The EU's Green Deal Industrial Plan for the Net-Zero Age

The EU's Green Deal Industrial Plan for the Net-Zero Age

February 3, 2023, Covington Alert

The U.S. Inflation Reduction Act (the IRA) has raised concerns in the EU about the potential impact on international investment - particularly the possibility that such investment will be pulled into the U.S., rather than directed to the EU and may encourage ‘green industries’ to relocate production to the U.S. The EU has been working on an appropriate response that would increase the attractiveness of the EU as a green investment destination without breaching either WTO rules or its own State Aid rules.

Background

The IRA has provoked diverse reactions across EU Members States. Whilst some countries have lined up behind calls for a “Made in Europe” strategy which would accelerate production targets (cf the EU Chips Act); weaken state aid rules; establish an EU emergency sovereign fund; and mobilize WTO-compliant trade defense instruments. Other Member States have expressed concern that such an approach would risk undermining EU provisions on State Aid and fragmenting the EU internal market.

With some justification, smaller EU Member States are concerned that weakening the EU’s State Aid rules would favour more fiscally powerful Member States (52% of the Temporary Crisis Framework (“TCF”) established following Russia’s invasion of Ukraine was notified by Germany and a further 24% by France). Such Member States would prefer the creation of a joint EU fund - a proposal in turn opposed by fiscally conservative Member States who reject any further joint EU borrowing.

On 1 February, the Commission released its Communication for A Green Deal Industrial Plan for the Net Zero Age (The Communication) which contains a series of proposals for discussion at the EU Council Summit on February 9-10. The differences between the various Member States noted above, are likely to influence the discussions at the Council Summit and impact the formal proposal which is expected to be presented to the European Council in late-March.

Contents of the EU’s Proposal

The key elements of the Communication are:

• A Net-Zero Industry Act (NZIA)
• A Critical Raw Materials Act (CRMA);
• A temporary Crisis and Transition Framework (“TCTF”) State Aid framework;
• Repurposing existing EU programs to fund the green transition; and
• Production targets.

The NZIA is intended to create a simplified regulatory framework for production capacity. It will target key product sectors including batteries, wind-turbines, heat pumps as well as technologies including solar, electrolyzer and carbon capture and storage (CCUS). The list of targeted sectors suggests that the Commission intends building on existing initiatives such as the proposed Batteries and Waste Batteries Regulation and legislative proposals forming part of its Hydrogen Strategy.

The CRMA is intended to ensure access to critical raw materials by:

• diversifying sourcing;
• reducing dependence on highly concentrated supplies from third countries;
• improving recycling of materials already on the internal market; and
• the creation of a “Critical Raw Materials Club” of like-minded countries to help ensure a secure, sustainable, and affordable global supply of raw materials.

The TCTF is intended to facilitate Member States funding for renewable technologies by:

• simplifying the process for the providing of State Aid for decarbonizing industrial processes;
• enabling higher Aid grants for projects in third countries;
• allowing additional aid for major new production projects in strategic net-zero value chains; and
• revising the Green Deal Block Exemption Regulation by raising the notification thresholds for key sectors, such as hydrogen and CCUS. The TCTF will be in place only until the end of 2025.

The EU President has made clear she prefers the establishment of a common ‘European sovereignty fund’ to incentivize continued green production in Europe, rather than run the risk of fragmenting the internal market and the creation of regional disparities by allowing wealthier EU Member States to leverage their own, stronger economies.

To achieve this (whilst avoiding the difficult issue of raising further debt) the Communication proposes repurposing existing EU programs and initiatives to fund the green transition:

• The REPowerEU initiative would be repurposed to provide additional grants and facilitate access to funding through national one-stop-shops for permitting renewables and net-zero-projects;
• Grants from the Brexit Adjustment Reserve would be re-directed to renewable projects; and
• InvestEU program procedures would be simplified to encourage private investments into priority sectors.

These proposals are in addition to existing green funding streams, including NextGenerationEU (the EU’s Covid-19 recovery program), which requires that Member States allocate a minimum of 37% of their received funds towards the green transition; and the Horizon Europe Program which has funding streams dedicated to Green Deal-related research and innovation.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Public Policy and Government Affairs practice.