The proposals form part of the Green Deal Industrial Plan and aim to scale up technology and materials for the energy transition.

By Paul A. Davies, Beatrice Lo, JP Sweny, Alexander Buckeridge-Hocking, Michael D. Green, and James Bee

On 16 March 2023, the European Commission (Commission) formally proposed two legislative initiatives and announced the development of a European Hydrogen Bank as part of its program to enhance the EU’s competitiveness in green technologies and support its transition towards net zero greenhouse gas emissions by 2050.

The Commission initially introduced the Net Zero Industry Act and Critical Raw Materials Act, among other initiatives[i], within its Green Deal Industrial Plan for the Net-Zero Age (the Green Deal Industrial Plan). The Green Deal Industrial Plan was announced in February 2023 and forms the overarching policy framework by which the Commission aims to better support the EU in scaling up its manufacturing capacity for net zero technologies and products that will be required to meet the EU’s climate targets. Some commentators therefore see the Green Deal Industrial Plan as the Commission’s answer to the US’ Inflation Reduction Act (please see this Latham blog post for further information on the announcement of the Green Deal Industrial Plan).

Concurrently, the Commission issued a communication on the European Hydrogen Bank, an initiative which will seek to boost the uptake and production of renewable hydrogen in the EU.

The Net Zero Industry Act

The Net Zero Industry Act aims to increase industrial manufacturing of key technologies in the EU and provide a simplified regulatory framework to manufacture products required to meet climate neutrality goals. The Commission proposes to provide for faster permitting procedures and to develop European standards to support industrial manufacturing capacity and multi-country net zero projects.

In particular, the Net Zero Industry Act identifies “strategic net-zero technologies”,[ii] selected based on when such technologies would be commercially available and their potential for scaling up by 2030. Since the EU aims to manufacture at least 40% of its annual deployment of such technologies needs by 2030, the Net Zero Industry Act would introduce support to boost EU production, including faster permitting processes and increasing access to finance. In addition, the Net Zero Industry Act proposes to prioritise “net-zero strategic projects” – projects in net-zero strategic industries that meet certain additional criteria. Member States would select these projects based on how they would increase the manufacturing capacity of net zero technologies for which the EU depends heavily on imports from a single third country (as part of an attempt by the EU to shorten supply chains and be less reliant on third country supply), or based on their contribution to the competitiveness of the EU’s net zero supply chain.

The Net Zero Industry Act would also introduce measures to support other net zero technologies, including sustainable alternative fuel technologies and certain nuclear power uses. However, these other technologies fall outside the 40% target and the full range of benefits that would apply to the “strategic” net zero technologies.

In addition, the Net Zero Industry Act particularly focuses on carbon capture and storage (CCS) as a net zero strategic technology, introducing a specific target of 50Mt injection capacity in strategic CO2 storage sites in the EU by 2030,[iii] with the EU’s oil and gas producers being required to proportionally contribute to establishing this required capacity.

Finally, measures are included which would seek to enhance skills, attract investment, and encourage innovation in relation to net zero industries and technologies, as part of an all-encompassing effort to increase the bloc’s supply-chain resilience.

European Hydrogen Bank

The Commission also intends to develop a European Hydrogen Bank, which would facilitate the production, uptake, and import of renewable hydrogen within the EU.

The European Hydrogen Bank would primarily aim to unlock private investment in hydrogen value chains by addressing the initial investment challenges and seeking to lower the marginal cost of renewable hydrogen over fossil fuels by introducing measures aimed at improving the transparency of hydrogen transactions and prices, supporting infrastructure planning, and engaging with non-EU countries in relation to cooperation and trade.

The proposal of the European Hydrogen Bank comes at a time when the EU is undertaking a number of renewable hydrogen-related initiatives, reflecting the fact that the EU considers the renewable hydrogen industry one of its key areas of focus to support the transition to net zero. In particular, the Commission has targeted 20 million tonnes of renewable hydrogen within the EU (comprising 10 million tonnes domestically produced and 10 million tonnes imported) under the REFuelEU plan, and has proposed to define renewable transport fuels of non-biological origin (RFNBOs) under the Renewable Energy Directive, while the revised EU Emissions Trading System (ETS) Directive (which the EU political institutions agreed on in December 2022) would establish free allowances under the EU ETS for the production of renewable hydrogen.

The Critical Raw Materials Act

The Critical Raw Materials Act sets out targets for the production, refining, and recycling of critical raw materials (CRMs) which are often indispensable inputs for strategic sectors including renewable energy, the digital industry, space and defence, and the health sector. These CRMs often involve a high level of supply risk, and may also be associated with negative environmental impacts depending on the extraction methods and processes.

The Critical Raw Materials Act aims to provide the EU with security of supply for the CRMs required for net zero technologies. In particular, the Critical Raw Materials Act aims to boost domestic production in the EU by directing supply chains away from third-party countries (including China, which currently has a significant role in most CRM value chains). The proposal notes that “excessive dependencies on single suppliers could disrupt entire supply chains, particularly as export restrictions and other trade restrictions are increasingly used amid intensifying global competition”.[iv]

The proposals set out voluntary targets for the EU supply of critical minerals which require the following minimum domestic levels for strategic raw minerals by 2030:

  • 10% of annual consumption for extraction capacity;
  • 40% of annual consumption for processing capacity;
  • 15% of annual consumption for recycling capacity; and
  • Not more than 65% of annual consumption of each strategic raw material[v] at any relevant stage of processing from a single third country.

In addition, the Critical Raw Materials Act, similar to the Net Zero Industry Act, proposes a framework to select and implement “strategic projects” which can benefit from streamlined access to finance. The Critical Raw Materials Act also proposes measures to improve the circularity of CRMs, by requiring operators and Member States to improve the recovery of critical raw materials from products and waste.

Finally, significant investment outside of Europe to help extract and process CRMs for export to the EU is identified as essential in order to achieve the supply-chain diversification that the Critical Raw Materials Act requires.

Next Steps

The European Parliament and Council of the European Union will discuss the proposed regulations before they come into force.

Latham & Watkins will continue to monitor developments in this area.

Endnotes

[i] Alongside proposed reform to the electricity market design.

[ii] The eight strategic net zero technologies appear in the Annex of the Net Zero Industry Act: (i) solar PV and solar thermal; (ii) onshore wind and offshore renewable technologies; (iii) battery and storage technologies; (iv) heat pumps and geothermal energy; (v) electrolysers and fuel cells; (vi) sustainable biogas and biomethane; (vii) carbon capture and storage; and (viii) grid technologies.

[iii] Storage sites can classify as net-zero strategic projects if they are located on EU territory, aim to provide operationally available CO2 injection capacity by 2030 or earlier, and have applied for a permit for the storage of CO2 in accordance with the CCS Directive.

[iv] Critical Raw Materials Act.

[v] The proposal defines strategic materials as those with a high importance in specific sectors that may experience global demand/supply imbalances. Critical raw materials are those crucial for the wider EU economy.