17 Jan 2023

The Dawn of Green Protectionism?

In her keynote speech at the 2023 World Economic Forum in Davos, Ursula von der Leyen, EU Commission President, outlined yesterday the main pillars of the EU’s Green Deal Industrial Plan to boost Europe’s leadership in green technology on its road to carbon neutrality.  “We know we have a small window to invest in clean tech and innovation to gain leadership before the fossil fuel economy becomes obsolete,” said von der Leyen.

As the plan’s regulatory pillar, she announced a new Net-zero Industry Act to support the “greatest industrial transformation of our times” and keep up with strongly incentivized programs taking shape outside the EU.  She most notably referred to the US’s $369 billion green investment plan, alluding to signs of growing protectionism in the field.  “It is no secret that certain elements of the design of the Inflation Reduction Act raised a number of concerns in terms of some of the targeted incentives for companies,” she said, adding: “Our aim should be to avoid disruptions in transatlantic trade and investment.  We should ensure that our respective investment programs are fair and mutually reinforced.  We should also set out how we can jointly benefit from this massive investment.” She mentioned China in this context: “We see aggressive attempts to attract our industrial capacities to China and elsewhere.

As part of the plan’s financial pillar, the EU Commission seeks to temporarily adapt the EU’s state aid rules to accommodate more flexible instruments, such as tax breaks, and make them more accessible to businesses, including SMEs.  To this end, the EU aims to simplify and speed up administrative processes and permits for green industry projects.  The EU Commission will also propose a European Sovereignty Fund to provide further structural financing for net-zero projects.

The plan also looks at the EU’s position in international trade.  It includes a robust agenda in this area, which will involve expanding on trade agreements with existing key partners, concluding agreements with others (Mexico, Chile, New Zealand, Australia, India, and Indonesia), and revisiting previously stalled arrangements, such as that with Mercosur.  At the same time, the EU will aim to establish a level playing field in international trade, decisively countering what is seen as unfair trade practices, emphasizing China as a clear example.  “… China heavily subsidizes its industry and restricts access to its market for European Union companies…we need to refocus our approach on de-risking rather than decoupling.  This means using all our tools to deal with unfair practices, including our new foreign subsidies regulation, and we will not hesitate to open investigations if we consider that our procurement or markets are being distorted by such subsidies”, von der Leyen concluded.

This announcement comes amid ongoing tectonic changes in global supply chains and trade.  For one, the energy crisis set off by the conflict in Ukraine has affected Europe most severely, tempting energy-intensive industries to leave the EU in search of lower costs, greater energy security, more incentives, and less stringent regulation elsewhere.  In turn, the need for energy security drives growing investment in green technologies.  Governments have realized that they have a significant role in attracting foreign investment and focusing on green technologies to build their competitive edge for a future inevitably orientated towards mitigating climate change.  They have seen an essential part of the answer in subsidizing clean tech projects with both local and international players.

The context of the announcement also includes the EU’s internal struggle to devise an adequate response, finding itself between a rock and a hard place.  Only days ago, Margrethe Vestager, the EU’s Commissioner for Competition, proposed the mentioned “temporary” changes in the EU’s state-aid policies to urgently counteract the US’s robust financial plan within the IRA, which is seen as protectionist and potentially in violation of international trade rules.  She said this “risks luring some of our EU businesses into moving investments to the US.”  Other voices within the Commission argue that the measures as a short-term fix are insufficient to resolve the overall problem.  Others still are concerned that the trend may kick off an endless subsidy rally.  Instead of international collaboration and exchange in facing some of the world’s most significant challenges, are we ushering in a new era of green protectionism?