More than a year after the first lockdowns across Europe and almost two years after the May 2019 European elections, the EU has experienced a war-type shock to its economy and the health of its citizens, albeit without physical destruction. The EU has overall proved resilient despite the pandemic crisis and Brexit trade deal negotiations. It has been fostering critically important energy and climate policies at the same time its institutions and the concept of European solidarity have been subject to unprecedented tensions. A recovery and resilience fund is being set up, yet the EU’s economic cohesion has been further weakened by the crisis. Fostering cohesion and efforts for strategic autonomy in the energy sector and rapidly increasing public and private investment will be crucial if that transformation is to succeed.
Two years that changed Europe and can now change the world
Ahead of European elections two years ago, who would have bet that Germany, Poland and the Czech Republic would adopt the EU carbon neutrality objective by 2050, that an agreement on enhancing the 40 percent reduction of carbon emissions by 2030 objective to net a 55 percent reduction would be within reach, and that the European Commission (EC) would be mobilizing over 300 billion euros in grants borrowed on its own in financial markets, grants to be spent by member states (MS) in 2021-2023? The Green Deal has survived the pandemic and historical, unprecedented changes in policy ambition, speed, scale, mobilization and support are on the table: not only is this a new program of sustainable growth aimed at fighting environmental, climate and sanitary degradations, it has also become an investment roadmap of the European recovery strategy, alongside the digital transformation. And who could have foreseen that European oil and gas majors would join utilities and other players in dramatically ramping up investments into low carbon technologies? These tectonic changes were brought by social pressure, growing awareness of the interplays between the climate and biodiversity crises, technological progress, the greening of finance and political elites starting to live up to these challenges. In a sign of changing times and with thanks to tough EU regulation, electric vehicles took a 10 percent market share in 2020, a robust growth in sales despite a gloomy automotive market. Last but not least, the global climate governance picture appeared to be in a stalemate when the world went into lockdown. The COP26 had to be postponed and only a small minority of countries had met the obligation to submit a revised climate pledge for 2030. Emissions suddenly declined, yet the first signs of the Chinese recovery were accompanied by a surge of coal demand, prompting concerns that the economic recovery would bring back emissions on a soaring path. The WTO was ineffective and US-China tensions were the highest in decades, and these factors marginalized climate issues. In 2021, global climate governance comes into a new light: China, Japan, South Korea, the UK and the EU have notably adopted a carbon/climate neutrality objective by 2050/60. Canada and Australia are also expected to raise their mid-term ambition, alongside the US, which will present a new National Determined Contribution (NDC) at the climate summit of 22 April 2021. These developments call for a reality check: Is the European Green Deal going to succeed? What are the conditions for that success and the key obstacles? And how should the EU position itself in relation to global climate governance and the US-China rivalry?
The EU’s eventual success rests on its ability to foster internal cohesion
Member States have very different energy and electricity mixes, natural resource endowments and economic structures. There is no single pathway to reach climate neutrality and every MS should choose its own journey, provided that it delivers and does not hamper the efforts of others. Of course, policies need to be closely coordinated to ensure cost-effectiveness. The large sequencing scheme should also be unified. First, decarbonizing the electricity sector will need to be pushed from 25 percent of end uses currently to well over 50 percent. The transport sector is the next milestone and substantial progress can be achieved in the road and rail segment over the 2020 decade, and e-fuels should be used in aviation even though it will inevitably be costlier than present fuel. Industry, agriculture and the residential sectors should make their contribution and efforts cannot wait, but it will be very long and difficult transition. Energy efficiency is now rightly identified as the central pillar of the transformation (renovation wave of over 300 million buildings), but practical and financial hurdles are still to be addressed and high consumption reductions are uncertain in the absence of deep behavioral changes. As of now, industry and agriculture decarbonization are the two other weak spots of the journey towards carbon neutrality. MS should be able to decide which technologies will be needed. A different magnitude of effort depending on national circumstances should also be recognized, with some countries having to move quickly while others need more time as they have much higher emissions to abate, bigger challenges in terms of social acceptance and structural change, or a lower potential for affordable low-carbon energy production (hydro, offshore wind). The ultimate objective is to reach net zero, giving the possibility to reach neutrality later by individual MS, provided that this is compensated by offsets from others. What matters is that the European Commission helps by providing the rules for burden sharing, the sequencing of transition, the level of coordination and scale, and the optimization of overall system costs. This requires:
- Laying out financial and regulatory support for the right technologies and sectors where there is real need, given the chosen pathway and external competition;
- Triggering the right level of investments in low-carbon technologies with public subsidies and conducive regulation;
- Ensuring that finance can be mobilized for investments and that there is an optimal redistribution of costs and benefits among the states, regions, sectors and citizens.
There are manifold problems that may arise. Several MS want to drop nuclear benefits from a level playing field and insist that while being low carbon, nuclear waste contradicts the “do not harm” principle. Instead, they want to impose their renewables based solutions on the rest of Europe. Other MS argue that they will need natural gas longer in order to reduce system costs while others want to reject gas and coal, going for the all electric option. Controversies related to the taxonomy and its delegated acts reflect these issues and Europe should not contradict the rest of the world on either nuclear or gas. The taxonomy should also help industries in transition improve their operations, no matter if this is not fully green from the start. Of course, there will be challenges in aligning criteria and conditions among policies and instruments as well as with the climate and environmental urgency. But the point is the transition should not destroy jobs, industries and balances among MS, that is, social, economic and political cohesion. Otherwise, it will fail altogether. Hydrogen will have to be a targeted complement to electrification, not a substitute. Its roll out requires public funding, but that should be carefully tailored to real and efficient needs. Priority should be given to existing carbon intensive production/uses such as aviation fuels, segments in industry and eventually, ammonia for the petrochemical sector or maritime segment. Its competitive large scale production will require all fuels as renewable electricity and water could actually be scarce and as efficiency losses and logistics mean higher costs. Overall, as stakeholders discuss the right balance between electrons and molecules, one should not underestimate the pace of change in electricity demand patterns with the electrification of transport and digitalization of the economies. Seeking to decarbonize without nuclear, or in pushing out gas from power generation too quickly as the penetration of renewables accelerates, or in planning for hundreds of terawatt hours of hydrogen imports looks questionable, if not irresponsible.
Following the crises, structural challenges to the acceleration of the transition appear. Several MS face soaring public debt levels with less budgetary playing field, especially if interest rates rise. Millions of Europeans are poorer and facing social difficulties. Recovery funds may not be used to accelerate the transition, but rather to fill budget gaps, and robust new cross border value chains may not emerge. There is way too little information available about the plans of MS, and too many are late in attaining goals. Moreover, while governments are keen to take grants, they are not so eager to take loans. Recovery fund allocation will be conditional on at least 37 percent of money being allocated to sustainable projects and digital investments. The EC will also have to be the effective gatekeeper for ensuring that recovery funds are properly used while MS are responsible for laying out credible investment and reform plans. The risk is too slow, insufficient and uneven spending, and thatwould failto give the technological boost needed and turn out as a missed opportunity for industrial renaissance and upward economic convergence.
An independent energy and climate advisory body assessing European and policies from MS would be an efficient tool, notably with a more systematic approach to the CO2 abatement costs of the different options. Cohesion is also paramount among regions, territories and cities - they are the blind spot of the Green Deal. They will have a crucial role to play yet lack funding and resources although the Just Transition fund is a new much needed approach to avoid entire regions falling further behind. Education and training will be essential and requires constant dialogue and adjustment at all levels to prepare the right skills for tomorrow. Lastly, the Green deal will have to deliver on the job front: more lasting, qualified, attractive jobs need to be created everywhere, not just in a few regions.
Industrialization and strategic autonomy in energy and digital systems are critical
The crises have highlighted the role of value chain resilience and the importance of having European companies mastering critical components of value chains for current and future technologies that will determine Europe’s economic and political sovereignty. Industrial policies for low carbon solutions and technologies are central to this endeavor. The EU has rightly been developing the Important Projects of Common European Interest (IPCEI) instrument and mobilizing for battery cells with the European Battery Alliance, aswell asincreasingly on recycling and mining, and now for electrolyzers. Horizon Europe or the Modernization Fund, for example, have been strengthened and the stability pact could be reformed. The need for combining the digital transformation with the energy transition is rightly identified, with initiatives on data centers, quantic calculators, space and artificial intelligence. Advanced economies will transform their worlds with artificial intelligence, data, smart systems and robotization. More attention needs to be paid now to scaling up hydrogen, digital buildings, high efficiency individual and centralized cooling systems, small modular nuclear reactors, new highly efficient solar cells, all major equipment of electricity grids batteries, European mining, refining and battery recycling ventures and offshore wind systems. Major innovation and scale up efforts are needed in the field of electricity storage, recycling, semiconductors and solid state battery cells. Decisively, the EU needs to concentrate on a market design that triggers investments at the scale needed: a doubling for the power sector alone, a tripling for energy efficiency, not to mention industry! That requires walking a smart line: regulation can deliver quickly but the implied shadow carbon price varies, while a super high carbon price risks derailing the economy. The decarbonization of existing industries will be costly and challenging to deliver. Europe needs robust steel, cement and petrochemical industries and outsourcing emissions would be fully inconsistent with Europe’s climate ambitions. Support must come from clear and predictable targets, ecodesign regulation, financial support and smart and coordinated taxation. The carbon border adjustment mechanism may protect these industries from unfair competition (provided that free carbon allocation is progressively cancelled, which is a challenge for exporters), help replenish the EC budget and contribute to international climate finance. Should it not work out, a plan B is needed, one based on stricter ecodesign standards on emission-intensive products, consumption taxes coupled with environmental and social certificates and more direct grants or preferential loans to companies exposed to international competition that are making decarbonization investments. Overall, EU’s competitiveness must be built around carbon and environmental footprints and strict standards.
Navigating the storm of the US-China rivalry
The multiple crises have also fostered the systemic nature of the US-China rivalry. With China and the US committing to deep decarbonization and mobilizing recovery funds for that purpose, the technological race and competition for standards, markets and innovation will strengthen. EU cohesion and strategic action will be essential if the EU is to have a say and preserve its interests, which need to be clearly defined: ensuring that EU’s acceleration effort does not open new vulnerabilities; protecting European companies and jobs from unfair actions and practices and helping them deliver the investment and technologies needed in Europe and abroad; and scaling up global decarbonization and biodiversity protection efforts to preserve the planet. Competition from China will toughen, especially with regards to low carbon mobility technologies and solutions, nuclear, offshore wind, smart and sustainable cities and everything related to internet of things and artificial intelligence. China is also expected to seek greater advantage and leverage from its strong, if not dominant, position in many critical metals and rare earths, and the 14th Five-Year Plan confirms China’s focus on self-reliance. Competition from the US will be particularly tough in the field of industrial data, electricity storage, clean mobility, nuclear notably coupled with hydrogen, and CCS, especially in the context of the infrastructure package and large federal support for strategic industries. The EU should be active, using trade, diplomacy and development aid, in order to promote a result-oriented global energy and climate governance agenda. That would include:
- Higher NDC commitments by leading economies, notably China, the US, South Korea, Japan, and Australia;
- A major initiative on plastic sobriety, recycling alongside efforts to reduce the carbon footprint of existing hydrogen and ammonia uses, which could be dealt with by the G20;
- Fostering efforts by the G20 for energy efficient appliances and standards worldwide and for finally phasing out fossil fuel subsidies, more than ten years after the Pittsburgh summit;
- Harmonizing green finance, notably extra financial disclosures, taxonomies,
green bonds standards measures to fight greenwashing;
- Proceeding with a swift implementation of the carbon border
adjustment mechanism for the steel, cement, electricity, fertilizers and
aluminum industries, while ensuring full WTO compliance and strong coordination
with trade partners;
- Stopping planning for new coal fired power plant projects, immediately ending coal power plants finance, closing ageing coal plants in China, the US, Japan, Korea and Australia and accelerating the German coal phase out;
- Ramping up funding for adaptation in emerging economies exposed to climate change;
- Creating a UN observatory of climate related changes, risks and threats with an alert mechanism and a response force;
- Seeking the right balance between industrialization and protection from unfair practices and the need to seek open and transparent markets and trade;
- Engaging Sub-Saharan African nations into an engaged sustainable energy access partnership, with more conditionality, yet more tailored support measures and resources to scale up investments into grids, smart and hybrid systems, and resilient infrastructures;
- Leading a global efforts towards helping the suffocating mega cities to becoming more sustainable and resilient.