THE EUROPEAN GREEN DEAL CHALLENGE: 3 SCENARIOS

Author: Dr. Frank Umbach 

The European Commission has announced it is launching a European Green Deal (EGD) that would make Europe the first carbon-neutral continent by 2050. By 2030, the plan would decrease European Union greenhouse gas (GHG) emissions by at least 50 percent compared with 1990 levels. The previous, already controversial target was 40 percent. Successfully implementing this new emissions goal demands a huge, systemic transformation of the EU’s energy sector and indeed, its broader economy. The investment plan is dependent on sufficient funding, international support and public acceptance throughout the member states.

European Commission President Ursula von der Leyen has called the Green Deal “Europe’s man on the moon moment.” No legislation has yet been proposed. The strategy aims to reduce the bloc’s greenhouse gas emissions to net zero by 2050 by fostering innovation throughout Europe’s economy.

The Commission says that the EGD is the centerpiece of a long-term plan to “reconcile the economy with our planet” by subordinating the EU’s economic, energy and finance policies to the objectives of its climate policies. It currently includes 50 specific policy initiatives, though most of them are not new.

The influential Federation of German Industries (BDI) has already warned that the new emission targets could “unsettle” businesses and consumers. During the last European Council summit in December, Poland opted out of the EGD.

Systemic transformation

Over the next few months, the European Commission plans to move forward on the following initiatives:

• In March 2020, it will propose a “climate law,” enshrining the 2050 net-zero emissions goal in legislation
• In June, it will propose a new “action plan for green financing”
• Later in the summer of 2020, it will also reveal a detailed plan to reduce emissions by at least 50 percent in the next 10 years

If these plans are approved by the European Council, then the member states’ national economies will require a deep transformation that will depend on sufficient funding and global support. Without other major polluters, like the United States, China, Japan, India and Brazil reducing their greenhouse gas emissions, the EU risks undermining its own global economic competitiveness.

Optimistic scenario

The European Commission has been unable to specify how much money its plan will actually require. However, it has already promised 100 billion euros for an expanded Just Transition Fund (JTF) to implement the strategy. In doing so, it hopes to overcome the objections of Poland and other Central and East European (CEE) countries. The promised figure of 100 billion euros for the JTF is almost three times the 35 billion euros in the original draft of the Commission’s proposal.

The JTF will be linked with a lending policy from the European Investment Bank (EIB) and other banks, which will also increase the cofinancing available for 10 member states from 50 percent to 75 percent on related projects. The member states are Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. They are participating in the EU Emissions Trading System (EU ETS) and are eligible for its Modernization Fund, which also offers opportunities for a higher level of cofinancing. Over the next decade, the ETS will make about 26 billion euros available for implementing the European Green Deal.

President von der Leyen has also proposed a Sustainable Europe Investment Plan to spur 1 trillion euros of green investments until 2030. As part of this initiative, the European Commission will raise its green funding efforts to 25 percent (320 billion euros) of the 2021-2027 Multiannual Financial Framework, a significant increase compared with the 20 percent (206 billion euros) that was designated for the same goal in the 2014-2020 plan. EU countries will also be supported or allowed national subsidies to compensate for increasing carbon costs. Most of the funding, however, will cover the much-needed capital expenditure investments during the transformation period.

Under an optimistic scenario, all of this financing will be provided as France, Italy and other EU member states would successfully lobby to have the EU’s deficit rules reinterpreted so as to boost environmentally friendly investments.

Moreover, France and some of the CEE countries would be allowed to include nuclear power as a clean energy source for meeting the EU’s climate targets – a solution that is currently opposed by Germany, Austria and Luxembourg. Yet the EU cannot realistically achieve the 50-55 percent emissions reduction target by 2030 without the use of nuclear power.

Also under this scenario, member states would still be allowed to build new natural gas-related projects for replacing coal plants. The gas infrastructure could be used after 2030 while the EU would increasingly replace conventional gas with more environmentally friendly “green gases” such as hydrogen and biomethane. Germany is already discussing a hydrogen strategy and plans to push an EU-wide version when it takes over the rotating EU presidency next summer.

Under this scenario, the U.S. would elect a new president in the November 2020 election and would decide not to leave the Paris Agreement. At the COP26 United Nations Climate Conference in November this year, other major emitting countries would follow Europe’s example and commit themselves to much more ambitious emissions cuts by 2030.

Pessimistic scenario

Under a pessimistic scenario, the European Green Deal would not be sufficiently funded and technological innovations would not go far enough to solve major energy transformation problems, such as storing large amounts of electricity at affordable prices.

The European Commission has announced the EGD without clarifying the implementation costs for its emissions targets. The various financial instruments, even the 1 trillion euros for green investments, would, in this scenario, prove insufficient for the following reasons:

• Just to meet the EU’s pre-EGD climate and energy targets, the Commission estimated that additional annual investments of up to 260 billion euros would be required by 2030 (in total 2.6 trillion euros over the next 10 years), and these had not been sufficiently mobilized by 2019. Consulting firm McKinsey has estimated that Poland alone needs to invest as much as 150 billion euros in its power generation assets by 2050. Last year, the Polish government came up with a list of green projects to be funded by the EIB and the JTF. Completing all of the investments on that list will cost at least 578 billion euros.
• The 2019 EU budget amounted to some 166 billion euros, of which 39 percent was attributed to “sustainable growth and natural resources,” but included huge agriculture subsidies. The EU’s new long-term budget for 2021-2027 requires national contributions that would amount to 1.07 percent of the bloc’s gross national income (1.11 percent was originally proposed). In this context, it would become politically impossible to reconcile the budget goals with the EGD. Disagreements between the member states would deepen the political rift between the two political camps: the net contributors such as Germany, France, Italy, the Netherlands, Austria, Sweden and Denmark, and the net-recipient countries, such as Poland, Greece and Portugal. The room for political compromise between the various EU member states’ national interests is already narrowing – Brexit has not helped this state of affairs.
• The UK’s exit from the EU is expected to decrease annual funding by some 12 billion euros. On top of that, Germany and other northern EU countries would also likely oppose changes to the EU’s budget rules to, for example, allow countries to take on higher debt for green projects. They would fear France, Italy and Greece, for example, could label any outlay as “environmentally friendly.” These developments would seriously hinder efforts to finance the many legitimate investments needed to sufficiently transform the EU economy.
• Brexit also means that the remaining 27 EU member states have to decrease emissions by an additional 136 billion tons of carbon dioxide just to achieve the 40 percent target in 2030. To reach the EGD emissions target, they would have to reduce CO2 emissions by an additional 360 billion tons – an amount equivalent to the annual emissions of Spain.
• The EGD proposal comes at a time when the global economic conditions have deteriorated. Economic growth worldwide, and in Europe specifically, is weakening due to the U.S.-China trade conflict, among other causes. This situation constrains the options for any additional funding for such hugely ambitious climate targets.
• The lion’s share of the JTF’s 100 billion euros and the Sustainable Europe Investment Plan’s 1 trillion euros will be provided as loans, which may increase public debt, particularly in poorer EU member states, further undermining their economic development. The proposal has already been criticized for not offering any new funds, and instead reappropriating them from existing EU budgets. More than half of EU member states have already rejected any cuts to the 63 billion euros in development aid in the bloc’s next budget. Proposals included decreasing cohesion and economic development funding for poorer regions.

Internationally, under this scenario, other major emitting countries would not follow the European example and adopt deeper emissions cuts. Such an outcome occurred at the COP25 conference in 2019.

China in particular will use the opportunity to further strengthen its economic and technological competitiveness thanks to its much lower energy and carbon prices. The situation will lead to even more carbon-leakage effects (as goods and services imported into the bloc would still have high carbon footprints) and “greenwashed” projects that seem more environmentally friendly than they are. Even if Russia, Brazil, China and other countries do not follow the U.S. in withdrawing from the Paris Agreement, they would not accept any climate policies that reduce economic growth. Nor would they – or oil and gas producers in Africa – willingly restrict their oil and gas exports, which for many of them provide much of the revenue for their state budgets. In their view, regime and political stability top any climate protection efforts.

In sum, current global energy megatrends would grow stronger. Moreover, the dissonance between global climate change goals (like holding warming at 1.5-2 degrees Celsius) and the realities of the energy market would grow larger. Coal consumption, for example, is still rising: it reached a new record of 6,900 TWh in 2018. Worldwide greenhouse gas emissions rose 2 percent in 2018. At the same time, growth in clean energy investments is slowing.

Muddling through

The most likely scenario for the European Green Deal will be more “muddling through.” The year 2030 is likely to come and go without the EU achieving its 50 percent target for reducing greenhouse gas emissions because of three major reasons. First, although the EGD will add momentum to a systemic energy transformation and to technological innovations, the financial implications and technological complexity will be underestimated and the project will prove far more challenging than expected (as already highlighted by Germany’s Energiewende policy since 2011).

Second, as the EU will realize in the coming years, other major emitting countries will not follow its example, despite having announced their own ambitious climate policies. Third, together with a lack of political support internationally, increasing costs for consumers will lead to societal polarization (with right-wing political parties benefiting in particular). The Yellow Vest movement in France has demonstrated how such phenomena will occur. These developments will hinder the EU’s progress toward achieving its climate goals.

The European Commission will also increasingly need to balance its climate policies with economic competitiveness and supply security. By focusing on financing green energy projects and more ambitious climate targets, these other two factors have been largely ignored.

The political discussions surrounding the European Green Deal, including on the funding needs, instruments and sources, have only just begun. They will heat up in the coming months and years. Political objections will not just come from Poland and other CEE countries. Germany, among other member states, will raise objections, particularly regarding funding instruments that conflict with other EU policies such as the Stability and Growth Pact.

Some people, including members of the European Parliament, have suggested a new tax for the EU, though this is not a popular idea among most member states. The idea of the European Central Bank taking a more active role, at the forefront in fighting climate change, has also been proposed. It is a highly controversial concept, however, since such activities are not part of its mandate and would overlap with the role of member state governments. The challenges of funding the EGD may thus remain the hottest issue in the debates ahead. Their importance should not be understated.

Nor should the challenges for achieving public acceptance. Even European Commission Vice President Frans Timmermans has warned that societies in EU member states are not politically prepared for the radical economic transformation the EGD will require.

Although the European Green Deal could create jobs, if other major powers like the U.S. and China do not take up similar decarbonization strategies, then the EU will have to cope with rising carbon leakage. In that case, the EU might consider a carbon border tax on imports to protect domestic businesses from unfair competition from countries that do not respect international climate targets.

However, such a tax may fall afoul of World Trade Organization rules. Moreover, it could escalate the EU’s trade conflict with the U.S. and incite protectionist countermeasures by China and other countries. Instead of instituting a carbon tax, Europe might find more success in defining an industrial electricity price.