Towards a New, Sustainable Paradigm: Pillars and Trends of the European Green Transition

A Greener Europe

Planet Earth has a deadline. Seven years, 49 days, 3 hours, 32 minutes and counting: this is the time left before the planet approaches the unsustainable 1.5°C of global warming. In this race against time, every region of the world is adopting different strategies and tools to fight the common enemy of climate change. The European Green Deal represents Europe’s major weapon within this battle, a weapon aimed at turning Europe into the first climate neutral continent by 2050 and constructed on four main pillars. The EU has already started to transform the economy in order to achieve climate neutrality by 2050. Between 1990 and 2018, the greenhouse gas emissions in the European Union fell by 23%, whereas the economy grew by 61%, witnessing that a decoupling between GDP growth and gas emissions is possible. In this sense, Next Generation EU and the new Multiannual Financial Framework 2021-2027 will be key drivers to boost and achieve a sustainable transition for the European economy. 

 

The pillars of the European Green Transition

The first pillar of European sustainable transition builds on the conception that greenhouse gas emissions have a cost, not only in environmental terms, but in social and economic terms too. Hence, carbon pricing becomes the main priority of the Deal, extending the European Trading System (ETS) and securing a just carbon tax throughout those sectors of the economy that do not align with climate goals. To reduce the risks of carbon leakage and industrial delocalization, a further carbon border adjustment mechanism has been proposed, to tax carbon emissions ascribed to the imported goods which have not been taxed at the source. The ETS and the carbon tax will be hence core sources to finance green investments to relaunch European growth within the framework of the €750 billion Next Generation EU. The Carbon Border Adjustment Mechanism, in particular, 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. 

To reduce the gap of €260 billion yearly in green investments, new sustainable investments emerge as second major priority to ensure a transition towards smart and sustainable processes of production and consumption within Europe’s economy and industrial value chains. These private and public investments, aimed at supporting an increasingly circular economy, will mainly touch on specific targets, such as energy-intensive industries like the steel, chemicals and cement ones, as well as on transport infrastructures for a smarter mobility. Within a smarter mobility framework, digitalization will be at the forefront of a new and more sustainable approach to carbon-neutrality, through innovations such as zero and low-emission vehicles. 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 resource intensive - will have to become circular, ensuring sustainable processes of production and consumption, reducing wastes substantially. 

The energy sector will be at the forefront of the energy transition: the renewable energy is already set to reach a share between 30.4% and 31.9% in 2030, not far from the target of 32%. The sector, accounting for 25% of EU greenhouse gas emissions, is crucial for EU’s de-carbonization. Several Member countries have confirmed ambitious goals for the gradual elimination of carbon in electric energy production: 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[1]. On the other hand, a fifth of electricity production in Europe relies on coal. Poland, in particular, heavily depends on 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 percent in 2030 and around 50 percent in 2050. For these reasons, Poland was the only country to opt-out from a net-zero emissions target by 2050. However, at the end of September Warsaw has moved closer to ending its heavy reliance on coal as the government and miners’ unions agreed a landmark plan to phase out mines by 2049, amid a new 2040 national energy roadmap.

Investments in transport infrastructure will be crucial to enable a transition towards a smart and sustainable mobility. Greenhouse emissions from transport sector is about 25% of overall emission, 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. Digitalization 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 elaborate more stringent standards for combustion-engine vehicles, with a new legislation on CO2 emission by June 2021. To reach the goal of less polluted cities, the EU is committed to rapidly increase the supply of sustainable alternative transport fuels. By 2025, about 1 million public recharging stations will be needed to recharge the estimated 13 million zero- and low-emission vehicles. Smart infrastructure will thus be an essential tool to reach carbon neutrality. In this direction moves intention of the EU Commission to revise the regulatory framework for energy infrastructure, in particular the TEN-E (Trans European Network – Energy) regulation. The new framework should allow boosting the introduction of innovative technologies and infrastructure upgrades: smart grids, hydrogen networks, carbon capture, energy storage and a circular value chains for batteries. The strengthening of EU’s comparative advantages in low-carbon-technologies is needed in sectors including electricity, heat, cooling and transportation.

The EU is paving the way for a faster and more efficient green transition not only through the reallocation of investments and funding, but also through a relaunch of its new industrial priorities. Industry is in fact a crucial component for Europe’s growth and prosperity, as it counts for more than 20% of EU’s economy, giving work to more than 35 million individuals. Such reprioritization, announced in March as the New Industrial Strategy for Europe, aims at offering Europe a position of strategic autonomy and leadership in the production of those goods deemed essential to ensure a competitive advantage of the continent in the transition towards sustainability, innovation and digitalization.  These goods will mainly revolve around the usage and exploitation of new digital and technological communication networks and tools, such as the 5G, semiconductors, cybersecurity and artificial intelligence. As previously highlighted, particular emphasis will also be dedicated to renewables and clean energy, developing the potential of low-carbon-instruments such as hydrogen and smart girds, and promoting a more sustainable treatment and wider strategical alliances in the field of critical raw materials. Raw materials, whose demand is expected to double by 2050, are key elements for markets such as aerospace, defence, bioenergy, batteries, pharmaceuticals and digital mobility. A sustainable and affordable production of pharmaceutical devices becomes a new priority outlined by the latest EU industrial plan too, together with a greener and cleaner fabrication of chemicals, electronics and steel. Smart mobility and transports are also considered fundamental components to foster circular economy and smart urbanization processes within the green transition, accompanied by processes of offshore production.

Together with these new industrial priorities, the EU also underlined how new alliances in the field of hydrogen and high capacity batteries will be essential to exploit the potential impact, size and integration of its single markets to set new global standards, while at the same time triggering important synergies in strategic sectors such as defence and aerospace and civil industries. 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 has plugged the whole Europe in a deep downturn cycle in the recent months. To win 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 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. Finally, the completion of the EU internal market is crucial to become more competitive at the global stage and unleash innovation potential. Joint environmental standards, a common energy taxation and shared support measures for clean technologies can help to create cleantech companies of European dimension.

To foster the transition of the overall European industry and boost the economic recovery, the European Union has launched several new strategies: among them, the circular economic Action Plan and the hydrogen strategy. The first aims at creating a market where products will be designed to last longer, to be easier to repair and upgrade, recycle and reuse. Measures will be introduced to create new business models forwaste prevention and reduction, increasing recycled content, minimising waste exports outside EU and substitute single-use packaging. 

The hydrogen strategy will be at the forefront of the transition. The Commission considers hydrogen as key driver for sustainable mobility and energy production and it has been individuated as an investment priority within Next Generation EU to boost economic growth and resilience. According to the strategy, by the end of 2024 it has been set the installation of at least 6GW of renewable hydrogen electrolysers in the EU, and the production of up to 1 million tonnes of renewable hydrogen. By 2030, the target is increased to 40GW, to become an intrinsic part of EU integrated energy system. From 2030 onwards, renewable hydrogen will be deployed at a large scale across all hard-to-decarbonise sectors. Through the European Clean Hydrogen Alliance, the EU is expected to mobilize up to €53 billion by 2030. 

The transition towards climate-neutral economy will require increasing investments all over Europe, in particular in countries heavily dependent from fossil fuels. From a political perspective, to avoid a backlash against climate policies, they should be enacted alongside compensation schemes to counter the adverse distributional effects and address the economic and social effects of the transition. To meet the needs of specific regions, the Commission has proposed a Just Transition Mechanism, the fourth pillar of the European Green Deal. The Mechanism will rely on three main sub-pillars, generating estimated investments for €150 billion from 2021 to 2027. The Just Transition Fund, namely a fund aimed at compensating the most energy- and carbon-intensive countries which will be more likely to share the largest burden of the transition,  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. However, in July 2020 EU leaders decided to reduce the JTF to €17.5 billion. The European Parliament disagrees, calling instead for €57 billion in funding for the JTF. Ongoing negotiations on the EU’s budget for 2021-2027 should result in a stronger JTF, considering its importance for social inclusiveness and for the acceptance of the EU decarbonization process. It is thus important that climate policies are targeted and well-designed to reduce the regressive effects, focusing the reduction of emissions on the less impacting sectors. Secondly, it is crucial that the revenues from climate policies are used to compensate the citizens most affected if the final goal is to achieve a positive attitude of population towards climate policies. Third, climate policies will result in a reallocation of employment: policies to facilitate the transition towards new jobs for those at risk are essential. EU, national and regional authorities play a crucial role to ensure that the workforce can be retrained quickly: adult education, re-training and policies to avoid a high level of unemployment in the most affected regions. 

 

The European green transition: recent trends and developments

In the last months, the European Commission has taken several steps to meet the objective of the Paris Agreement of keeping global temperature increase well below 2°C, with an ideal threshold of 1.5°C . The initial target of 40% reduction in greenhouse gas emissions with respect to the 1990 level by 2030 has been further expanded from a 50%-55% in March 2020, and to an even tighter 55% on the 17^th September 2020. On the same date, together with the 55% climate target, Ursula von der Leyen has announced other three major next steps in the race towards carbon neutrality: 

• An amendment to include the new 55% reduction of greenhouse gas target in the European Climate Law as part of the European transition to climate neutrality;
• New legislative proposals to be presented by June 2021. These proposals encompass a variety of subjects: first, a revision and expansion of the EU Emissions Trading System (ETS), granting a deeper alignment between carbon pricing and climate goals. The second proposal of the Commission concerns instead an update and adaptation of the Effort Sharing Regulation with regards to the emissions related to land usage. An enhancement and reinforcement of EU renewables and energy objectives as well as a strengthening of norms and regulations on the matter of CO2 emissions for cars stand as third and fourth proposals;
• The adoption of a first analysis and assessment of the National Energy and Climate Plans (NECPs) submitted by each Member States. Constituting a fundamental part of the Clean Energy for all Europeans package adopted in the last year,  the NECPs outline how each Member States intends to approach matters of energy efficiency, renewables and greenhouse gas emissions reduction in terms of policies, multi-sectorial interactions, research and innovation. An initial evaluation of NECPs prospects an encouraging scenario, where Member States are already in the right direction of surpassing the current 2030 renewable energy target of 32% by almost 2 points percentage, with an estimated value of 33.7%. In terms of energy efficiency, however, the NECPs currently forecast a less promising projection: as a matter of fact, the gap with respect to the ultimate target of 32,5% still corresponds to 2,8% for primary energy consumption and 3.1% for final energy consumption.

On 6^th October 2020, the European Parliament voted to update the EU’s climate target for 2030, backing a 60% reduction in greenhouse gas emissions by the end of the decade. The text will now be forwarded to the EU Council of Ministers representing the EU’s 27 member states for final approval.

Alongside these major announcements, the European Commission launched on this same day the “European Green Deal Call”, the last and biggest call under the EU Horizon 2020 programme, the largest EU programme – with almost € 80 billion in available funds – dedicated to research and innovation. The €1 billion European Green Call represents a new green challenge aimed at fostering innovative solutions to the climate crisis by tackling areas such as clean and affordable energy, smart mobility, toxic-free environments, smart mobility and circular economy. 

One of the most important role in the transition will be played by the main financial institution of the European Union, 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. These goals are encompassed in the “Climate Bank Roadmap 2021-2025”, aimed at unlocking at least €1 trillion of investments dedicated to climate action and environmental sustainability from public and private partners by 2030.

On this line of thought and action, the European Commission also specified how, on a broader scale, at least 30% of the total spending in the next Multiannual Financial Framework (MMF) and in the Next Generation EU ought to be directed towards carbon neutral projects, to achieve the ultimate goal of zero oil and gas related investments by 2030 and carbon neutrality by 2050. This means at least €547,3 billion of climate related investments. The EU leaders' promise of devoting a minimum of 30% of the €750 billions of the Recovery Fund to sustainable purposes is meant to be further matched with the introduction of green bonds. Green bonds represent an unprecedented tool proposed by Brussels in its path and commitment towards a sustainable financial framework for the Union. With the aim of selling €225 billions of social and green bonds for an environmentally friendly recovery post pandemic, Ursula von der Leyen has in fact emphasized in the last months how these instruments will be central in a financial transition to low-carbon investments and economies, a transition which would lead the bloc to become the largest issuer worldwide.

           

The European role in fostering a global transition

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 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 chances to be 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 national level. The EU is thus committed to develop 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 the Signatory countries to strengthen the global response to the threat of climate change. Countries are called to keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius. 

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 neighbors will be fully involved in the efforts, in particular Western Balkans, the Eastern Partnership and the Southern Neighborhood. The EU-China Summit, the Comprehensive Strategy with Africa will be privileged fora to discuss international coordination in this field.  A noteworthy commitment has been taken by China, during the UN General Assembly in September 2020. President Xi Jinping has announced that his country will become carbon neutral by 2060, paving the way for a global reduction of emissions, considering that China accounts for about 28% of global emissions. 

More broadly, financial cooperation will be at the core of international efforts, with a focus on international projects in third countries aimed at phasing out fossil fuels. However, the most important tool to engage with third countries is the EU trade policy: new trade agreements will be concluded with binding clauses concerning policy alignment with the Paris Climate Agreement, as repeatedly stated by President Macron. The EU, the biggest trade bloc in the world has a powerful bargaining tool to spend with third countries: the access to the European market in exchange of 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 – are some of the pillars of the more comprehensive Next Generation EU, aimed at boosting employment and social cohesion. If the European Green Deal has originally been envisaged as a sort of reallocation mechanism for investments and employment, it will now be part of a new context marked by an enhanced role of public investments that – together with private ones – will be crucial to create an economic bazooka to relaunch and reshape the European economy in the months and years to come.