T&E’s view on industrial policy

The world is facing the prospect of catastrophic climate change. The good news is many of the solutions to rapidly and radically cut emissions caused by burning coal, oil and gas are there. The challenge is to get electric cars, heat pumps, electrolysers, and wind and solar to fully replace fossil combustion as fast as we can.

This is an industrial and political challenge. So it is right that leaders in America and Europe are increasingly focused on industrial strategy. That is not just a blessing though. Industrial strategy also carries risks.

Historically industrial strategy has often meant governments subsiding inefficient national champions or political friends. Industrial rivalry between economic blocs can complicate the trade and collaboration that is needed for the world to prosper and to combat global warming. Finally, throwing taxpayer money at corporations is not an efficient way to get them to change.

What works? Regulation!

If there is one lesson from 50 years of environmental rulemaking it is that regulations work. Examples range from toxic car exhaust, to ozone depletion to plastic littering to wasteful lightbulbs. Regulations are just and equitable, because they require polluters to clean up their own mess. They are also effective and efficient, because they create investment certainty and new markets, and because they put the onus on corporations that are actually incredibly good at finding and commercialising solutions to complex problems. 

The EU Green Deal was based on this logic, making it the world’s leading example of how we need to tackle the climate crisis. Industrial policy is no alternative for regulation.

But whilst climate action is our most pressing problem, it is not our only problem. Europe has legitimate security interests – as our past dependence on Russia demonstrated. It also has major socio-political interests. Our social contract rests on the assumption that people have access to decent jobs. Industry provides many of those jobs. And of course Europe isn’t an island. China, the US, Japan and others pursue their own strategies, and they do not always play fair. For example, the IRA offers de facto export subsidies for batteries, and though less transparently China is doing the same.

Decarbonisation policies need to contribute to clean tech made in Europe, green jobs and prosperity. Decarbonisation that leads to deindustrialisation will not be acceptable.

Open strategic autonomy

Our goal should be to decarbonise as fast as possible, but do so in a way that safeguards essential economic, social and security interests. This is an important principle. Our aim should not be to have 100% manufacturing in Europe, done by European companies. The Chinese make the best batteries in the world. If they respect our social and environmental rules, let them come and produce in Europe. Let them hire Europeans, train them up, work with local suppliers, and become part of a European value chain. If we want to compete we need to learn from the best.

But let’s not be naive, a 100% China dominated battery supply chain would be a disaster. Not only is China a revisionist one party state that is on a collision course with our most important ally, the US.; overly relying on China could cost us dearly, just like overly relying on Russian oil and gas has cost us dearly. 

How to create a Green European Industry?

Where European companies lag behind Asian and American companies, for example on batteries, it will be necessary to deviate from Europe’s traditional industrial and trade policy to ensure manufacturing and jobs in Europe.

There are three main options:

1. We can set local content requirements, ranging from made in US/Europe requirements to more complex environmental, safety or human rights requirements such as the new French eco-bonus which de facto favours Europe built cars. The cost is borne by taxpayers whose subsidies are limited to more expensive but mostly made in Europe products. 
2. We can use trade policy, countering subsidies with tariffs, either for specific companies or entire countries. We can go even further, increasing general tariffs that make it harder to import into the EU. Carbon border taxes are not trade policy although they sometimes end up having the same effect. In this case the cost is clearly for consumers.
3. we can subsidise corporations to make it more attractive to produce in Europe. The cost of this is borne by taxpayers.

Our preference is to use trade policy, local content and other regulatory requirements. This is both more fair – costs are borne by buyers of vehicles, not all taxpayers – and more effective. Subsidies are a notoriously unreliable policy instrument and get introduced, reduced or withdrawn on a political whim. For companies they are ‘nice to have’ but hard to build a long term business strategy on. That means the ‘additionality’ of subsidies is often low.

What role for subsidies?

There is a role for subsidies in the transition. First, to enable a fair transition. Lower income people often don’t have the capital to make the necessary investments, e.g. to renovate their home, or buy heat pumps and electric cars. This is where public policy can play a very important role and this is what we mean when we call for a green deal investment plan and a big social climate fund.

When it comes to subsidies for industry, caution is in order. There is no lack of private capital. A combination of green regulations, local content and/or trade policy will often be enough to create a powerful business case. In some instances public support can help grease the wheels, or accelerate things. Northvolt, Europe’s largest battery maker was kicked off with an EIB loan. Tesla was kept alive with US stimulus funding. State guarantees, preferential loans and rates for innovative projects can all help. But we need to understand they are a small part of what is required, and they are pointless without investment certainty provided by regulations and genuine commitment from private capital. Our guiding principle is that subsidies should primarily be financed through taxes on pollution, be that carbon levies or purchase taxes on polluting cars. In that respect the Innovation Fund which is funded through EU ETS allowances and administered at EU level is the kind of instrument we like very much.

State aid is a very bad form of public subsidy, especially within the EU single market. Loose state aid rules create a race for subsidies between countries, favouring those countries and companies with the deepest pockets. The exemptions to state aid rules should not be prolonged beyond 2026 and instead a green industry fund, or a much larger innovation fund should be created.