The Future of the EU: Grasp the Opportunities of the Green Deal

Rising temperatures and global protests have moved climate policy to the top of the political agenda. The European Commission has put action on climate change at the heart of its agenda and underlined its importance by appointing a Commissioner for Climate Action, who is also Executive Vice President for the European Green Deal.

A Green Deal for climate neutrality

In December 2019 the Commission published its proposal for a European Green Deal. This prominent initiative for a climate action and investment is designed to make Europe’s economy climate-neutral by 2050 – with a binding European climate law. Fifty individual implementation measures are planned, including a European industrial strategy, a reform of state aid law, a carbon border tax and a sustainable finance strategy. While this broad approach is to be welcomed, the devil will be in the detail. The EU’s climate target for 2030 is to be increased, as a stepping stone to full carbon neutrality by 2050. This is in line with the logic of the Paris Agreement, which urges countries to enhance their nationally determined contributions (NDCs).

Internal imbalances hamper joint EU action

In a world where states are increasingly pursuing nationalist paths, a united European Union has the potential to create a multilateral, sustainability-driven alternative building on social balance, economic prosperity and ecological sustainability. Backed by credible action those goals would make the EU a global leader in limiting climate change.

In recent years, however, economic setbacks have dramatically eroded the internal cohesion required for strong and united action. Economic inequality has grown over the past decade, both between and within the member states. While Germany and France quickly recovered from the last crisis, GDP in Greece and Italy remains well below the level of 2008 despite the effort poured into cohesion policy. The policy response to the economic and financial crisis in fact dramatically worsened the social situation, especially in southern Europe, and degraded public confidence in the EU.

Pandemic demands sustainable economic stimuli

The corona pandemic since spring 2020 brings an additional major challenge. Member states are dealing with the economic impacts from widely differing starting points. The European Commission expects Union-wide GDP to decline by 7.4 percent in 2020. There is a danger that this will further exacerbate the imbalances, with dramatic consequences for affected populations. It is therefore positive that the Commission is pursuing an investment-led crisis response. The proposal to introduce a Recovery Fund outside the EU’s normal budget – the Multiannual Financial Framework – is an especially important signal for the economically battered nations of southern Europe.

In addition to the European imbalances and the impact of the Covid-19 crisis, climate-neutral economic conversion faces Europe’s regions with additional challenges. The Commission’s decision to put the Green Deal at the heart of its economic stimulus measures underlines its willingness to combine growth measures with climate policy and shows that it is pursuing an integrated approach.

Ambitious targets require a just transition

The political debate of recent months reveals that support for more ambitious climate targets extends far into the conservative spectrum. But it remains unclear how big the leap can be, given the general state of the EU and the impact of the pandemic in particular. And of course transposing targets into concrete measures is even more crucial.

Recently there have been growing warnings against overdoing the increase in targets, specifically with reference to the dramatic economic repercussions of the Covid-19 pandemic. Even the existing target of a 40 percent reduction by 2030 requires the same quantitative cut as the 2020 target[1] – to be achieved in one third of the time.

The Commission is proposing a corridor of 50 to 55 percent reduction as the new target for 2030; environmental groups are demanding up to 65 percent. It remains unclear whether such an ambitious target can be realistically achieved within less than ten years, and what the social and economic effects would be. One thing is certain: Greenhouse gas emissions will have to fall a good deal more quickly than they have to date, and that this is likely to be associated with accelerated structural change.

Just transition means security and new perspectives

So before more ambitious targets are set, we need to know how the greenhouse gas reductions are to be distributed among member states and sectors, what measures will be necessary and what impacts are expected. An impact assessment on distribution effects and effects on regions, employment and economic structures is absolutely vital.

Especially given the different starting points, the question is how to achieve consistently strong public acceptance of and participation in the fundamental changes. From the trade union perspective a just transition is central. The motto “nobody left behind” must be taken seriously and applied across the entire Union. The EU has waited far too long to institute social minimum standards and a fair pay framework in place of social and wage dumping. It must do so now, or risk a “race to the bottom” especially in regions affected by structural transformation. On the other side we need credible perspectives for the regions and workers affected by change, which means strengthening regional structural policy. In this connection the German trade union confederation DGB welcomes the Just Transition Mechanism and its Just Transition Fund (JTF) proposed by the Commission as a central element of the Green Deal (augmenting the existing European Structural Funds). The partnership principle already established in the European Structural Funds must also be applied to the Just Transition Fund, to ensure that the trade unions are also involved in regional elaboration and implementation.

From the DGB’s perspective the Commission’s proposal to actively shape and socially cushion the structural transformation in the European regions is correct. It is therefore essential to extend funding eligibility to include regions facing structural disruption through change driven by climate policy. This also means creating a safety net for workers affected by transformation in situations where adequate coverage is not available nationally. The Commission’s original figure of €40 billion for the JTF – rather than the €7.5 billion now on the table – would have been a step in the right direction. The cuts now announced send the wrong message and demand rectification.

More climate protection means more investment

Beyond the more or less abstract discussion of targets, it will be crucial to initiate investment in climate-friendly technologies along the value chains. Fundamentally, the steeper the required emissions reduction, the more rapid public and private investment must be rolled out. Even to achieve the existing 40 percent target by 2030, the European Commission estimates that annual investment of €260 billion will be needed. With its Green Deal the EU is proposing annual investment of volume €100 billion. The question of whether such investments can be realised that quickly needs to be clarified, as does the issue of potential major investment risks. A reality check is needed, along with an unideological debate about the relationship between state and market.

In many areas the structural transformation associated with the objective of greenhouse gas neutrality demands innovative production processes, new services and changes in consumption patterns – the European green energy transition, the hydrogen economy and electromobility to name just three examples. The European Union needs to think large and act in concert. Concrete flagship projects can generate momentum for climate-neutral transformation and foster identification among Europe’s citizens. For example a pan-European high-speed rail network could both contribute to climate protection and create a powerful symbol of European cohesion.

Long-term investment demands far-sighted financing

Europe would be well advised to avoid falling behind technologically or sleepwalking into deindustrialisation. Maintaining the continent’s standard of living will require a strong industrial sector creating value and meeting society’s needs with innovative and sustainable products. Especially at the regional level, GDP and wages are noticeably higher where industry is strong. Conversely, deindustrialisation leads not only to social dislocation but also to a loss of the skills needed to develop innovative climate solutions.

The question of competitiveness of goods produced under high social and economic standards is central, especially for highly export-dependent industries. Here the extent to which existing EU law on competition and state aid can satisfy the requirements of the transition to climate neutrality needs to be investigated. Sectors where climate-neutral production will not be able to match global market prices for the foreseeable future will need publicly guaranteed financing options to fund the market launch and penetration stages. The EU is currently moving towards a carbon border tax, to be levied on products imported from regions without ambitious climate policies. But even if it can be implemented without violating WTO rules, the instrument could turn out to be counterproductive in trade terms. One alternative would be to compensate the costs of investing in climate-neutral production processes within the EU, for example through “carbon contracts for difference” to reimburse the differential cost above the actual market price for CO2. First and foremost the question of fair and plannable funding of the differential costs needs to be clarified.

A third alternative would be a public European investment fund investing its own capital in enterprises in strategically important branches. This form of equity funding could ensure that necessary long-term investments can be realised in a competitive environment – investments that would otherwise occur elsewhere or not at all because of the disjoint between long amortisation periods and the short-term perspective of financial markets. In this way a public investment fund could make an important contribution to securing value creation, locations and jobs on the road to climate neutrality. Any returns on investments could be reinvested or spent on public goods. This would create a possibility of direct control to promote climate neutrality in crucial sectors while simultaneously pursuing structural and employment objectives, without which it will not be possible to participate in the competition for the best technologies. In the best case this form of investment control represents a public-private partnership in the public interest.

Grasp the opportunity!

The EU stands at a fork in the road, with the pandemic making the choice all the starker. All climate change efforts will come to naught unless the centrifugal forces within the EU are brought under control, the spatial disparities reduced and policies introduced to boost public welfare in the process of tackling the great challenges. At the same time the negotiations over the Multi-annual Financial Framework, the EU Recovery Fund and the details of the Green Deal create a political window in which fundamental choices for more social justice and sustainable development in Europe can be made. Let’s grasp the opportunity, time is short!

[1] The EU’s target for 2020 was to reduce greenhouse gas emissions by 20 percent (in comparison to 1990). According to the European Environment Agency a reduction of 23.2 percent had been achieved by 2018.

(Translated from the German)
 

The views expressed in this article are not necessarily those of Friedrich-Ebert-Stiftung.