Paths to a low-carbon and resource efficient European industry

How can the European Union support the transition to a low-carbon circular industry? On Friday 5 March, I participated in a webinar based on a new report from IEEP and the Ellen MacArthur Foundation (EMF). Carmen Valache from EMF did an excellent presentation of the part related to three specific sectors: the build environment, mobility and food. My introduction about horisontal policy levers can be found below (slightly edited with links and some clarifications):

“Our report describes how five horisontal policy areas can contribute to a low-carbon circular industry:

• Industrial policy
• Climate policy
• Next Generation EU and the national recovery plans
• The European Semester
• External relations and industry transitions

Starting with industry, the Commission is now updating the Industry strategy. One important point is to establish a ‘resource-efficiency first’-principle, as has been done in energy policy with the ‘energy-efficiency first’-principle. This would be wider, it would be to first consider solutions based on resource efficiency and circular economy, before for example investing in changed production methods even if that is also sometimes necessary. To make this happen, a mental shift is necessary by clearly stating the principle, but also to provide the tools as is presently being done with the energy efficiency first-principle, looking on obstacles and opportunities.

Large-scale demonstration of circular economy solutions that can lower carbon emissions is another crucial area. Most applications to the EU Innovation Fund are for support to projects on the production side. Here, it is necessary to look both on how to better create platforms along the value chains, and on the legal language on the innovation fund, in the upcoming revision of the regulation on the emission trading system (ETS).  There are good efforts within Horizon Europe, but they do not and cannot legally go far enough.

This is linked to the state aid and competition frameworks, allowing more state aid for innovative solutions, and allowing more cooperation along the value chains. In a recent speech, Commission Vestager indicated a move in this direction, but it has to go far enough.

Government support for green transitions needs to be combined with more stringent regulation. The current revision of the Industrial Emissions Directive (IED) provides an opportunity to integrate resource efficience better both in horisontal requirements and in specific standards on best available solutions (BREFs).

Finally, on industrial policy, the move to an ecosystem approach can have advantages as shown for example by the Battery Alliance. But is also important to keep the transversal perspective, both regarding the measures, and when it comes to the governance of this approach. For example, if DG GROW is reorganised according to the ecosystem approach, it is crucial to also have a strong horizontal unit dealing with for example circular economy across sectors. There are many possibilities in better coordination of policies on heavy industry, construction and services, just to take one example.

Regarding climate action in general, the level of ambition in the climate law will be important. The Commission will present proposals based on the climate law agreement before summer. For example, circular economy can be better integrated in the energy efficiency directive. Sector-specific actions on better resource efficiency need to be integrated in this endeavour, for example regarding the built environment, mobility and food. The report provides a number of such examples.

We know that Member States do not take circular economy well enough in account in their National Energy and Climate Plans (NECPs). There is a need both to give this a higher political priority, and to develop a ‘tool-box’ based on good examples how this can be done.  For example, the Netherlands can provide inspiration, as well as countries outside the EU such as South Korea.

There is also a need to further develop carbon footprint methodologies, not only for products but also on system-wide issues.

On Next Generation EU and the national recovery plans, there is good language in the Commission guidelines on addressing circular economy, but this has to be prioritised in the dialogue with Member States regarding the draft plans.

One example where much can be done now when funding is available is to promote synergies between digitalisation and green transitions. It is possible to find good examples in for example Germany, but much more can be done. The new climate plan in South Korea is interesting in this regard.

Improving the framework on green procurement would facilitate Member State. Facilitating access to funding for SMEs, and the final design of the EU Taxonomy, are other important elements.

The European Semester is currently linked to the recovery plans, but there is also a discussion on the future of this process. For example, encouraging green tax reform in the country recommendations can help create markets for circular economy solutions. The next few years could be a ‘window of opportunity’ in this regard since there will probably be a tendency towards fiscal consolidation in Member States after the present crisis, with a need for new sources of income.

To finally find agreement on the revision of the VAT Directive can facilitate circular economy solutions.

Including knowledge for low-carbon, circular economy solutions in the revised Skills Agenda is also important to give good guidance to Member States in the Semester process. New skills for workers in a changing labour market is a crucial part of a just transition.

External aspects of the industrial policy is a crucial issue. IEEP has published other studies on the links between trade and circular economy. It is encouraging that foreign ministers are engaging in climate diplomacy, but there has to be more priority to circular economy. For example, the recently launched Global Alliance on Resource Efficiency and Circular Economy is a very positive step, but it also has to be a real priority for the External Action Service.

Carbon border adjustment mechanisms (CBAM) have to be analysed from a circular economy perspective. IEEP has written about this as well.

Introducing carbon border adjustments might create tensions with other parts of the world. This is one of several reasons to promote cooperation with other parts of the world: on the early stages of innovation, on standards, and so on. And to give special attention to the Global South, both on the effects of CBAMs, and on not preventing them from using new innovation low-carbon solutions because of very stringent application of intellectual property rights.”