The Net-Zero Industry Act: Designing Europe’s launchpad for a cleantech investment plan
As the world enters a new era of cleantech competition, policymakers must confront two key policy questions – regulation and investment. The Net Zero Industry Act is Europe’s response to the former. Yet key concerns around permitting, sectoral targets and the scope of the Act will need to be addressed if it is to be effective, argue Thomas Pellerin-Carlin and Ciarán Humphreys in this blog post.
The global cleantech race is underway, with leaders and businesses rushing to seize the first mover advantage and capture a global market that is likely to reach $650bn by 2030. Doing so requires a historic expansion of production capacity for clean technologies along the value chain, starting now.
This race takes place against a geopolitical backdrop of fragmentation and escalating tension. Russia’s invasion of Ukraine and US-China strategic competition have created a more volatile geopolitical environment. As Europe has experienced this past winter, such escalating crises threaten not only national security, but security of energy and commodities. To be more resilient, Europe needs to scale its own cleantech manufacturing capacities. It will also have to diversify imports to avoid overdependence on a single supplier – and be ready to pay the short-term economic cost that may come as a result.
Closer to home, the expansion of cleantech manufacturing can play a crucial role in shoring up domestic support for the green transition. In the US, the Inflation Reduction Act (IRA) greatly expands US cleantech manufacturing capacity, and may deliver up to 9 million green jobs in the coming decade. Building up EU cleantech, coupled with skills initiatives which train citizens to join these industries, could have a similar impact. A green transition that delivers security and prosperity will be one that politicians and citizens across Europe are more likely to support.
The USA and China are investing in cleantech
From Washington to Tokyo, policy makers face several challenges as they seek to secure their share of the industries of the future. Public and private investments are climbing, but not yet sufficient to reach net-zero goals. Uncertainty around permitting timelines and access to public finance damage the predictability of cleantech markets and dent investor confidence. Finally, concerns around the lack of a skilled workforce places further demands on governments to create the conditions for scaling up cleantech.
China is addressing these challenges with its Made in China 2025 strategy and the fourteenth Five-Year Plan (FYP). The US’ Inflation Reduction Act (IRA) tackles the question of investment using a variety of public spending mechanisms that could be as high as $1,200bn. Similarly, Japan’s Green Transformation Policy (GX) has pledged €140bn.
While the EU is yet to propose a comparable investment plan, its answer to the challenges of permitting and market predictability comes in the Commission’s March 2023 proposal for a Net Zero Industry Act (NZIA), which is currently under consideration in capitals and the European Parliament. The NZIA seeks to build upon Europe’s already existing regulatory architecture to make the EU a more attractive environment for cleantech manufacturing investment.
The NZIA sets ambitious targets for the build-up of European domestic cleantech manufacturing capacity, while fast-tracking permitting timelines for 8 strategic net-zero sectors from solar and wind to hydrogen electrolysers and heat pumps. The NZIA also includes provisions for expanding carbon storage capacity within the EU, gives member states the power to create “regulatory sandboxes” to support early-stage innovators, and foresees the set-up of “Net Zero Academies” to help build the skills base necessary for these new industries.
The NZIA proposal is the first concrete proof of the Commission’s willingness to “make Europe the home of Cleantech“1, as President von der Leyen put it in her January 2023 World Economic Forum speech in Davos. However, some of the NZIA provisions remain vague and ill-defined, with questions on how such ambitious targets can effectively be implemented on the ground. This blogpost proposes that the Net Zero Industry Act:
- include provisions to support member states in the set up of “one stop shops” for faster permitting, in the form of technical and administrative expertise, as well as EU funds;
- incentivise the redesign of permitting procedures at national level to increase efficiency, preserve environmental protections and incorporate climate adaptation and mitigation considerations;
- avoid significant widening of the scope of the Net Zero Industry Act – clean technologies should benefit from a comparative advantage, and therefore remain the focus of its targets and permitting provisions;
- include a provision to empower the Commission to design sector-specific production targets for strategic net-zero technologies and components, to be implemented through delegated acts;
- serve as the first step towards a wider EU debate on how to build a long-term EU cleantech investment plan that creates a better investment environment for the scale up of cleantech in Europe in this decade and the next.
Faster permitting requires resources
One of the most significant sections of the NZIA concerns itself with accelerating permitting timelines for the construction and expansion of cleantech manufacturing projects. While permitting is undoubtedly a key challenge for wind and solar installations both in Europe and globally, there is anecdotal evidence but still insufficient data available to assess the scale of the permitting challenge for cleantech manufacturing projects. According to the European Commission’s own analysis, permitting speed is only one driver for longer project lead times, which can also result from shortage of skills or specialist machinery.
Nevertheless, the NZIA (in its current form) would represent an overall acceleration in the permitting timelines for cleantech projects. All listed strategic net-zero sectors would benefit: 12 months for projects of less than 1GW annually and 18 months for larger projects and those not measured in GW. The timelines are yet shorter if the applicant is designated a “Net Zero Strategic Project”. Applications benefit from a centralised national “one stop shop” (following the Danish example), in an effort to streamline an assessment process which is often split across various authorities.
However, for this improved permitting regime to be effective on the ground, the NZIA should address two outstanding issues: the resources needed by national permitting authorities, and the need to preserve environmental standards.
The creation of one stop shops dedicated to green industry will deliver a regulatory competitive advantage to cleantech manufacturing projects, increasing their appeal to investors. Yet to be effective, these one stop shops require resources – in terms of humanpower, skills and digital infrastructure. The NZIA should include a provision which provides specific member states with financial and administrative support. This could be funded through the existing EU budget and governance structure of the Commission (e.g. Recovery and Resilience Programs, DG REFORM, etc.), with knowledge-sharing and administrative support for the effective set-up of one stop shops organised through the Net Zero Europe Platform, a governance structure proposed in the NZIA.
A centralising one stop shop will help accelerate a permitting process that has previously been slowed by responsibility being spread across different jurisdictions. Yet it is important that the reforms do not focus exclusively on speed at the expense of environmental protection. There does not need to be such a zero sum trade-off – delays arise because the current permitting process is poorly designed, not because of high environmental standards.
Therefore, the NZIA should go further than setting up one stop shops and fast timelines to include a provision to incentivise the redesign of permitting procedures. The smarter procedures should maximise institutional efficiency, ensure relevant expertise is involved throughout and strengthen environmental safeguards. This process can also include aspects of climate change adaptation – in a Europe facing worsening climate impacts, such considerations could be crucial for the sustainability and competitiveness of cleantech manufacturing sites, including access to water for industrial processes such as electrolytic hydrogen production.
Keep the NZIA focused on Cleantech
In an increasingly decarbonised world facing fragmentation and geopolitical tensions, Europe needs to devote as much state capacity as necessary to building up the industries and infrastructure of the green transition. This is where the proposed scope of the NZIA, with its focus on eight strategic net-zero sectors, is crucial.
The eight selected sectors include wind, solar PV, solar thermal, battery and long-duration storage technologies, grid, heat pumps and hydrogen electrolysers – in short, the already developed solutions to the climate crisis that are ready to be deployed at scale in this decade. The scope of the NZIA should not be widened beyond the strategic sectors which will have the greatest climate impact by 2050.
With the regulatory preference offered to these sectors by the NZIA, investors and developers would rate European cleantech projects more favourably both in comparison to other markets and polluting European projects. This would be a factor in supporting the build-up of cleantech industries. Conversely, expanding the core scope of the Act to include, for example, the entire chemical, steel, or concrete industry (under the justification that these materials are also sometimes used in renewables and cleantech) would dilute that advantage afforded to strategic clean technologies. If all industries have access to preferential treatment, none do.
NZIA Targets should be designed to speak to real world investors
Preserving the focused scope of the NZIA will not be enough to maximise its impact. Following the Commission’s release of the NZIA, the 40% production target in the Act’s first article has grabbed the most headlines. The target, which aims for Europe to meet 40% of domestic needs with domestically-produced clean technologies by 2030, is very broad and poorly defined, with all eight strategic net-zero technologies, and their relevant components, falling under the same numerical goal.
Setting the same target for every technology, and every component part, is an approach divorced from the real conditions of these different European industries and their relative importance for Europe’s long-term energy security and global competitiveness. The EU needs specific production targets for each of the net zero technologies and their strategic components – if the goal is leadership in the race to net zero, the bloc will need a clear vision of what that leadership will be based on.
Targets should be designed based on a thorough analysis of the future production capacities of EU member states, including labourforce and skills base, infrastructure and natural conditions. A comparison with the projected capacities of China, Japan, the US and other global competitors should also be undertaken, so as not to set an over-ambitious target for sectors where Europe is lagging behind (such as solar PV, where China is dominant and the US is making dramatic inroads thanks to the IRA), or be under-ambitious in industries where Europe can lead (such as wind turbines, electrolysers, heat pumps and solar thermal systems). Finally, a clear-sighted geopolitical analysis will have to be incorporated, to ensure long-term security of supply of clean technologies in an increasingly volatile geopolitical environment2.
Such an analysis would produce clear, evidence-based targets for EU production of cleantech for 2030 and beyond. However, to expect all of this to be integrated into the current text of the NZIA would be unrealistic – such analysis takes time. To ensure the effective development of such targets in future, the NZIA should include a clause empowering the European Commission to develop sector-specific targets, in the form of delegated acts which would then become binding for the EU, under the force of the NZIA.
Investment: the missing piece of the NZIA puzzle
Translating the vision of the Green Deal Industrial Plan into a concrete reality requires not only regulation (in the form of the NZIA), but fresh investment – both public and private. The Commission provided a first estimate of a need for €92-119bn between now and 2030, €18-24bn of which would be public investment.
With the NZIA, the EU can set itself up as a trailblazer in terms of cleantech regulation – but in terms of effective public investment, it remains a laggard. For instance, the US IRA now provides a simple uncapped federal subsidy of $3 per kilogram of renewable hydrogen produced anywhere in the USA. By contrast, even three years after the adoption of its Hydrogen Strategy, the EU still has a patchwork of national situations, with divergent and sometimes non-existent support schemes. This discrepancy damages investor confidence in EU cleantech, while established EU green industries, such as Northvolt, are increasingly considering expansion into the USA.
An improved regulatory architecture for cleantech, as proposed by the NZIA, is welcomed, but will not go far enough to ensure Europe secures its competitiveness and security in the technologies of the future, while accelerating progress towards net-zero. Europe cannot replicate the IRA, but a well-designed EU cleantech investment plan can match, or even surpass, its impact.
The authors would like to thank Clara Calipel, Damien Demailly, Domien Vangenechten, Jean-Philippe Hermine, Nicolas Berghmans, Philipp Jäger, Simone Tagliapetra, Suzana Carp and Zofia Wetmanska for their valuable comments on this blog post.
1 Those sectors, as set out in the annex to the NZIA, are: solar photovoltaic and solar thermal technologies, onshore wind and offshore renewable technologies, battery/storage technologies, heat pumps and geothermal energy technologies, electrolysers and fuel cells, sustainable biogas/biomethane technologies, carbon capture and storage (CCS) technologies, grid technologies
2 It is important that the EU, in seeking to support strategic cleantech sectors, is explicit about what it means by “strategic”. Clear definitions of what materials and products are vital to the energy security of the future, and threatened by future geopolitical disruptions, will help identify which industries should be developed within the EU and which partnerships should be strengthened and offered support to develop their clean industries.