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The European Green Deal: Europe’s answer to the US Inflation Reduction Act
ESG investment

The European Green Deal: Europe’s answer to the US Inflation Reduction Act

By Dr. Thiemo Lang, Senior Portfolio Manager, Polar Capital Smart Energy Fund The US Inflation Reduction Act (IRA) was signed into law in August 2022 to accelerate the transition of the US economy to clean energy. Regrettably, it has also led to significant transatlantic tensions as encouraging local manufacturing through massive tax credits is seen […]
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13 JUN, 2023

By Polar Capital




By Dr. Thiemo Lang, Senior Portfolio Manager, Polar Capital Smart Energy Fund

The US Inflation Reduction Act (IRA) was signed into law in August 2022 to accelerate the transition of the US economy to clean energy. Regrettably, it has also led to significant transatlantic tensions as encouraging local manufacturing through massive tax credits is seen as protectionist, violating World Trade Organisation rules.

In response, in early 2023 the European Commission presented the Green Deal Industrial Plan, an update to the European Green Deal. It repeats its 2050 climate neutrality goal, targeting the reduction of greenhouse gas emissions (GHG) from 1990 levels by 55% by 2030. To achieve this, the European strategy relies on higher carbon taxes and prefers to negotiate free trade agreements rather than include stronger protectionist elements.

The sum of the Green Deal’s parts

The Green Deal Industrial Plan consists of the Net-Zero Industry Act and the European Critical Raw Materials Act, providing a framework to rely less on imports and more on their own supply chains. The objective is also to accelerate the permit-granting process through an upper time limit of two years, down from up to seven years currently. Funding will come from a combination of state-aid rules and direct subsidies.

The Net-Zero Industry Act’s aim is to scale up the manufacturing of clean technologies in the EU, with at least 40% of the EU’s capacity needs by 2030 being manufactured locally, while supporting the EU’s 2030 climate and energy targets and the 2050 net zero target. The beneficiaries should be the companies across the supply chain for wind turbines, heat pumps, solar panels, renewable hydrogen, batteries and CO2 storage.

In the Critical Raw Materials Act, the EU is looking to ensure access to strategic and critical raw materials like lithium, cobalt and rare-earth elements, aiming to boost security of the EU’s supply. It also includes a target that no third country supplies more than 65% of any strategic raw material.

The European Green Deal also relies on the REPowerEU plan and the Circular Economy Action Plan, reset in 2022 to deal with the impact of the Russian invasion of Ukraine. The REPowerEU plan revolves around saving energy and diversifying the EU’s energy supplies – both largely successful – as well as producing clean energy, which is lagging. On 30 March 2023, a proposal to increase the target of renewable energy’s share of total energy use to 45% in 2030 was agreed, a step up from the former target of 32% and the 22% level in 2022. Wind and solar are expected to see a more than threefold increase from current levels.

Sector-specific targeting

The revised directive now strengthens targets for buildings, industry and transportation. Building energy use is the largest sector in the EU, responsible for over 40% of energy consumption. The new indicative target of at least 49% renewable energy share in buildings by 2030 should push member states to incentivise heat pump technology, one of the most efficient ways to lower energy use and raise green energy use through electrification.

Transport is the second largest sector in terms of energy use and has a new framework for renewable energy incentivising GHG reduction and promoting advanced biofuels and renewable fuels. While we welcome the pressure on the transportation sector to move to green energy, synthetic fuels are a poor choice for passenger vehicles as they have a much lower overall efficiency than electric vehicles. They might be a good choice for aviation, the fastest increasing transport segment in the past few decades. Industry is also included for the first time.

Along with the European Hydrogen Bank, hydrogen is a clear pillar of the EU green energy framework. This new bank will help accelerate investment and cover the cost gap between green and grey hydrogen through a program expected to start in the autumn. To reach the hydrogen production target by 2030, €335-471bn of investment is necessary, including €200-300bn for additional renewable energy production, a significant growth driver for the leading companies in that area.

Overall, the EU’s Green Deal should lead to a tremendous increase in renewable capacity and green hydrogen production, though many hurdles still remain. We expect a great deal of simplification in the legislative and permit-granting process to come through this year and next, leading to real momentum for all the companies active in these exciting sectors.

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Benchmark: The Fund is actively managed and uses the MSCI ACWI Net TR Index. The benchmark has been chosen as it is generally considered to be representative of the investment universe in which the Fund invests. The performance of the Fund is likely to differ from the performance of the benchmark as the holdings, weightings and asset allocation will be different. Investors should carefully consider these differences when making comparisons. Further information about the benchmark can be found https://www.msci. com/acwi. The benchmark is provided by an administrator on the European Securities and Markets Authority (ESMA) register of benchmarks which includes details of all authorised, registered, recognised and endorsed EU and third country benchmark administrators together with their national competent authorities. 

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