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 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.

Discover the Polar Capital Smart Energy Fund 

Risks:

Important Information: This is a marketing communication and does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. Any opinions expressed may change. This document does not contain information material to the investment objectives or financial needs of the recipient. This document is not advice on legal, taxation or investment matters. Tax treatment depends on personal circumstances. Investors must rely on their own examination of the fund or seek advice. Investment may be restricted in other countries and as such, any individual who receives this document must make themselves aware of their respective jurisdiction and observe any restrictions. 

A decision may be taken at any time to terminate the marketing of the Fund in any EEA Member State in which it is currently marketed. Shareholders in the affected EEA Member State will be given notification of any decision and provided the opportunity to redeem their interests in the Fund, free of any charges or deductions, for at least 30 working days from the date of the notification. 

Investment in the Fund is an investment in the shares of the Fund and not in the underlying investments of the Fund. Further information about fund characteristics and any associated risks can be found in the Fund’s Key Investor Document or Key Investor Information Document (“KID” or “KIID”), the Prospectus (and relevant Fund Supplement), the Articles of Association and the Annual and Semi-Annual Reports. Please refer to these documents before making any final investment decisions.  These documents are available free of charge at Polar Capital Funds plc, Georges Court, 54-62 Townsend Street, Dublin 2, Ireland, via email by contacting [email protected] or at www.polarcapital.co.uk. The KID is available in the languages of all EEA member states in which the Fund is registered for sale; the Prospectus, Annual and Semi-Annual Reports and KIID are available in English.

The Fund promotes environmental and/or social characteristics and is classified as an Article 9 fund under the EU’s Sustainable Finance Disclosure Regulation (“SFDR”). For more information, please see the Fund Supplement and Prospectus or by visiting www.polarcapital.co.uk.

ESG and sustainability characteristics are further detailed on the investment manager’s websites. (https://www.polarcapital.co.uk/gb/professional/ESG-and-Sustainability/Responsible-Investing/). 

A summary of investor rights associated with investment in the Fund is available online at the above website, or by contacting the above email address. In the United Kingdom and Switzerland, this document is provided and approved by Polar Capital LLP which is authorised and regulated by the Financial Conduct Authority (“FCA”). Registered address: 16 Palace Street, London SW1E 5JD. Polar Capital LLP is a registered investment adviser with the United States’ Securities and Exchange Commission (“SEC”). Polar Capital LLP is the promoter of Polar Capital Funds plc – an open-ended investment company with variable capital and with segregated liability between its sub-funds – incorporated in Ireland, authorised by the Central Bank of Ireland and recognised by the FCA. 

Polar Capital (Switzerland) AG is the investment manager of the Fund and is authorised and regulated by the Swiss Financial Market Supervisory Authority (“FINMA”). Registered address Klausstrasse 4, 8008, Zurich, Switzerland. Bridge Fund Management Limited acts as management company and is regulated by the Central Bank of Ireland. Registered Address: Percy Exchange, 8/34 Percy Place, Dublin 4, Ireland. 

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. 

Third-party Data: Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved in or related to compiling, computing or creating the data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained herein.

Country Specific Disclaimers:  Please be aware that not every share class of every fund is available in all jurisdictions. When considering an investment into the Fund, you should make yourself aware of the relevant financial, legal and tax implications. Neither Polar Capital LLP, Polar Capital Funds PLC or Polar Capital (Switzerland) AG shall be held liable for, and accept no liability for, the use or misuse of this document.

The Netherlands: This document is for professional client use only in the Netherlands and it is intended that the Fund will only be marketed to professional clients in the Netherlands. Polar Capital Funds plc is authorized to offer shares in the Fund to investors in the Netherlands on a cross border basis and is registered as such in the register kept by the Dutch Authority for the Financial Markets (“AFM”) www.afm.nl.

Spain: The Fund is registered in Spain with the Comisión Nacional del Mercado de Valores (“CNMV”) under registration number 771. 

Switzerland: The principal Fund documents (the Prospectus, Fund Supplement, KIDs, Memorandum and Articles of Association, Annual Report and Semi-Annual Report) of the Fund may be obtained free of charge from the Swiss Representative. The Fund is domiciled in Ireland. The Swiss representative and paying agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich, Switzerland.  

Austria / Belgium / Finland / France / Germany /Gibraltar / Ireland / Italy / Liechtenstein / Luxembourg / Netherlands / Norway / Spain / Sweden / Switzerland and the United Kingdom: The Fund is registered for sale to investors in these countries. Investors should make themselves aware of the relevant financial, legal and tax implications if they choose to invest. Please be aware that not every share class of the Fund is available in all jurisdictions.