Strategy and risk: How to make the Green Deal Industrial Plan a geoeconomic success

Earlier this month, the European Commission finally released its Green Deal Industrial Plan (GDIP) – a response, among other things, to President Joe Biden’s Inflation Reduction Act.

Yet member states’ initial reactions to the plan suggest they may be taking the wrong approach to the deep strategic matters at stake. When EU leaders discussed the GDIP last week in Brussels, debates revolved around whether the European Union should really be supplying new pots of cash rather than use existing covid-19 recovery funds. Worries about whether the GDIP will harm the single market have also divided member states. These are important issues – but European decision-makers risk missing the wood for the trees.

The more important question is: what priority targets should the EU’s strategic industrial policy focus on?

The GDIP promises a suite of actions – regulation, skills, trade, and finance – in support of the broader European Green Deal ambition of making Europe the first climate-neutral continent by 2050. It is fundamentally a response to developments outside the EU: in large part, the IRA, which policymakers and business leaders in Europe have fretted will harm industry within the EU by sucking investment away, along with shifting energy geopolitics and continuing inflationary pressures. The bloc is also facing growing and varied risks from China’s aggressive economic policies and dominant position across green supply chains, issues that are becoming foundational to how the superpowers define their economic and national security as Washington and Beijing continue to square off. Where once the EU believed it could handle green technologies as a matter of commercialisation and efficient scaling, it is now having to adopt a geoeconomic mindset to deal with global challenges. 

In this sense, the GDIP could be a decisive tool for the EU to stand its ground in this geoeconomic battle.

The GDIP has numerous goals in this regard: to fast-track decarbonisation of EU industry; to shore up EU green industrial competitiveness; to decrease Europe’s vulnerable strategic dependencies; and to deepen cooperation with international partners. The GDIP not only promises to advance these many goals simultaneously, but also aims to stick to the EU’s core principles of protecting the single market’s level playing field, as well as continuing to be an open trading bloc that supports rules-based economic multilateralism. All this is a tall order.

To take member states and industry on this journey, the GDIP should involve a transparent process of prioritisation and weighing of trade-offs. Part of this will involve adopting a de-risking approach that helps narrow GDIP activity to make it more impactful.

Firstly, EU policymakers should work with political and business leaders to identify and agree on which green tech supply chains are strategic to the EU. They should measure these up against economic security considerations (such as jobs and skills, intellectual property rights, resilience, fair competition, and sustainable trade links), national security considerations (critical infrastructure security, dual-use technology transfers, and energy security dependencies), and sectors’ importance to the green energy transition.

Secondly, policymakers should map risks across these prioritised supply chains. The EU has already developed ways to assess such strategic risks. Some member states are carrying out import dependency reviews. But, as others have noted, import dependency is a “crude yardstick for vulnerability” and masks a more complex picture of risk. Previous ECFR research and work by the International Energy Agency, among others, have developed more complex risk profiles across different green supply chain stages (from raw materials to manufacturing, deployment, and operation), which consider geopolitical tensions, cyber-attacks, intellectual property rights, and natural risks. The EU should factor all these issues into its GDIP negotiation process.

Thirdly, since addressing the totality of risks is a Sisyphean task, policymakers need to provide clear guidance for governments and the private sector about how to address priority risks. Such assessments should consider both the likelihood of disruption and the disruptive potential in supply chains. For example, when China punitively targeted Australia’s agricultural commodity exports following a series of political disputes, Canberra quickly found new export markets that helped the country’s economy withstand the major disruption. Economic security and national security risks vary greatly across different green tech supply chains – decision-makers could use these insights to shape the strategic orientation of the GDIP.

Crucially, honing EU strategic industrial policy in this way will help strengthen political resilience when times get tough. For example, the EU may decide to prioritise dealing with the risks of over-reliance on China for battery parts by using the GDIP to try to boost parts’ production in Europe. But these EU-made products are likely to be more expensive because they do not benefit from Chinese subsidies, market scale, and cheaper labour and energy. EU-made batteries with diversified supply sources could end up more expensive, supporting one goal – reducing supply chain risks – while undermining another – pursuing the green transition. Such a choice may be valid but leaders can minimise the chances of political, industry, and consumer unhappiness if they have led partners through a transparent process to determine the decision.

Equipped with this deeper risk intelligence, the EU will be better able to design policies to mitigate risks while supporting effective decarbonisation and international partnerships. Other outcomes could include leaving mitigation to companies where risks are low but mandating mitigation where they are acute (such as by setting mandatory import diversification requirements or stockpiles). There is no one-size-fits-all approach, as some risks will best be mitigated through trade diplomacy and deeper market integration while others would benefit from stricter intervention or incentivised local production.

The GDIP debate thus far remains captured by operational questions – which money? Who gets what? The EU should be ready to answer these. But European political leaders should ensure they adopt the right strategic orientation for their industrial plan. The de-risking approach offers one part of a new intellectual scaffolding necessary for Europe to successfully pursue strategic industrial policy in a geoeconomic age.