The Net Zero Transition in Manufacturing: Regulatory Stringency, Competitiveness, and the EU Climate Club

The EU is committed to achieving climate neutrality by 2050. We assess progress towards this goal in the manufacturing sector and highlight remaining challenges. Between 1990 and 2023, industrial emissions in the EU-27 decreased substantially, but at markedly different rates across countries. Using a general equilibrium framework, we construct a measure of climate policy stringency based on sectoral emissions and output. We show that stringency evolved unevenly, reflecting differences in initial emission intensity. A disproportionate share of emission reductions were achieved by convergence of initially high-emission producers—particularly countries joining the EU in the 2000s—towards the frontier. Improvements among initially cleaner producers have been more modest, suggesting that further progress towards net zero will require a different margin of adjustment. These patterns suggest that the EU shares important characteristics with a successful climate club, where market access is associated with regulatory convergence and substantial emission reductions. We show that these reductions did not coincide with a systematic decline in manufacturing activity or revealed comparative advantage. One reason may be that the EU had limited comparative advantage in emissions-intensive sectors to begin with. Looking ahead, we provide evidence that supply chain considerations may constrain more stringent climate policies, and discuss the potential role of instruments such as the Carbon Border Adjustment Mechanism.

von Graevenitz, Kathrine und Elisa Rottner (forthcoming), The Net Zero Transition in Manufacturing: Regulatory Stringency, Competitiveness, and the EU Climate Club, Oxford Review of Economic Policy