The EU is trying to ensure the safety and sustainable development of net zero technology from the upstream raw material acquisition of net zero technology manufacturing to the downstream end consumption guarantee. However, only for the current situation, the EU’s net zero technology manufacturing is highly dependent on foreign countries. Although the EU has decided to invest heavily in supporting the manufacturing sector, there is still a large funding gap for green investment, which will provide opportunities for green enterprises from other countries in the world, including Chinese enterprises, to layout in Europe.

Affected by the implementation of the “Inflation Reduction Act” in the United States, the EU issued the “Net Zero Industry Act” in March this year to accelerate the green transformation of industry, aiming to establish the EU’s global leading position in the field of net zero industry by improving the local manufacturing capacity of the eight net zero strategic technologies and their key components. The Act is an important part of the EU’s Green Deal Industrial Plan, published in February, and is also the European Commission’s action plan for achieving climate neutrality in the industrial sector of the EU Green Deal, launched in December 2019. At the same time, the European Union promulgated the “Key Raw Materials Act”, coupled with the earlier release of the EU electricity market reform program, the EU tries to ensure the safety and sustainable development of its net zero technology from the upstream raw material acquisition of net zero technology manufacturing to the downstream end consumption protection link.

Net zero technology becomes the focus of competition

Net zero technology is the focus of the global major economies competing for geostrategic interests and is at the core of the global technology competition. Net-zero technologies are not only green in their own right, they are also essential for the green transition of energy-intensive industries (decarbonizing industries and achieving climate neutrality). It should be said that the introduction of the Net Zero Industry Act by the EU has profound internal and external factors.

On the one hand, major economies are increasing their investment in net-zero technology development. The Inflation Reduction Act aims to spend $369 billion in subsidies over 10 years to 2032 to support the production of electric vehicles and batteries in the United States. Between August 2022 and March 2023, driven by the Inflation Reduction Act, the world’s major electric vehicle and battery producers have invested $52 billion in the production of the electric vehicle supply chain in North America (mainly the United States). Japan has decided to issue 20 trillion yen (about 150 billion US dollars) in green transition bonds over the next 10 years to support the development of clean energy technologies.

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On the other hand, the EU’s net zero technology manufacturing is highly dependent on foreign countries. The Russia-Ukraine conflict has reinforced the urgent need for EU energy and industry to address the climate transition. The Net Zero Industry Act and the previously published Circular Economy Action Act set the framework for the transition of EU industry to net zero. However, in the current five net zero technologies that the EU is most concerned about, in addition to wind energy (wind turbines) and heat pumps, the EU’s industrial competitiveness in the field of solar energy (photovoltaic), batteries (new energy) and electrolytic cells is slightly insufficient.

Wind turbines and heat pumps are the most prominent manufacturing capabilities of EU companies. At present, wind turbines manufactured in the EU account for 85% of the EU market, 31% of the global market, heat pump products account for 60% of the EU market, 15% of the global market, but the main raw materials of wind turbines, rare earth mines are heavily dependent on imports from third countries, and in recent years, its competitiveness in heat pump products is facing the threat of rapid growth in imports. In the solar PV sector, EU producers account for less than 10% of the EU market, and their production relies heavily on photovoltaic modules from third countries, while the manufacturing of wafers and solar glass is almost completely blank. In the battery sector, although EU producers currently provide 54% of its market demand, battery production is heavily dependent on lithium mining and smelting from third countries. Electrolyzer is an emerging field, and the raw materials for expanding the EU’s manufacturing capacity for electrolyzer technology are heavily dependent on imports from third countries.

Under the Net Zero Industries Act, local manufacturing capacity for eight strategic net zero technologies is required to meet 40% of the EU’s annual deployment requirements by 2030, These include solar photovoltaic and thermal technologies, onshore wind and offshore renewable energy technologies, battery and storage technologies, heat pumps and geothermal energy technologies, electrolyzers and fuel cells, sustainable biogas and biomethane technologies, carbon capture and storage technologies, and grid technologies. To this end, the EU intends to increase the manufacturing capacity of net-zero technology products by reducing administrative “burdens” (such as shortening approval times), simplifying project licensing procedures, and providing financing support.

It is estimated that between 2023 and 2030, in order to achieve the eight net zero technology manufacturing capacity targets, the EU, including government and private investment, is expected to need to invest at least 92 billion euros (about 100 billion US dollars). Mainly from three channels: The first is to relax the provisions of the State Aid Act prohibiting the use of subsidies, allowing member states to extend the scope of subsidies from the previous support for the production and storage of renewable energy, industrial decarbonization (electrification, hydrogen and hydrogen fuel use, energy efficiency) to the development of clean technology support, the relevant policy will continue until the end of 2025; Use the EU’s existing investment instruments, such as the Recovery and Resilience Fund, Invest in the EU, the Cohesion Policy Programme and the Innovation Fund, to support the development of net-zero technologies; Third, the establishment of a structural European sovereign fund to promote the financing of clean technologies for important projects of common interest to the EU (IPCEI) to ensure that economically backward member states or regions have equal access to the possibility of developing clean technologies. These important projects usually involve multiple EU member states.

The EU has strong ambitions for green development

According to the EU, the goal of its Net Zero Industries Act is to accelerate its transition to a green economy and diversify supply chain sources.

The EU’s ambition for green development is strong, and the Russia-Ukraine conflict has not slowed down its pace of promoting green transformation. According to estimates, the $100 billion that the EU intends to invest in net-zero technologies is only focused on manufacturing, and does not involve investment in upstream development and downstream deployment of net-zero technologies. According to the EU research report, between 2021 and 2030, the EU will need to invest an additional $500 billion per year to achieve green transformation, including for energy transformation (power grids, power plants, boilers, etc.) under the “RePower EU” program, as well as green vehicles and charging pile equipment. Because the US Inflation Reduction Act is more attractive for European enterprises to invest in the United States, and the current green development capabilities of EU member states are uneven, there is a large gap in green investment in the European market before 2030, which provides opportunities for green enterprises from other countries in the world, including Chinese enterprises, to deploy in Europe, especially related to lithium batteries and solar photovoltaic products. Production of wind turbines, heat pumps, electrolyzers, carbon capture and storage devices and their key components, as well as the production and recycling of key raw materials.

The Net Zero Industry Act clearly stipulates that the supply of net zero products in the EU market should be diversified. When single-source (third country) supply of a particular net zero technology accounts for more than 65% of the demand within the EU, a downgrade is given to bids for net zero products from the country of origin. According to EU data, a quarter of its electric vehicles and batteries and more than 90 percent of its solar photovoltaic modules and fuel cells are imported from China.

Following the entry into force of the US Inflation Reduction Act, within the framework of the Trade and Technology Council, the EU and the US have strengthened synergies on clean energy transition policies to address the global challenge posed by carbon emissions. After reaching a rule in December last year that electric rental vehicles do not apply to the proportion of U.S. electric vehicle subsidies, in mid-March this year, the EU and the United States began negotiations on the issue of key minerals for the production of electric vehicle batteries, aiming to ensure that key minerals mined or processed in the EU meet the conditions of electric vehicle tax incentives under the Inflation Reduction Act. Thus opening the way for it to enjoy the green subsidy of $7,500 per electric vehicle under the Inflation Reduction Act. Around the green subsidies for electric vehicles, the Trade and Technology Council has become a platform for the United States and Europe to negotiate international trade rules to deal with climate change, from the previous promotion of “green steel and aluminum” agreements, to further expand to the downstream manufacturing industry such as electric vehicles. The successive introduction of the US Inflation Reduction Act and the EU Net Zero Industry Act will accelerate the development of a new set of standards on industrial green transformation between the US and Europe, which may change the trade pattern around the electric vehicle industry chain between the world’s major economies in the future.