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Commentary

Implications of the New Green Industrial Policies

Frédéric Vonner, Sustainable Finance and Sustainability Leader, PwC Luxembourg, calls for better coordination between major trading partners.

For some years now, pundits and experts across the political spectrum have been proclaiming the end of the neoliberal era – the political and economic paradigm that dominated the global economy since the early 1990s, characterised by globalisation, free trade and the state’s retrenchment from the economy.

Much of this thinking is warranted. From the COVID-19 pandemic, the erosion of diplomatic and trade relations between the United States and China, and the return of double-digit inflation and high interest rates, to Russia’s harrowing invasion of Ukraine and all its attendant disruptions, the shocks that have befallen international relations and the global economy are nothing short of systemic.

Bolstered by energy security considerations, the Biden Administration launched what is arguably an epoch-defining green transition plan for the United States. In the European Union, the Green Deal unveiled in December 2019 was recently upended with a Green Industrial Plan and a Net Zero Industry Act (NZIA) in a bid to catch up with the United States. In both cases, the state has returned to directing industrial policy after a long absence.

But this re-evaluation of industrial policy, characterised by substantial subsidy packages for the green transition, may be inadvertently triggering a green subsidy race – or ‘war’, as Germany’s vice-chancellor and economics minister dubbed it – throwing a spanner in the green transition. What are the implications of this new competitive landscape?

The United States: A (green) giant awakens

Since the early 2010s, technological developments, increasing competition and declining capital costs have led to a significant decline in the cost of renewable energy. Already in 2021, renewables uptake across the world had grown tremendously, as it became “the cheapest source of power,” according to the Director-General of the International Renewable Energy Agency (IRENA).

The Russian invasion of Ukraine in February 2022 and the subsequent stoppage of Russian gas flows towards Europe placed energy sovereignty as a policy priority on both sides of the Atlantic, with renewable clean energy as one of the main tools to achieve it.

In August 2022, the Biden Administration’s Inflation Reduction Act (IRA) was signed into law. With roughly US$370 billion in governmental funds allocated over the next decade for clean energy and green infrastructure projects, the IRA is unequivocally the “single largest investment in climate and energy in American history.” Among its flagship provisions, the IRA allocates billions of dollars for the deployment and installation of projects in the fields of renewable energy, energy efficiency, electric vehicles (EVs), charging stations and batteries, as well as advanced nascent and experimental clean technologies such as green hydrogen and carbon capture, storage and utilisation.

Ultimately, the IRA is a multi-faceted, multi-sectoral transformative bill that simultaneously seeks to decarbonise and revitalise the United States economy by creating ‘green’ jobs across the manufacturing and industrial sectors and – as its name indicates – reduce inflation and the country’s vulnerabilities to exogenous energy shocks on the long-term.

Europe responds

In May 2022, Europe responded to the Russian invasion’s energy shocks by launching the REPowerEU Plan which rapidly helped the European Union diversify its energy supply, increase its renewable energy deployment, and save on energy costs. But in February 2023, a few months following the passing of the IRA, the European Commission responded with the Green Deal Industrial Plan.

Firstly, the plan seeks to simplify the EU’s regulatory environment to encourage investments in the production of the key technologies necessary for the green transition, such as solar panels, batteries, heat pumps and electrolysers for hydrogen. In this vein, the European Commission later proposed the NZIA which seeks to put these regulatory reforms into action. The plan also seeks to facilitate public funding to green energy projects, develop the EU labour force’s skills to bring about the green transition, and promote open trade relations to ensure the transition is endowed with resilient supply chains.

But the response to the proposed NZIA has been relatively lukewarm. While it received praise for firmly positioning clean hydrogen as a key decarbonisation tool and for putting a primer on skills-training, many green industry bodies have criticised the act for not being ambitious enough, commenting that some of the targets appeared to have been chosen in a rather haphazard fashion and that there is a lack of clarity on several financing-related aspects.

Contours of a new conflictual relation

Perhaps the biggest concerns with potentially transformative legislative acts such as the IRA and the NZIA are the protectionist measures they entail which ostensibly seek to expand domestic manufacturing and industry while reducing exposure to foreign suppliers.

These measures risk causing substantial harm to long-established trade ties. Pillars of European industry are already exploring their new post-IRA options in the United States, with leading European car manufacturers already beginning to pivot their car and battery manufacturing activities, lured by the hefty IRA-enabled incentives. European policymakers have understandably sought to respond rapidly to such developments, which might explain the rushed nature of the NZIA and the confused reaction industry groups have had.

In addition, protectionist policies risk delaying global decarbonisation efforts and make net zero goals even more unattainable, as it would become more difficult to rapidly import and deploy clean energy technologies in a cost-effective manner.

The United States and Europe are not alone in this re-emergence of industrial policy with green contours. Most leading developed and developing economies – such as the United Kingdom, Japan, India, China, and Brazil, to name a few – are also implementing or considering similar measures, be it in clean energy deployment, batteries and EVs manufacturing, or establishing clean hydrogen supply chains.

Debating whether the neoliberal order has ended is a fruitless exercise. But what’s certain is that we are entering a new context, as showcased in PwC’s latest report on the global asset and wealth management industry.

At a time of climate emergency, it is a relief that the political will for a green transition is present. But if this is to be translated into actual climate change mitigation and reversal, transnational green industrial policies need to be better coordinated and, most importantly, devised and carried out with the full participation of industry groups.

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