Net Zero Industry Act: regulatory sandbox or legislative sandbag?

Against a backdrop of escalating geopolitical tensions, it has become evident that Europe must establish its own capacities for clean energy and net-zero technologies. To achieve this, the EC launched the Recovery and Resilience Facility (RRF) in the wake of the COVID pandemic. However, due to a perceived lack of focus in the RRF legislation and a high administrative burden, the financial incentive was generally deemed insufficient to attract novel investment in clean tech, and the funds were widely seen as remaining underutilized.

Recognizing this shortcoming, the EC introduced the Net-Zero Industry Act (NZIA; the Act) on March 16th, 2023, with the primary objective to remove barriers for new technologies, thereby enhancing the competitiveness and resilience of Europe's green industries. By motivating Member States to reduce market entry obstacles for net-zero technologies, the EC aims to strengthen Europe's autonomy in strategic technologies. The act sets a specific target, aspiring to manufacture at least 40% of the EU's net-zero technologies within the Union by 2030. This initiative marks a significant step towards fostering innovation and sustainability in Europe's industrial landscape.

Key principles of the Net Zero Industry Act

To accomplish this ambitious goal, the NZIA centers its actions around 3 fundamental principles:

1. Streamlined Regulation: The NZIA aims to create a predictable and simplified regulatory environment. This involves reducing administrative burdens by simplifying processes, limiting permit-granting durations, setting up regulatory sandboxes, and ensuring open access to information. By doing so, the Act intends to improve investment certainty and incentivize industry investments in European innovation and production capacity.

2. Access to Funding: The Act seeks to facilitate access to funding through public procurement procedures, auctions, and schemes supporting private consumer demand. It's important to note that the structural additional funding is limited, as the current proposal primarily repurposes existing funding channels. The European Parliament recognizes this limitation and is exploring additional financing options, including taxing carbon emissions to finance decarbonization efforts.

3. Skill Enhancement: The NZIA aims to empower citizens to contribute to net-zero industries and cultivate a skilled, adaptable workforce. To accomplish this, the EC is providing € 5 million in seed funding for the establishment of 'European Net Zero Industry Academies’. These academies will develop and promote learning programs for students and training materials for employees, encompassing both up-skilling and re-skilling.

The Act defines a shortlist of core technologies, labelled 'Strategic Net-Zero technologies,' from which the EU Member States can select technologies to prioritize in national legislation and approval procedures. This list includes solar PV, solar thermal electric and solar thermal technologies; onshore wind and offshore renewable technologies; battery/storage technologies; heat pumps and geothermal energy technologies; electrolysers and fuel cells; sustainable biogas/biomethane technologies; carbon capture and storage (CCS) technologies and grid technologies. However, there's ongoing debate regarding the inclusion of technologies like nuclear energy, sustainable aviation fuels, and CCU (carbon capture and utilization). Members of the European Parliament recently voted to broaden the scope of the legislation to include components, materials and machinery, and the inclusion of Net-Zero Industry Valleys and to expand the list of technologies covered by the legislation. The approved amendments, resulting from the vote, did not include additional objectives for the technologies on the list, which makes CCS the only technology for which the Act provides a detailed objective, already set by the EC in their original proposal. Concretely, the EC sets an objective of achieving an annual injection capacity of 50 million tonnes of CO2 by 2030. Currently, Europe has no injection capacity, except for some smaller test sites. To achieve this objective, measures are foreseen such as creating a single market for CO2storage services, enhancing information sharing on geological data, and garnering support from Member States for strategic CCS projects.

In the bigger picture, the NZIA is just one pillar of the EC's Green Deal Industrial Plan, a broader package of policy initiatives designed to steer the EU toward climate neutrality by 2050. Critics[1] argue that the Act lacks coordination and strong governance when compared to other EU policies. Although the 'Net-Zero Europe Platform' is proposed to coordinate NZIA actions and monitor objectives, it appears more as a forum for sharing best practices rather than a steering body.

Comparison with the U.S. Inflation Reduction Act

To fully grasp the potential global impact of the NZIA, it's worth comparing it to the 'Inflation Reduction Act' (IRA) in the United States. The IRA aims to strengthen green industries in the U.S., setting the stage for a fierce competition between the EU and the U.S. in attracting investments in sustainable technologies and materials. A significant difference is that the EU doesn't provide additional funding, whereas the U.S. has earmarked $369 billion in government spending. Additionally, the IRA contains 'Buy American' provisions, encouraging global industries to invest in U.S. operations, potentially countering the efforts of the NZIA.

Please note that, at the time of this writing, the Net-Zero Industry Act is a proposal still being debated within and between the European Parliament and the Council of the EU. A finalized Act, approved by Parliament, Council and the EC, is expected by the end of the year. In the meantime, industry revolving around these strategic technologies should consider this Act as a signal from the EC that the technologies provide a lot of value to Europe. Consequently, companies with this focus can expect new opportunities to further develop and implement their technology.

Moore Grants & Incentives believes that it is crucial for the Member States to quickly establish effective regulatory sandboxes to accelerate the development of European strategic net-zero technologies. Additionally, there is an essential need for public funding (both grants and incentives) as well as complementary financing methods (EIB, InnovateEU, private investments) to build out and scale-up a fast-evolving clean tech manufacturing industry. Without financial support from the EU Member States, the NZIA, like the RRF, could risk becoming an additional government structure and an administrative burden, i.e. a legislative sandbag.

[1] Rebooting the European Union’s Net Zero Industry Act (bruegel.org)

What does the NZIA mean for manufacturing industry?

The NZIA introduces Net-Zero Strategic Projects, which will be prioritized based on their impact on the manufacturing capacity of net-zero technologies. For existing facilities, permits to increase production capacity should be easier to obtain. Additionally, new investments, especially for the development of new CO2 storage sites, should be supported and expedited by the Member States. To ensure availability of a highly skilled workforce, Net-Zero Academies will be set up with a training program for each Strategic Net-Zero Technology.

What does the NZIA mean for innovators?

For innovative Net-Zero Technologies, i.e. technologies with a TRL below 8, the EU will provide regulatory sandboxes. This allows for innovative net-zero technologies to be tested in a controlled environment before market deployment. To enter the sandbox, enterprises will have to comply to a set of selection criteria, which will be set by the Member States at a non-specified timing. The EU will grant priority access to small- and medium enterprises.

What does the NZIA mean for academia?

Fundamental research and development of novel technologies is not within the scope of this Act. Consequently, budget increases for research initiatives, e.g. Horizon Europe, are not expected. Academia might be consulted for the establishment of Net-Zero Academies, where students and employees will be trained to deal with the Strategic Net-Zero Technologies.