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Sustainability in product (pre-)development

PART I
This article is part of a series of articles on sustainability in the lifecycle of a product

 

The beginning of life: product (pre-)development

The EU has the ambition of transitioning to a truly sustainable economy and becoming carbon neutral by 2050. Starting with the publication of the European Green Deal in 2019, the EU is adopting environmental, climate and energy legislation with a wide-ranging scope, which will impact European and international companies’ entire chain of activities, both in terms of risks and opportunities. In a series of articles, Dr2 Consultants will analyze the impact of EU policies on four key areas of companies’ operations: the product (pre-)development, the introduction to market, the end-of-life, and strategy and reporting. In this first part, we will dive into sustainability in product (pre-)development (conception, design, sourcing and production).

Designing sustainable products

One of the key building blocks of the European Green Deal is the Circular Economy Action Plan (CEAP), adopted in March 2020. The CEAP aims at reducing the pressure on natural resources by making sustainable products the norm, reducing waste and developing new low-emissions technologies and services. The key to ensuring circularity of the economy is to have products that are meant to be durable, reusable, repairable and recyclable. To that end, the European Commission presented on 30 March a proposal on the Ecodesign for Sustainable Products Regulation (ESPR), previously called the Sustainable Products Initiative.

The ESPR will be key for delivering on the ambitions of the Green Deal and ensuring that all products put on the EU market are sustainable. The regulation extends the existing Ecodesign Directive, which sets certain design requirements for the sustainability of energy-related products (e.g. washing machines) to all physical goods (except from feed, food and medicines). Under the ESPR, ecodesign requirements will be set for specific product groups to improve their circularity, energy performance and information provided to consumers.

Categories of products will be targeted in several waves, with the first workplan to be defined at the end of the year. The European Commission will open public consultations to determine which categories should first be addressed, but on the long-term, all products are planned to be included in the scope. The Commission has already announced it considers textiles, furniture, mattresses, tires, detergents, paints, lubricants, as well as intermediate products like iron, steel and aluminum to have high environmental impact and strong potential for improvement and may thus be suitable candidates for the first workplan of ESPR.

Sustainability requirements laid out by the ESPR will need to be taken into account in the entire product (pre-)development phase: from the moment the concept of the product is developed, and then during the product’s design phase. Indeed, they include performance requirements for products such as durability, reusability, recyclability and repairability of the product, but will also prohibit use of substances that inhibit circularity as well as set some minimum targets for inclusion of recycled content.  

Making companies accountable

The ESPR also plans for the sustainability and environmental footprint of products to be monitored and accounted for in a newly created Digital Product Passport (DPP), which will also include information on the traceability and durability of the product. The DPP will make technical data about the product’s environmental impact and overall sustainability public and easily available to consumers. This will enable businesses and consumers to make informed choices about the products they use, as well as to be more aware of the hazardousness of the chemicals contained in the products, to which the regulation also draws special attention.

Therefore, the sustainability of products needs to be considered in the product (pre-)development phase not only from a regulatory perspective, but also to gain an advantage compared to competitors. Indeed, studies have found that that EU citizens place the environment and climate change among the most important issues their countries and themselves face. As such, the attention paid by consumers to the environmental impact of their purchases is increasing.

Promoting sustainable sourcing and due diligence

The sourcing of materials used to make the product is also increasingly being regulated at EU level, with the aim to drive more sustainability in the second phase of product (pre-)development. First and foremost, the Commission aims at addressing the high environmental impact of imported raw materials associated with deforestation and forest degradation, such as soy, beef, palm oil, wood, cocoa, coffee, but also leather and furniture, through the Deforestation-Free Imports Regulation. The Regulation will introduce mandatory due diligence rules for companies placing such commodities on the EU market, which would need to track geographically the origin of the commodity and be able to show proof that is does not originate from areas subject to deforestation. The European Parliament ambitions to go even further, with Members of European Parliament suggesting to also include raw materials such as rubber, gold and iron, or wooden furniture in the scope.

This comes in the context of a larger ambition from the Commission to increase corporate responsibility over the environmental and social impact of their activities. As such, the Commission proposed to introduce due diligence requirements in the Corporate Sustainability Due Diligence Directive, presented on 23 February 2022. Under the new rules, companies will be required to look for, identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights or the environment, for example pollution and biodiversity loss.

These new due diligence requirements will drive more sustainability in the (pre-)development of a product, as they will apply to companies’ entire supply chains, including procurement and sourcing. Companies will need to ensure that their activities but also their suppliers’ do not have negative social or environmental impacts.

Global trends for responsible production

Internationally the United Nation’s Sustainable Development Goals (SDGs) of 2015, also known as the 2030 Agenda for Sustainable Development, contain a universal call to action to end poverty, protect the planet and ensure that by 2030 all people enjoy peace and prosperity. While the SDGs provide a non-binding framework, nation-states and supra-national organizations, such as the EU, use it as basis for developing binding policies. Conversely, the EU also played a major role in developing the seventeen goals, each of which are integrated in EU policies, recognizing that action in one area will affect outcomes in others and that development must balance social, economic and environmental sustainability.

The goals of “Responsible consumption and production”, “Climate action”, “Industry, innovation and infrastructure” and “Partnerships for goals” create a framework that companies can use as basis to establish long-term, ambitious sustainability strategic goals when it comes sustainable production.

Reducing CO2 emissions in production processes

The production process itself will be impacted by a series of more stringent environmental rules presented in July 2021 as part of the Fit for 55 package, another key building block of the European Green Deal. Companies will have interest in increasing the share of renewable energy in their energy mix as the revision of the Energy Taxation Directive will increase taxation rates on fossil fuels while ensuring an advantageous rate for renewables and low-carbon fuels. For industries falling under the scope of the EU Emission Trading System, reducing their emissions is even more important as the number of carbon allowances delivered yearly within this carbon market are bound to decrease, in turn leading to an increase in carbon price.

Member States will also have to take action to reach their new, increased, emissions reduction targets under the Energy Efficiency Directive, leading to measures that will disfavor energy-intensive practices. This could however also make it easier for companies to reach their sustainability goals as Member States will support making available energy-efficient technologies and solutions and promote the use of renewables. Other opportunities in support of sustainability goals as regards the production process can also be found in the revision of the Renewable Energy Directive, which aims to make providing renewable energy easier for energy operators, and therefore cheaper for consumers.

Companies will therefore have to look at the environmental impact of their production activities to evaluate the extent of the impact of new EU energy and climate legislation. On this basis, companies will need to evaluate whether their activities will need adaptation. However, for companies looking to enhance the sustainability of their production processes, many opportunities will arise from these new legislations.

Conclusion

The new European environmental rules will have strong implications on future products, driving more sustainability in their (pre-)development, from the earliest phases of their conception and production. New legislation is setting a trend for more sustainable design, choice of materials, sourcing as well as for production processes that are environmentally friendly and respectful of human rights.

Next to the design, conception and production of the product, EU legislation is also aiming at making the activities related to introducing a product on the market more sustainable, notably by reducing the environmental impact of logistical activities and of packaging. Dr2 Consultants will analyze this legislation in our next article of the “Sustainability in the lifecycle of a product” series.

Curious about how EU environmental legislation applies to your company’s activities? Dr2 Consultants’ European Green Deal Impact Scan provides you with a comprehensive overview of how EU legislation will affect your business, identifying the opportunities and challenges and highlighting moments to positively influence the policies and legislation or compare the EU policy perspective to your company’s strategic goals. Want to know more? Don’t hesitate to contact us!

Fit for 55 developments in 2021 – the launch year in review

As 2021 is coming to an end, Dr2 Consultants is providing a retrospective of the key Fit for 55 developments and highlights in 2021, and a preview of what to expect in 2022. For a more detailed analysis, please read our policy updates, published regularly since the publication of the package.

With the presentation of the Fit for 55 package on 14 July 2021, the EU took on a role as a frontrunner in the field of climate change with impactful policies, paving the way to become the world’s first climate-neutral continent by 2050. With this move, the EU has encouraged other states to adopt similar plans, including China and the US. As such, the EU’s commitment to both the Paris Agreement and European Green Deal are translated into concrete legislative proposals, revising the entire EU climate and energy framework to reach the EU’s 2030 objective of reducing emissions by 55%.

Understandably, Fit for 55 dominates the policy agenda as its proposals address a wide range of policy areas, including transport, energy and international trade. Ultimately, the package will impact the life of all EU citizens and businesses, but will also have a global impact, notably through the Carbon Border Adjustment Mechanism.

14 July: publication of the Fit for 55 package

On 14 July, the Commission presented the Fit for 55 package, containing a set of legislative proposals to make the EU’s climate, energy, land use, transport and taxation policies fit for reaching the European Green Deal’s objective of reducing net greenhouse gas emissions by at least 55% by 2030. The package encompasses revisions of key legislation, including a proposal to extend the scope of the EU Emissions Trading System, increased national emissions targets under the Effort Sharing Directive, a review of renewable energy and energy efficiency targets, a new Energy Taxation Directive and more stringent CO2 emission standards for new cars and vans. Furthermore, new legislation was proposed especially to combat carbon leakage by a Carbon Border Adjustment, as well as to stimulate the fuel transition in the maritime and aviation sectors.

Mixed reviews

The presentation of the Fit for 55 package received mixed reviews from industry stakeholders and politicians, with many welcoming the ambition of the Commission but at the same time worrying about the implementation and the too high costs put on consumers. Industry stakeholders also raised the question of the availability of sufficient low-carbon energy to meet EU needs. On the other hand, actors of the energy transition, such as the electric vehicle charging industry or the wind energy industry welcomed the package.

On the European Parliamentary groups’ side, reactions also varied. The Europeans People’s Party (EPP) underlined the need for a credible social instrument in order to make sure “low-income families, middle class homeowners or car owners in rural areas without public transport” do not have to pay the highest bill. Meanwhile, the Socialists & Democrats (S&D) group welcomed the “ambitious and bold” commitments of the Commission and Renew Europe called the package “the most important legislative initiative of the decade”. The Greens, however, regretted the lack of ambition of some of the measures.

Climate organizations such as Greenpeace responded with disappointment. Greenpeace considers the 55% emissions reduction target too low, and the measures proposed not sufficient to prevent the destruction of the planet’s life-support systems. The European Environmental Bureau, the EU’s largest network of environmental organizations, called the package unfit and unfair. Friends of the Earth Europe criticized the extension of EU’s emissions trading scheme (ETS) to building and transport, fearing it will push millions of European households into energy poverty.

Fit for 55 developments in the Council and the EU Parliament in 2021

Following the publication of the package, the files were sent to the Council of the EU and the European Parliament for discussion.

Social concerns among Member States

Within the Council of the EU, Member States mostly worried about social impact of the transition, and the political unrest it could lead to, with higher transport and energy prices fuelling social movements similar to the ‘Yellow Jackets’ in France. Despite the package being accompanied by a proposal for a Social Climate Fund, especially Eastern Member States worried that it would not be sufficient to mitigate the impact of the transition for vulnerable households and businesses.

All throughout autumn, Council working parties, in charge of the technical work on legislative proposals, examined the Fit for 55 files, which were distributed among the different Council configurations, notably the Transport Council, the Environment Council and the Economic and Social Affairs (ECOFIN) Council. According to the Slovenian Council Presidency, which published a progress report on 6 December, EU Member States have been seeking clarifications from the Commission on the proposals and their impact, both at the EU and national level.

Delegations have also requested more information on the role and contribution of the individual proposals to the overall economy-wide ambition of achieving net emissions reductions of at least 55% by 2030, as well as on how the proposals interact. Discussions on certain files, especially the transport-related proposals (such as the CO2 standards for cars and vans or the ReFuelEU Aviation and FuelEU Maritime) have advanced well, some are more contentious and little progress has been made, notably on the EU Emissions Trading System or on the Effort Sharing Directive.

Challenging appointment of the key MEPs

One of the Fit for 55 developments in the European Parliament in 2021 was the appointment of the responsible Committees and MEPs that would act as rapporteurs, leading the negotiations on each file. The process of dividing the proposals between Committees went relatively smoothly, while the rapporteur appointment process was rather lengthy and difficult, with all political groups making their claims to the files with the most political weight. The process was only finalized in mid-November. The proposals were distributed among the Environment (ENVI), Transport (TRAN) and Industry, Research and Energy (ITRE) Committees. Both the European People’s Party (EPP) and Socialists & Democrats (S&D) got hold of most positions as rapporteurs, meaning they will be in the driving seat of determining the Parliaments’ position on the files.

Wrapping up 2021

To wrap up its mandate as President of the Council of the EU, which finishes on 31 December, Slovenia presented a series of progress reports, providing a state of play on the Council’s ongoing Fit for 55 work. Although discussions have advanced significantly, the Council of the EU has not been able to adopt its position on any file yet. The Environment Council will also hold a final meeting on 20 December 2021 to take stock of the progress made, the Transport and ECOFIN Councils having held their last sessions on 7 and 9 December. As of January, France will preside the Council of the EU with ambitious plans to achieve a common position on most of the files.

Another Fit for 55 development in 2021 was that, on 15 December, the European Commission presented additional Fit for 55 proposals, including an “energy, climate and nature protection” package, and the revision of the Energy Performance of Buildings Directive. The energy, climate and nature protection package will include a revision of the “third gas package”, comprised of a new Gas Regulation and a new Gas Directive, with the aim to completely overhaul the EU gas market to promote low-carbon and renewable energies instead of fossil gas. It also includes a proposal on Sustainable Carbon Cycles to upscale carbon recycling and removal solutions, especially focusing on carbon farming and industrial carbon capture, and legislation to reduce methane emissions from oil and gas exploration and production sector.

What to expect in 2022

As of 1 January 2022, France will assume the Council of the EU Presidency until July 2022. On 9 December, Emmanuel Macron presented the Presidency’s priorities, which include advancing negotiations on Fit for 55 files and moving ahead as quickly as possible. The Presidency will work to ensure both the availability of sufficient investments and innovations for the transition as well as sufficient support for industries and households in the transition. The Presidency will focus specifically on the conclusion of Council negotiations on the Carbon Border Adjustment Mechanism.

The European Parliament gathered in Strasbourg from 13 to 16 December for the last Plenary session of the year, after which the institution went into recess for the Christmas break, returning to work on 3 January 2022. In 2022, now that all Committees and rapporteurs have been appointed, proposals will be discussed in Committees and rapporteurs will start drafting their reports. Difficult discussions are already foreseen, with an opposition between Greens MEPs wanting more environmental ambition and EPP or Renew Europe MEPs worrying about the social aspects of certain proposals. Less contentious files, such as the Alternative Fuels Infrastructure Regulation or FuelEU Maritime, are nonetheless expected to be voted on between spring and summer 2022. More controversial files such as the EU ETS, ETD and CBAM will likely take longer.

Is your business Fit for 55?

The Fit for 55 Package will shape the legislative landscape for the upcoming decade, trigger the public debate and impact businesses across the different transport modalities. The revised and updated COemission standards might radically impact your day-to-day business operations. More than ever, making your voice heard is crucial.

Fit for 55 services

Over the last years, Dr2 Consultants has built up a track record in advising a broad range of transport clients in navigating the EU ecosystem. Would you like to know more about what the ‘Fit for 55 Package’ means for your organization? Feel free to reach out to us or visit our Fit for 55 webpage. You can also sign up for our weekly Fit for 55 policy updates.

COP26 conference

COP26: Big promises, little accomplishments

For the past two weeks, all eyes have been on Glasgow, Scotland, where the 2021 United Nations Climate Change Conference (COP26) took place between 1-12 November. The two weeks of negotiations were supposed to lead to the adoption of an ambitious plan on how to limit global warming to 1.5 degrees Celsius, in alignment with the 2015 Paris Agreement. Dr2 Consultants analyses the success of the conference, which brought together 190 countries and over 30,000 delegates. 

A COP snubbed by key players 

The conference did not kick off with the best odds as China and Russia – two of the biggest emitters worldwide – were absent from the conference. Moreover, both countries had adopted their own climate strategies in parallel to the COP26 summit, but only committing to cutting net carbon emissions by 2060, and not 2050, as deemed necessary by the EU to limit climate warming to 1.5 degrees Celsius. 

Nevertheless, an unexpected agreement was announced by the US and Chinese delegations on 10 November, which showed a will from China to take the climate crisis more seriously, however, specific actions will still need to be determined.  

An array of pledges and commitments at COP26

The two weeks of the conference led to a number of voluntary climate commitments and pledges to reach the targets laid down in the Paris Agreement.   

Deforestation 

On 2 November, the Glasgow Leaders’ Declaration on Forest and Land Use was adopted, pledging over $19 billion of public and private spending to stop and reverse deforestation and land degradation by the end of 2030. Forests highly contribute to mitigating climate warming, as they absorb about 30% of COemissions. The statement was backed by major countries such as Brazil, Indonesia and the Democratic Republic of Congo, which together account for 85% of the globe’s forests. 

Methane pledge 

The US and the EU led the adoption of a pledge to drastically reduce emissions from methane, the second-largest contributor to global warming after CO2. Through the Global Methane Pledge, leaders at COP26 committed to reducing methane emissions by 30% below 2020 levels by 2030. If the 100 signatory countries comply with their commitment, it could prevent 0.2 degrees Celsius of global warming. Although significant methane emitters such as Nigeria or Pakistan have joined the pledge, the largest emitters of methane such as China, Russia and India did not. 

End of public funding for fossil fuels 

The British government promoted another pledge to stop public financing for fossil fuel projects abroad by the end of 2022. Over 30 countries, including Canada and the US, as well some development banks, such as the European Development Bank and the East African Development Bank, have joined this pledge, which commits signatories to stop using a number of financial instruments, such as loans, grants or share purchases to finance new international fossil fuel developments. 

While China, Japan and South Korea – three of the world’s biggest fossil fuel funders after Canada – did not join the pledge, France and Germany signed it last minute, under pressure from civil society and environmental activists.  

Phase out of coal power 

On 11 November, 23 countries committed to phase out coal power through the Global Coal to Clean Power Transition Statement. The agreement plans for major economies to transition away from coal for energy generation in the 2030s, and the rest of the world in the 2040s. However, countries remain free to decide themselves in which category they fall, and the deal does include major coal-reliant economies such as China, India and the US.  

Sustainable food systems 

Countries participating in COP26 recognized the need for a transition towards sustainable and climate-resilient food systems to achieve climate objectives. However, only 45 governments joined the pledge for urgent actions and investments to shift towards more sustainable farming. This led many environmental activists to denounce the fact that farming and agriculture were not thoroughly addressed in the discussions, despite being responsible for about 20% of global emissions.   

EU commitments  

The EU adopted some specific commitments of its own, notably a Just Energy Transition Partnership with South Africa. The agreement, which also includes France, Germany and the UK, aims to accelerate the decarbonization of South Africa’s economy, and especially its electricity system. Participating governments will provide financial and technological support to South Africa.  

European Commission President, Ursula von der Leyen, also signed a Memorandum of Understanding launching the EU-Catalyst Partnership, together with Bill Gates’ Breakthrough Energy Catalyst and the European Investment Bank. This partnership will mobilize up to €820 million to accelerate the deployment and commercialization of innovative climate technologies. Investments will be directed towards a portfolio of EU-based projects with high potential in four sectors: clean hydrogen, sustainable aviation fuels, direct air capture and long-duration energy storage. 

Finally, Commission Vice-President Frans Timmermans announced that the EU would contribute €100 million to the Climate Adaptation Fund, to support the environmental transition of developing countries.  

Would you like to know more about the EU’s sustainability efforts. Subscribe to our Fit for 55 policy updates. Learn more about our Fit for 55 services here.

A watered-down COP26 final agreement 

The COP26 led to the adoption of an agreement, the Glasgow Climate Pact, engaging all 190 participating countries, unlike the previously mentioned pledges, which were voluntary.  

However, to the disappointment of many, first and foremost COP26 President Alok Sharma and UN Secretary Antonio Guterres, the final agreement was considerably watered-downed compared to previous negotiating versions drafted by the COP26 Presidency. Indeed, under the pressure of India and China, a commitment on coal was made less stringent, with the final text only mentioning “phasing down” of coal instead of “phasing out”. Language on cutting out fossil fuel subsidies was also significantly watered-down.  

Analysts find that commitments under the current agreement are not sufficient to stay under 1.5 degrees Celsius of global warming, but rather put the world on track for above 2 degrees Celsius in temperature rises. 

An agreement with mixed reviews

MEP Pascal Canfin (Renew Europe, France), leader of the European Parliament’s delegation to the COP26, remained cautiously positive, stating that although a lot remains to be done, the COP26 showed that the climate crisis is taken seriously worldwide. In a swing towards the US, China and India, he nonetheless called for big emitters to adopt concrete and credible roadmaps towards net zero emissions.  

Ursula von der Leyen and Frans Timmermans issued similar statements, saying that the final agreement keeps within reach the 1.5 degrees Celsius target, although much work remains ahead.  

Other MEPs were more transparent regarding their disappointment. MEP Jyvtte Guteland (S&D, SE), Coordinator for the Socialists & Democrats in the Environment Committee, would have liked to see more cooperation among the US and China, for example in methane and the phasing out of fossil-fueled vehicles, and more ambitious commitments from other countries, especially from China to commit to stop using coal for power generation or for India to move its net zero emissions target sooner than 2070.  

All political groups in the European Parliament share the opinion that big polluters must increase their efforts to combat climate change and the EU should motivate and encourage countries to follow its ambition to achieve climate neutrality. In the light of lacking ambitions from international partners, Renew Europe highlighted the need for the Carbon Border Adjustment Mechanism, proposed in July by the European Commission.  

Photo credit: https://www.flickr.com/photos/unfccc/51677360193/ 

EU Artificial Intelligence Regulation: how will it affect the tech sector?

The European Commission presented on 21 April its Proposal for a Regulation on a European Approach for Artificial Intelligence. This EU Artificial Intelligence Regulation, a key element of the 2020 Strategy on Europe’s Digital Future, aims at creating the first-ever legal framework for artificial intelligence, fostering innovation, and maximizing the societal benefits of AI while ensuring the safety of EU citizens by guaranteeing the trustworthiness of AI systems. This article briefly presents measures included in the proposal and provides Dr2 Consultants’ analysis of the potential impact on the tech sector.

Ensuring the safety and trustworthiness of artificial intelligence systems

To ensure the safety and trustworthiness of artificial intelligence systems and applications put on the European market, the European Commission adopted a risk-based approach in its proposal. Depending on the risk posed by a system or its application, different conditions will apply.

Unacceptable risk

The proposal for an EU Artificial Intelligence Regulation lists a number of AI systems or applications that pose an unacceptable risk to the safety, livelihood and rights of people, and that are banned altogether from being commercialized in the EU. Those notably include AI systems or applications manipulating human behavior to circumvent users’ free will, but the wording used by the Commission seems vague and it is unclear how systems will be assessed to determine whether they fall into the banned category.

It also concerns AI systems or applications allowing social scoring by governments (directly targeting systems already introduced in China), and real-time biometric recognition systems used by law enforcement, unless their use is necessary in certain specific cases (such kidnapping, terrorist attack or criminal search).

EU Artificial Intelligence Regulation - Unacceptable Risk

High-Risk

One step down on the risk scale, the proposal lists artificial intelligence systems with “high-risk” use, which are systems with a variety of sensitive applications, from transport (such as self-driving vehicles), to essential private and public services (such as credit scoring) to education (e.g. exam scoring). The proposal also targets public applications of AI, especially in the fields of law enforcement, migration and border control management, and administration of justice.

High-risk systems will be allowed to be commercialized and used in the EU only after complying with conformity assessment procedures, to ensure that the systems or their application respect the EU standards. Although the proposal plans for national authorities to conduct checks to ensure that systems are compliant, the text still intends for many applications to be evaluated through self-assessment, meaning that the AI providers will assess themselves if they meet the conformity criteria set by the EU. Those criteria notably include: having in place adequate risk assessment and mitigation systems, using high quality datasets to avoid algorithmic bias, and ensuring appropriate human oversight. This flexibility is likely to be positively welcomed by the tech industry, but MEPs have already warned that they would support stricter compliance rules.

EU-Artificial-Intelligence-Regulation-High-Risk

Limited and minimal risk

Systems that do not fall under the “unacceptable” or “high-risk” categories are considered of limited or minimal risk, which covers the majority of artificial intelligence systems widely used in the EU at the moment. AI systems of limited risk will need to respect transparency obligations, meaning that users must be informed that they are interacting with an AI system. Systems posing minimal risks, such as spam filters or AI-enabled video games, can be commercialized and used freely.

The application of the EU Artificial Intelligence Regulation will be overseen by a newly-created body, the European Artificial Intelligence Board.

Download AI Regulation Infographic

Fostering European excellence in artificial intelligence

Next to measures to secure AI systems, the proposal also includes a few measures to promote innovation in AI in the EU. The Artificial Intelligence Regulation notably includes an update of the 2018 Coordinated Plan on AI, which sets out a series of actions to be taken by EU Member States and provides funding instruments, financed by the Digital Europe, Horizon Europe and Cohesion programmes, to accelerate investments in AI.

The proposal also targets SMEs to facilitate their access to testing and experimentation facilities as well as digital innovation hubs.

Next steps for the EU Artificial Intelligence Regulation and potential impact on the tech sector

The European Parliament and the Council of the EU, representing Member States, will now both study the proposal and adopt their respective positions, before entering into negotiations. The negotiations are likely to be stormy, considering their diverging positions. Indeed, MEPs support even stricter rules, notably promoting additional applications to fall under the banned category. On the other hand, it can be expected that Member States will adopt a position demanding more leeway on security and law enforcement applications, especially considering that national security remains a national prerogative of Member States.

As the proposal is likely to be reworded and amended during the negotiation process, the impact it will have on the tech sector is not easy to evaluate. However, if the proposal were to be accepted as is, the first impact for the tech sector would be that companies commercializing banned AI systems, or putting on the market high-risk systems that have not gone through the conformity assessment procedure, could be subject to financial penalties of 6% of the company’s total annual turnover. Considering the vague wording used by the Commission, it is difficult to understand how this law will be practically enforced.

There is also a worry from the industry side that this regulation will overburden a sector composed mainly of SMEs and start-ups, without a sufficient support framework to create balance, considering that measures included in the proposal to support innovation remain limited.

There is a strong interest of big tech companies in AI technologies and systems developed by small startups. In the past five years, big tech companies have purchased over 60 AI startups creating systems that can improve products created by the tech giants.

It remains to be seen how this new Artificial Intelligence Regulation introduced by the EU will affect the AI landscape. Will the measures to foster innovation and support SMEs lead to a multiplication of actors or will the additional regulatory burdens created by the regulation burden startups too much, leaving room only for bigger companies?

Moreover, a risk exists that, as it happened with the General Data Protection Regulation (2016), the implementation and enforcement of the European Artificial Intelligence Regulation at national level will be fragmented, leaving the industry to deal with disparities between Member States and an uncertain legal framework that would hamper the EU Single Market and the economy.

Dr2 Consultants continuously monitors the developments in the discussion on artificial intelligence and supports its clients on these matters. Should you be interested in further information on the AI Regulation and how it could impact your business, you can reach out to Dr2 Consultants at info@dr2consultants.eu or find more information on our website.