A rising tide lifts all boats – Europe and US are both working to develop green technologies – Hydrogen as example

Prologue

The world was woken up this week by the developing global debate on green competition. At Davos 2023, Ursula von der Leyen, President of the European Commission, announced a new #NetZeroIndustryAct as part of the #GreenDealIndustrialPlan – widely seen as Europe’s response to the US Inflation Reduction Act (IRA).

She said - "We need to create a regulatory environment that allows us to scale up fast and to create conducive conditions for sectors crucial to reaching #netzero.” This includes #wind, #heatpumps, #solar, #cleanhydrogen, and a continued response by EU for access to critical raw materials needed for energy transition.

We observe the pressures for, and value from decarbonization (the rising tide we refer in title) are creating new sources of competition between global governments. This includes competition for capital, market share, raw materials, labor/capabilities. In turn, these new competitive dimensions are what is shaping the US and EU responses on policy formulation in context of green competition.  

Let’s unpack an example, of what it means for Hydrogen in particular.

A point of view - EU responding to IRA type of approach on Hydrogen

The EU has its own ambitions to develop a green hydrogen sector, and is concerned that this might be undermined by highly subsidized US imports. It’s responding by stepping up its own hydrogen strategy, with four key actions proposed:

1) Net-Zero Industry Act.

A new Net-Zero Industry Act with yet to be defined clear goals for European clean tech by 2030. The aim will be to focus investment on strategic projects along the entire supply chain, including green hydrogen. In parallel to this Net-Zero Industry Act, the EU committed to make Important Projects of Common European Interest (IPCEI) easier to fund and process. This now takes 1-2 years, and can benefit from reduced timing to access. IPCEI has strong funds to go with, with a theoretical ultimate access to overall EU climate spending (at least 600 bn EUR in 2021-2027 financial framework; in speech von der Leyen referred 800 bn EUR total EU Next Generation warchest).

2) State aid loosened.

Adapt EU state aid rules to speed up and simplify giving subsidies to green projects across Europe. This could take a range of forms, from research and development grants to training and reskilling support. One method increasingly under consideration in the economically stronger EU member states, such as Germany,  is contracts for difference (CFDs), which guarantee a minimum price to green hydrogen producers. There is strong pressure from Member States with more limited national resources for more EU-level funding to help them introduce similar measures. EU Sovereignty Fund – lingo for more EU funding for EU states with less strong balance sheets, will be prepared to help.

3) Investments in green upskilling.

Details are yet to be defined. Here we may expect initiatives like EU funded Clean Hydrogen Partnership to benefit with additional focus on education and upskilling.

4) Fair trade focus.

The EU will take a carrot and stick approach to the international trade in hydrogen. As a stick, under the new Foreign Subsidies Regulation, the EU can probe the operation of companies receiving significant subsidies. It may consider ‘countervailing duties’ - additional import tariffs on subsidised products. However, as a carrot, the EU wants to extend its Free Trade Agreements with key partners to include products such as hydrogen, as it has recently done with Chile.

So what for trade conflict?

In the speech in Davos von der Leyen mentioned the US #InflationReductionAct, to which these measures appear designed to be part of the EU response:

“And of course, we have seen the Inflation Reduction Act in the United States, their USD 369 billion clean-tech investment plan. That means that together, the EU and US alone are putting forward almost EUR 1 trillion to accelerate the clean energy economy. This has the potential to massively boost the path to climate neutrality. But it is no secret that certain elements of the design of the Inflation Reduction Act raised several concerns in terms of some of the targeted incentives for companies. This is why we have been working with the US to find solutions”.

Does this mean that the EU and the US are set for a trade conflict over decarbonisation? No. In reality, the rising tide of climate action will lift both the European and American boats, just through different regulatory models.  

So what for green competitiveness of EU and US?

Let’s unravel this further. What do these EU measures do for the competitiveness of Europe versus the US ?

Specifically, we observe that the EU is working to catch up in areas like scale of cleantech funding, materials sourcing, and investing in clean tech production (as in the hydrogen example we unpacked above). Meanwhile in other areas, we see that the EU potentially is moving ahead of the US in a few areas, including permitting reform/streamlining, integration of climate into trade policy, and on the capacity to implement these measures. The EU’s mature carbon pricing regime – which will shortly be extended to imports through Carbon Border Adjustment Mechanism– provides strong decarbonisation incentives.  The US – with split House/Senate – may struggle to catch up on new rules for permitting or trade enhancements and is unlikely to introduce carbon pricing. However, this may not matter – as the IRA with its simple tax breaks may do the climate work by itself.  This shows that the "race to the bottom" in climate standards is over, both in US and EU.  

IRA and the EU upcoming Net Zero Industry Act are clear signposts of a "race to the top" and countries are looking for competitive advantage through more climate action, not less - despite some recent voices claiming that the energy crisis would slow down the energy transition. Policies like the Carbon Border Adjustment Mechanism will likely increase this self-enforcing dynamic of ratcheting up ambitions. Good news for the world.

Would you agree? We look forward to your comments.

Authors – Esben Hegnsholt, Alex Dewar, Tim Figures, Jonas Schroeder, Katherine Phillips and Erik Rakhou.  Thank you to Mogens Holm and Sanjay Purswani for comments.

Disclaimer – views of authors are personal.