European Union Policy – What is the European Green Deal?

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European Union Policy – What is the European Green Deal, how can it be achieved from a finance perspective and how important is it in the global context?

Introduction

The European Union (“EU”) has set many targets to enable it to achieve its central goal on environmental policy: to make Europe the “first climate neutral continent in the world” (Europa, 2022). To achieve this, the EU has set out policies on almost all areas of life, from making transport sustainable and leading the “third industrial revolution” to cleaning its energy system and improving buildings for greener lifestyles (Europa, 2022). To say that this is ambitious in the current context, would be an understatement. Internally, societies in the EU are increasingly unequal both from a financial and a climate perspective, meaning that many of the EU’s policies must become increasingly targeted at wealthier people to achieve its goals. If the goal of becoming the first “climate neutral continent” is achievable, there is also a broader question surrounding the impact this will actually have on solving a global problem, particularly given the way that the EU has handled the Covid-19 crisis and the growth in CO2 emissions in other countries (Worldometer, 2022). This article will introduce the EU’s goals and targets, examine what is required to make them achievable purely from a finance perspective and assess how important this is in the context of climate change.

What are the EU’s goals in the European Green Deal?

The EU set out its blueprint for transformational change in the “European Green Deal” (Europa, 2022). The goals are straightforward, the 27 EU Member States will turn the EU into the first climate neutral continent by 2050 and each Member State will reduce its emissions by at least 55% by 2030, compared to 1990 levels (Europa, 2022). This is intended to create new opportunities for investment and innovation, as well as reduce emissions, address energy poverty, reduce external energy dependency and improve health and wellbeing for EU citizens (Europa, 2022). These overarching goals are underpinned by more specific targets, for example in the automotive industry by 2030 it is intended that there will be a 55% reduction in emissions from cars and 0 emissions from new cars by 2035, in the construction industry 35,000,000 buildings could be renovated, creating 160,000 “green jobs” by 2030 (Europa, 2022). It is broad and ambitious in its scope.

The European Green Deal sits alongside certain larger international treaties on climate change. One of the key components of the European Green Deal is to encourage the funding of climate focused development in developing nations through providing financing. The obligations for developed countries to provide financial assistance to developing countries so that they can build “clean, climate-resilient futures” is enshrined in the Paris Agreement of 2015 (UNFCC, 2022). The Glasgow Climate Pact built on this, confirming that there will be a “doubling of finance to support developing countries” (UN, 2022). It is in this context that the EU is striving to be a world leader in the fight against climate change.

What is the key to making the European Green Deal achievable from a finance perspective?

The mention of finance in the context of radical environmental change tends to lead to an assumption that we are only really discussing government funding. However, finance is broader than just public sector debt and it is important to consider that during any period of change there will be new risks to identify and manage, and novel problems to solve.

One approach taken by the EU has sought to manage and regulate private financial services and make them “greener” through the introduction of regulation. The Sustainable Finance Disclosure Regulation (“SFDR”), which became effective in March 2021 was introduced to ensure that private advisers in the finance industry had to consider the adverse sustainability impacts in their investment processes and provide sustainability-related information with respect to financial products (KPMG, 2022). The SFDR is related to the Taxonomy Regulation, which seeks to prevent “greenwashing”. The Taxonomy Regulation sets out criteria which must be adhered to for an activity to be considered “environmentally sustainable” which includes complying with the minimum ESG standards, meeting certain technical metrics and aligning with the sustainability objectives of the EU (JPM, 2022). The Taxonomy Regulation and SFDR together place significant obligations on businesses to become compliant and include penalties for those who do not. This flips the focus for transformation away from just relying on public sector funding and ensures that the private sector bears its fair share of responsibility for environmentally focused change. This is vital for the success of the European Green Deal, particularly given that interest rates remain historically low and financial markets are not as resilient as may have been expected given that we are 24 years from the 2008 recession. Some of the traditional public sector funding methods available during the 20th century are not applicable or available in the current context.

This is not to say that the public sector will not be providing key funding to tackle climate change also; it will. The EU Commission has proposed that at least 25% of EU expenditure will contribute to climate action during 2021-2027 (Europa 2, 2022). For context, the budget for this period is EUR 2.018 trillion, making 25% of this amount c.EUR 500 billion (Europa 3, 2022). This may sound like a large amount of money, however the EU spent a total of EUR 289 billion on bailout packages for Greece to help it recover from the 2008 financial crisis (BBC, 2018). Accounting for inflation, the difference between the bail-out packages that were made available to Greece and the proportion of the budget made available for climate action during 2021-2027 is only c.EUR 165 billion (IT, 2022). There is no doubt that the Greek economic crisis was a key moment for the EU owing to fears of Grexit. However, the closeness of these numbers immediately points to an uneasy realisation that the EU Commission may still not be allocating sufficient funding to climate initiatives given the ambitiousness of the European Green Deal.

It is not yet clear how the EU will seek to tackle carbon inequality across the 27 Member States either. Many of the regulatory plans for private financial services and the funding available do not address one key issue: since 1990, emissions cuts in the EU have been achieved only among lower and middle income EU citizens, while the total emissions of the richest 10% of EU citizens increased (Oxfam 1, 2020). To put this into a global context, the EU was responsible for 15% of global cumulative consumption emissions between 1990 and 2015, while being just 7% of the global population; while the richest 10% of EU citizens were responsible for 27% of EU emissions (Oxfam 2, 2020). This means that the top 10% of EU citizens contributed to 4.05% of global emissions between 1995 and 2010. In some ways this can be seen hand in hand with broader inequality growth during this period, as many Europeans have seen their real wages tumble while wealthy Europeans have become increasingly rich in real terms. There are not any clear EU regulations which tackle this, neither has funding been made available to these wealthier groups to make their lives more sustainable. Whatever your political view is on governments managing private wealth, it is clear that from a carbon consumption perspective wealthier people need to do more than less wealthy people to help tackle climate change. From an EU policy perspective, there are certain changes which could be made to address this. For example, frequent flyers could be taxed substantially more for their flights, a carbon-linked wealth tax could be introduced to bring further funds into the EU budget and a carbon cap could be introduced to limit a person’s annual carbon allowance, with any carbon consumed in excess being taxable. It remains to be seen what the EU will do to tackle this.

How important is the European Green Deal from a global perspective?

It is difficult to discern the global impact that the success of the European Green Deal could have. Purely on the basis of the EU’s contributions to CO2 emissions, any reductions are likely to become increasingly unimportant over time. The EU population was 5.9% of the global population in 2018 and is expected to fall further over the coming century (Europa 4, 2020). This means that any successes in fighting climate change which are made by EU citizens and not replicated in other regions in the world will be increasingly ineffective from a global perspective. This is likely to be the case at least in the short term, as many of the developing countries outside the EU have yet to reach peak greenhouse emissions in their development cycles. This means that, while aspirational, it is likely that the EU plays an ever-reducing part in the actual reduction of emissions through behaviour of its citizens alone.

One area in which the European Green Deal’s achievements could cause significant improvements from a global perspective is through research and innovation. The EU is home to some excellent research centres which, if expertise sharing is accepted, could provide necessary technology to reduce the adverse impact other nations and groups have on the planet. Horizon Europe has been created with this in mind. It is a EUR 95.5 billion research and innovation framework which forms part of the EUs 2021 to 2027 budget and seeks to support top researchers, innovators and citizens to create a “sustainable, fair and prosperous future” for the planet (Europa 5, 2022). The budget allocated, combined with the expertise from the European Innovation Council formed as part of Horizon Europe could bolster the work of innovating groups to help tackle climate change globally. If executed correctly, this could create a more equitable planet from a carbon consumption perspective while providing fuel for the green revolution globally. However, before becoming too excited by this, it is important to recall the approach taken by the EU to Covid-19 vaccines, where it has refused to lift intellectual property rights despite the global challenges faced (RW, 2022). If it takes a similar approach, poorer nations will likely be unable to gain access to such innovations and seek cheaper, potentially less sustainable alternatives. It is therefore important for the EU to learn the lessons of the pandemic – i.e. that to solve a global problem you need to have global solutions – and ensure that it is prepared to forgo profits for progress.

Closing remarks

This is a very brief introduction to the European Green Deal and only focuses on the use of finance to help make it achievable. There are many other elements to the European Green Deal which are not covered here, and which are of core importance to its success. One common theme however is this: it is not obviously the remedy to a global problem.

References

· (BBC, 2018) Accessible at: https://www.bbc.co.uk/news/world-europe-45245969. Accessed on: 7 March 2022.

· (Europa 1, 2022) Accessible at: https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en Accessed on: 7 March 2022.

· (Europa 2, 2022) Accessible at: https://ec.europa.eu/clima/eu-action/funding-climate-action/supporting-climate-action-through-eu-budget_en. Accessed on: 7 March 2022.

· (Europa 3, 2022) Accessible at: https://ec.europa.eu/info/strategy/eu-budget/long-term-eu-budget/2021-2027/whats-new_en. Accessed on: 7 March 2022.

· (Europa 4, 2020) Accessible at: https://ec.europa.eu/eurostat/cache/htmlpub/eu_in_the_world_2020/chapter1.html. Accessed on: 7 March 2022.

· (Europa 5, 2022) Accessible at: https://ec.europa.eu/environment/ecoap/about-action-plan/union-funding-programmes_en. Accessed on: 7 March 2022.

· (IT, 2022) Accessible at: https://www.inflationtool.com/euro/2010-to-present-value?amount=289&year2=2022&frequency=yearly. Accessed on: 7 March 2022.

· (KPMG, 2021) Accessible at: https://assets.kpmg/content/dam/kpmg/ie/pdf/2021/03/ie-sustainable-finance-disclosure-reg-sfdr.pdf. Accessed on: 7 March 2022.

· (JPM, 2022) Accessible at: https://am.jpmorgan.com/gb/en/asset-management/institutional/investment-strategies/sustainable-investing/eu-taxonomy-regulation/. Accessed on: 7 March 2022.

· (MT, 2019) Accessible at: https://www.militarytimes.com/opinion/commentary/2020/02/06/the-iraq-war-has-cost-the-us-nearly-2-trillion/. Accessed on: 7 March 2022.

· (Oxfam 1, 2020) Accessible at: https://www.oxfam.org/en/research/confronting-carbon-inequality-european-union. Accessed on: 7 March 2022.

· (Oxfam 2, 2020) Accessible at: https://oi-files-d8-prod.s3.eu-west-2.amazonaws.com/s3fs-public/2020-12/Confronting%20Carbon%20Inequality%20in%20the%20EU_0.pdf. Accessed on: 7 March 2022.

· (RW, 2022) Accessible at: https://www.republicworld.com/world-news/europe/no-sign-of-eu-lifting-ip-rights-for-covid-19-shots-articleshow.html. Accessed on: 18 February 2022.

· (UN, 2022) Accessible at: https://www.un.org/en/climatechange/cop26. Accessed on: 7 March 2022.

· (UNFCC, 2022) Accessible at: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement/key-aspects-of-the-paris-agreement. Accessed on: 7 March 2022.

· (Wed,2022) Accessible at: https://wid.world/europe2019/. Accessed on: 7 March 2022.

· (Worldometer, 2022) Accessible at: https://www.worldometers.info/co2-emissions/co2-emissions-by-country. Accessed on: 7 March 2022.