European Green What?

The European Union has taken the first steps toward a comprehensive plan to reduce emissions 50–55 percent by 2030 and become net zero by 2050. And the details of how the continent does this could make all the difference.

by Christian Roselund
January 2020

January 15, 2020, was a big day in Brussels. Under the perpetual gray skies of the European capital, politicians from 28 nations assembled to vote on a proposal unlike any other. Billed as “greatest challenge and opportunity of our times,” it touched on everything from industry, transportation, and buildings to agriculture and land use, even including a section on plastic waste.

The thread uniting these disparate sectors is climate, with the top-line goal of making Europe carbon neutral by 2050, and a mid-term target of 50–55 percent decarbonization economy-wide by 2030. And despite is breadth and ambition, the European Green New Deal was approved by a wide margin of 482 to 136 with 95 abstentions, drawing broad support from parties on both the left and the right.

The main points of this policy had been introduced at the European Commission a month earlier by incoming European Commission President Ursula von der Leyen, who makes for a strange messenger for this bold proposal. The longtime ally of former German Chancellor Angela Merkel is known more for her parental leave policies than any record of strong energy or environmental work.

It is also a sign of changing times when 61-year old center-right politicians are bringing forward such proposals. Youth have been leading the call for bold climate action globally through school strikes, and in the United States through the Sunrise Movement. There is a generation between von der Leyen and the chief proponent of the Green New Deal in the US Congress, Alexandria Ocasio Cortez, the youngest person to serve in that office to date.

But it may be that it was simply an idea whose time had come. This proposal emerging at this time could be the result of a number of factors, including the falling costs of renewable energy and electric vehicles, Europe’s re-emergence from economic crisis, and more than anything the momentum of political movements. The buzz generated by proponents of a Green New Deal in the United States may be one of these, but the growing influence of the European climate movement and its teenage Messiah, Greta Thunberg, are likely bigger drivers.

The truth is that this concept is far from new. European Green Parties have been calling for a Green New Deal in their platforms for at least a decade, but the lack of a clear majority by either center-right or center-left coalitions and strong results for the Green Party in 2019 European Parliament elections now puts the Greens in a potential position as kingmakers in whatever ruling coalition does emerge.

Upping the Ante

The European Green Deal’s top-line target of net zero emissions by 2050 is groundbreaking. Previously a number of EU member nations including Denmark, Finland, France, Germany, Sweden, and the UK had made net zero or similar commitments, however they were often limited to the electricity sector and some of the largest nations had not set a date by which to fully decarbonize.

But while this target is three decades away, what will have a much greater impact on policies today is the interim target of 50–55 percent carbon reductions from 1990 levels by 2030. This is an acceleration on the EU’s previous target of 40 percent decarbonization; as of 2018 the 28-state block had brought emissions down 23 percent.

It is difficult to directly compare this European target of 50–55 percent from 1990 levels to the global 45 percent from 2010 levels that the Intergovernmental Panel on Climate Change has stated is needed to keep the world at 1.5°C of warming or less. However, as Europe and other developed nations are expected to bear more of this burden, some environmental groups had pushed for 60–70 percent cuts.

Regardless, 50–55 percent is a significant acceleration of ambition. “This is a steep decline for the level that we have today,” explains Dario Traum, Bloomberg NEF’s head of policy for Europe, the Middle East, and Africa. “The 40 percent was already quite ambitious.”

One important implication of this change is that it will require greater contributions from outside the electricity sector, which traditionally has seen the most attention. The carbon intensity of electricity generation has fallen 43 percent from 1990 to 2016, and most member states have set policies to wring out further reductions. And while the EU already has policies to address other sectors, these have not been as ambitious.

Regulating Carbon from Ships and Planes

As part of its plan for carbon neutrality, the European Green Deal calls for a 90 percent reduction in transportation sector emissions by 2050, with contributions from sectors including road, rail, aviation, and shipping. In practical terms, the Green Deal contemplates looking at tax loopholes for airline and maritime fuels, subjecting shipping to the Emissions Trading System (ETS), and limiting the number of ETS exemptions for air travel.

The Energy Transitions Commission has proposed a different approach. Faustine Delasalle, the director of the Commission, says that while integrating aviation and shipping into ETS “is right in principle,” it will not deliver.

“The level of pricing that EU-ETS delivers is far lower than the level that would be required to trigger a shift to new fuels in aviation and shipping and underpin the business case for investment in clean fuel plants,” argues Delasalle. She notes that the current €24 per ton price of carbon under ETS is far below the estimated €135 per ton that would be needed to spur an initial shift. Energy Transitions Commission has argued that it is necessary to at least complement EU-ETS with fuel mandates that would force the adoption of zero-carbon fuels, and Delasalle says that this would also provide certainty on future demand volumes.

Furthermore, it may not be easy to move these sectors into ETS; Bloomberg NEF describes bringing shipping into the trading system as a “mammoth” task.

Automakers Feeling the Heat

But perhaps the biggest impact will be on the automotive sector. German carmakers have already been bristling under the impact of CO2 emissions performance standards. These require that the vehicles they produce have a limited volume of emissions, which are low enough to set a de-facto requirement for a minimum number of electric vehicles. The European Green Deal plans to revisit this legislation by June 2021, “to ensure a clear pathway from 2025 onwards towards zero-emission mobility.”

European automakers have responded by issuing a 10-point plan for compliance, which includes insisting on technology neutrality in policies and changes in taxation policies for fuels. The European Automobile Manufacturers Association has also called for assistance in building out an EU-wide network of charging points and alternative fueling stations, and specifically an “ambitious review” of the Alternative Fuels Infrastructure Directive.

To put all of this into numbers, Bloomberg NEF estimates that the EU will double its current levels of EVs to 13 million by 2025, and that this will require the roll-out of 1 million charging and refueling stations.

But build-out of charging stations is not the least of the challenges faced by the plan. Bloomberg NEF notes that road transport will likely have to bear more of the burden of decarbonization, given that the task for aviation, shipping, and rail is harder.

One Trillion Euros

But while many of the changes that will need to happen at the individual sector level are still under development, the proposal at least has a price tag. Von der Leyen has proposed mobilizing an unprecedented €1 trillion over the next decade in both public and private investment towards this transition. This funding would come from several different sources and a main source would be the European Investment Bank (EIB), as well as a significant portion of the EU budget, and revenues from an expanded EU-ETS.

Additionally, the plan calls for the adoption of the EU taxonomy for sustainable activities, a framework that classifies what investments do and do not qualify as compliant with a 1.5°C pathway. And while this last step may not attract the attention that the thirteen-figure top-line number does, Rocky Mountain Institute’s Climate Finance Program says that this is exactly what is needed by investors.

“The mobilization of a trillion euros is huge, but so is the proposal to adopt the green taxonomy, which can spur further investment” explains Lucy Kessler, a senior associate at Rocky Mountain Institute. “It provides a common language that investors need.”

Kessler notes that this move comes in the context of changes to the way that the financial sector approaches climate change, including action by the Bank of England to incorporate climate into its decision-making. “The Bank of England is beginning to recognize that Climate change is no longer just a reputation risk, but is a financial and strategic risk,” notes Kessler.

Additionally, the European Green Deal envisions “record” amounts of public investment in advanced research and innovation, but there are fewer details about the specific sources of these funds and how they would be disbursed.

The Polish Question

The first aspect of this massive mobilization of capital that is being actualized upon is a fund which marries social justice and political expediency. When proposed in December, the Just Transition Mechanism had a €100 million proposed budget, to “provide targeted support to regions and sectors that are most affected by the transition towards the green economy.” This includes a new €25–€30 billion public sector loan facility with the EIB backed by the EU budget.

The EU states that this will focus on “the regions, industries, and workers who will face the greatest challenges,” and this means Poland more than anywhere else. Coal provided nearly 80 percent of Poland’s electricity in 2018 and nearly half of its primary energy, and the ruling Law and Justice Party has traditionally resisted EU climate policies that would force decarbonization.

In Poland the EU-ETS is having clear impacts on both Polish coal mining and electric utilities, and the nation has given indications that it is slowly coming around. The Polish Energy Market Agency’s recently released 2019 draft plan envisions less than 17 GW of fossil fuel capacity in 2040, down from the more than 20 GW that was planned only a year ago.

“It’s going to need that help to move decisively away from (the coal) sector,” states Bloomberg NEF’s Dario Traum. He notes that it is not accidental that one of the first pieces of legislation that is being considered is funding for the Just Transition Mechanism, nor is it an accident that only nations which agree to the new climate objectives of the European Green Deal will be eligible for funding.

This quid pro quo also has its detractors, and Traum names the Netherlands as among the nations that have expressed reservations about this transfer of funds. But other nations have expressed interest in EU funds to assist with the transition, including the Baltic nations, which have jointly requested funding in addition to the Just Transition Mechanism.

For Poland and similar nations that are less affluent and more dependent on fossil fuels, funding will be needed not only to transition coal communities, but also to rebuild the replacement. And despite the Law and Justice Party’s denial in the face of the collapse of the nation’s domestic coal industry, Traum notes that change is inevitable. “None of them are dreaming that their kids and their kid’s kids can work in a coal mine,” he explains.

Traum also cites Greece’s plans to phase out coal, which accelerated in the last quarter of 2019. “The coming decade is going to see support for fossil fuels erode at a very fast pace.”

More Questions than Answers

In many ways, the 25-page text voted on by the European Commission sketches out only the broadest outlines of the suite of policies which will become the European Green Deal, and all of these will need to make their way through approval in various bills. “It’s going to take some time before we get there,” notes Traum.

And while it is likely that most or all of these measures will become actual policies in the coming months and years, how they are implemented on the ground is another matter.

“It is all well and good to raise the ambition in Brussels, but if you look at what is happening in onshore wind in Germany, the tenders are often not fully subscribed,” notes Bloomberg NEF’s Dario Traum. He identifies a number of challenges, including legal issues, permitting, and NIMBYism as factors that provide friction for a wide range of needed infrastructure projects including offshore wind and new rail systems.

In the end, in order to translate these targets into actual decarbonization, it may be necessary to make bigger changes in society, including potentially changing the way that renewable energy and infrastructure is approved, and limiting the ability of local communities to stop or delay necessary projects.

RMI’s Lucy Kessler notes that the European Green Deal sends a powerful signal to investors. “It sends the signal that this is the direction that Europe is moving, and that financial regulators increasingly see climate change as a risk.”

And while the European Green Deal shows up the lack of action in other nations, particularly the United States, it could inspire a greater groundswell of support from diverse actors across world markets. “If these goals are to be met, the next decade is going to look very different than the last one,” notes Dario Traum.