EU Pushes for Local Industry with New Industrial Accelerator Act

The European Union is gearing up for a significant shift in its industrial policy with the introduction of the Industrial Accelerator Act (IAA). This new legislation, originally set to roll out earlier, has been postponed until February 25, 2024. The act aims to reverse a troubling trend where the EU’s share of global industrial output fell from 20.8% in 2000 to 14.3% in 2020, a decline attributed to rising energy costs and competitive pressures from regions like China and the United States.

The IAA represents a shift towards protectionism, a concept that would have been largely unthinkable in Brussels just a decade ago. According to a draft reviewed by Reuters, the European Commission believes it is imperative to take strategic action to ensure that the climate transition becomes a catalyst for industrial success rather than further de-industrialization.

At the core of the IAA is a plan to create a “lead market” by imposing mandatory “Made in Europe” requirements on government purchases of green technology. The proposed domestic production targets range from 60% to 80%. This is not merely a recommendation; it is a market mandate. For instance, if a local government seeks to procure a battery system, the law would require it to be assembled in the EU within twelve months of the Act’s implementation. In two years, the requirements would escalate, demanding that battery cells be produced in Europe.

The Commission argues that boosting the share of EU-made low-carbon products will stimulate demand within the European market. However, the reality is stark. Currently, China dominates the battery supply chain, producing nearly 75% of the world’s lithium-ion batteries. Despite numerous announcements regarding “gigafactories,” Europe remains heavily reliant on imported processed minerals and specialized components necessary for production.

Furthermore, the IAA introduces new rules regarding foreign direct investment (FDI). Any investment exceeding €100 million in strategic sectors will come with mandatory conditions aimed at utilizing European-made components and local labor. This move signals to American and Chinese companies that their investments are welcome only if they directly benefit the European industrial base. This response comes in the wake of U.S. tariffs and substantial subsidies enacted under President Donald Trump‘s administration.

While the IAA aims to strengthen European industry, it risks pushing potential investors towards lower-cost alternatives in regions like Morocco and Egypt, which are positioning themselves as attractive industrial hubs with easy access to European markets.

Strategic Priorities and Challenges

The Commission’s draft places significant emphasis on nuclear power and hydrogen as key components of its strategy. It suggests that forthcoming nuclear projects should prioritize EU-sourced technologies to promote long-term sovereignty. However, the European nuclear supply chain has faced numerous setbacks, exemplified by the delayed Flamanville 3 project in France and the Olkiluoto 3 plant in Finland, both of which encountered substantial issues over the past decade.

Similarly, the hydrogen sector is expected to demonstrate resilience by sourcing components predominantly from within the EU. Yet, European electrolyzer manufacturers are grappling with high production costs and insufficient orders. Mandating local sourcing before the industry reaches cost-competitiveness could hinder the decarbonization efforts the Commission aims to promote.

The IAA also proposes a voluntary labeling scheme for low-carbon products, particularly targeting the steel industry. The goal is to create a label that indicates the carbon intensity of steel produced within the EU, allowing “green” European steel to command a premium over “brown” imported steel. However, if “green” steel comes with a cost that is 40% higher than global benchmarks, the financial implications for infrastructure projects could be severe, potentially inflating costs for vital constructions such as bridges and wind turbines.

Concerns Over Fair Competition

The IAA is set to alter how state aid is regulated within the EU. According to a senior EU diplomat, member states could be exempt from notifying the European Commission regarding funding for decarbonization initiatives. This represents a significant concession, potentially undermining the “level playing field” that the European Single Market was designed to uphold. Wealthy nations like Germany and France could invest billions into their domestic industries without oversight, leaving smaller member states at a disadvantage.

As the IAA seeks to expedite permitting for energy-intensive industries, it may not address the underlying legal challenges that hinder new projects. Navigating local regulations, environmental protests, and fragmented power grids complicates the establishment of new chemical plants, often leading to prolonged delays. If the IAA does not tackle these fundamental issues, it may simply create a faster route to project rejections.

The draft’s most ambitious assertion predicts that steel and cement could contribute 20% to the EU’s economic output by 2030. Achieving this goal would necessitate a substantial replacement of aging industrial infrastructure with hydrogen-ready plants, requiring more green hydrogen than is currently produced globally. The feasibility of this target raises significant questions.

The European Commission is banking on the idea that by mandating demand, supply will inevitably follow. Yet, industry requires more than just legal requirements; it needs affordable energy, a skilled workforce, and a stable regulatory environment. The postponement of the IAA to February 25 serves as a clear indication of the internal conflicts within the EU as it grapples with the necessity for a green transition while contending with the reality that Europe is becoming an increasingly expensive place for manufacturing.

If the EU prioritizes industrial sovereignty over cost-effectiveness, it must be prepared for the inflationary repercussions that may ensue. The Industrial Accelerator Act represents a critical juncture for European industry, one that seeks to foster growth while navigating the complexities of a global economic landscape.