On 25 April 2023, the European Parliament passed the Net-Zero Industry Act (NZIA) as a significant component of the Green Deal Industrial Plan, with 361 votes in favor, 121 against, and 45 abstentions. A primary goal of the NZIA is to reduce Europe’s reliance on China by locally producing 40% of the continent’s annual net-zero technology requirements by 2030 and achieve climate neutrality by 2050. The scope of the NZIA encompasses a wide range of technologies, including renewables, nuclear power, industrial decarbonization, grid, energy storage, and biotechnology. Moreover, the act introduces revisions to government contracting rules and includes provisions to prioritize local green technology options.
Yet, the cost of this piece of legislation may be significant, while the benefits may be relatively modest.
The Net-Zero Industry Act: A Strategy with Inherent Flaws
Europe is responding to the U.S. Inflation Reduction Act (IRA), which offers billions to attract green investors. Although the NZIA doesn’t match America’s $369 billion IRA, it sends a strong signal. The agreement comes at a critical time for Europe’s renewable energy industry, with many solar firms going bankrupt due to cheap Chinese alternatives.
What about its benefits? First, the Act’s top-down approach carries significant risks. By emphasizing specific pre-defined technologies, it could eventually encourage policymakers to support wrong or obsolete technologies, resulting in unnecessary and potentially harmful expenses. In contrast, a technology-neutral strategy that welcomes any project capable of reducing emissions would be more effective. Additionally, promoting projects based solely on their potential to advance a chosen technology is flawed, as many do not need public support. Once again, the Act would cause more harm than good.
Secondly, the Act suggests that advancing green technology in the EU is good for business in general and for green business in particular. Yet, many green technology investors will likely encounter the same obstacles as the other investors, including a lack of access to finance, high energy costs, policy fragmentation, and skill shortages. The NZIA proposal mentions regulatory sandboxes and a skills agenda, but offers little or no details regarding implementation. For example, addressing broader issues like the significant shortfall of skilled workers (180,000 in hydrogen and 66,000 in solar PV by 2030) may be more effective than giving preferential treatment to cleantech projects.
Finally, the most contentious aspect of the Act is its protectionist aim to achieve 40% self-reliance in local manufacturing. This approach overlooks the cost disparity between promoting self-sufficiency and depending on cheaper imports, and raises considerable worries. There is uncertainty about whether this strategy will speed up or impede the EU’s transition towards decarbonization and resilience, as these objectives currently rely on inexpensive imports.
Can the EU Achieve its Net Zero Ambitions Without Chinese Imports?
In the past three years, the EU has installed nearly as many solar panels as had been installed since the industry’s inception at the start of the century, with a record 40% increase in installations last year, primarily due to affordable Chinese panels that account for 95% of the EU’s installations. By 2030, the EU aims to triple this number, covering an area 24 times the size of Paris. However, achieving this goal without cheap Chinese imports seems problematic. Production costs for solar panels are 35% less costly in China than in Europe.
Indeed, and despite China’s crucial role in Europe’s green transition, European manufacturers have raised concerns about China’s pricing practices, prompting the Commission to consider action. In October 2023, European Commission President Ursula von der Leyen launched an inquiry into foreign EV subsidies over market distortion concerns. By February 2024, the Commission began discussing anti-subsidy measures to support struggling EU solar manufacturers, particularly against Chinese imports. This issue has historical precedence. In the early 2010s, the EU imposed restrictions on Chinese imports, which led to a decline in installations. When the restrictions were lifted six years ago, installations surged. Today, EU producers are advocating again restrictions or subsidies. Although these actions aim to support essential domestic production for the low-carbon shift, restricted access to cost-effective Chinese green technology could in fact prevent the EU from obtaining its Net Zero objectives by.
In short, the NZIA encourages firms to reduce reliance on China, but high labor and energy costs make mass-producing photovoltaic cells within the EU challenging. The EU’s plans to make solar power its primary energy source by 2030 and ban new carbon-emitting cars by 2035 depend heavily on Chinese imports. Achieving these targets without cheap Chinese products is doubtful, and EU protectionist policies could hinder the transition. Moreover, Chinese retaliations pose additional risks and raise production costs for EU manufacturers.
Thus, the European Union finds itself at a critical juncture, facing challenges posed by expensive labor, soaring energy costs, and vulnerable industrial supply chains. Rather than channeling resources into industries that struggle to generate profits, particularly in comparison to other global producers, there’s a pressing need for a strategic reassessment. Europe has the potential to swiftly and economically embark on a green revolution through cheap imports and maintain a vibrant competitive environment. There is no need for more protectionism and rent-seeking. Free trade will ensure the continued inflow of affordable foreign goods. Upholding these principles is not just a matter of sustaining EU competitiveness; it is now more critical than ever to promote innovation and direct Europe’s energy policy for the future.
Photo by Andreas Gücklhorn
