Industrial policy is not a relic of the past but key to winning the green energy race
There was a time when ‘industrial policy’ was a swear word in Brussels. Is that still the case?
There was a time when ‘industrial policy’ was a swear word in Brussels. National champions, state aid, lead markets; all of this reeked of the 1970s and ‘failed french economic policies’. Industrial policy was a relic of the past, or so I was told by my colleagues when I joined T&E back in 2011.
How things have changed!
Thanks to China and the IRA – the Inflation Reduction Act, not the militant group -industrial policy is now on everyone’s minds and lips. This is a good thing for the fight against climate change, and can be a good thing for Europe, but only if we play our cards right.
Chinese state capitalism, with a big dose of industrial policy, has helped China become the world’s clean energy leader, overtaking the west in several key technologies. For example, China’s strategy to develop an automotive industry, ‘leapfrogging’ combustion engines and focusing on electric vehicles instead, has been very successful.
China’s focus on clean energy is net positive. It is key to the decarbonisation of the world’s biggest economy and is making things like solar panels and batteries affordable around the world. Europe benefits from this in a big way, e.g. in helping it cut reliance on Russian oil and gas.
But it’s equally clear that China’s industrial policy represents a major challenge. China is now the world’s biggest EV market and as such dominates much of the electric vehicle supply chain – battery cells, battery minerals, recycling. Amidst a boom in EV sales, Chinese EV startups have started eating into the market shares of European OEMs in China. Unless EU carmakers do something about high prices and long waiting times they ‘ll do the same in Europe.
It was Donald Trump who broke with neoliberal orthodoxy in the US, bringing about a major change in US trade policy, backing out of EU and Asia trade deals and initiating protectionist policies. Joe Biden’s rhetoric and goals are different, but in reality Biden’s economic policy is closer to Trump’s than Obama’s, in a clear sign of what historian Gary Gerstle calls the end of the neoliberal order.
The so-called Inflation Reduction Act (IRA) is a big deal, for Biden, for the climate and for the global clean energy race. Just look at the IRA’s automotive provisions. The bill combines a $7500 vehicle tax credit, a $4000 used EV credit, as well as a battery production tax credit worth $35-45 per kWh (cell-module), adding another $3000 or so in subsidies. Crucially, these credits are only available to vehicles, batteries produced in the USA and raw materials sourced from friendly countries (i.e. not China).
Given how incredibly generous the IRA is, the US is now set to become a battery and electric vehicle manufacturing powerhouse, changing the competitive landscape dramatically. It might even lead to some automakers preferring exporting vehicles or batteries into Europe.
Aviation will also benefit from the IRA, with $300M in grants for Sustainable Aviation Fuel (SAF) production and low emission aviation technologies, or more importantly credits for SAF linked to how much they reduce emissions: the more they reduce, the more generous the credit becomes.
Given how “big a deal” the IRA is, Europe’s reaction cannot just be one of smoothening some of its roughest edges or simple retaliation.
Europe has no choice but to up its game in the race for clean energy primacy. It had some good cards. The previous Commission changed the narrative on industrial policy and initiated the Battery Alliance. The Von der Leyen Commission has intensified these efforts, combining aggressive regulatory goals with industrial policies and money for things like chips, hydrogen and other clean technologies.
In automotive, the EU is in a relatively good place. BEV sales are close to 10%, battery plants being built, factories retooled; and on the regulatory side, both the EU and the UK are close to agreeing a 100% zero emission vehicle target for 2035, binding targets for charging infrastructure roll out and a host of other supportive policies.
However, given the way in which the US and China have just upped the ante, as well as the weaknesses of the EU in areas such as energy and labour costs, or central fiscal power, Europe must step up in a number of areas:
- One of the EU ‘s great weaknesses is its lack of money, and lack of focus where it exists. Generating new resources, for example by creating an energy sovereignty fund, along the lines of the post-Covid, European Recovery Fund, is essential. If we want to compete with China and the US, and establish energy autonomy fast, we need money, and we need to spend big to insulate homes, deploy heat pumps, and renewables, and of course to support our industry in going electric.
- As Ursula von der Leyen herself said “Lithium and critical minerals will soon be more important than oil”.So we can’t ignore China’s attempts to completely dominate that supply chain. Europe should create policies to promote, and if necessary, require local content, to secure access to responsibly sourced critical minerals, in and outside Europe, reshore some of the associated processing and accelerate recycling. It should also work with the US and other western nations to ensure open markets for key minerals.
- One of Europe’s big strengths is premium cars. Those are usually gently taxed company cars and turning the massive tax credit – worth €15,564 in a year for a Porsche 911 in Germany – that currently goes to ICE, into forms of EV credit would help counter the US IRA provisions. The announced EU fleets initiative can’t come fast enough. It should be kept simple, setting ZEV registration targets for cars and vans, in large fleets.
- A policy to promote access to clean cars for all through social leasing – along the lines proposed by Emmanuel Macron, starting from, say, 200€/month – would be a great way to make affordable EVs available to Europeans. If we use today’s 17 billion in fuel duty cuts to finance an EU wide social leasing programme, millions of Europeans could gain access to affordable, entry-level EVs.
- Indeed, we must protect ourselves. The IRA amounts to an export subsidy undercutting European vehicle import duties. As a continent with high labour and energy costs, the EU cannot ignore this, even if we support the US taking action on climate and rely on it for our security. A poor, deindustrialised Europe will be a weak and unreliable ally of the US.
- Last but not least, champions need competition. We cannot be world leading if we ban non-European champions from coming to our market. New entrants increase consumer choice, reduce prices and bring innovation, expertise and skills to Europe. This means investment in Europe, for example by CATL and others, is most welcome, just like Toyota was welcome in the 1980s.
The industrial policy train has left the station. Europe made a spectacular comeback after Dieselgate. Now its competitors have upped the ante. We still have excellent cards, but we need to play them now. Otherwise we risk losing the clean energy race to China and the US. As Europe’s most famous 1970s cultural export once said “the winner takes it all.”