Faced with global competition from countries with cheap renewable energy, the EU should embrace a partial deindustrialisation rather than subsidise uncompetitive industries, according to a new report from the Potsdam Institute for Climate Impact Research published on Wednesday (24 April).

Deindustrialisation and economic competitiveness are key talking points as the EU heads towards elections on 6-9 June. Things can unravel fast: When the energy crisis hit in 2022, European ammonia production, a step in fertiliser manufacturing, dropped by 70% and remained low in 2023.

But while EU politicians want to maintain existing domestic supply chains and nurse new green value ones in the face of international competition, researchers warn against creating industries that depend on subsidies to survive.

Instead, Europe should “absolutely embrace deindustrialisation or at least consider it”, said Falcko Ueckerdt, a senior scientist at the Berlin-based Potsdam Institute for Climate Impact Research (PIK), who co-authored a paper on global clean industry perspectives in Nature Energy.

He said it is inevitable. The paper found that in some countries, where a mix of wind and solar energy performs optimally, power prices will consistently be €40 per MWh cheaper than in Europe – making some green industrial processes up to 37% cheaper. A likely insurmountable barrier.

European governments today, Berlin at the forefront, are subsidising the transformation of industrial processes. Steelmakers can switch to hydrogen, paper mills can purchase large heat pumps, and cement plants can capture their unavoidable CO2 – all made possible by generous government grants.

Only to find out in the 2030s “that they are not competitive due to pressure from global markets” because green commodities can be produced more cheaply elsewhere, warned Ueckerdt.

“Then, having spent billions of Euros, you either maintain the subsidies or let these industries slowly fall apart,” he added.

With budgets tight “after multiple crises” that battered the EU, the German expert said there remains another option: “embracing imports.”

By moving all steel production steps – from iron ore reduction to steelmaking – abroad to optimal locations, it could become 18% cheaper than when all steps are retained in Europe, the paper said.

The cost of urea, a chemical fertiliser, would drop 32%, while ethylene, a chemical with multiple industrial applications, could come in 38% cheaper.

Production of these commodities abroad would be cheaper for two reasons.

Firstly transporting finished goods costs less than transporting energy – particularly hydrogen transport, which is largely untested and expected to be costly.

Secondly, some countries have wind and solar resources that will allow the production of unprecedentedly cheap energy.

“Australia has good potential,” said Philipp Verpoort, a postdoc who led the study, because “it is a developed country which keeps financing costs low” and its “existing iron ore industry” positions it to serve global green steel demand.

The “same is also true for Brazil and South Africa,” he added, but while these countries have iron ore industries, their relative political-economic instability means that “they might face some development issues”.

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