A Green Industrial Policy for an Era of Economic Security

The European Commission is seeking input to update its 2023 Economic Security Strategy amid global trade turbulence and ongoing negotiations arising from the EU-US tariff and trade accord reached in July. Climate change is expected to be less of a priority given the current economic, security, and geopolitical environment, and this is likely to impact green technology firms that develop and manufacture the equipment and services required to produce, install, and manage effective and efficient renewable energy provision. The EU’s green industrial policy must adapt accordingly if the bloc’s policymakers wish to reach their official competitiveness, economic security, and decarbonization goals without sacrificing one for the others. This brief assesses the EU’s green industrial policy, examines the obstacles to decarbonization posed by increasing security challenges, and proposes recommendations to ensure that targeted investments and policies to promote clean technologies in Europe are fit for purpose.

The Return of Industrial Policy

The tripartite challenge of decarbonization, competitiveness, and economic security, sometimes but not always explicitly related to countering China, was central to US policymaking under the Biden administration. The Inflation Reduction Act (IRA) of 2022 was itself in part a delayed reaction to Beijing’s “Made in China 2025” industrial strategy and the Chinese state’s enormous support for scaling the production of green tech equipment. Europe’s primary concerns about the IRA were related to its use of local content requirements and the risk that EU firms would leave the bloc’s territory en masse to benefit from the United States’ cheap fossil energy and its green tech subsidies. These worries were not entirely borne out, as the immediate empirical effects of the IRA on the EU and trade and investment flows did not match initial warnings. Still, the legacy of the EU’s response to the Biden administration’s “post-neoliberal” turn to industrial policy remains salient for Europe. The IRA provoked a sense that something more needed to be done to keep up with US (and, increasingly, Chinese) intervention to support strategic green technologies. The legacy of this reaction, coinciding with rising security concerns, presents unresolved challenges for Europe today. Can decarbonization, competitiveness, and an economy fit for new security challenges be achieved together? Are these goals interlinked? Is countering China, for example, an inherent condition for achieving decarbonization? Or does Europe face a trilemma requiring difficult trade-offs?

The Net Zero Industry Act (NZIA), followed by the recent Competitiveness Compass and Clean Industrial Deal, represent the EU’s ongoing attempts to balance competitiveness, security, and decarbonization. But key points remain unclear. The NZIA aims to have 40% of clean tech manufactured in the EU by 2030. But it falls short in addressing how to achieve that goal and specifying the needed funding options in relevant sectors. In addition, intra-European disagreements over the EU’s response to the IRA linger. They include how and whether to maintain World Trade Organization compliance, Europe’s relative ability to match US or Chinese subsidies, and the limits beyond which loosening state aid rules to promote green tech manufacturing would damage the single market. Member states with larger fiscal capacity, such as France and Germany, argue for more subsidies to promote domestic manufacturing of green tech equipment through mechanisms including the 2023 Temporary Crisis and Transition Framework and measures approved under its mandate (e.g., a €10.82 billion French offshore wind scheme). But there are now signs that smaller states such as the Nordics, Belgium, and the Netherlands, usually reticent about carve-outs to the official EU prohibition on state aid, are shifting their traditional positions. Differences of opinion also persist among members states over the need to decarbonize by just importing the cheapest green technology as rapidly as possible, even if it negatively impacts the EU’s own clean tech capabilities or security.

Implementation of these European green industrial policies now faces additional headwinds. First, the days when the IRA seemed like the biggest threat are gone. The Trump administration has terminated the act’s tax credits for wind and solar technology, cancelled clean energy project grants, rolled back Environmental Protection Agency enforcement, and targeted state-level environmental policymaking through a wide-reaching executive order. EU firms such as Denmark’s Ørsted are reeling from a stop-work order on its $6.2 billion Revolution Wind project off the coast of Rhode Island, showing the knock-on effects of Washington’s actions on European economies. Unlike the United States, Europe is dependent on external energy suppliers, leading to higher structural energy costs and a less competitive manufacturing sector. EU wholesale gas prices in 2024 were five times higher than those in the United States, and wholesale electricity prices also remain higher despite regional disparities. Second, losing market share or increasing dependencies in key clean technologies is its own type of security threat, with EU industry already impacted by Beijing’s dominance of green tech and electric vehicles amid worries about a new China shock. With the Trump administration having withdrawn from international agreements such as the Paris Accords, prohibiting scientists employed by the federal government from attending Intergovernmental Panel on Climate Change meetings, and clashing with EU officials over the International Energy Agency’s (IEA) climate agenda, Europe is adapting its role in international climate diplomacy to fill the vacuum left by the United States, including in international development banks. Third, defense spending has become the priority in the halls of Brussels and European capitals as the United States scales back global involvement and Russia continues its aggressive stance. A green industrial strategy that allows the EU to meet its stated economic, security, and climate targets must adapt to this broader global context.

Obstacles to European Decarbonization 

Beyond the aforementioned systemic factors, achieving climate targets through green industrial policy faces several other important and overlapping hurdles.

• Clean tech is a communications and marketing challenge. The EU needs a compelling narrative around green industrial policy to ensure buy-in and support by providing concrete examples of the benefits of a greener economy for EU citizens. As the Draghi report on EU competitiveness noted, targeted investments that further the most important comparative advantages and strategic interests will have the greatest chance of success. But citizens must be told why difficult decisions are needed using a positive narrative that reflects the trade-offs and synergies between rising defense spending and sustained investment in green technologies. As studies by the Organization for Economic Co-operation and Development (OECD), the European Central Bank, and the International Monetary Fund show, green investments are positively correlated with national security, energy independence, and long-term economic resilience.

• Lack of demand is a barrier to clean tech uptake and deployment. Even if Europe were able to produce all the wind turbines, solar panels, and other green tech equipment it needs, barriers to the use of that equipment weaken demand for it. The barriers include delayed permitting processes, lack of market integration, and limited purchasing power, including lack of demand for green energy and infrastructure. The NZIA addresses the need to harmonize permitting processes across member state legal structures, but significant amounts of planned capacity remain frozen. In the case of wind energy, for example, an average of 81% of planned EU investment in new wind capacity is stuck in permitting stages. In Portugal, it is 45%, but it is 100% in several other member states. Demand-side support through policies such as guarantees, sustainability standards, or public procurement mandates can strengthen demand for clean technologies over the longer term. The OECD has compiled examples of obstacles, tools, and methodologies for green public procurement across EU member states, and granular data can facilitate targeting policies to sectoral and regional needs.

• The EU’s infrastructure is still insufficient to meet the needs of the green transition. The transition requires resilient energy systems. Power grid preparedness and interconnection are foundational aspects of improving the EU’s energy independence and ensuring that new installations can be brought online. 5G and deployment of energy-efficient smart systems can optimize energy use. The April 2025 blackout on the Iberian Peninsula illustrates the importance of modernizing grid infrastructure for new demand and integrating renewable energy sources. Improving vehicle-charging infrastructure is another key aspect of a successful green transition. 

• The financing environment for green tech investment is inadequate for achieving scale. Research and development, innovation, and commercialization of green technologies depend on a dynamic investment environment and more unified capital markets. But the EU is hampered by saving and investment habits that lead to a largely bank-centered system, persistent division along national lines, and small and fractured capital markets and venture ecosystems. This poses challenges for scaling Europe’s green tech industry, its longevity, and targeting production assistance. According to the European Investment Bank, annual venture capital investments are approximately six times higher in the United States than in the EU. The key challenge to competing with Chinese state support lies in achieving scale across supply chains. The recent bankruptcy of battery startup Northvolt illustrates the challenges of achieving scale despite significant investment. The firm struggled with supply chain administration; prolonged dependency on Chinese and Korean equipment makers, which led to workplace tensions; and had difficulty attracting skilled workers in remote northern Sweden, which meant that the company’s primary plant was producing below 1% of its theoretical capacity.

• Clean tech requires new skills, and labor markets must adapt. A robust clean-tech manufacturing ecosystem could be a boon for European economies, but it requires skills training and constant reevaluation as technologies quickly develop. The installation sector in particular is critical for green tech employment and skills development in many geographic regions and throughout the industry. Addressing these issues is mainly a member-state responsibility, which means results have so far varied. A comprehensive mapping of 26 national skills strategies by the OECD, including for the green transition, produced nine key lessons for success, among them the importance of aligning skills policies with other government strategies and ensuring constant feedback among government, industry, and social partners.

Recommendations

As the EU prepares to update its economic security strategy, moving from risk identification to risk mitigation in a world of geopolitical and trade tensions, green industrial policy must adapt. The Commission and member states can readjust their policy approach to align competitiveness, innovation, decarbonization, and economic security goals by prioritizing the following:

1. Good data for good policy

a. Clean tech and security mapping can identify strategic areas at a granular level. Following the Draghi report’s push for strategic focus on certain key areas, the EU’s Directorate-General for Climate Action (DG GLIMA) and Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG GROW) should use their shared ownership of the Clean Industrial Deal to identify key choke points and strategic assets across clean tech value chains. This can build on broader frameworks, such as those developed by the IEA, but tailored for the EU and specific security challenges. For example, solar panel production is dominated by China, but European industry is and can remain the lead supplier of many electrical and electronic components integral to solar energy production systems. Such a mapping exercise will be crucial to inform targeted policy interventions at the EU and member-state levels.

b. Green industrial policy requires a range of expertise and insights. Ad hoc knowledge exchange among experts and European Commission and European Parliament policymakers should shift to regular exchanges and briefings, with an emphasis on gathering insights from as wide a range of experts as possible, including industry and national-level experts and regulators close to the issue. For the past decade, a growing body of academic work has identified conditions for success in green industrial policy. Economist Dani Rodrik wrote in 2014 about the key principles of embeddedness (cooperation and iteration between public and private without capturing the process), discipline (carrots and sticks), and accountability. Other recent work has emphasized the firm-specific nature of industrial policy, showing the importance of targeting policy approaches to loans, grants, guarantees, tariffs, and other tools. Checking ongoing initiatives such as new subsidy regimes against the benchmarks laid out in this type of research will ensure that policy is dynamic and responsive to changing circumstances. The European Parliament Research Service’s “What Think Tanks are thinking” reports could be adopted as a model for broader, more frequent updates for policymakers.

2. Targeted international engagement for domestic success

a. Engage with non-EU economies to prioritize scale. An EU green industrial policy should aim at competing for market share within the bloc and in external markets, and at increasing scale to bring down marginal costs. The EU launched negotiations for the first of its new Clean Trade and Investment Partnerships (CTIP) with South Africa in March 2025. These “mini trade deals” could help identify interests within particular markets or governments and adapt instruments to support industries or goals. But for CTIPs to succeed, partner countries will need more concrete guidance about benefits and how this initiative promises to complement existing programs such as Global Gateway. Lessons should also be drawn from Ukraine on grid resilience, the need to build back cleaner energy infrastructure, Russian obstruction, and US ownership or trusteeship of pivotal infrastructure including gas storage. Recognition of Ukraine as a source of critical minerals for the country’s and the EU’s clean tech industries is also needed.

b. Do not give up on targeted transatlantic industrial policy coordination. EU and US companies are strong leaders in green tech development and have deep investments in production on both sides of the Atlantic. Reflecting this, the Trade and Technology Council produced initiatives and policy recommendations to promote transatlantic green industry development, including through its Working Group Two on Climate and Clean Tech and its Transatlantic Initiative on Sustainable Trade. Such close coordination on climate-focused industrial policy is unlikely with the Trump administration, but the EU can and should build on existing industry ties. Even on the government level, deals can be made by focusing on mutual interests and geopolitical considerations. The EU and the United States, for example, still share a common interest in diversifying supply chains for critical minerals and rare earths. Battery supply chains could be an area in which necessity forces cooperation. Work on mapping and accounting for Chinese subsidies across clean tech production could be of mutual interest. Jointly funded research initiatives to identify and close gaps could be easily achieved when broader political agreements remain out of reach.

3. Everything is PR: Improve the politics of industrial policy. To ensure popular buy-in and support, green industrial policy needs to show that it can deliver. The narrative and public perception of investing in clean tech is just as important as the nitty-gritty of policy details. Eurobarometer surveys show security and defense is the top medium-term priority for EU citizens, with migration, economic competitiveness, and climate close behind. A winning political narrative will not frame these as inherent trade-offs but emphasize the mutually reinforcing benefits of green industrial policy, such as stronger local communities and job opportunities, knowledge spillover and upskilling, the benefits of scale for cost effectiveness, and the dangers of dependency in a world of rising tariffs and geopolitical tensions. Focus groups and surveys developing political messaging should explicitly test this framing. Participants could be asked, for example, if the Iberian blackout makes grid capacity a higher priority issue and how citizens link this challenge to integrating renewables into energy networks.

A tripartite ambition of strengthening competitiveness, bolstering strategic readiness, and pursuing decarbonization does not need to be a zero-sum endeavor. A green industrial strategy that is fit for purpose can help Europe achieve these interdependent strategic goals.