Green transition points to greater cooperation potential for China and the EU in response to the US' Inflation Reduction Act

The European Commission presented the Green Deal Industrial Plan on Feb 1, a sign that the European Union, a global leader in climate action and energy transition, is stepping up efforts to seek more competitive advantages amid rising global turbulence and the industrial transformation. The plan is, to a great extent, the bloc's response to the mounting challenges of industrial competition with other nations, particularly to cushion against the adverse impacts of the industrial policies unveiled unilaterally by the United States.

For a long time, the EU has been vigorously pressing ahead with climate action and the green transition of industries. In doing so, it aims to blaze a trail in efficient growth and emerging new industries through the green transition, so as to consolidate and further boost its industrial advantage against the backdrop of globalization. Over the past few years, the EU has made the green and digital transitions both important drivers of economic recovery and transformation.

Amid great turbulence in energy supplies following the outbreak of the Ukraine crisis, the EU is increasing its reliance on the renewable energy industry. However, its renewable energy industry, and even the entire manufacturing industry, which used to boast a first-mover advantage, are facing grave challenges.

On the one hand, high energy prices are lashing the EU's manufacturing industry.

Since the outbreak of the Russia-Ukraine conflict, the EU has acted swiftly in shifting the center of its energy supplies from Russia to the US, the Middle East and Africa. In the meantime, turmoil in the international market has dramatically driven up energy prices. French President Emmanuel Macron has criticized the US for selling natural gas to Europe at three to four times the price the US sells to its own industry and said this is not what an ally is supposed to do.

On the other side of the equation, to seize the economic dividend from a clean energy boom and strengthen US competitiveness in this area, the US has unveiled a controversial, massive industrial subsidy program to lure companies to invest and build factories in the US.

The Inflation Reduction Act, signed into law in August 2022, provides $369 billion in spending and tax credits for clean energy products including electric vehicles, green hydrogen and renewable energy produced in the US or in North America. By subsidizing the consumer end, the US provides its domestically produced clean energy products with a significant price advantage compared with similar products made in other countries. By giving out unfair subsidies, it forces foreign companies to either invest in the US or be subject to discrimination in the US market, so as to prop up its domestic industries at the expense of other countries' industrial strength.

Executive Vice-President of the European Commission Margrethe Vestager said bluntly that part of the IRA "is a threat to the competitiveness of specific key sectors for the green transition of the European industry". Macron called the IRA "super-aggressive for our companies" and warned that the US risked "fragmenting the West "with the IRA.

Amid growing anxiety in Europe over the IRA, the EU is attempting to relaunch the industrial policy instrument with supportive measures for green industries that could rival those put in place in the world's major economies like the US, so as to scale up the EU's manufacturing, R&D and promotion capacity for the net-zero technologies and products. By doing so, the EU hopes more European businesses will remain within the bloc and more industrial investment will come in.

Some pioneering EU member states have rolled out their own versions of green industry bills that place a greater focus on nurturing "made in Europe". For instance, France unveiled the "Green Industry Bill "in May to promote the development of five major green technology industries, including green hydrogen, batteries, wind energy, heat pumps and solar energy, and attract investment in these fields.

The EU's Green Deal Industrial Plan is in response to the long-term trend of the bloc seeking more growth momentum from the green transition. Also, as a leader of the low-carbon energy transition, through the plan, the EU strives to promote its autonomy in green energy to tackle energy security challenges and take a long-term approach to address the adverse impacts of rising energy costs on its economic competitiveness. Furthermore, as the world's second-largest renewable energy market, the EU's Green Deal Industrial Plan will boost global investment and deployments in green industries.

According to a new International Energy Agency report, global investment in clean energy is on course to rise to $1.7 trillion in 2023. Enhanced policy support through major actions like initiatives in Europe and elsewhere has played a role.

In the meantime, in a follow-up step to the Green Deal Industrial Plan, the European Commission unveiled in March more detailed supportive policies in specific areas, including the Net-Zero Industry Act and European Hydrogen Bank, forming the major pillars of its green industry policy framework to promote the implementation.

That said, to promote the effective implementation of the Green Deal Industrial Plan, the EU is faced with several problems.

In terms of funding, although the plan focuses on funding support that could rival the US' IRA, its sources of funding are mostly economic assistance or the fiscal support framework that already exist. The newly founded European Sovereignty Fund needs to be earmarked from the EU's existing budgets. The effect of scaling up subsidies to businesses through increased levels of state aid depends on each EU member state's financial strength.

Although the plan pledges to substantially speed up go-aheads for clean energy manufacturing projects, industry insiders still say that the permitting processes are a major holdback for their business development. In the meantime, the EU's special treatment for clean energy projects has aroused lots of controversy.

Both China and the EU are significant forces in driving the global climate transformation and clean energy development; China-EU climate and energy cooperation is a key area of cooperation in bilateral relations.

In essence, the Green Deal Industrial Plan is aimed at enhancing the EU's manufacturing and R&D capacity in relevant fields. Its smooth implementation hinges on the bloc's cooperation with industrial investors and upstream and downstream industries worldwide. Currently, China has huge advantages in cost competitiveness and production capacity in final and intermediate products in the key areas of the clean energy industry — such as solar power, wind power and lithium batteries. This could provide important upstream and downstream support for the EU to develop its own green industries.

Chinese companies' clean energy investment and cooperation in Europe has become a highlight in China-Europe production capacity cooperation. China's XTC New Energy Materials (Xiamen), BYD and CATL are flocking to EU member states for investment and business operations. French Finance Minister Bruno Le Maire said France should welcome clean energy investment from China the way China welcomes Airbus. As China and Europe are both speeding up the transition to green industries, the two sides share huge potential and broad space for cooperation.

The author is an assistant research fellow at the Institute of European Studies, China Institutes of Contemporary International Relations. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.