O

ver the past years, climate policies in the European Union (EU) have reached a critical juncture. An unprecedented combination of global shocks and intensifying geopolitical competition has forced European policy-makers to reconcile ambitious green policies with the need to safeguard industrial strength and competitiveness through industrial policies. Unsurprisingly, industrial competitiveness has become a top priority for Europe.

Higher energy costs compared to other major economies, like the United States and China, have become a structural economic disadvantage for European industries—especially energy-intensive industries (EIIs) like steel, cement and chemicals. As a result, governments, businesses, and social partners are intensely debating how to regain competitiveness while achieving climate targets. This quest has deeply shaped the mandate of the second von der Leyen European Commission and has been given new impetus by Mario Draghi’s report on the future of European competitiveness. Published in September 2024, the report bluntly called out long-standing structural constraints and proposed a new industrial strategy for Europe. Its central message is that decarbonization can be a driver of industrial opportunity for European countries, rather than a drag on growth.

 

 

Measures for industrial revitalization

Building on this assessment, the Commission presented its Clean Industrial Deal (CID) in February 2025 to regain industrial strength while also decarbonizing. Under the CID, the Commission frames decarbonization explicitly as an economic and industrial strategy, not just an environmental agenda, marking a shift from the framework of the Green Deal. Such a view has been reinforced by China’s industrial success in clean technologies and the growth of clean-tech markets. To achieve this target, the CID seeks to create a business case for scaling up clean tech manufacturing capacity, while also safeguarding the competitiveness of industries that remain critical to the European economy like EIIs.

The Commission has also launched a series of initiatives and sectoral dialogues on competitiveness and economic security that bring together industry, social partners and other stakeholders. Two prominent examples are the Strategic Dialogues on the future of the automotive sector and on the steel industry, each of which was accompanied by an action plan to tackle long-standing structural challenges faced by these industries. Particularly, the rise of Chinese champions, underpinned by patient industrial policies, has given rise to f concern for many European companies, particularly in light of the widening of Chinese overcapacity. The growing availability of cheap Chinese products has eroded European market share, particularly in steel, and discourages green investment. These dynamics unfold in an international environment marked by growing trade fragmentation, great power rivalry, and a renewed reliance on tariffs and protectionist measures as tools to achieve economic security, particularly embraced by the United States under the Trump Administration. However, embracing the protectionist wave may slow down European decarbonization. The EU needs to carefully design its trade policy and tools to strike a balance between decarbonization, economic security and industrial competitiveness as outlined in the Draghi report, in particular with regard to tariffs and imports on solar panels and electric vehicles.

 

In this challenging scenario, high energy prices remain a core concern for EU policymakers and industry, even though prices have eased somewhat in 2024 and 2025. In response, the Commission issued the Action Plan for Affordable Energy alongside the CID, setting out eight measures to lower supply costs. The Plan identifies the high dependence on imported fossil fuels, coupled with incomplete integration of the power system, as the main issue for Europe’s energy affordability. Therefore, the Commission treats clean energy as instrumental for both economic and energy security and the Plan promotes the adoption of long-term contracts for green energy, such as power purchase agreements, to favor green energy and reduce exposure to price volatility. 

 

 

Political resistance to decarbonization

However, the EU decarbonization pathway faces growing political headwinds. Shifts in the political environment both at domestic and international level have triggered calls to revisit climate targets, regulations and timelines. Indeed, political opposition towards EU climate policies has gained traction at the national level, blaming climate regulations for job and competitiveness losses. Despite these pressures, the EU has agreed on the 2040 climate targets, aiming at a 90 percent reduction of GHG by 2040 by amending the European Climate Law.

To overcome opposition, decarbonization must clearly deliver economic and industrial benefits. The EU aims to seize market share in expanding clean tech markets, which are expected to triple in size to more than $2 trillion by 2035 according to the International Energy Agency. Turning the CID into reality will require massive investments to build a business case both for clean technology deployment and for decarbonizing EIIs. Yet, CID-related investment remains insufficient and risks to be overlooked at a time of multiple fiscal needs and competition with other strategic sectors, notably defense.
Additionally, debates on the scale and origin of funding instruments to achieve CID goals inflame the never-ending debate among frugal and expansive Member States—especially regarding the possibility of creating joint European mechanisms. The Commission’s proposed the Competitiveness Fund and €100 billion Industrial Decarbonisation Bank, included in its proposal for the next EU budget, would boost investment, but it seems to be too little to address its ambitious objectives.

The EU needs an industrial policy that envisages the creation and allocation of funds to strategic sectors and in technologies where the EU holds or can build a comparative advantage. A major step in this direction was taken with the Clean Industry State Aid Framework (CISAF), which revises the State aid rules. Under the CISAF, national governments can more easily channel financial support to offset energy costs for energy-intensive users, to back industrial decarbonization and clean tech manufacturing. Nonetheless, this approach carries risks: it may cause a subsidy race among Member states, which could lead to market fragmentation given the stark differences in fiscal space across countries. 

 

 

 

Measures to support low-carbon demand 

Alongside supply-side measures, the EU must ensure demand for clean technologies and low-carbon products, such as green steel. Current efforts focus on the creation of lead markets using public procurement, which amounts to around 14 percent of EU GDP, as a lever for low-carbon demand. Given harsh global competition, the EU is also considering ensuring that this demand is satisfied by EU production through the use of “Made in Europe” criteria as affirmed by President von der Leyen in her 2025 State of the Union address. Yet, the EU must balance support for domestic producers with its broader goals for energy and with economic fundamentals and realities, avoiding unnecessary protectionism. An excessively protectionist approach would be counterproductive given its current energy and economic challenges, potentially leading to higher costs. Indeed, green energy in the EU presents persistent constraints on renewable potential and limited electricity interconnections. At the same time, importing green energy—whether electricity or hydrogen—is more expensive than fossil fuels, partially undermining the continuation of the previous trade framework characterized by imports of raw materials.

These constraints underscore the need for a renewed green industrial diplomacy that fosters cross-border green value chains with partner countries endowed with abundant, low-cost renewable energy. T he Commission has announced a new external instrument as part of the CID, known as Clean Trade and Investment Partnerships, or CTIPs.
CTIPs are designed to contribute to achieve the goals set by the CID in an open and fair way, strengthening EU climate diplomacy. Supporting local industrial clusters abroad would be particularly important for contributing and supporting several countries in the Global South in achieving their socioeconomic objectives and, at the same time, accelerating global decarbonization. The first CTIP was signed between the EU and South Africa during the G20 summit in Johannesburg. Yet, the Commission must further design and operationalize CTIPs , including defining clear governance and coordination frameworks among national and European initiatives to avoid overlap or conflict with existing external initiatives.

The EU has increasingly embraced decarbonization as both an industrial and economic strategy, marking an important turning point in its policy approach. Yet the effectiveness of recent initiatives—at both the domestic and international level—will ultimately depend on whether they can be implemented at a scale and speed that delivers on the dual objectives of competitiveness and deep decarbonization.