The European Green Deal: will the ends, will the means?

The European Green Deal needs sustained political commitment, especially on ‘just transition’, if it is to realise its ambition.

The European Union is under new leadership. The most important programmatic change is the central role accorded by the new European Commission to climate protection. On December 11th, days after taking up her responsibilities, its president, Ursula von der Leyen, announced a roadmap for key strategies and measures constituting a European Green Deal (EGD). This was endorsed by the European Council the following day, although Poland has a reservation regarding national transposition.

The commission proposes to tighten the EU greenhouse-gas emission-reduction target for 2030 from 40 per cent to 50-55 per cent, compared with 1990. While a substantial improvement, the 5 percentage-point margin is a sign of the difficulties in reaching political consensus, and in any case environmental NGOs such as Greenpeace consider 65 per cent necessary to meet the commitments stemming from the 2015 Paris agreement. The goal of achieving climate neutrality by 2050 is to be given legal force, which would open up the possibility of legal action against EU institutions or member states in the case of insufficient efforts, as prefigured in the Netherlands.

Carbon pricing

The flagship EU climate policy is the emissions trading system (ETS), founded in 2005 and the largest cap-and-trade system in the world. Although CO2 prices have at times been very low and volatile, by the end of 2020 the emissions covered by the scheme should have been reduced by 21 per cent compared with 2005. But the ETS only covers about 45 per cent of European greenhouse-gas emissions, in particular (heavy) industry, energy production and intra-European air traffic.

Emissions in sectors outside the ETS—such as other transport, households and agriculture—are rising. Alongside the already-determined faster annual cuts of 2.2 per cent in the volume of certificates issued, under the EGD the commission has committed to extend the scheme to the maritime sector and airlines, although it has shied away from a promise to incorporate road transport, a substantial and growing source of emissions.

Some ETS permits are allocated free of charge, in particular to heavy industry to protect against foreign competition—nothing is gained for the climate globally when CO2 pricing drives energy-intensive production outside the EU (‘carbon leakage’). Much more effective, though, would be to impose a border adjustment levy on the carbon content of imports into the EU (provided the manufacturers do not pay comparable tax in the country of origin).

Within the framework of the EGD, the commission will propose a levy for selected sectors. Not only would this remove the justification for the allocation of free allowances; it would provide a strong incentive for other countries to follow the EU’s carbon-pricing lead.

The implementation is however technically complex. If the levy is directly linked to the ETS the volatility of the CO2 price makes it difficult to set its level. In any case the legitimate interests of trading partners, and the principles of non-discrimination in international trade, must be respected. The commission says its proposal will comply with World Trade Organization rules, but it is likely to face challenges from trading partners and the area is uncharted territory in international trade law.

Climate-friendly investment

Carbon pricing will foster climate-friendly investment by the private sector but the investment gap if climate goals are to be reached is huge: the commission estimates it at €260 billion (around 1.5 per cent of 2018 gross domestic product) annually until 2030, not including mitigating the social costs of transition. Public-sector involvement will be critical.

The European Investment Bank, the largest multilateral donor in the world, is to play a key role in the EGD. It has already ended the funding of coal projects and announced that all projects related to fossil fuels are to be phased out by the end of 2021, reaching a compromise on the thorny issue of gas-power generation (which some see as a necessary bridging technology). The EIB plans to double the share of climate-motivated funding and in 2021-30 to mobilise climate-friendly investments amounting to €1 trillion.

In addition, the European Fund for Strategic Investment (EFSI)—the main instrument in the Investment Plan for Europe, often called the Juncker plan, launched in 2015—is to focus more on climate goals. Already in the second EFSI phase (mid-2018 to end 2020) at least 40 per cent of supported infrastructure and innovation projects are supposed to target climate protection. The same principle as in the EFSI—the EU provides a first-loss guarantee, enabling the EIB to fund riskier investments—will underpin a new programme for 2021-27 called InvestEU. With a volume of €38 billion, a total investment of up to €650 billion could be triggered. 

The EU budget, which runs from 2021 to 2027, is being negotiated. Especially against the background of the loss of the UK as a net contributor, a significant increase overall, in keeping with the programmatic ambition of the EGD, is highly unlikely. The commission proposes new EU ‘own resources’ from, inter alia, a plastic packaging tax and part of the revenue from the auction of ETS certificates, but this will not by itself increase the scope for spending: higher own resources would merely reduce member states’ budget contributions.

The task is thus one of reprioritisation. The commission envisages that 25 per cent of all programme expenditure in the budget will target climate change. And the scope for reallocation is greater than often thought.

A disproportionate part of the budget is devoted to agriculture, whose contribution to climate change is increasingly well-documented—changes to funding within the Common Agricultural Policy could therefore have a significant impact. But it will not be easy to find the political majorities, as recent farmers’ protests against environmental regulations in the Netherlands and Germany show.

The regional and structural funds distribute considerable resources across the EU, in particular to underdeveloped or high-unemployment areas. Much could be done to achieve a socially just transition if this support were distributed to assist adaptation in struggling regions; disfavoured regions often lack resources for co-finance or planning and implementation. Last but not least, the proposed new budget framework will expand the EU research-funding programme ‘Horizon Europe’ to €100 billion, with at least 35 per cent devoted to climate-protection solutions.  

Additionally, a specific Just Transition Fund is envisaged under the EGD. It will have a budget of €100 billion to cushion the burden of adjustments to achieve the emissions-reduction goals.

Framework for member states

Alongside these measures at EU level, regulatory changes are proposed under the EGD to facilitate actions by member states. The commission will propose a revision of the 2003 Energy Tax Directive, which sets the framework for national taxation of energy products—in particular with a view to addressing the exemptions for aviation and marine fuels. At the same time, if the Council of the EU approves a draft directive on national VAT rates, member states would more easily be able to apply reduced rates as an instrument for climate protection. 

In December the European Parliament, the council and the commission agreed in principle a so-called taxonomy of ‘green’ investments, which will form an important regulatory building-block of the EGD. Such EU-wide setting of standards is important so that the buyers of financial products can make informed decisions (preventing ‘greenwashing’) and banking regulation offers privileged status to green investments and related financial products. Concretising the proposal is likely to be politically controversial—as the debate on the inclusion of nuclear energy and gas, which France and Germany have respectively sought, illustrates.  

As expenditure by national governments on climate protection constitutes a key investment for the future, there would be good reasons to finance it via borrowing. Encouragingly, the commission has announced that it intends, in its review of economic governance, to consider separate treatment of environmental investments under the fiscal rules.

The corresponding formulation is very vague, however, and the proposal is likely to lead to controversial discussions in the council. As long as no progress is made, an important gap in the EGD will continue to exist, as the scope for climate-policy public investment at national level will remain constricted.

Broad and ambitious agenda

The new commission’s roadmap sets ambitious goals and contains promising, interlocking approaches to reducing European greenhouse-gas emissions. It blends EU initiatives with framework-setting for national policies. Some projects however remain vague and it must be doubted whether the council—despite the general political and economic agreement—will support all proposals when they become concrete. Poland can be expected to sign up if appropriate allowances are made to facilitate the restructuring of its coal-dependent economy.

The envisaged plans for carbon pricing remain too limited. Member states will need to go further with additional national measures, such as carbon taxes, as Germany is now doing. If implemented successfully, a border levy addressing carbon leakage could be a game-changer, within Europe but also beyond. Some of the headline figures, notably the €1 trillion investment supposedly generated by EIB seed money, need to be assessed with caution, as there is always uncertainty about deadweight effects.

In relation to annual EU GDP of around €15 trillion and the enormous costs climate-change measures will impose on households especially, the Just Transition Fund of €100 billion, stretched over several years, seems inadequate. An additional possibility would be to extend the remit of the European Globalisation Adjustment Fund, enabling employees also to benefit if their jobs are negatively affected by climate-related structural change. Addressing the fears of such potential losers—and of higher energy prices—through offsetting measures, in particular to create high-quality, well-paid jobs, is crucial to the political success of the European Green Deal.