EU to unveil ​‘Clean Industrial Deal’ to cut CO2, boost energy security

The European Union is set to unveil its grand strategy to decarbonize factories and smelters and make its energy supply cheaper and less vulnerable to geopolitical meddling.

Leaked drafts of the EU Clean Industrial Deal — copies of which Canary Media obtained — outline a plan to increase government aid, overhaul electricity markets, establish ​“Buy European” quotas, roll out emissions product labels, and forge new trade alliances between the 27-nation bloc and countries that share its carbon-cutting goals.

The proposal, set for official release Wednesday, comes as the continent grapples with the ongoing energy crisis triggered by Russia’s invasion of Ukraine three years ago this week. In the wake of the war, countries once dependent on Russian natural gas to heat homes and fuel factories were left scrambling to import piped fuel from Norway and liquefied natural gas from the United States, Algeria, and Qatar.

The EU has already made significant progress in boosting renewable energy generation since then; last year solar produced more electricity than coal in the region. But with President Donald Trump threatening to realign relations and industry still struggling as energy remains scarce and expensive, the bloc is rushing to further reduce its reliance on fossil-fuel imports and lay the foundations for nascent industries generating low-carbon hydrogen fuel, recycling metals, and sucking carbon dioxide out of the atmosphere.

While the strategy comes from the highest levels of the EU, it’s only an outline of plans for future legislation in the European Parliament and a guideline for member states to harmonize their approaches at the national level.

“This is a communication from the [European] Commission. It signals intentions and sets out broad policy,” said Sem Oxenaar, a Brussels-based associate who oversees research on industrial decarbonization at the Regulatory Assistance Project, a nonprofit that advises governments on the energy transition. ​“But this isn’t a regulation.”

If the strategy comes together to reverse the continent’s industrial decline, however, ​“this could potentially trigger a race to the top” as other large economies rush to mimic Europe’s success, said Valerie Karplus, an expert in industrial decarbonization and the associate director of Carnegie Mellon University’s Wilton E. Scott Institute for Energy Innovation.

“The Europeans have been and will continue to be pioneers,” she said. ​“They’re focused on the process. To the extent that any system or any new measures provide a stronger incentive for countries with high-pollution-intensive value chains to clean up, that’s a win.”

But skeptics say that’s a big if in a supranational bloc that lacks the powers to force its member states to fall in line.

“The EU is unable to respond in an agile or radical way,” said Juliusz Kowalczyk, a Warsaw, Poland-based energy lawyer who works with the climate campaigner WePlanet. ​“It’s not like a boat that can swerve. It’s a very big ship that can only adjust its course very slightly.”

Cheaper gas and locally sourced renewables 

Even before Russia invaded Ukraine, Europe had a natural gas problem.

The Kremlin had started to limit the continent’s supply leading up to the war, and weaker-than-expected winds reduced production from the EU’s wind turbines, forcing countries to burn through gas in storage. Once missiles started raining down on Ukraine’s Kyiv, outright gas shortages set in and sent prices soaring to nearly $70 per million metric British thermal units in Europe.

Today, Europeans — now dependent on more expensive LNG imports to make up for the loss of cheaper Russian pipeline gas — pay roughly $13 to the $3 American spend on natural gas.

In its strategy document, the European Commission proposes streamlining regulations to improve gas storage and opens the door to new legislation to deal with still-elevated gas prices and inoculate the bloc against future shocks.

But the plan also calls for the continent to move away from the direct use of gas as much as possible by replacing it with electricity in everything from steelmaking to battery production to the manufacturing of grid equipment. As a first step, that means making electricity cheaper by urging member states to slash taxes as much as legally possible.

The bloc wants to make the electricity underpinning that transition itself less dependent on gas. In the draft proposal, the EU said its key performance indicator would be to electrify 32% of the economy by 2030, up from 23% today, and install 100 gigawatts of renewables per year to make that power clean.

The European Commission plans to design a European Grid Package to, among other things, streamline permitting and improve both distribution grid and cross-border planning.

To help finance the efforts, the European Investment Bank is considering launching a pilot program to backstop long-term power purchase agreements businesses make for renewable energy. The program is also set to provide money to manufacturers of grid equipment, such as transformers, to bring more production to Europe.

The document sets a deadline of the final quarter of this year for the EU to propose legislation to ​“accelerate permitting for renewables, grids, storage, and industrial decarbonisation.”

By July, the EU said it will ​“simplify state aid rules” to ​“accelerate the roll-out of clean energy, deploy industrial decarbonisation and ensure sufficient capacity of clean-tech manufacturing” on the continent. As part of its guidance to member states, the draft strategy document said the EU will establish new demand-flexibility schemes to pay industrial power users to lower energy consumption during periods when the sun generates less solar power and winds are weak.

The Clean Industrial Deal aims to increase capacity to store more of that intermittent power, too.

For grid-scale batteries, the main support mechanism will likely come through the EIB-backed power purchase agreements and the permitting reforms scheduled to be unveiled later this year.

The EIB program will also help fund power purchase agreements for hydrogen — at least until the European Commission develops a long-term program to support the sector producing the non-emitting fuel with completely clean electricity.

In a separate leaked draft outlining the guidelines for state aid, the European Commission gave national governments more leeway to fund nascent technologies like hydrogen, allowing member states to make decisions on subsidies through administrative fiat. For ​“mature technologies” such as solar photovoltaics, onshore and offshore wind turbines, and hydroelectric stations, the Commission said it will require countries to hold competitive bidding processes.

The guideline caps state aid for large projects at 45% of the total costs but allows medium-sized undertakings to receive up to 55% and small projects to net as much as 65%.

The proposal limits national investments in carbon-capture equipment to projects where the captured CO₂ is used in synthetic fuels, injected into a well where the greenhouse gas can’t escape, or ​“permanently chemically bound in a product so that it does not enter the atmosphere under normal use.”

Product labels, ​‘Buy European,’ and recycling

The EU’s strategic vision relies heavily on markets.

The main draft document calls product labeling ​“a powerful tool to speed-up the transition to decarbonised manufacturing,” arguing that factories can ​“reap a ​‘green premium’” that the European Commission said it will support through targeted government procurement.

This is meant to encourage compliance with the Carbon Border Adjustment Mechanism, the carbon tariff that’s set to take effect next year.

The draft also includes a ​“made in Europe” target, aiming to produce at least 40% of the energy transition technology parts in the EU. The provision mirrors the ​“Buy American” measures in the Biden administration’s landmark climate-spending laws.

That’s a problem for the batteries needed for electric vehicles and for storing wind and solar power. Europe’s largest proposed project to mine lithium, the main ingredient in batteries, is in Serbia, which is outside the EU and facing massive political upheaval in opposition to the proposal. Portugal, which hopes to open the EU’s largest lithium mining and processing facility in its scarcely populated northern region, is also facing severe blowback to the plans.

In an attempt to work around that bottleneck, the Clean Industrial Deal seeks to build on the EU’s recently passed Critical Raw Materials Act, which sets targets for recycling more minerals at home to avoid new mining and overreliance on imported ore. The draft document sets a 24% ​“circular material use rate” target for 2030 — a goal in line with the Critical Raw Materials Act — up from just under 12% today.

“Recycling is essential for both environmental reasons and long-term financial reasons,” said Peter Kavanagh, CEO of Harmony Energy, the owner and operator behind the second-largest battery storage and solar facility in Europe. ​“It definitely helps security if you can retain those raw materials and have some manufacturing.”

Still, Felix Schenuit, an associate researcher at the German Institute for International and Security Affairs, warned that the EU’s ​“competence in industrial policy is quite limited,” and expectations for the Clean Industrial Deal ​“are overblown.”

“The key question will be whether the Commission can find a politically feasible way to mobilize new money for the Clean Industrial Deal — quite a challenge, especially if it has to be agreed by the majority of member states, which have different interests when it comes to how industrial policy should be shaped,” he said.

“Maybe the new pressure from the U.S. can help to agree on the next steps,” he added. ​“But for now, I would only bet on incremental changes, not a major overhaul of EU industrial policy.”