The much anticipated “Draghi-report” published earlier this month has by now made its way into most parliaments, cabinet offices and boardrooms. The almost 400 pages of analysis and recommendations provide a stark warning for the EU to clean up its economic and industrial act.
The conclusions from the main report (section A) have already been covered in op-eds, policy briefs and essays, but section B of the report, which contains sector-specific in-depth analyses, still contains valuable nuggets of information.
Many of the sectors mentioned in the report are direct research areas of The Hague Centre for Strategic Studies. In this Draghi Report Series, we decided to ask our experts for their views on specific sections of this high-profile report.
For the eighth installment of our Draghi Report Series, we asked strategic analysts Irina Patrahau, Ron Stoop, and Berend Kwak for their take on the report’s section on Clean Technologies.
– Which policy recommendations do you think are the strongest, and why?
Irina Patrahau: I think Draghi’s second proposal is crucial for increasing competitiveness in clean tech manufacturing. He calls for the introduction of minimum quota for products and components manufactured in Europe in public procurement and Contract for Difference auctions, which will create demand for locally and sustainably manufactured products. The barriers to entry for clean tech companies in Europe are incredibly high. They compete on a global market with companies that have much lower operational costs or that receive governmental subsidies. As Europe aims to be the first climate neutral continent by 2050, the demand for these clean technologies is rapidly growing. This demand can be leveraged to support European production capacity. Why not support European permanent magnet manufacturing through the North Sea offshore wind plans? European countries need to be strategic and act together to maximize these opportunities.
Ron Stoop: Draghi’s mention of positive spillovers between sectors is quite important. EV battery factories tend to be built close to where the raw materials are. EV factories also tend to be built near battery factories. This means that these sectors do not exist in an economic vacuum. Rather they are more likely to land in places where there already are economic ecosystems present. It is key that the EU understands this if it wants to retain a strong and flourishing automotive and battery industry.
Berend Kwak: I think Draghi rightfully mentions the need for regulatory harmonization in the EU. The difficulties on this front have been voiced by manufacturing companies in the EU repeatedly – in addition to the cost issues that Irina highlights, and other structural economic issues. If we want to improve the competitiveness of our clean technology industry as efficiently as possible, we should give these sectors the regulatory space they need to capitalise on the EU’s investments, for example through tailored agreements alongside targeted investments.
– Is there anything missing in the policy recommendations? What would you add?
Irina Patrahau: I would like to point out two issues regarding the set of recommendations: insufficient supply chain thinking; and an over-emphasis on complete information. They are two sides of the same coin, but in my opinion the nuances are missing. First, supply chain thinking is not clearly translated in the proposals. Even though the high import dependency for critical minerals is mentioned as a root cause of the EU’s competitiveness gap, this does not come back in the proposals. Of course there is a lot being done in the critical raw materials sector, but this should be coordinated with off-takers (i.e., clean tech manufacturers). This would be mutually beneficial and help both parties’ business cases. Increasing clean tech manufacturing in the EU can bring significant demand for a specific type of high-purity processed mineral, while domestic production of said mineral can contribute to security of supply. These synergies should be encouraged through European platforms.
Second, ‘complete’ information on supply chains is time and cost intensive and at times even impossible. The report calls for supply chain data a number of times, but this kind of research requires significant resources which may be better allocated to another task. Of course it is important to understand supply chains, but it is debatable whether knowing every single detail will lead to better policy making.
Berend Kwak: Indeed – supply chain data can be effectively translated into policy making. Yet we should realise that potentially, the EU will have trouble leveraging data and policy to increase competitiveness at all. For some technologies, the EU faces structural dependencies on suppliers that are heavily locked in. Whereas adequate policy making is necessary to foster domestic European production for some established producers such as Siemens Gamesa or Vestas, it will be difficult in some sectors (think e.g. permanent magnets for wind turbines, or solar panels) to build a competitive position against these locked-in suppliers. Focusing on promoting potential EU champions with an already established market position could be a more effective approach.
– Which figure or data point in the report did you find most insightful, and why?
Berend Kwak: Figure 4 provides us with a clear notion of how supply chains in clean technologies are concentrated. It is imperative to note that China’s quasi-monopolistic position in some of these steps provides us with affordable clean technologies on the one hand – a great advantage for the energy transition – yet this poses potential security risks, on the other. The Dutch intelligence agency AIVD has warned multiple times that Chinese infiltration of energy infrastructure is a major risk to the (cyber)security of the Netherlands.
To illustrate what this could mean, which answers the previous question too: Whilst we should by no means harm or slow down the energy transition, from a strategic perspective we could think about incorporating certain security benchmarks in the tenders for new wind parks, for example. Security-by-design might not be the first thing on our minds when trying to improve competitiveness, but in the long term this should be part of our investment decisions. Competitiveness should be built with long-term sustainable welfare in mind; which supplier are we looking at for the technologies we’re going to invest in so heavily (and which parties will provide the replacements, maintenance, software updates)? If we cannot build position against unwanted suppliers through aforementioned cost mechanisms or production quota, we could look at security benchmarks.
Irina Patrahau: Figure 7 provides a very clear break down of how the costs are formulated in the EU and China, giving insights into what the EU may be able to change with well-defined interventions to increase our competitiveness.
Ron Stoop: By far the most telling statistic is the investment need of 640 billion in cleantech production capacity between 2020-30. Estimates may differ, but all sources agree that the current level of investment in cleantech production capacity ánd cleantech rollout in the EU and globally is far from sufficient. This means that the EU should seriously ramp up its spending on clean technology, whether through better market rules, raw materials pricing policy, public-private partnerships, ‘clean tech banks’, extra taxpayer funds or ‘Eurobonds’, we need every initiative we can get to move the needle.
– How do you view the feasibility of these plans in a European context?
Ron Stoop: The problems the EU faces on the clean technology front are first and foremost political. The EU lags behind China (and now the US) due to inability to deliver on an effective internal market, strong and unified decision-making and clear expectations for producers and investors. Tax breaks, subsidies and incentives can achieve local goals but unless properly harmonized will not succeed in achieving economies of scale needed for competitiveness in the EV, battery, wind and solar industries. European citizens should be made aware of this.
Irina Patrahau: I believe that Europe has a lot of potential to become an innovative ‘laboratory of the world’, but we need to choose our battles. It is unlikely that the EU will become an innovative leader in every clean tech industry. Rather, we should be clear about our goals and set realistic expectations.
Berend Kwak: Would we be able to act effectively on the breadth of policy recommendations that this report proposes (which are quite extensive), I would give it a good chance that maintaining or improving the market position of established EU manufacturers is attainable. We should be cautious about trying to achieve the same in highly concentrated sectors with strong lock-in suppliers and a lack of EU presence.
Stay tuned for the next issue of the Draghi Report Series by HCSS, where we invite experts to discuss other sectorial policies in Mario Draghi’s report “The future of European competitiveness”.
Read the previous installments here:
- Draghi Report Series | Patrick Bolder on Space
- Draghi Report Series | Benedetta Girardi on Semiconductors
- Draghi Report Series | Han ten Broeke and Ron Stoop on Automotive
- Draghi Report Series | Irina Patrahau and Michel Rademaker on Critical Raw Materials
- Draghi Report Series | Tim Sweijs and Frank Bekkers on Defence
- Draghi Report Series | Lucia van Geuns and Jilles van den Beukel on Energy
- Draghi Report Series | Sofia Romansky and Jesse Kommandeur on Artificial Intelligence