EU Climate Policy Reforms Set Conditions for Large Global Manufacturers to Decarbonize

by | Jun 5, 2023

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The European Union has cut an ambitious path for climate legislation in 2023. In March, the bloc released the Net-Zero Industry Act, with the goal of increasing green manufacturing capacity and providing greater diversity in the supply chains of key technologies. Now, the EU has approved a rehaul of its carbon market, the most ambitious since the passage of the original policy in 2005. The new reform targets the highest-emitting sectors in two ways: through the removal of free CO2 permits for certain industries in the Emissions Trading System, and through the Carbon Border Adjustment Mechanism, the world’s first carbon import tax for high-emissions products.

For multinational corporations (MNCs), these pieces of legislation offer some hidden opportunities. The proliferation of manufacturing across the globe has led to a patchwork of regulations that MNCs must follow, complicating the creation of a holistic decarbonization strategy at the company level. Over the long term, ambitious policies such as the EU’s are likely to level the playing field by making it advantageous for European MNCs to reduce their emissions abroad as well as domestically. By setting the material conditions for the domestic adoption of clean technologies and generating political willpower for other countries to follow suit, these policies can create a global push for industry decarbonization.

A Clean Energy Foundation Makes Countries and Companies More Competitive

The European Union is not starting from scratch when it comes to cleantech policy. With a 20-year history of green technology development and a strong regulatory framework of climate targets, the bloc has historically been the sector’s global leader. Other regions have followed this example, rapidly expanding their manufacturing capabilities to compete on an international scale. With this new set of policies, Europe takes a dual approach, driving innovation in hard-to-abate industries while setting strong manufacturing targets for necessary technologies. These policies push the envelope in terms of meeting decarbonization goals, but the ideas behind them are not fundamentally new. Rather, they build on existing policies in a way that allows the continent to remain competitive and innovative in a more crowded global cleantech landscape.

Forward-thinking policies can have a ripple effect that extends beyond borders. This has been the case for the original Emissions Trading System (ETS), which has reduced Europe’s factory and power sector emissions by 43% and inspired similar systems in other nations. The new ETS adjustments and the Net-Zero Industry Act (NZIA) will also likely have global impacts. Within Europe, the NZIA focuses on building up a broader array of accessible clean energy options, while the ETS adjustments create a new revenue source that can be used for further technology development.

This means companies can focus on deploying solutions in the contexts where their use makes the most sense: making the most of the buildout in Europe, while continuing to utilize cost-effective and locally-produced clean energy technologies in other parts of the world. By taking advantage of shortened supply chains to decarbonize production facilities, companies can meet their sustainability targets faster. In turn, the use of on-site renewable energy sources ensures a consistent energy supply for factories around the world, regardless of geopolitical developments. This allows MNCs to build their long-term resilience by stabilizing costs and future-proofing their energy stream.

Low-Carbon Production Overseas Becoming Strategically Important for European Companies

As the Carbon Border Adjustment Mechanism takes hold, the use of clean energy in overseas manufacturing will become even more vital. Currently, the law only applies to certain emissions-intensive sectors, such as steel, cement, and fertilizer. But with greater attention drawn to the issue of “carbon leakage”— i.e. the offshoring of carbon emissions caused by relocating production to third countries— it is wise for companies in all manufacturing sectors to be proactive about implementing a decarbonization strategy. This will become doubly true as laws around ESG reporting grow more stringent in the EU, meaning increased scrutiny of the overseas manufacturing practices of EU-based companies. As carbon emissions take a greater place in the public and political eye, MNCs can benefit from the implementation of measures to reduce their footprint abroad – both for the sake of compliance and for the sake of consistency in their sustainability values.

For producers of consumer goods, whose emissions are comparatively easy to abate, these policy developments create a chance to get ahead of the curve. On-site renewables can be sufficient to power many light industrial processes, enabling low-carbon manufacturing even in countries whose energy mixes are dependent on fossil fuels. This is valuable for both European companies and the countries in which they operate.

European consumers increasingly demand sustainability and transparency in the goods they purchase. Greater use of clean energy abroad can help maintain the comparative advantage of lower manufacturing costs while allowing European companies to remain transparent about their emissions-reduction measures. In return, companies can create green energy jobs and contribute to the development of cleantech expertise in the parts of the world where it has the biggest impact.

The need for clean energy is more urgent than ever. Just as climate change will have global impacts, so will the implementation of forward-thinking policies. By challenging industry to innovate in the short term, providing funding sources for research and development, and encouraging global technology transfer, ambitious policies create stability for the green transition over the long haul.

Guest Author

Eren HeadshotEren Ergin is the CEO of BECIS and a sustainability professional with over 20 years of experience in clean energy. In his current role, he drives the global growth of renewable Energy as a Service for commercial and industrial clients. Prior to starting at BECIS, he served as the General Manager of Honeywell’s Renewables & Distributed Assets division and as the Founder and Managing Director of Calterra Energy, a project and construction management firm providing advisory services for renewable energy development. Previously, he worked as the EMEA General Manager for TAS Energy and at GE Energy for 10 years.

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