EU Joins the U.S. in the Clean Arms Race
March 07, 2023
Read Time 5 MIN
For months, European leaders have voiced concerns about how the U.S.’s landmark climate act is threatening to pull clean tech manufacturing jobs and investment from Europe to the U.S. Now, the EU has introduced its own plan to onshore clean tech in Europe by creating a more predictable and simplified regulatory environment that will speed up access to financing for these industries.
What Does the EU Currently Have in Climate Spending?
Fit for 55 is a set of proposals that aims to reduce the EU’s net greenhouse gas emissions by at least 55% by 2030.1 It operationalizes the EU Green Deal, which seeks to make Europe the first continent to reach net zero emissions by 2050. As part of this effort, the EU has earmarked more than €1 trillion ($1.1 trillion) into greening the EU’s economy over the next 10 years.2 Several other pieces of legislation are catalyzing the resource transition in the EU alongside Fit for 55, including the REPowerEU Plan and national climate plans.
Fit for 55 Contains Funding for Many Different Climate Initiatives
Source: European Council of the European Commission, 2022.
What is in the U.S. Climate Act?
The Inflation Reduction Act (IRA) was passed in August 2022 and contains approximately $400 billion in domestic green subsidies over the next 10 years. It aims to secure the U.S. energy supply while also significantly reducing its greenhouse gas (GHG) emissions. The IRA seeks to make the U.S. more energy independent by onshoring and attracting clean energy industries through tax credits and infrastructure funding. For instance, the subsidies for electric vehicles (EVs) only apply to those with final assembly in North America3 and the tax credits for solar cells, wind turbines and batteries produced in the U.S. are higher than for imported technology.4
Beyond the Headlines: Why the IRA is (Currently) More Attractive to Clean Tech
While the Fit for 55 packages contain more than double the funding for the resource transition than the IRA, the type of funding in the IRA is what makes it so competitive. The IRA’s tax credits and subsidies in the U.S. are simple and straightforward for clean tech industries to access relative to navigating the complexity of the incentives offered by Fit for 55, REPowerEU and 27 national climate plans.5 The IRA also specifically targets boosting the manufacturing and production in resource transition industries, whereas Fit for 55 contains funding for a wider range of climate initiatives.
Europe Comes up Short in Clean Tech Financing
Clean technology venture and growth capital funding by region (€B)
Source: Cleantech for Europe, Financial Times, as of February 1, 2023.
The IRA’s impacts have been immediate, with nearly $90bn in investment in clean energy projects announced since its passage.6 Honda and LG Energy announced a $4.4B EV battery factory in Ohio7, Enphase announced plans to open multiple new solar inverter factory lines in 20238 and Enel indicated its intentions to build one of the largest solar factories in the U.S.9 As more clean tech manufacturers bid to secure clean energy projects, additional plans can be expected to be announced in the coming months.
Europe’s Response: Calling for its Own IRA
European leaders have criticized the IRA’s onshoring approach, which they argue might disadvantage the EU by pulling manufacturing jobs and investment from the EU to the U.S. In parallel, EU politicians have pushed the European Commission (EC) to lay out a plan to incentivize investment into Europe’s energy transition industries.10 In early February, the EC President unveiled the Green Deal Industrial Plan, an initial proposal that aims to create a predictable and simplified regulatory environment that will speed up access to financing for these industries.11
While it does not include new spending, the Green Deal Industrial Plan seeks to make existing funds more easily accessible by accelerating permitting, loosening state aid rules and providing grants to clean-tech industries.12 Further, it aims to enhance global trade cooperation in order to provide the EU with a more secure supply of the critical raw materials needed for clean technology manufacturing.13
What’s Next
EU leaders discussed the plan in more detail at the EU Leaders Summit on February 9-10.14 Funding is proving to be the most debated element of the plan as the two largest economies, Germany and France, may have an outsized benefit from loosening state aid rules and may consequently diminish subsidies offered in other countries. The committee is meeting again in March to propose solutions. While this is a work in progress, we ultimately believe whatever final draft comes from the EU will emphasize simplified regulatory processes and attractive funding structures that make investments competitive with those coming to the U.S.15
Impact
Ultimately, we believe the Green Deal Industrial Plan should markedly amplify the investment opportunities for the clean tech sector in the EU. Combined with the incentives emanating from the IRA, we see a dramatic change in the investment cadence into near-term, transformational projects. We hold a number of names across the VanEck Global Resources Fund and Environmental Sustainability Fund that benefit.
A few portfolio highlights:
- SolarEdge Technologies16 is a global solar inverter manufacturer and solutions provider for grid-connected solar + storage. Over the past number of years, it has increasingly shifted toward the European markets, where it enjoys competitive economics as solar + storage has a significantly shorter payback period compared to other geographies, largely due to the ongoing energy crisis. The continued increase in power purchase agreements (PPAs), combined with a potential loosening of permitting timelines and regulatory red tape, should drive further growth in the commercial and industrial solar markets, which comprise ~50% of Solaredge’s revenues.
- ENGIE SA17 is a French utility company and a sustainable, reliable provider of renewable energy, natural gas and nuclear energy. Earlier this month it announced its plans to invest €22-25bn in growth spending in the energy transition from 2023 to 2025, up 50% from previous years.18 A key component to this strategy is investing in renewables projects with high single-digit returns (and in some cases higher), a markedly different perspective than some energy majors who have indicated a step down in renewables investments as they are unable to meet return targets. We think there could be an upward trend in value creation on the back of strong PPA prices in the U.S. and particularly Europe, and with the potential simplifying of the regulatory environment and faster permitting, we believe this positions Engie well to capitalize on these investments in the medium term.
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Important Disclosures
Sources
1 European Council. Fit for 55. As of February 2023.
2 European Commission. The European Green Deal Investment Plan and Just Transition Mechanism. As of February 2023.
3 VanEck. The Inflation Reduction Act: Accelerating the Energy Transition in the U.S. September 2022.
4 The National Law Review. Domestic Content Requirements of the Inflation Reduction Act. February 2023.
5 Financial Times. EU plans to relax curbs on tax credits in response to ‘toxic’ US subsidies. January 2023.
6 Climate Power. Clean Energy Boom. As of January 31, 2023.
7 Wall Street Journal. Honda, LG Energy Plan $4.4 Billion EV Battery Factory in U.S. August 2022.
8 Enphase Energy. Q3 2022 Earnings Call. As of October 2022.
9 Bloomberg. Italy’s Enel Joining US Solar Push With Plans for New Plant. November 2022.
10 Financial Times. Davos delegates praise Biden’s ‘huge’ green package, as Europe voices complaints. January 2023.
11 EU Commission. A Green Deal Industrial Plan for the Net Zero Age. As of February 2023.
12 Financial Times. Energy Source. January 2023.
13 EU Commission. A Green Deal Industrial Plan for the Net Zero Age. As of February 2023.
14 Euractiv. France eager to discuss funding of EU’s new green industry plan. February 2023.
15 Financial Times. EU plans to relax curbs on tax credits in response to ‘toxic’ US subsidies. January 2023.
16 Note: As of January 31, 2023, SolarEdge Technologies represents 5.17% of net assets for the VanEck Environmental Sustainability Fund and 3.22% of net assets for the VanEck Global Resources Fund.
17 Note: As of January 31, 2023, ENGIE SA represents 2.23% of net assets for the VanEck Environmental Sustainability Fund.
18 ENGIE. ENGIE steps up its sustainable growth. As of February 2023.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing Considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.
You can lose money by investing in the VanEck Global Resources Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with concentrating its investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, derivatives, direct investments, emerging market securities, ESG investing, foreign currency transactions, foreign securities, global resources sector, other investment companies, management, market, operational, small- and medium-capitalization companies and special purpose acquisition companies. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation.
The VanEck Environmental Sustainability Fund’s sustainability strategy may result in the Fund investing in securities or industry sectors that underperform other securities or underperform the market as a whole, and may result in the Fund being unable to take advantage of certain investment opportunities, which may adversely affect investment performance. The Fund is also subject to the risk that the companies identified by the Adviser do not operate as expected when addressing sustainability issues. Regulatory changes or interpretations regarding the definitions and/or use of sustainability criteria could have a material adverse effect on the Fund’s ability to invest in accordance with its sustainability strategy.
Companies that promote positive environmental policies may not perform as well as companies that do not pursue such goals. Issuers engaged in environmentally beneficial business lines may be difficult to identify and investments in them maybe volatile. Environmentally-focused investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by the Adviser or any judgment exercised by the Adviser will reflect the opinions of any particular investor.
You can lose money by investing in the VanEck Environmental Sustainability Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. An investment in the Fund may be subject to risks which include, among others, investing in derivatives, equity securities, emerging market securities, environmental-related securities, foreign currency transactions, foreign securities, investments in other investment companies, management, market, non-diversification, operational, sectors, small- and medium-capitalization companies, special purpose acquisition companies, and sustainable investing strategy risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
Important Disclosures
Sources
1 European Council. Fit for 55. As of February 2023.
2 European Commission. The European Green Deal Investment Plan and Just Transition Mechanism. As of February 2023.
3 VanEck. The Inflation Reduction Act: Accelerating the Energy Transition in the U.S. September 2022.
4 The National Law Review. Domestic Content Requirements of the Inflation Reduction Act. February 2023.
5 Financial Times. EU plans to relax curbs on tax credits in response to ‘toxic’ US subsidies. January 2023.
6 Climate Power. Clean Energy Boom. As of January 31, 2023.
7 Wall Street Journal. Honda, LG Energy Plan $4.4 Billion EV Battery Factory in U.S. August 2022.
8 Enphase Energy. Q3 2022 Earnings Call. As of October 2022.
9 Bloomberg. Italy’s Enel Joining US Solar Push With Plans for New Plant. November 2022.
10 Financial Times. Davos delegates praise Biden’s ‘huge’ green package, as Europe voices complaints. January 2023.
11 EU Commission. A Green Deal Industrial Plan for the Net Zero Age. As of February 2023.
12 Financial Times. Energy Source. January 2023.
13 EU Commission. A Green Deal Industrial Plan for the Net Zero Age. As of February 2023.
14 Euractiv. France eager to discuss funding of EU’s new green industry plan. February 2023.
15 Financial Times. EU plans to relax curbs on tax credits in response to ‘toxic’ US subsidies. January 2023.
16 Note: As of January 31, 2023, SolarEdge Technologies represents 5.17% of net assets for the VanEck Environmental Sustainability Fund and 3.22% of net assets for the VanEck Global Resources Fund.
17 Note: As of January 31, 2023, ENGIE SA represents 2.23% of net assets for the VanEck Environmental Sustainability Fund.
18 ENGIE. ENGIE steps up its sustainable growth. As of February 2023.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing Considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.
You can lose money by investing in the VanEck Global Resources Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with concentrating its investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, derivatives, direct investments, emerging market securities, ESG investing, foreign currency transactions, foreign securities, global resources sector, other investment companies, management, market, operational, small- and medium-capitalization companies and special purpose acquisition companies. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation.
The VanEck Environmental Sustainability Fund’s sustainability strategy may result in the Fund investing in securities or industry sectors that underperform other securities or underperform the market as a whole, and may result in the Fund being unable to take advantage of certain investment opportunities, which may adversely affect investment performance. The Fund is also subject to the risk that the companies identified by the Adviser do not operate as expected when addressing sustainability issues. Regulatory changes or interpretations regarding the definitions and/or use of sustainability criteria could have a material adverse effect on the Fund’s ability to invest in accordance with its sustainability strategy.
Companies that promote positive environmental policies may not perform as well as companies that do not pursue such goals. Issuers engaged in environmentally beneficial business lines may be difficult to identify and investments in them maybe volatile. Environmentally-focused investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by the Adviser or any judgment exercised by the Adviser will reflect the opinions of any particular investor.
You can lose money by investing in the VanEck Environmental Sustainability Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. An investment in the Fund may be subject to risks which include, among others, investing in derivatives, equity securities, emerging market securities, environmental-related securities, foreign currency transactions, foreign securities, investments in other investment companies, management, market, non-diversification, operational, sectors, small- and medium-capitalization companies, special purpose acquisition companies, and sustainable investing strategy risks, all of which may adversely affect the Fund. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
©️ 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.