The European Union's green industrial plan will give it greater flexibility to promote investment in green technologies and support local manufacturing, but the plan will likely fail to significantly enhance the bloc's industrial competitiveness vis-a-vis the United States and China. On Feb. 6, the European Parliament and the European Council reached a provisional agreement on a series of measures to strengthen the European Union's green technologies manufacturing ecosystem under a framework known as the Net-Zero Industry Act (NZIA). The plan sets a target for the European Union to produce 40% of its own demand for green technology products (like solar panels and electric vehicle batteries) by 2030, by accelerating permitting procedures and access to funding, improving labor skills and enhancing the overall global competitiveness of EU companies. Moreover, the agreement between the European Parliament and European Council broadened the scope of the European Commission's original proposal to also include third- and fourth-generation nuclear reactors (i.e. small modular reactors, or SMRs, and advanced nuclear reactors, or AMRs), as well as their fuel cycles in the list of strategic technologies that will benefit from simplified regulatory procedures. The provisional agreement will now need formal approval by both the European Parliament and EU member states.

• Reaching the NZIA's 40% domestic production target will largely fall on to EU member states, which will now have to change their national subsidy and public procurement regulations according to the legislation. Producers of components of green technologies — such as solar photovoltaic panels, wind turbines, batteries, electrolyzers, fuel cells, heat pumps, biomethane, grids, carbon capture and storage (CCS) technologies and new-gen nuclear reactors — will benefit from leaner permitting procedures, with deadlines ranging from 9-12 months for small projects (defined as those with a yearly output capacity of less than 1 GW of energy) and 12-18 months for larger ones (those that can produce over 1 GW annually). On public procurement, the NZIA will require member states to apply non-price criteria for 30% of their auctions for large renewable energy projects, such as wind farms and solar parks. While state support is normally awarded to the lowest bidder, a third of subsidy auctions will now need environmental and security-of-supply considerations.
• The NZIA also proposes creating ''Net-Zero Industry Academies,'' which would help provide education and training to reskill and upskill workers required for net-zero technology industries across the bloc, as well as a ''Net-Zero Europe Platform'' to coordinate EU action in this area. To foster innovation, the NZIA additionally gives member states the option to set up favorable regulatory frameworks, known as regulatory sandboxes, to develop, test and launch new green technologies.
• The NZIA also sets a target for developing the European Union's CO2 carbon capture and storage capacity, with the goal of reaching an annual storage capacity of at least 50 million tonnes by 2030 and 280 million tons by 2040.

The package is designed to boost the bloc's ability to compete with China and the United States in the global race to develop and supply critical green technologies as high energy prices and rising global protectionism fuel fears of an industrial exodus from Europe. The NZIA was proposed in 2023 alongside other two key legislative initiatives, the Critical Raw Materials Act and the electricity market design reform, as part of the European Commission's Green Deal Industrial Plan, a broader strategy aimed at scaling up the bloc's manufacturing capacity of green technologies and enhancing the competitiveness of its net-zero industry. The strategy is part of Brussels' response to China's long-established dominance in the global supply of both green technologies and the raw materials needed to domestically produce them. But it's also aimed at deterring European manufacturers in industries key to the energy transition from relocating production to the United States, where they could benefit from lower energy prices and generous subsidies under U.S. President Joe Biden's Inflation Reduction Act (IRA). In the pursuit of these goals, the NZIA calls for EU member states to give clean-tech manufacturing projects special regulatory treatment and to support them through state aid such as government guarantees, subsidized off-take agreements and tax benefits. But unlike Washington's IRA, which provides a $369 billion state aid package, Brussels' NZIA does not mobilize new resources to finance strategic projects across the bloc, relying instead on coordinating existing EU funds.

• The provisional agreement on the NZIA comes at a particularly concerning moment for Europe's renewable energy industry. In January, industry representatives from the solar sector warned most of Europe's production capacity could shut down within three months due to cheap competition from China if no action was taken, with European manufacturers either being forced into bankruptcy or forced to relocate to the United States, where they would be able to benefit from large subsidies under the IRA. The European Union, which produces only 3% of the solar panels it installs every year, is planning to more than double its solar energy capacity by 2030, from the current 263 GW to 600 GW. Based on the current state of the industry, this expansion will almost exclusively be based on solar panels imported from China, which today supplies more than 95% of the European Union's demand.
• Global demand for raw materials used in anything from heat pumps to solar panels and electric vehicles is also projected to increase sharply in the coming years as the world moves away from fossil fuels. But Europe currently relies heavily on imports — often from quasi-monopolistic suppliers like China, which provides the European Union with 98% of its rare earth materials, 97% of its lithium supplies, and 93% of its magnesium supplies. 

The NZIA does not provide new resources to fund strategy projects across the bloc, which means the European Union will struggle to match state aid provided by global competitors. By streamlining regulatory procedures, easing access to funding for strategic projects and introducing measures aimed at fostering innovation and tackling skills shortages in the bloc, the NZIA will help improve conditions for the manufacturing of green technologies in the European Union. Additionally, while avoiding explicit local content requirement provisions, the initiative introduces requirements for public authorities to consider ''security of supply'' – determined by whether over 50% of supply originates from a single source, like China — and environmental criteria in their public tenders, which would largely favor Europe-based producers. But while the NZIA provides the European Union with more flexibility to promote investment in green technologies and support local manufacturing, it comes nowhere near to matching state aid provided by global competitors like China and the United States. The proposed measures will thus be unlikely to meaningfully enhance the bloc's competitiveness in producing green technologies, given the United States and China's persisting energy price advantage, larger financial support, and overall simpler and faster subsidy and regulatory framework. 

• The NZIA does not include any provisions regarding funding to achieve its objectives. However, negotiators have raised the possibility of allocating resources from the European Union's carbon market (ETS) or from the Strategic Technologies for Europe Platform (STEP), a newly agreed funding portal aimed at supporting investment in green and other key technologies. 
• In 2022, European Commission President Ursula von der Leyen proposed creating a newly dedicated joint EU financing mechanism, the European Sovereignty Fund, to raise funds for green technology projects in the bloc. But Brussels abandoned the idea due to a lack of consensus among member states, opting instead for the creation of a ''sovereignty portal'' — STEP — where member states can apply for a mix of financial incentives and measures to facilitate the financing of projects. STEP, however, will only include 10 billion euros of fresh financing, rehashed from already-existing EU programs such as unused post-pandemic recovery funds. Overall, the platform could leverage up to 160 billion euros in investment, only part of which would be allocated to green technology projects.
• Companies operating in Europe pay bigger energy bills than those operating in Asia and, particularly, North America. While natural gas and electricity prices have been falling considerably in Europe from the record highs seen in the wake of Russia's Ukraine invasion in 2022, they remain significantly higher than those in China and the United States. The European Union agreed to a reform of its electricity market in December 2023, but this is mostly aimed at reducing volatility rather than drastically reducing prices. 

The lack of ad-hoc funds to finance the NZIA provisions may further fragment the EU single market amid discrepancies between the fiscal firepower of member states. The NZIA offers EU countries a framework to allocate industrial subsidies, thus avoiding a scenario in which single member states increasingly act unilaterally to implement their own protectionist industrial policies with no criteria attached and in defiance of EU state aid rules, which could lead to an internal subsidy race and significantly fragment the EU single market. However, the lack of common financing in the NZIA nonetheless risks enhancing economic disparities across the bloc. This is because smaller EU countries, as well as larger ones with less budgetary means (like Italy and Spain), will struggle to keep pace with the level of state aid provided by the likes of France and, especially, Germany, which have more fiscal capacity to boost support for their green industries. The lack of ad-hoc funds in the NZIA could thus, over time, distort the single market's level playing field and progressively erode the competitiveness of member states that are unable to match the financial incentives being offered to companies in other countries.

• Concerns over the progressive loss of European industries' global competitiveness have prompted some member states to call for a broader EU industrial strategy that would see Brussels direct and disburse subsidies and other business incentives across the bloc to meet specific industrial goals. Such calls, along with calls for increasingly protectionist measures, will likely grow in the coming years as European manufacturers face increasing pressure, despite the limited steps taken under the NZIA. As evidence of this trend, Belgian Prime Minister Alexander De Cro on Jan. 17 called for an EU Industrial Deal alongside the bloc's Green Deal to ''keep industrial production here with us in Europe'' during his speech to the European Parliament that inaugurated Belgium's rotating presidency of the European Union. 
• A common industrial strategy, however, would need to be backed by some form of common financing, an element that will continue to divide member states that are supportive of the idea (like France and Italy) and fiscally conservative ones (like Germany and the Netherlands).