Why the EU misses the mark with the Net Zero Industry Act
The Net Zero Industry Act (NZIA) misses the chance to harness trade policy in support of the worthwhile aims of ensuring a secure and sustainable supply of net-zero technologies.
The EU’s ambitious plan to support the green transition is moving forward. However, supporters of open and sustainable trade will not need to look far to be disappointed with the EU’s Net Zero Industry Act. The first article of the legal text introduces an import substitution goal aiming to increase EU manufacturing capacity of strategic net-zero technologies to 40% of the Union’s annual deployment needs. The approach is to streamline administrative and permitting processes, adapt public procurement processes, develop net-zero skills academies, create regulatory sandboxes for innovation, and to increase the EU’s CO2 injection capacity.
We know from economic theory that import substitution leads to raised domestic costs, making net-zero technologies and the green transition more expensive than necessary. The knock-on effect of higher production costs is a decrease in competitiveness of European producers on the global market, which reduces the export potential of European firms. Other negative impacts include dampening innovation, reducing labour productivity and harming import-reliant SMEs and their suppliers domestically and in third countries.
Furthermore, it is unclear that the proposed targets would actually be helpful in increasing resilience because they limit diversification and make EU-specific and external supply shocks more likely to be disruptive. Thankfully, the specific policy measures in the legal text are not sharply focused on achieving the arbitrary 40% import substitution goal and have some positive aspects in relation to climate goals.
The EU ought to analyse specific value chain risks that threaten the roll out of a net-zero energy system in the EU and target policy instruments to mitigate these risks.
The selection criteria for strategic net-zero technology projects are also problematic because they do not adequately capture upstream dependencies in value chains and their reliance on trade. Another issue with the proposal is the inefficient use of support for mature technologies that are already competitive with fossil-based alternatives and where the EU lacks a comparative advantage.
So how should the EU go about achieving the aims of the Net Zero Industry Act? The EU ought to use evidence-based policy approaches to address resilience and energy security. This would involve analysing specific value chain risks that threaten the roll out of a net-zero energy system in the EU and targeting policy instruments to mitigate these risks.
Trade policy could also be used more effectively to support the goals of security and sustainability of supply. Some examples:
- Diversifying suppliers. Cost-effective sourcing from different parts of the world lowers the cost of the clean energy transition and provides EU firms with greater flexibility during disruptions. Diversifying the pool of suppliers could be advanced by concluding and updating free trade agreements as well as pushing for a well-functioning WTO.
- Targeted trade policy. Various sustainability issues can lead to trade concentration and dependency in supply chains. Artificially low prices can be due to unfair labour practices, unpriced externalities or state support. There are good reasons to target these with policy specific instruments (e.g. the CBAM or the Forced Labour proposal) rather than using a generic import substitution approach.
- Mitigating supply shocks. Strategic stockpiling across the value chain can help mitigate acute supply shocks. Trade policy could help by reducing tariffs and other barriers to trade on parts and components.
- Reducing costs of maintenance. Good maintenance and extended life length of existing net-zero energy supply can be supported by enabling trade in services and in the goods needed for maintenance.
- Faster innovation. International cooperation and open trade provide access to the pooled expertise and larger markets needed to hasten innovation in early-stage net-zero technologies.
The points above are consistent with the EU’s objective of strengthening Europe’s net-zero energy technologies manufacturing ecosystem. They would allow European industry to specialise in the technologies, innovations, and services where they have a comparative advantage and can compete in global markets. At the same time, an open and transparent approach to global partners would help mitigate the worst effects of internal and external supply shocks.
Neil Swanson and Erik Merkus
Trade Policy Advisers
Subscribe to Trade Policy Insights
This article is part of a series of commentaries – Trade Policy Insights – connecting world trade issues with evidence-based analyses. Do not miss any new posts. Sign up to get email updates when there is a new Trade Policy Insight.