The US Inflation Reduction Act may have done the EU a favour, leading it into a possible international partnership to increase the speed, simplicity and focus of its industrial innovation and investment strategy, write Martin Porter and Peter Sweatman.
Martin Porter is the executive chair of the Cambridge Institute for Sustainability Leadership (CISL) in Brussels. Peter Sweatman is Chief Executive of Climate Strategy & Partners and co-chair of the Breakthrough Energy Innovation Hub.
Whisper it, but the US Inflation Reduction Act (IRA) might actually have done the EU a big favour.
You might not guess this from recent headlines citing EU-US tensions over inconsistency with WTO rules and the impact on Europe’s own industries, and the IRA has certainly landed at a time when industries are dealing with multiple stress factors, including high energy prices, and the massive incentives on the table make the US highly attractive as an investment opportunity.
But if it leads to the EU increasing the speed, simplicity and focus of its own industrial innovation and investment strategy, it could enhance the EU’s competitive sustainability and kick-start a race to the top.
That said, it’s questionable how much appreciation of the game-changing potential of the EU’s current strategy and its understanding of the new levers for competitiveness European leaders showed during the last EUCO meeting.
The IRA is clearly very significant for US climate action, with projections suggesting the US can now achieve its 40% emissions reduction target by 2030 rather than the originally projected 30%.
For many years the EU has lamented the lack of ambitious US policy to address climate change. Finally, we can move on from arguing over the risks of climate inaction to a debate over who can win the greatest opportunities from the necessary transition. It heralds a genuine transformation of the public debate.
President Von der Leyen said earlier this month that “there is a striking symmetry between the Inflation Reduction Act and the European Green Deal. Both of them are simultaneously a climate strategy and a strategy for investment and growth. Both of them include funding for a just transition, and both include regulatory standards”.
In this context, there is clearly potential for a transatlantic partnership to lead this transformation. Collaboration through an effective, rules-based system of international cooperation will be critical, especially in areas of early-stage breakthrough innovation across clean tech, where globally agreed open-source licensing for public benefit will be crucial to success.
The question that then follows is what should the EU focus on to outperform in the competitive race? A race that is clearly now underway and accelerating.
When considering its stance on the IRA, as well as Chinese competition, the EU has a robust and durable foundation to make a success of this new world of ‘co-opetition’ and transition to sustainable development.
Indeed, the European Green Deal, and the twin focus on the green and digital transitions, have proven their value and resilience in the face of Covid, Ukraine and the cost-of-living crises. And its new industrial strategy must be developed with this clearly in mind.
The Cambridge Institute for Sustainability Leadership (CISL) has been developing metrics to help assess performance and provide insights into how to make a success of the European Union’s strategy of Competitive Sustainability.
The Competitive Sustainability Index (CSI) demonstrates that the strategic integration of economic, social, governance and environmental dimensions is a key reason for the EU’s resilience to multiple shocks. It further demonstrates the critical role of public interest and mission-led innovation.
In energy, for example, a lack of domestic fossil energy sources does not have to condemn the EU to foreign dependence or structurally higher costs. Historically, it is a key reason EU energy efficiency has been superior to many other economies and a source of competitive advantage.
But strategically the push to generate, transmit and store renewable electricity, given renewed impetus by REPowerEU’s €95 billion investment package, has the potential to make the EU self-sufficient in a low-cost, abundant and climate-neutral power system. This would result in a synergistic – not an antagonistic – response.
Developed quickly enough at scale, near-zero electricity prices can make the EU’s production of everything that can be made using electricity the core of its industrial strategy.
A focus on processed metals, minerals and chemicals, and the cars, buildings and consumer goods that they go into, will put the EU on the front foot, and attract the investment necessary for these climate-neutral growth markets and industries in the process. Of course, the EU industrial strategy can and should also become more ambitious.
Proposals to streamline state aid procedures, further increase public investment into renewables, possible reform of the ETS allocation rules to enable scale-up and deployment of climate-neutral, digitally enabled industrial technologies, doubling down on targeting the key climate-neutral growth markets through world-leading Single Market standards in everything from sustainable finance to EVs, batteries, lights and insulation, cement and steel, are all examples of good ideas to do just that.
In addition, a concerted effort to develop a genuine ‘one-stop shop’ for any organisation seeking to tap into EU funding, so that it is simpler and quicker to use, would be a major step forward.
And developing clusters of Member States for collaborative learning and better-targeted structural funding by DG Reform aligned with ‘smart specialisation’ is also important.
Along with the efforts to agree on adjustments to the IRA and work collaboratively in ‘climate alliances’ of different sorts, these actions should all improve the EU’s competitive sustainability. And measures to address high short-term energy prices should align with and support this, not compromise it.
Now is the time for the EU to have confidence, continue to forge constructive partnerships with the US and others where possible, and work with the idea of ‘less haste, more speed, simplicity and focus’ to lead the competitive sustainability ‘race to the top’.
All countries will eventually be winners, but with the right additional action, the EU’s industries can and will be amongst the globally most competitive.
The new EU strategy requested by leaders to take on the growth and innovation gap between Europe and its global competition is a true opportunity to draw on the EU’s strengths to do so.