February 2023
EU Matrix Under One Country, One Vote Principle
On 1 February, the European Commission announced its Green Deal Industrial Plan for the Net-Zero Age. Europe has thus far positioned digital and green as the twin pillars of its industrial policy, and the plan signals its intention to continue strengthening its industrial competitiveness in green areas.
Background to Green Deal Industrial Plan
In Europe, moves to promote green industries have gathered momentum since Ursula von der Leyen became president of the European Commission. The New Industrial Strategy for Europe, announced in March 2020, kicked off this process. Under the banner of a "transition toward climate neutrality and digital leadership", it advocated: (1) a deeper and more digital Single Market; (2) upholding a global level playing field; (3) supporting industries toward climate neutrality; (4) building a more circular economy; (5) embedding a spirit of industrial innovation; (6) skilling and reskilling; and (7) creating the conditions required for investing in and financing the transition.
Overview of Green Deal Industrial Plan
The Green Deal Industrial Plan is positioned as an update to the green areas of the foregoing industrial strategy. It consists of four pillars: (1) improving the regulatory environment; (2) supporting access to funding; (3) skills; and (4) promoting trade. The broad framework is unchanged from the New Industrial Strategy. We outline the specifics below, which we think are designed to accelerate existing initiatives.
(1) Improving the Regulatory Environment
The European Commission will make three proposals by spring 2023.The first is the creation of a Net-Zero Industry Act. This will provide a simplified regulatory framework for batteries, windmills, heat pumps, solar, electrolyzers, and CCS technologies. The second proposal is a Critical Raw Materials Act. The act will aim to secure the supply of the critical raw materials needed to achieve net zero emissions by facilitating their extraction, processing, and recycling and continuing research and innovation. The third proposal involves electricity market reforms. Europe has implemented a variety of reforms aimed at liberalizing its energy supply, but we expect these to be revised somewhat in response to the Ukraine crisis and green policies.
(2) Supporting Access to Funding
Firstly, it proposes allowing member states to further speed up and simplify state aid on a temporary basis until end-2025. It also proposes expanding the Temporary Crisis Framework (TCF) introduced in response to the Ukraine crisis to transform it into the Temporary Crisis and Transition Framework (TCTF). If we look next at the EU-level funding measures, the main goal of these is to close the gap between EU member states in terms of support for reaching net zero emissions. Varying levels of national support impair the EU's status as a single market, and it intends to use its budget to prevent market fragmentation. Specific measures fall under the REPowerEU plan, the InvestEU Programme, and the Innovation Fund. On the private funding front, it notes the need to swiftly implement the 2020 Capital Markets Union (CMU) Action Plan given the difficulty of achieving decarbonization solely with state and EU aid.
(3) Enhancing Skills
It focuses on creating the skills required for the digital and green transitions. The EU is already acting on the initiatives set out in its European Skills Agenda, and it also plans to establish a skills partnership for onshore renewable energy by February 2023 and a heat pumps skills partnership by end-2023.
(4) Promoting Trade
It cites advancing free trade agreements (FTAs) as a key ongoing issue, but will also continue to develop other forms of cooperation on free trade beyond traditional tools. New trade-related policies include the establishment of a Critical Raw Materials Club, the development of Clean Tech/Net-zero Industrial Partnerships, and the creation of an export credits strategy. While the details of these are unclear, we expect them to act as frameworks for strengthening cooperative supply relationships that facilitate the transition to a digital/green economy. While not a new policy, the plan also mentions making full use of trade defence instruments (TDI) to defend the Single Market from unfair trade practices such as dumping and distortive subsidies, the use of the Regulation on Foreign Subsidies that came into force in January to ensure that foreign subsidies do not undermine the competitiveness of European industry, and the use of the EU framework for screening of foreign direct investment.
Prospects for Stiffer Competition
The 27-country EU is a massive economic zone that generates nearly 15% of global GDP, and its status as an international arena based on the principle of "one country, one vote" means that a consensus among its 27 member states carries considerable weight. In other words, the EU is increasing its presence as a global economic rulemaker. The EU's adoption of the Green Deal Industrial Plan reconfirms its goal of increasing its global competitiveness in green industries. It is also likely to fuel a livelier debate on fair and equitable industrial policy and trade rules amid stiffer global competition in these industries. We expect renewed interest in how to strengthen and advance green policies amid ongoing concerns about carbon border adjustment mechanisms (CBAMs).
Summary from "Nomura ESG Monthly (February 2023)"
