Make, buy, protect Europe

Written by William Todts, executive director of T&E and Jos Dings. Jos is a senior fellow at T&E. He previously worked for CE Delft, T&E and most recently for Tesla.

History is not kind to those that forgot to master modern tech. The Clean Industrial Deal, the flagship project of the new Von der Leyen Commission, seeks to take this lesson to heart.

Is it too late ? Despair is bad, but late it is. Turning the ship around requires a true departure from past practices and dogmas.

The EU perceives itself as squeezed between China and the US. This is nonsense. It has a single market, 450 million quality-conscious consumers, and importantly, the legal tools necessary to leverage this market power.

Instead of using that power the EU has obsessed over minimising internal distortions on the single market, whereas China and the US have obsessed over maximising external distortions with the rest of the world - including Europe. Either the EU faces this reality and acts on it, or it keeps doing more of the same and fails.

The CATL case

Bringing in foreign investment, including from China, is good. The tables are turning and we have a lot to learn. But it is important not to cede control in industries as critical as cleantech. This is however exactly what has been happening. Up to now, European investments by companies like CATL, Gotion, but also LG and Samsung have been under full foreign control, with little to no spillovers in terms of supply chain, IP or skills.

In a free market, this could make sense. But these projects received lots of European taxpayer money: CATL in Hungary €7.3bn and €800m state aid, Gotion in Slovakia €2.5bn and €214m state aid. Currently the Commission is considering a request by the Hungarian government to subsidise a BYD car plant, reportedly to the tune of €240 million.

And in recent news, CATL announced a €4.1bn battery plant in Zaragoza, with Spain giving around €300m which the Commission has pre-approved under the Temporary Crisis and Transition Framework (TCTF).

In summary, we have been very poor at using the leverage we have. How can Europe better build and control clean technology? Let’s explore a three legged strategy.

“Make Europe”

In order to supply EU-made cleantech, we must profoundly reform state aid for cleantech manufacturing.

It is not that we do not spend: hundreds of billions have - rightly - gone on deployment and use of renewable energy. And successfully so; we are global leaders in renewable energy deployment, and the cost of it is dropping fast.

Compared with this, state aid for cleantech manufacturing has historically been small, and apart from the control issues mentioned above, it has not been working. It is not hard to see why.

Europe has a fistful of state aid guidelines that in theory should clarify what kind of cleantech activities can get public money. Unfortunately, the acronyms speak for themselves: TCTF, R&D&I, CEEAG, IPCEI. These documents are incomprehensible to anyone who isn’t a specialised lawyer and consultant. They are also generic, vague and even contradictory.

The only way for a company to find out if their plans are eligible, is to propose a project and then engage in an often years-long negotiation process with the Commission and national governments, plus a small army of lawyers and consultants.

As for transparency, the only document the public will ever see is the “notification” - essentially the plan and the maximum approved subsidy. To what extent the company actually executed the plan and got paid is impossible to track down. When payment happens it is usually a lump sum, unrelated to actual output or performance. This is nice for profits and fertile ground for corruption, but does not address the production cost gap with China and the US.

That’s why Teresa Ribera, the new Climate and State Aid Czar, should do away with the existing guideline acronym soup. Europe needs a set of clear EU level rules for how much aid can be given per unit of Net-Zero Industry Act (NZIA) technologies like batteries, heat pumps, green hydrogen, E-SAF, solar cells or green steel. Support should be output-based (based on end products not projects), and conditional on using local supply chains and local control. Aid should end once the rest of the world ends it as well. Total amounts can be capped per company to give startups a clear runway. This copies much of the US Inflation Reduction Act’s approach, but with a few refinements.

Recent deals between US carmakers and CATL see the US firms investing in facilities, using CATL equipment, but keeping full control. Why does CATL accept this ? They receive part of the IRA production credits, and are rewarded for making their equipment work. This would have been helpful in the Northvolt case.

So instead of politicians waving billions at local favourites in trouble, any company that produces in the EU, under EU control, using EU content, should be allowed to get up to €25/kWh for battery cells or €2/kg for green hydrogen - for instance.

All the objections to such a shift in approach - “we do not have the money”, “this is only good for France and Germany”, “this only helps big companies and/or companies that do not need the money”, “government should not pick winners”- are untrue or addressable. The current system favours well-resourced countries and companies over small ones, and incumbents with deep ties over startups. Governments already pick winners - just on fully unclear criteria.

“Buy Europe”

After supply, the second leg is creating demand for the products through a ‘Buy Europe’ initiative. This initiative could have several elements. One should be public procurement. Another should be further tightening the “access to markets’’ language in NZIA which is a start, but again too convoluted to be impactful.

Importantly, the EU should set clear rules that national governments should follow if they want to include Buy Europe clauses in national incentives for EVs, heat pumps and other clean technologies. France created an EV ecobonus that very effectively favours made-in-Europe cars. This should be Europeanised. Any other demand-side legislation, such as a new regulation for corporate fleets, should also incorporate Buy Europe elements.

“Protect Europe”

Trade measures should be the third pillar. Just like on state aid, trade is an area where the EU Commission has real power. It recently took action on EVs, so we now have a situation where the tariff on Chinese EVs is around 30%, but only 1% on batteries. The logical outcome is that Europe gets to merely assemble cars with Chinese battery packs. It is inevitable to also investigate batteries and other cleantech it wants to onshore in Europe, just as the Draghi report prescribed.

An advantage of tariffs is that they increase leverage to localise production. But a disadvantage is that once you start imposing them on one product you can’t stop doing so for products upstream or downstream. Plus they do not improve the export position of European firms, it just protects them from imports. Therefore, tariffs can only be the last of the three legs.

Europe still controls its own fate. In 2025 it must ensure it remains master of its own destiny for decades to come.