Improving Competitiveness or Meeting Climate Targets: The Draghi Dilemma

Why It Matters

The study reveals that blunt industrial subsidies risk undermining the EU ETS’s emissions trajectory, forcing policymakers to reconcile competitiveness with climate commitments. Ignoring these interactions could lock in higher carbon emissions while Europe seeks to retain global market share.

Key Takeaways

• EU coalition proposes €5 bn/year ($5.5 bn) industry subsidies.
• Cost‑lowering subsidies boost competitiveness but raise EU emissions.
• Only clean‑tech subsidies cut emissions and meet climate goals.
• Market Stability Reserve reduces allowance cancellations, offsetting climate benefits.
• Global emissions may fall if EU replaces dirtier foreign production.

Pulse Analysis

European leaders are confronting a classic policy dilemma: how to keep heavy‑industry firms competitive while honoring increasingly ambitious climate goals. Former ECB chief Mario Draghi has called for a coordinated subsidy package of roughly €5 billion annually—about $5.5 billion—to lower production costs for energy‑intensive sectors in the Netherlands, Germany and France. The proposal reflects growing geopolitical pressure to prevent capital flight and preserve technological leadership, but it also raises questions about the interaction with the EU Emissions Trading System (ETS) and its Market Stability Reserve (MSR).

A joint CPB‑PBL study applied the GREENR global‑equilibrium model to simulate five years of support. Results show that subsidies that directly cut energy costs—whether for fossil fuels or electricity—significantly raise output and improve firms' global market position. However, these measures increase demand for ETS allowances, prompting the MSR to retain more permits and ultimately raising cumulative emissions through 2040. By contrast, subsidies aimed at clean‑technology adoption modestly improve competitiveness but deliver clear emissions reductions, as they lower the need for additional allowances. The model also notes a crowd‑out effect: higher EU output displaces production in non‑EU regions, which can modestly lower global emissions if the displaced output is carbon‑intensive.

Policymakers must therefore design a nuanced package that pairs cost‑reduction tools with targeted abatement incentives. A hybrid approach—lowering electricity prices while funding carbon‑capture or renewable upgrades—could sustain industrial competitiveness without derailing the ETS’s decarbonisation pathway. The study warns that expanding the subsidy coalition beyond the three core countries would amplify both the competitiveness gains and the emissions risk, underscoring the urgency of ETS reform that accounts for overlapping national measures. Aligning industrial policy with climate objectives will be critical for Europe to retain market share and meet its 2040 net‑zero ambition.