Europe cannot lose the global competition or become a continent of naive people and ideas. If we go bankrupt, no one will care about the natural environment globally …
— Prime Minister Donald Tusk’s speech in the European Parliament
Look around while reading this, and you will probably notice a lot of goods manufactured by European companies. Not all of them bear the ‘made in EU’ mark, however — industries compete on a global scale. For Politico readers, it’s hard to miss the discussion around how to keep Europe’s economy competitive given the pledge to become climate neutral by 2050.
As an association of industries in one of the largest member states, where industry accounts for one-fifth of GDP, we see the need to speak up on the risk of deindustrialization — and ways to prevent it.
Climate policy and competitiveness
EU industrial policy has two characteristics. First, it is generally anti-protectionist, as it originally aimed at establishing a single market covering the entire continent. Hence its focus on leveling the playing field between states. Second, the EU’s ambition in climate policy reaches the furthest among large international actors. Industries in the region are therefore under a uniquely strong pressure to reduce emissions and become energy efficient. Competitors in the globalized, increasingly interdependent world economy usually have it easier — both the costs imposed on emissions and energy prices for industries are not globally harmonized. The former generally depend on policy, while the latter are largely determined by a mix of fuel prices and policy.
Industries in the region are therefore under a uniquely strong pressure to reduce emissions and become energy efficient.
As shown in the Draghi report, both carbon and energy prices paid by EU industry are the world’s highest. Those differences are likely to deepen if, for example, the new US federal administration delivers on its electoral promises. The sectors most affected by the above are energy-intensive industries, especially those identified as hard-to-abate — where production processes are not easily decarbonized.
EU law includes measures to counteract relocation, chiefly carbon leakage, which is when industries keep emitting the same amounts of greenhouse gases but simply move it elsewhere. Those compensation measures — e.g. free emission allowances (EUAs) under Emissions Trading Scheme (ETS) the markup in energy costs caused by carbon prices — are, however, designed to ultimately decrease in scope and depth over time. To stay eligible for support, industries must increase their efficiency and reduce emissions in an almost linear way, while the actual support often depends on each member state’s capabilities. On top of that, new mechanisms are added, increasing regulatory pressure — especially the Carbon Border Adjustment Mechanism (CBAM). We don’t know if that so-called carbon border tax will strengthen the EU industry globally, but we know that, as the law stands, its introduction is coupled with the withdrawal of free EUAs. This is bound to have a measurable effect on the costs of industrial production.
What do the treaties say?
Under the Treaty on the Functioning of the EU, intra-union competition and climate protection are not independent goals to be achieved at all costs. In fact, Article 173 requires the industrial policy to “ensure that the conditions necessary for the competitiveness of the Union’s industry exist”, and other policies should contribute to that. The union is, as per Title IX, also committed to “a high level of employment, which should be taken into consideration in … Union policies”. Carbon leakage also means jobs leakage, and certain social movements have recently highlighted a crisis of trust toward the EU and member states in this respect.
rotecting the union’s security
In light of serious disturbances in the global economy first caused by the Covid-19 pandemic and then the Russian aggression against Ukraine, EU citizens are also concerned about security. Although we often pay less for EU brands’ goods produced outside of EU, in the long term, cost is not everything. Many industrial products are so important for how our societies function that we should think twice about letting them relocate — the pandemic showed the importance of where pharmaceutical supply chains are located and the Russian invasion of Ukraine reminded us of the grim reality that the EU needs weapons to protect its existence. The same applies to fertilizers and chemical compounds many of us have not even heard of until supply chains were disrupted and prices skyrocketed.
Many industrial products are so important for how our societies function that we should think twice about letting them relocate.
These contexts go beyond strict economic considerations. But policymaking is not accountancy. In the medium and long term, the EU will be better off keeping factories within its borders.
Our letter to the new commission
We welcome the lively discussion on industrial competitiveness and its reconciliation with the EU’s climate ambitions. We also note and welcome the deregulation drive, as simplifying compliance could also reduce costs.
In that context, the European Commission is working on streamlining multiple EU funds into the European Competitiveness Fund (ECF). We consider that the ECF may be a significant tool to counter Europe’s deindustrialization, but other aspects must be addressed too.
In our view, the new commission’s industrial policy should:
- focus on the global picture rather than the internal market — inter alia by giving EU funding precedence over state aid and progressively harmonizing compensation measures;
- ensure adequate funding not just for research and development in abatement technologies, but also investment and operating costs for innovative solutions — low-emission production processes are likely to always be more costly than those applied in continents without ambitions to become climate neutral;
- be technology neutral instead of favoring solutions that are not feasible for all sectors or areas in the EU (such as carbon capture and storage); and
- revisit the regulatory toolkit — abolish measures with the highest administrative burden but questionable effectiveness.
Last, but not least, we ask the commission to act quickly. Industries make investment decisions based on the applicable regulatory framework — but there remain a number of challenges like CBAM, the linear reduction of free EUAs, decreasing scope of eligibility for compensation and ever-tightening benchmarks. A strong signal from the Berlaymont on the drive toward global competitiveness can brighten their perspectives.