Quo Vadis Clean Industrial Deal
By Suzana Carp, Co-Founder CleanTech for CEE
Six months in
Innovation requires breaking away with a pathway, creating a new tradition based on new ideas which generate forward-momentum. Six months into the Clean Industrial Deal is an opportune moment to analyse whether this mega package of proposals is re-inventing the European Union’s approach to scaling innovation, with a view to deriving long-term competitiveness.
Clean Industrial Deal – How it started
The Clean Industrial Deal did not emerge in a vacuum, but followed shortly the Net-Zero Industry Act, an innovative policy creating a strategic list of key net-zero technologies with a target spelling out a clean industrial revolution was in the making. A logical next step would have been to innovate the EU’s financial landscape to support it. The timing couldn’t have been more urgent: just as the Clean Industrial Deal passed the European Parliament’s endorsement, Europe’s most financially supported cleantech innovator was in the process of filing for bankruptcy.
The story is known but it matters more than ever: Widely perceived as the future European champion in battery manufacturing, Northvolt had become the poster child for what Europe’s could offer innovators. It had attracted multiple investments, both from European sources but also from Swedish pension funds.
Worryingly, the company meant to catapult European competitiveness in clean technology manufacturing to a new era filed for bankruptcy before producing any European-made cathodes, due to multiple factors.
There are two main take-aways from this case that should have emerged as vectors of direction for the Clean Industrial Deal: 1. the absence of any production-related incentives means no matter how high the investment, we are not guaranteed to see any homegrown production; 2. putting all your bets for success in one proverbial basket is generally poor industrial strategy. The main question to ask in assessing the Clean Industrial Deal to date is therefore how it has dealt with these two lessons.
Clean Industrial Deal – How it is going
The best lens of analysis to answer the question is the recently published Clean Industry State Aid Framework (CISAF). This has been a much anticipated instrument to allow Member States to offer direct subsidies to companies (also in cleantech) quicker. A revision of state-aid was necessary but the question remains: can a state-aid driven approach be the innovative policy that brings a new idea forward and allows it to make Europe harness growth dynamics across the Single Market to propel us forward in the global technology competitiveness race?
The proposal removes obstacles to state-led investments, which can be a powerful ingredient to innovation scale-up, as shown by the experiences of other jurisdictions. In the case of the EU, this approach also brings to the forefront 27 different Member States with different financial capabilities and different visions, which invites a fragmented and unpredictable landscape, difficult to gauge for private investors.
With the 27 Member States encouraged to facilitate cleantech investments utilising a range of financial instruments (now without a concern for piling up too many subsidies on the same companies), questions around transparency will become increasingly more relevant.
A side effect of the proposed approach is that funding could flow in a cascade to a technology that may get a reality check from the markets, which are key in enabling innovation to prove its relevance and scale beyond the short-lived subsidies-cycle. This might mean that a well funded company still does not make it.
Following the CISAF proposal, Member States can take up equity in some of these companies. This may ironically have an adverse effect, as it may make Member States more prone to take on less innovative solutions which have smaller risk factors associated with them (not least because in the case of failure, there could be backlash from the population). This could yield further scenarios of placing multiple solutions in the same basket, to minimise risk, but which may fail on multiple accounts.
Diversification is the key in any industrial strategy for minimising risk as well as it ensures that innovators can compete with each other to keep driving momentum forward, which is how China does it and what is needed to keep an economy competitive for the long-term (it avoids inertia).
Europe’s competitiveness can’t come down to one leading company in each sector, nor to one Member State per sector; instead it will need to be truly bottom-up, spread across Europe’s regions, so that the future European champions keep innovating while developing increasingly more localised supply-chains.
Finally, such an approach as that proposed by CISAF does mean that certain Member States will have more financial leverage to support their industries than others, reinforcing existing economic path-dependencies. Luckily, this could in principle be addressed through the MFF, where a Competitiveness Fund could be designed specifically for the regions where Member States with a lower GDP than the EU average are constrained by default in their fiscal capacity. In other words, a Member State led pathway to financing the cleantech transformation requires additional European adjustment or correction instruments, exactly so that the power of the Single Market is not undermined following the CISAF, but rather strengthened through synergies.
