Europe’s Green Deal sets new course for economic growth

Photo by Gustavo Quepón on Unsplash
Photo by Gustavo Quepón on Unsplash

By Ewa Krukowska and Jonathan Stearns, Bloomberg

Europe is set to stake its economic future on an environmental clean-up that will overhaul the way the world’s biggest single market polices businesses and manages trade relations.

The new order unveiled on Wednesday by the European Union’s executive arm will center on a goal to eliminate by mid-century the bloc’s net discharges of greenhouse gases. Such pollutants cause the more frequent heatwaves, storms and floods tied to climate change.

“This is Europe’s man on the moon moment,” European Commission President Ursula von der Leyen told reporters in Brussels before detailing the plans. “I’m convinced that the old growth model that is based on fossil fuels and pollution is out of date and out of touch with our planet.”

Under the package of proposed measures, the EU transition to climate neutrality would start next year and involve: stricter emission limits for industries from cars to chemicals; revamped energy taxes; new rules on subsidies for companies; greener farming; and a possible environmental import tax. Everything from finance to the design of cities would need to become more sustainable.

Hours before a key summit of EU leaders in the European Council, eastern governments were resisting signing off on a collective pledge to zero-out the bloc’s carbon emissions, unless they are guaranteed assistance from richer countries to help finance the transition. Adding to signs that von der Leyen’s package of measures will be facing an uphill battle, powerful industries such as airlines signaled that they are ready to fight any attempt to make them pay the bill for a cleaner planet. EU diplomats are also struggling to reach agreement on the classification of green financial products.

“I’m hopeful that the council might come to that agreement,” European Commission Vice President Frans Timmermans told a briefing on Wednesday. “For us as the commission it’s very clear that if we want to fulfill our commitments under the Paris Agreement and to limit the rise of temperatures to 1.5 degree Celsius we will have to increase our efforts and we will have to have a climate-neutral Europe by 2050.”

As it seeks to create an environmental profit motive for businesses across the board, the EU executive’s proposals aim to spur action worldwide and uphold the landmark Paris Agreement to fight global warming. The U.S. has turned its back on the accord and other major emitters, including China, India and Japan, have so far failed to translate their Paris pledges into the necessary domestic actions.

“The commission is essentially proposing a complete transformation of the European economy, starting with a shift in policy priorities from growth toward sustainability,” said Dimitris Valatsas, a London-based analyst at Greenmantle LLC, an advisory firm. “It’s hard to think of any European asset class that will not be affected by this.”

While von der Leyen’s package will pave the way for months of lobbying and political fighting over a slew of underlying draft laws still in the works, the EU policymaking establishment is confident it has support on the street. Climate protection has risen on the EU agenda as people’s concerns about the risks of failing to act have grown, with 93% of Europeans regarding global warming as a serious problem.

For von der Leyen, the first woman to the lead the Brussels-based commission, the Green Deal helped ensure she was approved for the job earlier this year by a fragmented European Parliament. The assembly’s political groups, which differ on everything from data protection to migration, largely united behind her environmental program.

Following a debt crisis that almost shattered the euro, a Middle East migration wave that rattled governments and a populist uprising that helped propel Brexit, the grand plan to green the economy may be seen as a way to “give new purpose and unity to the EU,” Jonathan Gaventa at environmental think tank E3G wrote in a research note.

The first actual step on the road to net-zero emissions will be a proposal due by March to enshrine the 2050 climate-neutrality goal in European law and make it irreversible, according to an EU document seen by Bloomberg.

The climate neutrality target still needs to get the political green light from EU government heads when they meet this Thursday and Friday in the Belgian capital. In a bid to bend resistance by a group of eastern European countries led by Poland, which relies on high-polluting coal for energy, the commission intends to propose a 100 billion-euro ($111 billion) tool to help finance the economic transition in the most affected regions. Warsaw has estimated the shift would cost Poland more than 500 billion euros until 2050.

Legislative Frenzy

The EU government heads have a political incentive on the global front to weigh in this week, when talks wrap up at a high-level United Nations climate conference in Madrid.

“An EU agreement on climate neutrality would encourage competition for ambition worldwide,” said Isabella Alloisio, a researcher at the Florence School of Regulation, part of the European University Institute.

In the ensuing months, the Green Deal legislative frenzy will include a plan to tighten the EU emissions-reduction target for 2030 from the current 40% to 50% or even 55%, compared with 1990 levels.

Much more will follow in 2021, when draft laws are due to upgrade Europe’s goals for deriving energy from renewable sources and improving energy efficiency. That’s also the timetable for proposals to revise European energy taxation, widen the EU cap-and-trade market for pollution permits (covering power plants, factories and airlines) to include shipping, and reduce the number of free carbon-dioxide-emission allowances that carriers receive.

The year after next is also when the commission aims to propose an environmental import tax — one of the most controversial ideas. The so-called carbon border adjustment mechanism would seek to ensure that European manufacturers have a level playing field with competitors based in countries without emission curbs.

With global supply chains crossing multiple countries, designing a European carbon tariff in line with World Trade Organization rules will be tricky. And given the reservations in numerous EU capitals about the idea, the ultimate result may well be other, less controversial, moves to protect domestic businesses from lower-cost producers abroad.

“A key challenge for Europe will be to manage and develop its trade relationships to secure and incentivize the transition to a zero-carbon economy, while not creating unnecessary confrontations with other economies,” the European Corporate Leaders Group said.

While the commission will draft all the rules to bring the Green Deal to life, they will require the support of EU governments and the bloc’s assembly. Expect every word and coma to be analyzed by national governments, parliamentarians, companies, industry lobbies and environmental activists. In that context, Europe’s challenge has only just begun.

The Energy Transition is explored in detail at Enlit Europe (Milan, Italy, 27-29, 2020).


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