Innovation and competitiveness: key elements of a new green industrial policy in the EU

There is a deep debate in the European Union (EU) on how to make the Green Deal compatible with an industrial policy that enables European business and industry to compete in international markets.

What are the keys to a successful new European industrial policy that aligns business competitiveness with the principles of environmental (and social) sustainability advocated by the European Green Deal?

Risks for the European industry

The EU pioneered a long-term growth and competitiveness strategy with the launch of the European Green Deal in December 2019. This strategy focuses on a ‘green, circular, digital and just’ transition and global industrial leadership in clean technology value chains.

However, the covid-19 pandemic, the invasion of Ukraine by Russia - and the subsequent war, which also exposed the enormous weakness of the European economy in the energy field -, the aggressive industrial, technological, fiscal and trade policies of China and the US, and other factors, such as the new geopolitics of climate change and clean energy, have increased the risk of carbon leakage (the exodus of companies and investments to other regions of the planet) in the short term and of loss of competitiveness in the medium and long term in key industries for the European economy.

External factors

These external factors have caused the EU to shift from a proactive position of climate and techno-industrial leadership to one that is reactive to measures being taken in other countries and regions in the transition to a clean-energy-based economy.

For example, the tax incentives and credits included in the US Inflation Reduction Act, a law that aims to reduce greenhouse gas emissions in the US by up to 41% by 2030 compared to 2005, but also to attract investment and generate industrial advantages, have forced the EU to rethink its industrial and technological policy.

China's dominant position in the supply chains of raw materials essential for the energy transition and the digitalization of the economy has also prompted Europe to establish a long-term strategy to secure their supply, such as the recently adopted European Critical Raw Materials Act.

The Carbon Border Adjustment Mechanism, a border tax on imports of certain products to protect key EU industries, is a clear example of this reactive and defensive response.

In this context, how could industrial, energy and climate policies be refocused to protect the competitiveness of European industry?

Some recent reflections by representatives of the industrial sector, the academia and experts with extensive experience in the European institutions outline the new approach for an effective green industrial policy in Europe.

Industry proposals

In February 2024, a broad cross-section of European industry companies identified the basis for a new orientation of industrial policy in the EU in the Antwerp Declaration. The document mentions the need to take clear steps forward in issues such as:

• Simplifying some aspects of the European regulatory framework.
• Creating efficient tools to finance industrial decarbonisation and large-scale clean energy deployment.
• Making decisive progress on the single market and efficient energy taxation.
• Developing energy, digital and transport infrastructures.
• Encouraging demand for products and services with a low environmental footprint.
• Promoting a smarter, more collaborative, agile and pragmatic innovation ecosystem, focused, for example, on the transfer of innovation to businesses or the deployment of innovative and potentially disruptive first-of-a-kind projects.

Academic proposals

The academic community also brings fresh ideas to the debate. For example, Professor Dani Rodrik, the 2020 Prince of Asturias Prize awardee, argues that a successful industrial policy should:

• Set concrete and clear objectives.
•  Encourage continuous interaction and collaboration between the private sector, public institutions and other actors (e.g. universities and technology centres).
• Be based on flexibility and discipline -understood as the ability to abandon failed policies or technology/industrial bets- by governments.

Other authors argue that new industrial policies must address grand challenges, creating value and wellbeing for society and not just employment and economic growth, which would justify greater use of tools that were previously considered inefficient.

Institutional proposals

In April, former Italian Prime Minister and former European Parliament member Enrico Letta presented his report on the integration of the European single market, in which he argues that, in the face of strong global competition, the EU must move forward in consolidating a large European market with sufficient scale to compete globally⁽¹⁾.

Ann Mettler, former director of the European Commission's  European Political Strategy Centre, advocates a new strategy of technological and commercial cooperation-competition between the US and Europe around a Green Transatlantic Marketplace to face new geopolitical challenges (including the Russia-China axis) and to design a European Green Deal ‘with a better business model’.

Conclusions

All these elements must be included in a new approach to European industrial policy, together with the response to other relevant aspects, such as the security of energy supply, the social impact of the sustainable transition or its coherence with the EU's geopolitical strategy.

The joint and simultaneous reorientation of industrial policy and the Green Deal cannot be delayed. Europe has a lot at stake, both for current and future generations.

• (1) On 9 September 2024, the Draghi Report on EU competitiveness was released, including many policy and strategic proposals in line with those by E. Letta and other experts.