LittleLaw looks at… the European Green Deal

Europe’s man on the moon moment to save the planet

June 27, 2020

Category:

11 min read

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What’s going on here?

On 11 December 2019, the President of the European Commission, Ursula von der Leyen, hailed “Europe’s man on the moon moment”. She was referring to the European Green Deal. The deal is an unprecedented plan, spearheaded by von der Leyen and her Vice-President Frans Timmermans, to transform the EU’s 27 Member States into a region defined by its sustainable development and low carbon economy. It charts a course for the EU bloc to be carbon neutral by 2050. But for this to happen, a lot will have to change. It has taken the EU thirty years to cut carbon emissions by around 25% compared to 1990. The EU now has the same amount of time to cut the other 75%. The level of change will have to be revolutionary if the EU is to meet its targets.1

Revolutions are not suffered easily. With the added difficulty of a global pandemic causing economic havoc, the EU is reliant on limited funding, the goodwill of the 27 Member States and effective policy. So, will the European Green Deal be able to achieve “Europe’s man on the moon moment”? Or, will it struggle to find the political and financial backing to even have a chance of taking off?

The European Green Deal Key Aims

Action 

Goal

When?

European Climate Law

The EU will be climate neutral by 2050.

Proposed in March 2020

Circular Economy Action Plan 

Incentivise products, services and business models to reduce waste. Make the circular economy the norm in the EU.

Proposed in March 2020

Sustainable Europe Investment Plan

Increase the already growing investment in sustainable projects.

Proposed January 2020

Farm to Fork

Reform of farming and fishing to ensure that EU food is produced sustainably and affordably.

To be announced in Spring 2020

Sustainable and Smart Mobility

Reducing EU emissions from transport.

To progress in stages 2020-2021. Commission Proposal on a European Year of Rail (2021) has already be announced.

Announcing the European Green Deal Von der Leyen explained the deal will “transform our way of living and working, of producing and consuming”. And she meant it. The European Green Deal is not just a political promise but the commitment that the EU will be climate neutral by 2050 enshrined in EU law.2

But how is the EU planning to achieve this? The deal aims to implement a circular economy, whereby the EU’s economic activity will be centred on reducing waste and carbon emissions. It will provide the EU with “a strategy for growth that gives back more than it takes away”. Cutting pollution, providing clean energy and restoring biodiversity are also on the agenda. All this constitutes a shift away from polluting industries (oil and coal) to new green organisations, a redistribution of workers from these sectors and heavy investment in companies that can create a circular economy. 

The number of people who may lose their jobs in this process is difficult to estimate. An Irena report puts the number of jobs lost in the fossil fuels industry between 2018 and 2050 at 7.4m. However, the report claims that 19m new jobs would be created in the energy sector over the 32-year period, creating a net gain of 11.6m jobs. This seemingly appealing estimate will, however, depend on the success of the Just Transition Mechanism.

The Just Transition Mechanism

The Just Transition Mechanism is intended to mitigate any negative effects the deal has on employment by providing grants and loans for a variety of purposes. Following von der Leyen’s affirmation that the deal “will only work if it is just – and it works for all”, the Just Transition Mechanism will support investments in SMEs (Small to Medium Enterprises), start-ups, research activities, digitalisation and the circular economy. It will also help to reskill workers and help them find new jobs. That’s a big brief, but does the scheme have enough money to make this a reality?

To this end, the Just Transition Fund (one of the pillars of the Just Transition Mechanism) will be granted  €7.5bn of ‘fresh’ funding. The Just Transition Mechanism will mobilise a total of €145bn over the next decade. This €7.5bn fund – the only ‘new’ funding in a deal which predominantly uses pre-existing funds – is spread geographically across the EU, supporting the countries whose economies are most reliant on high-carbon activities.3

Just Transition Fund Allocation

Countries that receive the most

Countries that receive the least

Poland

€2bn

Luxembourg

€4m

Germany

€877m

Malta

€8m

Romania

€757m 

Ireland

€30m

Some have suggested that rather than allocating funds geographically, it would be more effective to dole out money for projects that meet the fund’s brief. In this way, the fund would be more efficiently targeted. But this method would be less easy to justify to certain member states, who want to know the amount of financial support that they will receive from the scheme.

Carbon Border Tax

It is clear that Europe, by pragmatically looking to be a “global leader” in resolving a global issue, should look beyond its borders.4 After all, Europe accounts for around 9% of global CO2 emissions whereas the US and China produce 14% and 30% respectively. A Carbon Border Tax is one such policy. The tax is embodied in the European Green Deal roadmap in the form of a Carbon Border Adjustment Mechanism. 

It aims to introduce a tax on imports into the EU that will charge the difference between the EU and the exporting country’s carbon price (the cost for emitting a certain amount of CO2). This means that countries with no carbon price, or very low carbon prices, will face the largest taxes. Those that match the EU’s carbon prices (or go further) will pay nothing. The policy promises to “ensure a level playing field globally and fairer conditions for EU companies participating in the climate effort”. 

The Carbon Border Adjustment Mechanism has, however, been the subject of a great deal of political criticism. Many developing countries have argued this tax will unfairly punish developing countries who are dependent on high carbon industries. Equally, some EU industries such as the car industry are worried about the response from other countries, namely a trade retaliation against their exports. EU member states will all have their own economic interests to protect and vulnerabilities to shield.5

Beyond these immediate implications, however, there are some more profound issues.6 Some believe that the policy will not work. They argue that it will make jurisdictions with lower carbon prices more attractive than Europe. Either the tax could be avoided by EU industries setting up operations in more attractive jurisdictions. Or the tax will simply reduce demand for EU industry in preference of cheaper less-carbon efficient industries

Legally, there are questions around whether the Carbon Border Adjustment Mechanism will be compatible with the World Trade Organisation’s rules (the authority that provides a framework for international trade). Practically, calculating the carbon emissions attached to specific products is more difficult than it seems. But, with few other options, these are risks that the EU may have to take to ensure change on a global level.7

In with the new, but not out with the old

The European Green Deal aims to improve upon past policies that are outdated or have not been as effective as anticipated. The Emissions Trading System (ETS) Directive that was introduced in 2005 and the Energy Taxation Directive that dates back to 2003 are two such examples. The ETS will enter its fourth phase of development in 2021. In the past, it has had problems predicting supply and demand, with an over-allocation of credits making the carbon price zero in 2007, or under-allocation causing spikes in energy prices. On the other hand, the outdated Energy Taxation Directive still provides tax incentives for fossil fuels

Directives to be revised

What is the Directive about?

Emissions Trading System Directive

The Directive uses a “cap and trade” principle to control CO2 emissions. There is a limit for emissions and a number of “Carbon Credits” that companies are given and can trade. Every year, the companies must hand over the number of Carbon Credits in accordance with their CO2 emissions – and if they go over there is a fine of €100 per excess tonne. 

Energy Efficiency Directive

The Directive set out ways to achieve the EU’s target of 20% energy efficiency by 2020. 

Renewable Energy Directive

The Directive aims to increase the renewable energy use to a 20% share of the overall EU energy market by 2020. 

Energy Taxation Directive

The Directive dates back to 2003 and still affords certain tax incentives for fossil fuels.

Alternative Fuels Infrastructure Directive

The Directive aims to reduce the EU’s dependence on oil and the environmental impact of transport in line with the EU’s 2020 target of renewable energy making up a 10% share of energy use in the transport sector.

Directive on Combined Transport

The Directive aims to cut CO2 emissions, noise and traffic congestion caused by long distance road travel to transport goods.

How much will the European Green Deal cost?

The European Green Deal will require a fair amount of money. More precisely, “at least €1 trillion of investment over the next decade. This may seem like a lot, but researchers have argued that €1 trillion is nowhere near enough. They explain that this one-trillion figure is based on the old aim of reducing greenhouse gas emissions by 40% in 2030. Von der Leyen has since raised those targets to a 50-55% reduction by 2030. Therefore, they expect the cost of the deal to be much higher: around €3 trillion over the next decade

And given the unexpected financial pressures that the COVID-19 crisis has placed on the world, funding for the EU’s ambitious green objectives may be under threat. Others fear the political backlash on a national and European level for supporting such EU policies in times of austerity. However, only €7.5bn of the trillion is actually ‘fresh’ money – the rest is being rediverted from other sources.

The European Green Deal will be comprised of four pre-existing financial sources8

  1. EU Budget
  2. InvestEU
  3. Emissions Trading System
  4. National co-financing

EU Green Deal Funding Until 2030

Funding source

What is it?

Amount (€)

EU Budget

This is the money that is contributed by the EU member states. The EU plans to raise the portion of the budget spent on climate and environmental projects to increase from 20% to 25%.

503bn

InvestEU

InvestEU is designed to encourage investment in Europe. An EU budget guarantee to the European Investment Bank (EIB) allows private investors to feel less at risk when making investments in EU projects.

279bn

EU Emissions Trading System funds

20% of the revenues from the auctioning of Carbon Credits will be added to the EU budget. This amount is dependent on carbon prices.

Estimated 25bn

National co-financing

Extra contributions from member states, to fill a gap left by the EU budget. This, however, is dependent on what extra money nations will be willing to contribute.

114bn

TOTAL

€921bn

Add the Just Transition Mechanism and you reach the magic one trillion:

Just Transition Mechanism (& Fund)

This will be granted €7.5bn of ‘fresh’ funding from the EU budget, with the rest coming from the other four funding sources.

Around 145bn

TOTAL

€1.066 trillion

Politics

The European elections in May 2019 delivered a record number of Green MEPs to Brussels. In her last-minute ascension to President of the EU Commission, von der Leyen appealed to the centre-left and greens promising a European Green Deal within her first 100 days in office. At the time, this collided with international climate protests that underlined the importance of the issue. However, there are high political tensions around green issues.

First, there is debate about the goal of making the EU climate neutral by 2050. This is a net figure, which means that member states that are in line with this target now will have less to do than others. High-polluting Poland says it will reach carbon neutrality “at its own pace”. Others, such as Spain, Sweden and Latvia, feel the targets could be even more ambitious.

However, since the times of climate strikes by schoolchildren and initial responses to the European Green Deal, another crisis has tested the world: the outbreak of COVID-19. This has placed a great deal of financial strain on EU member states that make funding sources from national co-financing seem increasingly in doubt. Taxes will most likely rise in the aftermath of the virus, as governments attempt to reduce large amounts of national debt that they have been forced to accumulate to support their economies. 

Therefore, justifying any additional green spending or taxation will be difficult for any politician that wants to remain popular. The French President Emmanuel Macron has already learnt this the hard way from months of Yellow Vest protests following rises in fuel tax to combat climate change. Others point to the rise in nationalists and populists, such as the AfD in Germany who are strongly opposed to green policies because they do not consider them to be in the national interest, as the path for future politics. 

Moreover, the European Union’s unity has been tested by the pandemic. The monetary union has been fraught with tensions, underlined by Germany’s Federal Constitutional Court ruling that the ECB’s plan to buy €2 trillion worth of bonds to support member states is unconstitutional. The EU has survived other such crises of monetary union in the past, but at a price. Now, some predict the collapse of the EU. But perhaps European unity will come at the expense of the European Green Deal.

LittleLaw’s Verdict: The EU must be brave

Europe’s man on the moon moment is an ambitious and noble cause. When it was first announced in December 2019, it faced questions on funding, effectiveness and fairness. These issues have been aggravated by the COVID-19 pandemic. Proposing the European Green Deal makes the EU like a chivalrous knight, who daringly and honourably stands up against the odds to face great adversity. Optimists read into the EU’s decision the stories of knights like Sir Gawain, Sir Galahad or Sir Lancelot, who are exemplified by their sense of knightly duty. Pessimists will view the EU as the deluded Don Quixote. It remains to be seen which story will prevail, but I fear it may be the Quixotic version.

Report written by Will Holmes

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Footnotes

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