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The 4 pillars of the European Green Deal

The coronavirus pandemic has deeply shocked the entire world, showing how fragile our societies and economies are when dealing with unexpected and unprecedented crises. A sudden health crisis has rapidly turned into a global economic crisis that is completely reshaping priorities for policymakers and economic operators. However, the urgency of climate change mitigation has not disappeared from the European agenda. Indeed, it has been included as a main pillar of the Next Generation EU – the Recovery Plan for Europe.

The 4 pillars of the European Green Deal

The proposed plan of fiscal stimulus envisaged by the European Commission considers the Green Deal to be an essential tool to boost and recover the European economy. After a first commitment to reduce greenhouse gas emissions by 40% by 2030, the EU Commission will unveil in summer 2020 a plan to increase the targets for greenhouse gas emission (GhG) reductions by 2030 to between 50% and 55% compared to 1990 levels. To reach these targets and become carbon neutral by 2050,  the EU is striving to update a wide range of instruments and adopt new policies to boost the transition towards a new economic system and an energy and industrial transition through four main pillars: carbon pricing, sustainable investment, a new industrial policy and a just transition.

1. The first pillar is based on the idea that all the reform action to be carried out by the Commission must ensure effective carbon pricing throughout the economy. The EU intends to extend the European Emission Trading System (ETS) to new sectors, and make sure that taxation is aligned with climate goals. A single price for all the sectors may be economically efficient but triggers considerable distributional effects, affecting in particular poorer EU countries, which generally have higher emissions. One of the major risks is of industrial delocalization into countries with less strict carbon rules. In this sense, the Commission does intend to propose a carbon border tax (or adjust mechanism) for specific sectors, in order to minimize the risk of carbon leakage. It would be effective because all products consumed in the EU, regardless of their place of production, would be required to comply with carbon reduction targets. Carbon-intensive imported products will be subject to a tax to enter the European market. Secondly, a carbon tax will also push other countries to decarbonize.

2. Sustainable investments are the second driver of a transition towards a sustainable economy. According to a recent European Commission report, the EU is experiencing a green investment gap of €260 billion per year, with almost half generated in the housing sector. On the other hand, the transportation sector is contributing €21 billion to the gap and the energy sector €34 billion. To meet these ambitious targets, the full mobilization of European industry is required. The Commission has adopted an EU industrial strategy to boost the green and digital revolutions. Energy-intensive industries, such as steel, chemicals and cement will be at the forefront of the transformation, considering also their crucial role in Europe’s economy and in the supply of industrial value chains. But they will not be alone: all economic sectors – in particular those that are resource-intensive – will have to become circular, ensuring sustainable processes of production and consumption, reducing waste substantially. The energy sector, which accounts for 25% of EU GhG, will be at the forefront of the transition: renewable energy is already set to reach a share of between 30.4% and 31.9% in 2030, not far from the target of 32%. Several member countries have confirmed ambitious goals for the gradual elimination of carbon in electric energy production[1].

Investments in transport infrastructure will be crucial to enabling a transition towards a smart and sustainable mobility. GhG from the transport sector is about 25% of overall emissions, steadily growing. The European Green Deal has targeted a 90% reduction in transport emissions by 2050. A key role is envisaged to be played by the enhancement of multimodal transport, in particular through a shift from road to rail and inland waterways. The Commission is planning to propose measures to further increase the continental capacity of railways and inland waterways. Digitalisation will be at the core of multimodal mobility, since it will introduce smart traffic management systems that can reduce congestion and pollution. To foster the reduction of transport pollution, the Commission will devise more stringent standards for combustion-engine vehicles, with a new law on CO2 emission by June 2021. In this direction moves the EU Commission’s intention to revise the regulatory framework for energy infrastructure, in particular the TEN-E (Trans European Network – Energy) regulation. The new framework should make it possible to boost the introduction of innovative technologies and infrastructure upgrades: smart grids, hydrogen networks, carbon capture, energy storage and a circular value chain for batteries. All sectors where  the strengthening of EU’s comparative advantages is needed.

3. The third pillar is represented by a new EU industrial strategy. The European Commission adopted a new strategy in March 2020. The direction is clear: the target of carbon neutrality cannot be reached at the expense of the competitiveness of European industry, considering also the growing geopolitical tensions with China but also with the traditional US ally. Furthermore, the economic impact of the coronavirus requires a stronger European response: a competitive European industry will be essential to face the economic consequences of the coronavirus outbreak, which will put all Europe in a deep downturn cycle in the months to come. To overcome the challenge of making the whole European economy sustainable while maintaining the competitiveness of its industry, the EU needs to become a global innovation powerhouse in energy, mobility and construction technologies. The first step is to increase the bloc’s investment in R&D: invest in a more coordinated and synergic way among member countries, in order to avoid overlapping and to take advantage of economies of scale. Furthermore, public procurement is an important tool to boost innovation, through specific technology requirements to win specific public contracts. To become more competitive on the global stage and unleash innovation potential, the completion of the EU internal market is crucial. Joint environmental standards, a common energy taxation and shared support measures for clean technologies can help to create cleantech companies of European dimensions.

4. Finally, the fourth pillar of the Green Deal is the Just Transition Mechanism (JTM), intended as a compensation scheme to counter the adverse distributional effects of the transition.

In particular, the JTM will have a Just Transition Fund (JTF) that will finance the territories with high employment in coal, lignite, oil shale and peat production, as well as territories with greenhouse gas-intensive industries, which could be severely impacted by the transition.

The European Commission, through the Next-Generation EU Plan, is proposing to strengthen the JTF with additional €30 billion funding, with a further €2.5 billion under the next long-term EU budget. This brings the total of the JTF to €40 billion (instead of the initial €7.5 billion). Increased funding for InvestEU – the second pillar of the mechanism – will also be provided.  The Commission has also proposed to set up a new public sector loan facility, supported by €1.5 billion of the EU budget and €10 billion in lending by the EIB. The JTM are expected to mobilize up to €150 billion of investments.

Where are the resources coming from?

The European Green Deal can be defined as a plan that calls for a complete transformation of the European economy and society. The investments it requires are thus very high. The European Union estimates that to reach the 2030 energy and climate target, €260 billion a year will be required. The EU has recently approved a Sustainable Europe Investment Plan, the investment pillar of the European Green Deal. The Plan is set to mobilize through the EU budget, associated instruments and private funds, around € 1 trillion of investments in the next 10 years. The transition towards a low-carbon economy would probably require additional investment of up to 2% of GDP by 2040. In particular, the EU budget is expected to increase the share of public spending earmarked to climate and environment: the Commission has proposed allocating at least 25% of the funds in the next Multiannual Financial Framework to climate-related issues[2].

The most important role in the transition will be played by the European Investment Bank. In November 2019, the EIB launched a new climate strategy and Energy Lending Policy, becoming de facto the EU Climate Bank.  The EIB will end financing for fossil fuel energy projects from the end of 2021, aligning all financial activities with the goals of the Paris Agreement by the end of 2020. New lending activities will be focused on energy efficiency, renewable energy, new green technologies and all the energy infrastructures required for the transition; the EIB will gradually increase the share of its financing dedicated to climate action and sustainability to reach 50% by 2025.

What role for the European Green Deal in a geopolitical perspective?

Decarbonization is one of the major efforts the EU has undertaken in the last decades. The more the process moves forward, the higher the costs will be. It is thus essential that the EU economy is not negatively affected by the transition. Free riding should be avoided and the EU Commission must ensure that a decline in domestic emissions is not replaced by an increase in imported emissions.

To be successful, the European Green Deal must be followed by the EU’s international partners. The plan has no chance of being effective if international cooperation and coordination are not in place. The reduction of greenhouse gas emissions in the EU is not sufficient if other countries do not enact similar policies at the national level. The EU is thus committed to developing a Green Deal diplomacy, focused on supporting other countries to share the burden and adopt policies to move their economies towards a sustainable transition. The Multilateral Framework is given by the Paris Agreement, the international treaty that calls upon the signatory countries to strengthen the global response to the threat of climate change.

On the other hand, the EU will enhance bilateral engagement with international partners, in particular with the economies of the G20 that account for almost 80% of global emissions. Immediate neighbours will be fully involved in the efforts, in particular the Western Balkans, the Eastern Partnership and the Southern Neighbourhood. Financial cooperation will be at the core of international efforts, with a focus on international projects in other countries aimed at phasing out fossil fuels. However, the most important tool to engage with other countries is the EU’s trade policy: new trade agreements will be concluded with binding clauses concerning policy alignment with the Paris Climate Agreement. The EU, the biggest trade bloc in the world, has a powerful bargaining tool to spend with other countries: access to the European market in exchange for more stringent policies on greenhouse gas emissions and sustainable development.

In the aftermath of the coronavirus crisis, the European Green Deal – alongside the New Industrial Strategy for Europe – will be probably  be among the main pillars of the more comprehensive recovery plan to revive and transform the European economy, strengthening its resilience, boosting employment and social cohesion. If the European Green Deal had originally been envisaged as a sort of re-allocation mechanism for investments and employment, it will now be part of a new scenario marked by an enhanced role of public investments that – together with private ones – will be crucial to creating an economic rocket to re-launch the European economy in the months and years to come.

REFERENCES

[1] France to stop the production in 2022; Italy and Ireland by 2025; Denmark, Spain, Netherlands, Portugal and Finland by 2030. Germany has announced that the country will decide a date to end electricity production from carbon. On the other hand, Poland has no plans to fully exit from carbon: 80% of national electricity is generated by coal, and Warsaw has announced the intention to reduce the share of coal in its energy production to 60% in 2030 and around 50% in 2050. For these reasons, Poland was the only country to opt out from a net-zero emissions target by 2050.

[2] In particular, in the next Multiannual Financial Framework (MFF), 30% of the Cohesion Fund and European Regional Development Fund will be devoted to climate-related objectives; similarly, 40% of the future Common Agriculture Policy and 60% of the Connecting Europe Facility (transport, energy and digital infrastructure).

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