recycling to take place domestically. And it cuts permitting times for strategic projects to prevent the process from taking more than two years and limits the percentage of raw materials that can be imported from a single country.

To meet those goals, the commission says it will establish a critical minerals “club” with “like-minded countries willing to strengthen global supply chains.” It puts an emphasis on expanding free-trade agreements and developing strategic partnerships that provide access to critical materials in return for investments in supplier countries.

The European Union is already working to upgrade trade agreements with countries like Chile, a major source of lithium and copper. At the climate talks in November, the bloc signed a strategic partnership with Namibia that would ensure the development of “a secure and sustainable supply of raw materials, refined materials and renewable hydrogen.”

That stands in contrast to the domestic content requirements of the United States.

A critical minerals club could tamp down concerns over a subsidies race and avert a bidding war over minerals by establishing that the European Union and United States would engage partners together, said Velasco of E3G.

Key differences between the United States and European Union will need to be sorted out to avoid further tensions, some experts say.

That includes their approach to tariffs on imports of carbon-intensive goods. The European Union is set to implement levies on steel, cement and a handful of other products.

“Brussels, at the end of the day, has an emissions trading scheme that functions as the primary regulatory mechanism through which to encourage companies to decarbonize faster,” said Emily Benson, a senior fellow focused on trade at the Center for Strategic and International Studies. “What they’re doing now is just trying to make it even easier to decarbonize, and they’re doing that through a mix of sticks and carrots, whereas here [in the United States], the big portion of the IRA is really only about carrots.”

She co-authored a report this week that says the two sides could engage in “cooperative competition” that allows them to challenge China and not work at cross purposes.

Von der Leyen and President Joe Biden sought to smooth out tensions over an industrial arms race last week by agreeing to coordinate on subsidies. Benson argues that this type of consultation could lead to expanded trade in green goods.

“Now is really the time to consult so that we can move towards a virtuous cycle,” she said.