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Unpacking the EU’s Green Deal Industrial Plan

Listen: Unpacking the EU’s Green Deal Industrial Plan

In this episode of the ESG Insider podcast, we explore challenges and potential solutions to the energy trilemma, which is the idea that the world needs to balance energy security, energy sustainability and energy affordability.  

We bring you interviews from the sidelines of the Reuters Global Energy Transition conference in New York City, including with Greg Jackson, Founder and CEO of UK-based renewable electricity supplier Octopus Energy Group.  

We speak with Joseph Vellone, Head of North America at ev.energy, which operates a cloud-based electric vehicle charging management platform. Joseph tells us how shifting the charging schedules of electric vehicles can help address the energy security component of the trilemma, specifically when it comes to maintaining grid reliability and enabling the use of more renewable generation.   

We explore the challenges and solutions for adopting low-carbon hydrogen and carbon capture technologies with David Burns, Vice President of Clean Energy at Linde, a large industrial gas and engineering company. And we talk with Patrick Schultz, Executive Vice President of Development, Strategy and Innovation and Chief Growth Officer at Veolia North America. Veolia helps industrial and municipal customers around the world manage water, waste and energy. 

Listen to our episode on low-carbon hydrogen here.

Photo source: Getty Images   

Copyright ©2023 by S&P Global       


This piece was published by S&P Global Sustainable1, a part of S&P Global.       

By accessing this Podcast, I acknowledge that S&P GLOBAL makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this Podcast. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. This Podcast should not be considered professional advice. Unless specifically stated otherwise, S&P GLOBAL does not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned in this Podcast, and information from this Podcast should not be referenced in any way to imply such approval or endorsement. The third party materials or content of any third party site referenced in this Podcast do not necessarily reflect the opinions, standards or policies of S&P GLOBAL. S&P GLOBAL assumes no responsibility or liability for the accuracy or completeness of the content contained in third party materials or on third party sites referenced in this Podcast or the compliance with applicable laws of such materials and/or links referenced herein. Moreover, S&P GLOBAL makes no warranty that this Podcast, or the server that makes it available, is free of viruses, worms, or other elements or codes that manifest contaminating or destructive properties.       


Transcript by Kensho.

Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Lindsey Hall: The energy transition is prompting policy changes around the globe as governments seek to mobilize the trillions of dollars needed to finance the shift to a low-carbon world. In August 2022, U.S. President Joe Biden signed the Inflation Reduction Act, or IRA. That's a comprehensive energy and climate law that allocates $370 billion in federal spending to decarbonization efforts over the next decade.

Esther Whieldon: Russia's invasion of Ukraine has also made policymakers around the world rethink their energy and transition strategies. For example, in May 2022, the European Commission proposed a new plan to wean the EU off Russian fossil fuels.

Lindsey Hall: And over the last few months, the European Commission has proposed measures to boost investment in clean tech industries and to make the EU more competitive on the world stage as the energy transition advances. These proposals are known as the Green Deal Industrial Plan, and they seek to make the EU less reliant on a specific country or region for supplies of raw materials.

Lindsey Hall: To learn more about what the plan entails, we asked our regular contributor, Jennifer Laidlaw, to join us on today's episode. Jennifer is also a member of the Thought Leadership team here at S&P Global Sustainable1 with Esther and I, and she's based in Paris. So Jennifer, welcome back, and thank you for joining us. And what can you tell us about this new plan?

Jennifer Laidlaw: Well, European Commission President Ursula von der Leyen first announced the plan in January, and more details were announced in February and March. The European Parliament and the Council of the EU, made up of government ministers of the 27 EU member states, have yet to approve the proposals. And it will be subject to negotiations over the coming weeks and months. The proposals include a Net Zero Industry Act to help speed up permitting for wind, solar, heat pumps, hydrogen and other green technologies as well as tax breaks and subsidies for European production facilities.

The Green Deal Industrial Plan also contains a Critical Raw Materials Act aimed at reducing Europe's reliance on imports for metals and minerals such as lithium for electric car batteries. Europe is going to need a lot of raw materials like lithium for its energy transition. The commission also intends to set up a European sovereignty fund to help finance the plan. To understand what prompted the EU to create the plan, I spoke to Elisabetta Cornago, a senior research fellow at the think tank Center for European Reform.

Elisabetta Cornago: So I think that the IRA was a bit of a call to action for the EU in the sense that Europe realized that it might risk, in a way, getting caught between China's strong support of its domestic manufacturing industry and practices that almost wall off its internal market of international competition on one hand. So that's one extreme of the spectrum. But when the U.S. introduced its IRA, Europe saw that there might be also an alternative model to support basically domestic manufacturing in technologies critical for the energy transition, and that is basically massive and swift subsidization.

Observing these 2 alternative models that are coming basically to, in a way, threaten some of its primacy as leader in climate action and in some of the sectors that are key for the energy transition, the EU has decided to try and intervene by acting upon industrial policy. 

And so this is really what this Green Deal Industrial Plan is about, to try and respond to the IRA while still, and I want to highlight that, recognizing that there are other practices that are not as friendly as the U.S. way of introducing subsidies, namely, the Chinese ones that I mentioned, that are still threatening the EU. So I think it's been a wake-up call basically for Europe to understand that it needs to get engaged in industrial policy to try and build up, scale up some of its manufacturing capacity.

Jennifer Laidlaw: So how is the plan actually going to work? How are they going to build this manufacturing capacity? And what sectors are going to benefit the most?

Elisabetta Cornago: Right. So this plan is basically talking about focusing, if you wish, on net zero technologies, so technologies that are necessary for the energy transition. We're talking about things like renewable energy from wind turbines to solar panels, but also batteries as well as heat pumps, electrolyzers which are necessary for hydrogen generation and so on and so forth.

So the way in which, I guess, the plan aims to boost investment in this wide range of clean technologies through multipronged set of strategies, the first aspect is simplification of the regulatory environment. And this involves things like simplifying the permitting procedures, for example, that are involved when you think about trying to start up a new manufacturing plant of some of these technologies.

The second aspect is speeding up access to finance. And now this is a big difference from saying open up the golden gates, but it's rather trying to support EU member states at national level by allowing them to temporarily relax certain State aid rules, so temporarily allow certain types of subsidization that would otherwise have been off-limits in the EU single market, but also try and, I guess simplify again some of the procedures that are associated with accessing funding for R&D, for example, that the EU makes available to start-ups in green tech.

The third aspect of the strategy is skills, so focusing on skills. The EU wants to work with its member states to try and understand and monitor, if you wish, the demand and supply of skills in those sectors that are oriented, geared towards the green transition, put some targets on there -- on that as well. So try and ensure that higher education is aligned, if you wish, in supplying the skill sets that are necessary for these sectors to flourish. And lastly, the fourth aspect of the plan is to rely on open trade to build resilient, really, supply chains for things like critical raw materials through cooperation with trade partners.

Esther Whieldon: Elisabetta explained how the plan aims to speed up financing and how it relax State aid rules to speed up investment in clean technologies. So Jen, how exactly is that going to work?

Jennifer Laidlaw: Just to step back a bit for our listeners, State aid is when a government pays subsidies to companies. This is prohibited under EU treaties. I wanted to understand how this aspect of the plan might work. So I spoke to Hayden Morgan, Head of Sustainable Finance Advisory at Pinsent Masons, a multinational law firm headquartered in London. You'll hear him mention CCS, which stands for carbon capture and storage, and the taxonomy, which is a kind of dictionary of sustainable activities.

Hayden Morgan: The State aid rules were there originally so that one member state didn't sort of have a competitive advantage over another member state. But I think over time, there is some awareness now that actually, the European Union as a block probably needs to have a consolidated response to sustainable investment, if you want to call it that, and in particular, a response to the Inflation Reduction Act in the U.S. because they see key industries being attracted to the U.S. given the federal funding there and the tax incentives and grants, et cetera.

European Union positions itself as a global leader for sustainability and green tech and sustainable finance. I think there's recognition now that this sort of State aid and the anticompetitive sort of nature, I think, is slowly falling away in favor of how can the EU as a block now respond to the Inflation Reduction Act.

Up until now, the EU's response to sustainability and increasing investment into sustainable activities has been through the sort of stick approach rather than the carrot approach, the stick approach being all the compliance and disclosure regimes that it's been globally leading on; and the taxonomy, for example. However, there is, I think, clear recognition now that, that hasn't had any material change of investment activity towards some of the green and sustainable objectives of the European Union.

And in addition to that, the U.S. Inflation Reduction Act has clearly demonstrated that this carrot approach is much more effective in terms of meeting sustainable investment goals and developing green infrastructure, green supply chains and green technologies, for example, around CCS and hydrogen, et cetera.

So I think there is a shift in the European Union now amongst many countries, I wouldn't say all countries, that State aid is -- has been a little bit of a barrier. I think there needs to be a little bit more consideration around how certain incentives and stimuli get balanced across the European Union in terms of the sort of the northern states versus the southern states and how that can be squared off because I think there's a lot of talk around some of the southern states losing out to France, Germany and the Nordics, for example.

And so how that can get balanced is an interesting one. But I think there has been a political shift. I think the EU Net Zero Industry Act, I think it will help in terms of potentially, it will help more towards contributing to the European Union's sustainability goals than perhaps the stick approach has to date.

Jennifer Laidlaw: I then asked Hayden how he expects companies to respond to the EU's proposals. You'll hear him mention the UNFCCC. That's for United Nations Framework Convention on Climate Change.

Hayden Morgan: I think market forces dictate sort of where companies position themselves and where they make their own investments. And so there's been a lot of interest and a lot of lobbying actually from some of the big Tier 1 corporates based in Europe to have this package brought forward to stop the jobs -- the flight of capital, human capital or financial capital, to, for example, the U.S.

That being said, taking a step back, from a sort of global sustainability perspective, in a way, it's good that there's this competitive tension and a bit of a trade war between the EU, Europe, and the U.S. because this sort of race towards who can provide the most attractive stimuli, tax breaks or incentives to increase sustainability in its broadest sense is good for the planet. So it's quite easy to get bogged down in the specifics of what percentage tax breaks is the EU going to propose compared to the U.S.

From a sustainability perspective, it's great to have this competitive tension. And it's about time because we've been waiting years and years and years for these sort of public sector incentives from the government to enable that mobilization of private sector investment to see some of these outcomes that we're looking for. And I think the U.S., in 6 months, has probably done more than the UNFCCC COP process has done for 6 years, I would say, in terms of actual outcomes.

And that's not to say the UNFCCC process is not worthwhile. Absolutely it is. But I'm just saying this is the power of the capital markets being mobilized in alignment with sustainable goals. And that is really, I think, going to be a theme for the next 5 to 10 years in terms of affecting this real change. If you get the incentives aligned with sustainable outcomes, with capital flow, increasing private sector investment, you get the win-win virtuous cycle. And again, for the planet, that is really where we need to be.

Jennifer Laidlaw: I also asked Hayden how much he thought the proposals would streamline financing and permit approvals for green industrial projects.

Hayden Morgan: The sort of policy instruments in terms of that approval process is a common theme, and it's common in the U.K., in Europe and in the U.S. I guess the comment I would say there is very much context-specific and location-specific. So if, for example, it's regenerating a brownfield site and you've put a new green hydrogen facility there co-located next to a renewables platform with -- co-located also with some battery storage, that is like the ideal scenario to fast-track approvals because there's limited impact on the environment, limited impact on any social receptors.

You can compare that potentially with an onshore wind farm next to a protected area, and it's visually intrusive. There's wind impacts. There's flicker impacts, the local community has no benefit from this. That is where the planning sort of process probably should carefully consider whether or not that project should go ahead.

So I do think there does need to be some reflection of that local context, which gets lost in sort of at the federal level in terms of just green-lighting all projects of a certain type through. So I would provide a little bit of caution there. But generally, we do need more agile planning, approvals and permitting for these projects. And it's a common theme throughout a lot of these economies.

Jennifer Laidlaw: Hayden's comments on the importance of adapting projects to local needs led me to wonder how the plan would impact different EU countries. I asked Elisabetta from the Center for European Reform how the plan might be implemented across different EU states.

Elisabetta Cornago: There is very, very real risk that countries with the greater fiscal space to unleash pretty much the power of State aid as well as with the most attractive business environment with a substantive presence already of some actors in these low-carbon technology sectors might be really the ones that benefit the most from State aid relaxation, think of France and Germany in import position.

Whereas countries that have tighter public budgets because of high public debt, for example, or just smaller public budgets overall, right, smaller economies, will not be able to use as much the lever of production subsidies, of R&D subsidies, of State aid more broadly, which would risk then fragmenting these potential industrial developments.

So this tension between, basically, enabling countries that have the firepower to support their industry but just need, basically, the green light to go ahead and do that and helping out the smaller or weaker, from a public finance perspective, players in building out equally resilient industrial base in green tech is also behind some upcoming or announced additional efforts from the European Commission, namely, there have been announcements that a proposal for a new so-called European sovereignty fund is going to see the light before the summer.

And the idea there is to use this type of EU-wide funding to bridge this gap between, again, those countries that have the space to rule out State aid themselves and those that, on the other hand, would need support at the EU level. But there are also worries that this European sovereignty fund might turn out to be not as ambitious as it really should be to match, if you wish, the IRA.

And also, instead of bringing about new funds like the Recovery and Resilience Facility had done through joint borrowing when the COVID crisis came about, if it only basically limits itself to repackaging, reshuffling existing resources, giving it a new shiny name, then it's unclear what the added value would be.

Jennifer Laidlaw: Funding for the plan will be key to its success, as you heard Elisabetta explained. To get some idea of how much money might be at stake, I spoke to Brian Hensley, Partner at climate advisory firm Kaya Partners. He wrote a paper on the Green Deal Industrial Plan in April for the Inevitable Policy Response. That's a climate transition forecasting consortium commissioned by the United Nations-backed investor network, the Principles for Responsible Investment. You'll hear Brian mention the CHIPS Act. That's a U.S. law that provides financing for the semiconductor industry.

Brian Hensley: I think a lot more money is needed to reach goals, for example, a 55% reduction in emissions and also all of these individual technology aspirations. For example, the electrolyzer aspiration in the Net Zero Industry Act is to have 100 gigawatts of capacity, which by 2030 would be 40% of global capacity. To get that off the ground, I think a significant amount more money is going to be needed.

But just to compare the money, we wrote a paper last year defining a role of public money that is available in the U.S. for the transition, where we added up not only the top line Inflation Reduction Act number of $370 billion, but also around $350 billion from Department of Energy loan guarantee authority. You have the Infrastructure Investment and Jobs Act. I think you had $80 billion from the CHIPS Act. Even California had $54 billion. All this added up to $1 trillion.

And if you zoom down into the Inflation Reduction Act, because it's uncapped in terms of how much it may cost, that can be modeled out, as the likes of Credit Suisse and Goldman Sachs have done, to be as large as $1 trillion or $1.2 trillion itself. So if you add and subtract all that up, you're looking at a top line number of around $1.75 trillion of public money available in the U.S., which can then draw in private money of 3, 5, 10x.

The EU, it's harder to compare apples to apples because you're looking at repurposed funds. There's around EUR 600 billion or EUR 700 billion in the Recovery and Resilience Fund and -- but it's uncertain on how much of that is going to be used explicitly for the transition.

And this is why the proposal of the EU sovereignty fund is potentially so critical because it's seen, it's acknowledged that the demand for financing could be much bigger, but that a legislative proposal for new common debt financing is obviously running up against some opposition from even -- well, especially from the traditional frugal states as they themselves find their budgets in deficit.

So I'd put the odds in quantitative terms with the U.S. But also, there's qualitative advantages, just one example being it's much easier to actually get the money. And another one is that the definitions for how you get paid are better, and another one is that you can trade the tax credits, so on and so on.

Lindsey Hall: Those comments from Elisabetta and Brian reminded me of what we heard recently on this podcast from Olivier Musset, Head of Energy at the investment banking division of French bank Société Générale. Olivier told us he didn't expect EU funding to be, and I quote, "In the same order of magnitude," compared to the U.S. Many investors were looking to invest in the U.S. market because they want to go where they can get the best immediate return, Olivier told us. So how is the EU addressing that challenge?

Jennifer Laidlaw: Yes, I wondered about that as well. Olivier had told me that the EU plan would take time because it needs to be implemented across the 27 member states. So I asked Elisabetta to what extent the EU's efforts to cut red tape would accelerate investment. Here she is again.

Elisabetta Cornago: Well, that's a crystal ball type of question. But I think that in certain sectors, certainly, there's a bit of cheap talk as well in the sense that, for example, if you think about the value chain of electric vehicles and batteries for these cars, it makes a lot of sense for the supply chains to be built close enough to minimize transport costs because they're talking about inputs that are very heavy.

So while it's understandable, for example, for companies to go ahead and invest in the U.S. because of support scheme, it's perhaps unrealistic to think that very large share of batteries going into electric vehicles for the European market manufactured in the EU are going to be imported in the medium to long term simply because of the technical aspect of the supply chain and the fact that you need to consider the ease and the cost of transporting inputs into the supply chain.

So I think ease of investment is certainly key in driving these decisions. But ultimately, also the rationality of the supply chain is something that is going to be driving this type of decision as well. So I understand the concern about losing out on investments, but that's why it's tricky for the EU to be, in a way, also cold-blooded in understanding where to act in terms of identifying strategic sectors that it supports to understand which are those that are really at risk of bleeding out and which, on the other hand, would stay in but are just looking for, I guess, some additional support to stay in Europe.

Esther Whieldon: Now Jen, you mentioned at the beginning that the plan includes a Critical Raw Materials Act. What did you learn about that?

Jennifer Laidlaw: Yes, I asked Brian to explain what part critical raw materials play in the EU strategy.

Brian Hensley: It's one of the new pieces of legislation, and appropriately so. The EU is very deficient in critical raw materials. It relies on China for 98% of its rare earths. It extracts negligible amounts of its own list of strategic raw materials. Really, the only one that it processes is cobalt at 15% of the global output. So they need to do a lot. And what they're doing in the Critical Raw Materials Act is setting, again, 4 targets. There's no plans as much as targets. And those targets are by 2030, at least 10% of EU demand to be met by domestic extraction, 15% through recycled waste and 40% through domestic processing.

So there's a fourth one, which is very interesting and I think could be the most problematic. The other ones are already quite aspirational. But the fourth one is that no more than 65% of any strategic raw material can come from a single third country. And given, as I mentioned, that China supplies 98% of the rare earths, it will be a very delicate balance to meet that target when the dependency is so entrenched upon China.

Jennifer Laidlaw: He then went on to explain how the Green Deal Industrial Plan, or GDIP, as you'll hear him call it, aims to reduce reliance on individual countries or suppliers for clean energy.

Brian Hensley: This is the fourth pillar of that GDIP, which is trade. And here, they haven't come up with any new trade regulations, although there is one pending at the commission level next year for China-specific measures. But what they're doing is they're looking at a more cohesive use of existing trade measures, for example, foreign subsidies regulation, which will determine how much foreign countries have helped the country. And if it's -- helped the company rather. And if it's deemed that company has been helped too much, then punitive actions can be brought to bear.

There's anti-coercion instruments. If you do something to do trade tariffs against us, we can do it back to you. There's EU foreign investment regulation. So there are instruments which are being brought into this Green Deal Industrial Plan to allow for a broader political autonomy development. But they're starting from the back foot, and they will need to balance that in the next 5 and 10 years delicately just because China is so dominant and if anything, getting more dominant.

When you hear the likes of LONGi, the solar company in China, looking to produce 500 gigawatts of solar, you could see a step change where the solar panel prices come down to 1/4 of what they are. And if -- that will just completely devastate the economic model of the EU or even the U.S., who's now trying to produce those with domestic supply chains at higher levels.

So one thing that we advise all of our clients to really, really focus on, and we help them do this, is to recognize the amount of binary policy risk in the production facility investments and to realize that these things can make the difference of make or break or hundreds of millions, if not billions, of dollars of investment.

Lindsey Hall: So clearly, there is a lot at stake as the EU weighs these proposals under the Green Deal Industrial Plan.

Jennifer Laidlaw: Yes, and it will be interesting to see how the proposals will be adopted across EU countries and the impact it will have on the EU's overall sustainability goals.

Esther Whieldon: Well, thanks so much, Jen, for filling us in on these proposals, and please do let us know when there are major developments in the months to come.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider, and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

Copyright ©2023 by S&P Global  


By accessing this Podcast, I acknowledge that S&P GLOBAL makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this Podcast. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. This Podcast should not be considered professional advice. Unless specifically stated otherwise, S&P GLOBAL does not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned in this Podcast, and information from this Podcast should not be referenced in any way to imply such approval or endorsement. The third party materials or content of any third party site referenced in this Podcast do not necessarily reflect the opinions, standards or policies of S&P GLOBAL. S&P GLOBAL assumes no responsibility or liability for the accuracy or completeness of the content contained in third party materials or on third party sites referenced in this Podcast or the compliance with applicable laws of such materials and/or links referenced herein. Moreover, S&P GLOBAL makes no warranty that this Podcast, or the server that makes it available, is free of viruses, worms, or other elements or codes that manifest contaminating or destructive properties.