The key provisions in the EU’s Net Zero Industry Act

Background

The world is entering a new age of clean technology manufacturing. According to the International Energy Agency, major economies are acting to combine their climate, energy security, and industrial policies into broader strategies for their economic systems. The most recent examples are to be found in Japan’s Green Transformation programme, the Indian Production Linked Incentive scheme and the US’ Inflation Reduction Act (IRA). Particularly, the Biden administration’s IRA has made Europeans feel uneasy about the direction of US trade and foreign economic policy. In essence, IRA represents a record package of $369 billion in spending on climate and energy policies. This includes tax credits and other financial incentives for the production of electric vehicles, renewable energy, sustainable aviation fuel, and hydrogen which would essentially boost the US’ competitiveness and businesses. The key concern here is that such a massive package of subsidies would make European industries consider moving their operations to US soil and leaving Europe behind. EU policymakers have expressed numerous concerns that the IRA’s incentives for US manufacturing of clean technologies will disadvantage European industries and called for Europe to respond.

The response came out on 16 March 2023 in the form of a new proposal for regulation called the Net-Zero Industry Act. What are the key proposals and are these enough to strengthen Europe’s competitiveness?

Key elements of the Net-Zero Industry Act

The Net-Zero Industry Act is the key part of the European Green Deal Industrial Plan — a communication that sets the foundation of the bloc’s response to Washington’s massive subsidies package. This is a new legislative proposal that sets a goal for the EU to domesticallyproduce at least 40% of the technology it needs to achieve its climate and energy targets by 2030.

The Net-Zero Industry Act is built on the following pillars:

• Setting enabling conditions: it will improve conditions for investment in net-zero technologies by enhancing information, reducing the administrative burden to set up projects and simplifying permit-granting processes. In addition, the Act proposes to give priority to Net-Zero Strategic Projects, which are deemed essential for reinforcing the resilience and competitiveness of the EU industry, including sites to safely store captured CO2 emissions. They will be able to benefit from shorter permitting timelines and streamlined procedures.
• Facilitating access to markets:  to boost diversification of supply for net-zero technologies, the Act requires public authorities to consider sustainability and resilience criteria for net-zero technologies in public procurement or auctions.
• Accelerating CO2 capture: the Act sets an EU objective to reach an annual 50Mt injection capacity in strategic CO2 storage sites in the EU by 2030, with proportional contributions from EU oil and gas producers. This will remove a major barrier to developing CO2 capture and storage as an economically viable climate solution, in particular for hard-to-abate energy-intensive sectors.
• Enhancing skills: it introduces new measures to ensure there is a skilled workforce supporting the production of net-zero technologies in the EU, including setting up Net-Zero Industry Academies, with the support and oversight of the Net-Zero Europe Platform.
• Fostering innovation: the Act makes it possible for Member States to set up regulatory sandboxes to test innovative net-zero technologies and stimulate innovation, under flexible regulatory conditions.
• Setting up a Net-Zero Europe Platform to assist the Commission and Member States in coordinating action and exchanging information, including around Net-Zero Industrial Partnerships. The Commission and Member States will also work together to ensure the availability of data to monitor progress toward the objectives of the Net-Zero Industry Act. The Net-Zero Europe Platform will support investment by identifying financial needs, bottlenecks and best practices for projects across the EU. It will also foster contacts across Europe's net-zero sectors, making particular use of existing industrial alliances.

Furthermore,the new Act proposes increased investment and improved permitting procedures for the following strategic net-zero technologies:

• solar photovoltaic and solar thermal technologies
• onshore and offshore renewable technologies
• battery and storage technologies
• heat pumps and geothermal energy
• electrolysers and fuel cells
• sustainable biogas and biomethane
• carbon capture and storage
• and grid technologies

What about nuclear energy?

The inclusion of nuclear technologies was the apple of discord between the EU Commissioners when drafting the proposal for this legislation. In the end, other net-zero technologies are also supported by the measures in the act, including sustainable alternative fuels technologies, advanced technologies to produce energy from nuclear processes with minimal waste from the fuel cycle, small modular reactors, and related best-in-class fuels. However, this also means that existing nuclear technologies, such as the French second-generation pressurised water reactors that France wishes to develop, are excluded from the text. And more importantly, nuclear does not appear in a separate annex to the regulation, which defines “Strategic Net-Zero technologies” that “will receive particular support” and are subject to the 40% domestic production benchmark. So, we could say that nuclear energy is half-included.

The situation, however, can change over the course of the next months as the current draft legislation could still be amended by the European Parliament (specifically the French Renew political group which is largely pro-nuclear) and the Member States. Nevertheless, when presenting the proposal at the press conference, Commission’s Vice-president Frans Timmermans appealed to the pro-nuclear Member States to not “make an ideological choice” but “do the maths”, stating that “renewable energies are getting cheaper almost every day, which is not the case for nuclear”.

Stakeholders react with little enthusiasm

The long-awaited response to IRA has been met by raising more question marks rather than giving a positive assessment of the proposal. For example, Bruegel highlighted that the EU Net-Zero Industry Act (NZIA) looks like it has been set up to keep everyone happy – and to achieve limited results: “The Commission has proposed a high-level EU clean-tech production target, but little in the way of meaningful tools to help reach this target. Those who oppose the proposal will possibly be relieved when they understand that it will cost nothing and achieve nothing”. E3G mentioned that the NZIA is sending a positive move for Europe to further invest in new cross-EU value chains while upholding stringent environmental, social and human rights standards. However, according to E3G, the plan presents significant risks that co-legislators will have to address, like tackling the bottlenecks in installation grid connections, skilling up the workforce downstream, and prioritizing access to CO2 storage for those industries that need it the most (like iron, steel and cement industries). Domien Vangenechten, E3G Senior Policy Advisor, stated: “Despite the name, the Net-Zero Industry Act does little to decarbonise energy-intensive industries beyond increasing CO2 storage capacity. The more important pieces of the puzzle – deploying efficiency and electrification of industrial processes – need immediate attention”.

Industry representatives have also voiced their position on the proposed legislation. Solar Power Europe (SPE) mentioned that the NZIA recognised the need to diversify the solar PV supply chain. However, the European solar industry is worried that the Act and related proposals offer a stick but not a carrot. In its position, SPE underlines that the current text is asking Member States to reduce support for technologies from dominant geographies in the supply chains, like solar PV. Nevertheless, more initiatives are needed, especially in terms of financing solar plants in Europe. According to the SPE, Europe needs a dedicated financial vehicle for European solar manufacturing, like a Solar Manufacturing Fund or a dedicated EU equity instrument, covering both capital and operating expenses. WindEurope also points out the missing pieces of the puzzle and highlights that public financial support will play a key role, both at the EU and national level as the current NZIA proposal does not provide clarity on the financial aspects. Europe produced nearly all the wind turbines installed on the continent last year in the EU (16GW) but needs to scale up dramatically to deliver on the REPowerEU objectives, according to WindEurope. The European Heat Pump Association (EHPA) shares its concerns as well. According to them, the act is too unambitious and lacks the detail to fully support the heat pump sector. It sets a heat pump target of 31 GW of manufacturing capacity by 2030 which is far lower than the EHPA foresees. Even a conservative growth scenario would lead to 47 GW by 2030 – more than 50% higher. In EHPA’s view, it would be more relevant to include the REPowerEU plan’s target of doubling heat pump sales by 2026 and adding intermediary goals. Today, 60% of heat pumps sold in Europe are manufactured in Europe – and given the sector’s record-breaking sales, EHPA believes this level can be maintained or even extended with the right mix of support measures. The 40% manufacturing target the Act refers to for all the technologies identified is therefore far too low for the heat pump sector. Cefic, the European Chemical Industry Council mentioned that the NZIA reads more like a Zero Industry Act. In its view, it is very unlikely to become a game changer for the EU industry’s competitiveness as it does not look at the problem from the business’s and investor’s perspective. On top of the European gas price being about 5 times the US, it does not match the USA IRA in whatever way. Moreover, according to Cefic, the list of technologies supported by this proposal largely ignores the energy-intensive industry decarbonisation and the circularity dimension. It highlights that Europe cannot reach the 2050 climate goals without building a competitive circular economy in order to reduce emissions across all industries and cut the EU’s dependence on raw materials imports. The same view has been shared by the business group Cleantech for Europe, according to which the list of technologies should also include deep industrial decarbonisation.

Patrick ten Brink, Secretary General of the European Environmental Bureau declared: “It is neither necessary nor desirable that the race to net-zero becomes a race to the bottom on environmental standards. The success of the EU’s industrial policy lies in its robust regulation and carbon pricing—and policymakers should not be fooled by comparisons to the US context, where power, but not guaranteed efficiency, lies in subsidies alone.” Moreover, “the definition of “net-zero technologies” is very limited, since it refers to low, zero or negative greenhouse gas emissions, failing to consider other environmental impacts and disregarding the EU zero pollution ambition. What is needed when awarding public resources are very clear indicators in terms of GHG and pollution emission reduction rates, saving of natural resources, recycling and reuse of raw materials.” The EEB is worried that the NZIAmentions carbon capture and storage (CCS) as Strategic Net-Zero technology, since it will not encourage the basic switch from combustion-based processes. Furthermore, EEB also underlines that hydrogen should be carefully deployed due to its high impact on water quantity and quality.

On the other hand, some positive assessments come from the hydrogen and geothermal industries. Hydrogen Europe mentioned that the proposed NZIA demonstrates the Commission's commitment to decarbonisation and its support for hydrogen technologies as a key component in achieving Europe’s climate ambitions. Currently bottlenecked hydrogen manufacturing projects will benefit from reduced administrative burdens. The European Geothermal Energy Council highlights that NZIA supports the manufacture of essential renewable energies and gives specific attention to geothermal. Dedicated measures are outlined to ramp up investment in production facilities and processes, fast-tracking regulations related to permitting and one-stop-shops, as well as “critical energy infrastructure” such as geothermal district heating systems. Trade unions also underline the acknowledgement of social aspects.

IndustriALL European Trade Union highlighted that the role of social partners has been recognised and welcomed that workers have made it on the agenda of the Net-Zero Industry Act. It highlights the importance of quality jobs, skills development, and job-to-job transitions to address sectoral labour market risks and help ensure EU competitiveness. According to IndustriALL, their demands have largely been heard and have improved the draft legislation and they expect the co-legislators to deliver further.

Member States positions

The official position of Member States has yet to be developed in the next weeks as the Council will start working with the Parliament on the draft proposal. Nevertheless, some initial reactions have been recorded already from Germany, France, Italy and Spain. German government officials have welcomed proposals by the European Commission to boost net-zero industries and the competitiveness of European companies in an effort to keep up with other regions of the world, such as the U.S. and China. Sara Aagesen, Secretary of State for Energy at the Ministry for Ecological Transition and Demographic Challenge of Spain, stressed the need to make progress on the Industrial Plan, in which for the first time “we are talking" about a comprehensive energy and industrial policy that must "go hand in hand" to strengthen competitiveness and "our energy autonomy”. Italy’s Vannia Gava, Deputy Minister for the Environment and Energy Security, stated that “Admittedly, the measure may be less incisive than expected reading the draft, which presented a much more concise list. Still, let us remember that the NZIA is an initiative to systemise a more streamlined legislative framework capable of simplifying authorisation procedures for investments useful for decarbonisation: a winning mechanism to respond to the USA’s Inflation Reduction Act, demobilising private and public resources in the Old Continent, first and foremost those of RePowerEU.” And when it comes to the position of France, it will boost its lobbying efforts in order to make "all" nuclear energy production a concrete part of NZIA meant to bolster green industries: "We are asking Brussels to include nuclear power, covering all technologies. Joint efforts with like-minded member states are therefore underway to expand the list of technologies covered by the Net-Zero Industry Act beyond emerging technologies," a spokesperson for France's energy ministry told POLITICO.

Next Steps

The proposed Regulation now needs to be discussed and agreed by the European Parliament and the Council of the European Union before its official adoption and entry into force.

Conclusions

The release of the NZIA proposal demonstrates Europe’s commitment and effort to become the future benchmark for green technologies. Will it be enough though? At this point, it is too early to tell as the picture is not complete yet. On the one hand, the current draft proposal could further evolve and be improved with more provisions to be included from the Parliament and the Member States’ sides during the negotiations. On the other hand, the key part of Europe’s ambitious industrial plan is still being drafted by the Commission’s services and will only come out in summer – the EU Sovereignty Fund - which will accompany Europe’s targets with funding. Furthermore, the success rate will also depend on how this proposal and the following funding support measures will be perceived by the companies that are leading in technological development and innovation and how quickly they will be able to benefit from these new provisions.

Reghina Dimitrisina is Policy Advisor at the FES Competence Centre Climate and Social Justice. She possesses expertise in climate and energy policies and European affairs. Prior to joining the FES Team, she worked as Policy Officer for the European Geothermal Energy Council (EGEC) and advised MEPs from the S&D and EPP political groups in the European Parliament. She studied international relations and political communications.