Why Europe’s Green Deal Still Matters
March 24, 2020
Before the coronavirus crisis upended every government’s priorities, the European Commission was focused on implementing its signature initiative, the European Green Deal. Now, with an economic crisis looming, the European Commission, the European Central Bank and governments across Europe have naturally turned their gaze to crisis management. But the European Green Deal is not going away, despite some calls to that effect and even if initiatives might slip as priorities get reshuffled. Sooner or later, Europe’s attention will turn to putting together a more durable fiscal stimulus, and the European Green Deal is as good a guide as any about where Europe’s leaders see their economies as needing to go. Understanding the European Green Deal is as important as well.
The European Green Deal is revolutionary in concept but deeply familiar in its details. It is, at the same time, an attempt to run a modern economy on net-zero greenhouse gas emissions by 2050. But it is operationalized through a very long list of recognizable goals: pushing energy efficiency, incentivizing modal shift for passengers and freight, introducing ever-stricter rules for the pollution that users are allowed to emit, implementing carbon pricing across all sectors, giving money for research and development, and supporting new fuels and new technologies. Yet alongside the familiar are a few big bets that, if successful, will reshape not just Europe’s fight against climate change but the world’s fight as well. Six such bets stand out.
Making This a Just Transition
The European Union will establish a “Just Transition Fund” because the energy transition “must put people first, and pay attention to the regions, industries and workers who will face the greatest challenges.” What this means in practice is unknown. A cynic might see this fund as engineered to secure political support from countries that are least enthusiastic about the energy transition (which it is). There is a substantial risk that lots of money will be pumped into places to create jobs that are inorganic and that money will be wasted to support uncompetitive ecosystems. This is especially true if there is undue focus on replacing current energy jobs with clean energy jobs rather than investing in whatever industries make sense for each region. And there is a fair amount of repurposed money or co-financing from national governments or the private sector, which means there is less firepower devoted to the task than first meets the eye.
Yet the underlying problem is real. Any scenario that gets us to net zero by 2050 requires that we stop doing things that are economically productive—in the United States, China, India, the Middle East, and all over the world. It requires we close coal mines and power plants before the end of their economic lives, leave oil and gas in the ground that could be profitably extracted, and shutter factories making carbon-intensive goods. The energy transition brings opportunity but also significant dislocation for people, communities, and capital, and they all need to see a pathway to life in a low-carbon world. Europe can show in the next few years that the energy transition can be fair for those who supply us with carbon-intensive energy. The demonstration effect of doing so will be powerful, and the lessons will be applicable for so many places around the globe.
Industrial Policy for Green Growth
The European Green Deal is unashamedly framed as an industrial strategy, whose aim “will be to stimulate the development of lead markets for climate neutral and circular products, in the EU and beyond.” Of course, green jobs are the holy grail of the energy transition, and Europe is hardly alone in wanting to seize the opportunities created by a transition to a low-carbon economy. Several European countries are already leaders in the industrial economy of the future, especially in wind energy. And much of what the European Commission is proposing is familiar: better harmonization of rules, enlarging markets, strong intellectual property protections, and support for labor, social, and environmental standards.
But Europe offers the potential for a midpoint between a limited industrial strategy that forgoes opportunities in order to avoid costs (the U.S. approach) and an expansive industrial strategy that achieves goals but with much waste (the Chinese approach). Europe will review state aid guidelines to allow countries to offer support to help develop new value chains. Again, this approach is not new—Tesla’s Gigafactory in Nevada, to pick one example, was enabled by generous incentives. But Europe might provide relief from a race to the bottom where localities offer ever more incentives to locate value chains in their jurisdictions (it is ironic that Europe, which is less federal than the United States, has more tools and appetite to intervene in this matter than Washington). If Europe can find a balance for thinking about how much state aid is enough to support new value chains, those lessons (and rules) might spread around the world.
A Climate Bank
The European Union plans to turn the European Investment Bank (EIB) into a “climate bank,” which means the EIB “will gradually increase the share of its financing dedicated to climate action and environmental sustainability to reach 50% of its operations in 2025.” In narrow terms, this is nothing new. The world has pledged a lot of money to fight climate change and has been developing climate-related funds for years. But no one has, to date, taken an institution of the scale and size of the EIB and repurposed it to combat climate change in such a visible way, where climate action is a core part of the institution’s mandate.
The infusion of cash to combat climate change will be just one benefit of this shift. The most significant impact could be the creation of a deeper pipeline of projects that are competing for funds. Increasing the supply of money is not enough—we need good projects that are seeking finance. Making climate action a core part of the EIB’s mission might help create a deeper pipeline of eligible projects, as investors see a huge pot of money waiting to be tapped, although a healthy pipeline has been a perennial problem for green investment. If the EIB is successful in demonstrating that such an institutional transition can happen, the ripple effects could be enormous—imagine the Export-Import Bank of the United States, or of China, embracing similar climate mandates. The impact on the energy transition would be enormous.
Trade for a Low-carbon World
One of the most visible, and most talked about, elements of the European Green Deal is the proposal for “a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage [to] ensure that the price of imports reflect more accurately their carbon content.” How this idea will work in practice remains to be seen—calculating with some confidence the carbon context of goods from all over the world might be prove logistically difficult, and it is not clear that such a mechanism will follow the rules of the World Trade Organization (WTO). In the end, the measure might apply to only a few sectors, aimed to solve a problem (carbon leakage) that many researchers doubt is very important.
At the same time, the carbon border adjustment conversation has raised two prospects. The first is the opportunity to force countries to adopt a certain amount of climate ambition if they are to continue trading freely with the European Union. Whether the European Union becomes a low-carbon island on its own or whether it becomes the center of an ever-expanding nexus of low-carbon states remains to be seen—in other words, whether the European Union succeeds in spreading its ambition or becomes isolated by it. But trade policy (and penalties) is one certain way to get the attention of even the most recalcitrant of states.
The second prospect is the opportunity to align the world’s trading system with the need to transition to a low-carbon world. So far, much of the conversation around a carbon border adjustment is focused on whether it can be WTO-compliant. This is a good question but one that could easily be turned around. Rather than asking how the carbon content of goods can comply with WTO rules, we should be asking how the WTO should be reformed to make the energy transition more likely. It is the WTO that needs to change to make way for climate action, not climate action that should be constrained by rules created at a different time. Europe’s Green Deal will supercharge that essential reckoning.
Rules for a Low-carbon World
By now, it is clear that European Union can set rules that everyone must pay attention to, even if it has yet to affect how other countries set their own rules (as they did in data privacy, for example). The Green Deal has many elements that, in sum, might amount to the same thing in the push to a low-carbon world. The European Commission is adamant that “The EU must leverage the impact, the size and the integration of its single market to set global standards.” The carbon border adjustment mechanism will, if nothing else, accelerate the conversation on setting up rules and methodologies for measuring the carbon-intensity of goods. One idea explored in the Green Deal is to establish “an electronic product passport [to] provide information on a product’s origin, composition, repair and dismantling possibilities, and end of life handling.” Another prospect is that people might have a “right to repair,” which would “encourage businesses to offer, and to allow consumers to choose, reusable, durable and repairable products” and expedite the arrival of a “circular economy” (more on that below). None of these is transformational on its own, but together these policies show what it would be like to take the carbon content of products seriously in designing policy, and that, too, can be an idea that spreads.
Building a Circular Economy
The idea of the “circular economy” is deeply interwoven into the European Green Deal. The multi-layered approach might include a “‘sustainable products’ policy to support the circular design of all products based on a common methodology and principles. It will prioritise reducing and reusing materials before recycling them. It will foster new business models and set minimum requirements to prevent environmentally harmful products from being placed on the EU market.” Or, put more succinctly, “We need to revolutionise the way we design, make, use and get rid of things by incentivising our industry.”
Once again, Europe is hardly alone in wanting a circular economy. But two things stand out: the approach and the ambition. Europe will use rules, not nudges, to foster circularity. For example, the European Commission notes that it “will develop requirements to ensure that all packaging in the EU market is reusable or recyclable in an economically viable manner by 2030.” These kinds of rules can ripple through the world.
Second, there is a holistic approach toward climate action that is so often absent from decarbonization strategies. All countries have ideas to encourage “nature-based solutions” or to reduce waste. But the typical approach envisions a technology-driven pathway to net-zero, where a combination of low-carbon energy sources and some kind of negative emissions does the trick. The European Green Deal is not that—it is an effort to fully reconceptualize what a modern economy might look like, not just find patches that reduce the carbon footprint of any one source or product. That framing, and ambition, is probably what sets the European Green Deal apart from anything else any other country in the world is trying to accomplish today—and why the success or failure of the European Green Deal will affect everyone.
Nikos Tsafos is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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