Towards the EU’s green economy: obstacles and opportunities

Introduction 

Energy has been an underlying factor in the creation of the European Coal and Steel Community (ECSC), a predecessor of the EU, playing thus an essential role in the political unification of the Union (Hafner, Raimondi 2020). Through time, the attitude of the EU towards energy has changed, and now it is a rather dividing issue for member states. The EU laws call for solidarity and support while transitioning to a green economy and sustainability. In the consolidated version of the Treaty of the Functioning of the European Union (TFEU), Article 194 states that the Union should develop an energy policy with regards to the solidarity between member states to ensure an effective energy market, energy security for members, energy efficiency, development of renewable forms of energy, and the interconnectedness of energy networks (TFEU, 2012). In addition, article 173 references the coordination of the member states’ efforts to accelerate the adjustment of the EU’s industry to structural changes (TFEU, 2012).

This analysis argues that a lack of coordination between member states does not allow the EU to have a fully-fledged green industrial policy. This article analyses two important components of the transition to a green economy in the field of energy: industrial policy and carbon pricing. Furthermore, this article argues that the main constraints and incoherences are due to the geopolitical thinking of member states regarding the solution to problems caused by climate change, as well as differences in willingness to transform the economy. 

The need for a green industrial policy 

The main source of greenhouse gas (GHG) emissions is coal, the primary energy source for European countries during the first steps of European political unification. The EU has adopted several initiatives regarding the transition of energy sources based on fossil fuels towards more sustainable ones (Anke et al., 2020). Structural changes in the economy are crucial to reduce emissions and make the industry more sustainable in the long term. The adoption of the Green Deal Industrial Plan is supposed to focus precisely on these transition issues. Scholars see it as an effective instrument for productivity growth and income increase (Barnes, 2021; Lucchese & Pianta, 2020). Moreover, the Green Deal Industrial Plan provides an opportunity to combine technical and institutional mechanisms to decouple economic development from resource depletion (Altenburg & Assman, 2017). 

The Green Deal Industrial Plan can be considered a start of the EU’s green industrial policy, as it consists of a set of investments, incentives, regulations, and policy support to facilitate the creation of environmental technologies and transform the structure of the economy overall to become more sustainable. It should be distinguished from climate policy, which focuses on reaching environmental targets of decreasing GHG emissions. By contrast, green industrial policy is aimed at structural changes of the economy to make it more sustainable. The logic behind the two types of policy is therefore different, while the goal is ultimately the same. Both need to be implemented to ensure that technological changes cover all the polluting sectors and actually result in the decline of emissions and reaching of the environmental targets, since pursuing a green industry may result in competition for financial resources between companies but not enough decarbonisation (Allan et al., 2021). 

Companies, being profit-maximisers, may be reluctant to invest in technologies with high levels of risk and uncertain profits (Pianta & Lucchese, 2020). Innovations are associated with these uncertainties since, usually, actors who take the risks of producing the technologies are the ones who benefit the most if they succeed or bear the cost of failure. A solution may be to try to separate risk-takers and cost-bearers, and an increased role of government would help reward those economic actors who usually take risks (Lazonick & Mazzucato, 2013). Another attempt to bring long-term contractual security for investors are Carbon Contracts for Differences – providing funding to energy-intensive industries for a 15-years period to cover their additional costs of transition to low-emissions technologies (Gerres & Linares, 2022). Furthermore, the EU tries to counter risks associated with investments with the Innovation Fund which aims to finance highly innovative projects and share the risks between the EU and innovators (European Commission, 2023). It is crucial that support to risk-taking companies be provided in the form of sizable grants, and that their application process is not highly bureaucratised (Claeys et al., 2019). In order to ensure that the EU’s investments are returned, the Commission provides technical support for applicants, as well as monitoring the management of the qualifying projects (European Commission, 2023).

The ambitions of the EU in terms of sustainability are stated in the European Green Deal (EGD), which was adopted in December 2019 as an umbrella strategy and a pledge to make Europe the first carbon-neutral continent by 2050. The strategy aims to make the EU economically sustainable without sacrificing the planet’s resources. The logic of the EGD is, therefore, similar to that of a green industrial policy, as it focuses on support of innovations, mobilisation of private investments, and encouraging coordination of member states’ efforts. However, the EGD itself contains rather vague pledges and aims for industrial policy objectives such as: “Further decarbonising the energy system”, addressing “the risk of energy poverty”, or restoring “the natural functions of ground and surface water” (European Commission, 2021). The range of issues discussed in the EGD is rather extensive, from energy security and sustainable farming to tax reforms. At the same time, there are no concrete steps for how these goals are to be achieved. Therefore, initiatives adopted under the Green Deal are far from being qualifiable as a fully-fledged green industrial policy but instead represent the EU’s vision for its future development (Tagliapietra & Veugelers, 2020). 

Obstacles and opportunities

Strengthening the EU’s green industrial policy and making it more comprehensive is, therefore, necessary if the EU is to reach its sustainability ambitions. However, economic, social, and political obstacles exist towards the realisation of green transition targets, a principle one being Research and Development (R&D) investments. In 2002, the Barcelona European Council set the target to invest 3% of GDP in the green transition by 2010. Nevertheless, in 2021, almost two decades after the Barcelona Council, the EU spent €328 billion, or 2.27% on the green transition, with 2.02% invested ten years earlier (Eurostat, 2023). This figure is growing but still lagging behind the 2002 target. In general, governmental subsidies towards R&D help to support specific industries in their transition by decreasing abatement costs for companies and creating societal co-benefits due to technological spill-overs (Allan et al., 2021). 

Another obstacle is the heterogeneity of EU member states’ willingness to transition to a green economy. As a result, their paces in decarbonisation vary greatly. Among the most advanced regions, where low-carbon products tend to be concentrated, are Rhône-Alpes in France, Dresden and Stuttgart in Germany, and Lombardy in Italy. For instance, Milan, a city located in the Lombardy region, implemented 11 emission-reduction actions in 2022 in food, transportation, and generation of energy sectors (CDP, 2023). Other EU member states, especially those in Eastern Europe, are less active in the green transition, mostly due to its socioeconomic costs (Hafner & Raimondi, 2020).

Finally, the EU and China remain each other’s main trading partners, and hence their cooperation is crucial for the EU’s green transition (EEAS, 2022). At the same time, their relations are deteriorating due to various challenges, including China’s position towards the war in Ukraine. On the national level, some member states are trying to decrease their partnership with China in the technological sector, which may arguably hinder the principle of free and fair competition. For instance, the Netherlands imposed blocks on the exports of Chinese advanced chips (Haeck, 2023). Such unilateral measures may undermine the performance of the EU as a coherent actor, shifting the focus from combating climate change and strategic autonomy towards geopolitical competition. 

Some constraints can be turned into opportunities if the EU uses its instruments correctly. Transportation and construction are two sectors that can help turn the green transition into an industrial opportunity. Transportation is an energy-intensive industry and the only sector in Europe where GHG emissions grew between 1990 and 2018 (+23% for road transport alone). Currently, the EU aims to increase the share of renewable energy used for transport (Hafner & Raimondi, 2020). R&D would help to develop low-cost sustainable and energy-efficient technologies for the transportation sector.

Similarly, the construction and buildings sector is one of the largest energy consumers, accounting for over a third of EU emissions. EU governments can use their public procurement to improve the energy efficiency of existing buildings (Hafner & Raimondi, 2020). In fact, recently there have been moves in this direction: in March 2023, the EU Parliament adopted a new directive on the Energy Performance of Buildings, setting more ambitious targets for buildings’ emissions, aiming to lower energy bills and increase the installation of renewable energy heating in houses (Taylor, 2023). This may also contribute to the creation of new jobs and sector development, increasing the EU’s industrial competitiveness.

The EU’s carbon pricing

Arguably, the EU’s most effective tool in combating climate change is the EU Emissions Trading Scheme (EU ETS), where cooperation among member states is most visible. Dechezleprêtre et al. (2022) found that multinational companies in Europe do reduce their emissions as a response to the EU ETS and do not displace their production to countries with no similar policies (“carbon leakage”). The main logic of carbon pricing is to create costs of emitting GHGs (following the ‘polluter pays’ principle), and apply market mechanisms to discourage fossil fuel usage and encourage the development of technologies associated with lower emissions. In the beginning of every phase (currently, Phase 4 (2021-2030) is in force), the number of emission permits is decided by the EU Commission. Some allowances are distributed for free to companies in energy-intensive industries sensitive to carbon leakage, while others are auctioned. The supply and demand of these allowances thus regulate the price of every ton of carbon emitted by them, and a company has a choice between buying the allowances to emit or reducing their emissions. The economic theory postulates that a company will reduce emissions as long as the price to do so is less than that of allowances (Rodrik, 2014). Thus, the policies of reduction of abatement costs should complement those of carbon pricing to ensure that emissions are decreasing steadily. Under the EU ETS, the price of a ton of carbon has seen a dramatic increase in the last years and is characterised by high volatility. From 2008–2012, the price fluctuated around 15–17 €/tonne of CO2 and around 20 €/tonne of CO2 in 2020 (Barnes, 2021). It reached 100 €/tonne in February 2023 for the first time and decreased to 92 €/tonne in March 2023 (Ember, 2023). The reduction in the number of allowances available can explain the price increase. In particular, from 2021, the reduction was 2.2% per year instead of 1.74% during the previous years (European Commission, 2021). 

Because carbon prices are so volatile, they do not always reflect the social cost of carbon, which is the economic cost for society caused by an additional ton of carbon dioxide emissions or its equivalent (Nordhaus, 2017). Therefore, the ETS does not always allow the carbon price to become the real emission price. The decision-making process of how many emission permits to introduce to the market and how to set allowances prices should take into account the social cost of carbon.

This measure, however, may raise interference concerns in the energy market. It has already started to experience similar measures, such as the price cap on Russian crude oil, and there are many debates about the extent to which the intervention is justified. However, in the case of climate change-related issues, such measures are deemed acceptable and necessary by some since the market itself fails to account for the price of carbon emissions, which appear as negative externalities or damage to society and the economy, both now and in the long term (Rodrik, 2014). Therefore, the government should intervene to set a correct price for carbon emissions and use the revenues to reduce the negative impact for the actors concerned (Feindt et al., 2021).

Conclusion 

In sum, the EU has attempted to take steps towards creating a green industrial policy. However, such a policy has yet to be comprehensive and currently consists of rather fragmented initiatives. The EU Green Deal cannot account for a full-scale green industrial policy since there are only broad targets and pledges without concrete policy proposals. Numerous obstacles exist towards a comprehensive strategy, mainly rooted in the different levels of preparedness and willingness of member states to fully embark on the green transition. The socioeconomic costs of the transition are too high for some member states, as it will most probably result in massive job losses in sectors connected to fossil fuels production. Overcoming these difficulties is crucial in order to make a pan-European transition towards a sustainable economy a reality. 

Allan, B., Lewis, J. I., & Oatley, T. (2021). Green industrial policy and the global transformation of climate politics. Global environmental politics, 21(4), 1-19.

Altenburg, T., & Assmann, C. (2017). Green industrial policy. Concept, Policies, Country Experiences. Geneva/Bonn: UN Environment / German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE).

Anke, C. P., Hobbie, H., Schreiber, S., & Möst, D. (2020). Coal phase-outs and carbon prices: Interactions between EU emission trading and national carbon mitigation policies. Energy Policy, 144, 111647.

Barnes, A. (2021). The challenges and prospects for carbon pricing in Europe. Oxford Institute for Energy Studies.

CDP Open Data Portal. 2022 Full Cities Dataset. (n.d.). Retrieved 30 June 2023, from https://data.cdp.net/Governance/2022-Full-Cities-Dataset/gd5v-pfcg 

Claeys, G., Tagliapietra, S., & Zachmann, G. (2019). How to make the European Green Deal work (Vol. 5). Brussels, Belgium: Bruegel.

https://www.bruegel.org/policy-brief/how-make-european-green-deal-work

Consolidated version of the Treaty on the Functioning of the European Union, 326 OJ C (2012).  http://data.europa.eu/eli/treaty/tfeu_2012/oj/eng

Dechezleprêtre, A., Gennaioli, C., Martin, R., Muûls, M., & Stoerk, T. (2022). Searching for carbon leaks in multinational companies. Journal of Environmental Economics and Management, 112, 102601.

EEAS. (n.d.) EU-China Relations factsheet. Retrieved 11 June 2023, from https://www.eeas.europa.eu/eeas/eu-china-relations-factsheet_en

Ember. (n.d.). Carbon Price Tracker. Retrieved 2 April 2023, from https://ember-climate.org/data/data-tools/carbon-price-viewer/

European Commission. (n.d.) EU Emissions Trading System (EU ETS). Retrieved 2 April 2023, from https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en

European Commission (n.d.). R&D expenditure. Retrieved 2 April 2023, from https://ec.europa.eu/eurostat/statistics-explained/index.php?title=R%26D_expenditure

European Commission (2021). A European Green Deal. https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en

European Commission (2023). What is the Innovation Fund?. Retrieved 30 June 2023, from https://climate.ec.europa.eu/eu-action/funding-climate-action/innovation-fund/what-innovation-fund_en

Feindt, S., Kornek, U., Labeaga, J. M., Sterner, T., & Ward, H. (2021). Understanding regressivity: Challenges and opportunities of European carbon pricing. Energy Economics, 103, 105550.

Gerres, T. & Linares, P. (2022). Carbon Contracts for Differences (CCfDs) in a European context. https://henrike-hahn.eu/de/aktuelles/study-release-carbon-contracts-for-difference-ccfds-in-a-european-context 

Haeck, P. (2023, March 8). The Netherlands to block export of advanced chips printers to China. POLITICO.  https://www.politico.eu/article/netherlands-impose-restrictions-chips-export-to-china-asml/

Hafner, M., & Raimondi, P. P. (2020). Priorities and challenges of the EU energy transition: From the European Green Package to the new Green Deal. Russian Journal of Economics, 6(4), 374-389.

Kleimann, D. (2023) Climate versus trade? Reconciling international subsidy rules with industrial decarbonisation. Policy Contribution 03/2023, Bruegel. https://www.bruegel.org/policy-brief/climate-versus-trade-reconciling-international-subsidy-rules-industrial 

Lazonick, W., & Mazzucato, M. (2013). The risk-reward nexus in the innovation-inequality relationship: who takes the risks? Who gets the rewards?. Industrial and Corporate Change, 22(4), 1093-1128.

Nordhaus, W. D. (2017). Revisiting the social cost of carbon. Proceedings of the National Academy of Sciences, 114(7), 1518-1523.

Pianta, M., & Lucchese, M. (2020). Rethinking the European Green Deal: An industrial policy for a just transition in Europe. Review of Radical Political Economics, 52(4), 633-641.

Rodrik, D. (2014). Green industrial policy. Oxford review of economic policy, 30(3), 469-491.

Tagliapietra, S., & Veugelers, R. (2020). A green industrial policy for Europe. Bruegel. https://www.bruegel.org/book/green-industrial-policy-europe 

Taylor, K. (2023, March 14). EU Parliament agrees position on buildings law despite pushback. Euractiv. https://www.euractiv.com/section/energy-environment/news/european-parliament-agrees-position-on-buildings-law-despite-pushback/