WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

by Roman Stöllinger and Michael Landesmann
photo: iStock.com/bigtunaonline

• Designing the European Green Deal, which aims to realise the ecological transformation of the EU economy as the trading bloc’s growth strategy, is the right move at the right time. It sends a clear signal: the incoming European Commission is serious about achieving climate neutrality and the shift to a circular economy.
• However, without clearly defined ‘green missions’ the chances of the EU achieving any of the macro-objectives of its Green Deal are slim. Talking about gazillions of euros for green investments without actually injecting serious amounts of fresh money will not do the trick.
• To blame is not the Commission, however, but the lacklustre commitment on the part of myopic Member States, which are either clinging to alternative policy priorities or are unwilling to feed the EU budget in a manner that allows for the financing of the heralded European Green Deal.

In December last year the incoming European Commission, headed by Ursula von der Leyen, heralded the European Green Deal (or EGD for short, since Brussels is full of acronyms) as the new growth strategy of the European Union. With this Green Deal the Commission is sending a clear signal: the EU is determined to get serious about climate change and the ecological transformation.

The announced objective of the EGD is to make the EU economy climate-neutral by 2050. The required reduction in carbon emissions and pollution is to be achieved through a shift to a circular economy. This implies increasing recycling rates, which currently stand at only 12% in Europe’s industrial sector, on the one hand, and by setting specific standards for the design and fabrication of industrial products, on the other (for example, by making it compulsory to design smartphones in ways that allow for the removal and replacement of batteries). Other macro-goals include the protection of human life, animals and plants to ensure a just and inclusive transition, and to assist EU companies to become world leaders in clean products and technologies. All these macro-goals correspond to what we have identified as the most pressing societal challenges of European industrial policy in a recent policy report, which are (i) defending industrial leadership, (ii) meeting the competitive challenge of emerging markets, (iii) internal divergences, and (iv) environmental degradation/climate change.

But the road to combat global warming is paved with good intentions. All the objectives of the EGD are laudable. Few would contend that a shift from a linear production model to more sustainable, circular production processes makes perfect sense, especially when it opens up new technological and industrial opportunities for EU firms. More contentious are the instruments suggested to meet these ambitious goals, and the actual amount of fresh money that is going to be spent. Add to this the vagueness of planned actions under the EGD and one quickly comes to the conclusion that, as with the Europe 2020 Strategy and the Lisbon Agenda before it (which aimed at making the EU the most innovative bloc in the world), the Green Deal is very unlikely to reach its objectives.

Why the EDG will not work in its proposed form

We see three main reasons why the EDG in its current form will (unfortunately) not work:

• The ‘green missions’ are still missing. The EGD has been announced as the EU’s new growth strategy, and the corresponding communication by the European Commission should serve as a roadmap. For a roadmap, however, the communication contains a surprisingly large amount of announcements, including the new EU industrial policy strategy, initially scheduled for December 2019 and now expected to be issued in March 2020. Particularly troublesome is the fact that as of today there do not seem to be any clearly defined ‘green missions’. Mission-oriented innovation and industry policy is one of the most promising industrial policy approaches that was inspired by the Apollo mission to send a man to the moon and safely back. The EU has incorporated the notion of mission-oriented innovation and industrial policy into its main research and innovation programme (to be relabelled ‘Horizon Europe’ as of 2021), and in 2018 it commissioned a report by Mariana Mazzucato, the founder of the UCL Institute for Innovation and Public Purpose, on exactly this issue, asking for concrete proposals for missions for Europe. Missions are comprehensive, innovation-driven technological or industrial endeavours that with regard to granularity lie between grand societal challenges (e.g. environmental degradation) and single projects (e.g. a zero-emission bus fleet for Brabant, Belgium). Missions constitute the operational stepping stones to master grand societal challenges. To our knowledge, as of today no actual mission has been agreed upon. So far agreement has only been reached on four green ‘mission areas’: climate change, healthy oceans, climate-neutral cities, and healthy soil and food. And given that each of these mission areas has a mission board consisting of 15 experts to decide on the ‘mission’, we may safely expect that there will be far too many ‘missions’, all of which will in terms of scope actually be projects. What is the difference between a mission and a project? An example of a project where it makes sense to let a board of experts decide would be the development of new emission-free urban buses (as in the case of the ZeEUS Project). A mission, however, would be something different. A good example and a candidate for a true mission would be to make the EU carbon-independent, meaning zero imports of petroleum, natural gas and coal. As the EU is currently a huge net importer of these commodities, numerous innovations, a complete change of the current energy system and technological adjustments would be necessary (e.g. electro-mobility) to achieve the proposed mission. This is what distinguishes a mission from a sheer project. Given the differences in the political priorities across member states, we see no such consensus on green missions on the horizon.
• Insufficient provision of fresh money. Bragging about gazillions of euros to be spent on the EGD does not help if the actual fresh money pledged is in homeopathic doses. The €1 trillion that were announced in mid-January 2020 to be injected into the green transition over a period of ten years will be coming from the following sources:
  • €503 billion from the EU budget (the Multi-annual Financial Framework, or MFF for short)
  • €114 billion from co-financing by Member States
  • €100 billion from the Just Transition Mechanism (or JTM for acronym junkies)
  • €25 billion from the receipts of the EU Emissions Trading System (ETS)
  • €279 billion from private investments triggered by the InvestEU programme.

This means that about half of the money will come from the existing EU budget, notably the European structural funds already planned in the next MFF period (running from 2021 to 2027 and yet to be agreed upon by Member States). While it should be acknowledged that the EU budget is planned to be slightly reoriented towards greening the economy, it is still doubtful whether all budgetary outlays for climate and the environment, including long-standing programmes such as LIFE, should really be added to the new stimulus provided by the EGD. A curiosity are the almost €300 billion of private investments to be triggered by EU activities that are factored in as part of the InvestEU programme administered by the European Investment Bank (EIB). On the positive side, the EIB has made substantial progress on making its lending operations more sustainable. For example, by the end of 2021 the EIB will no longer fund fossil-fuel energy projects. The drawback of the InvestEU programme (the successor to the European Fund for Strategic Investments, or EFSI, formerly known as the Juncker Plan) is that does not seem to live up to its proclaimed principle of additionality. This does not undermine the usefulness of the idea of the Just Transition Mechanism fund, which was set up for assisting regions specialised in coal mining to survive (and if possible benefit from) the ecological transition. However, in terms of policy design it would have been preferable to make it one of the (ideally trimmed down) thematic objectives of the EU’s structural funds. Streamlining the latter and redirecting it fully towards the ecological transition would have helped to improve the design of the EGD.  

The bottom line—and the major shortcoming of the EGD—is that on closer inspection of the above-mentioned sources of funding it turns out that only €7.5 billion of fresh money (for the Just Transition Mechanism, and over a ten-year period) will be provided for the EGD. This is peanuts, given the short- and medium-term costs associated with the green transition, the rewards of which will be reaped only later.

• Lack of consensus among member states. The vagueness of the EGD and the lack of clearly defined missions is hardly the fault of the European Commission or any other EU body. Rather, it seems that there are enormous (some would argue insurmountable) differences regarding the priority that should be given to the ecological transformation on the long list of other pressing policy issues. The Cohesion countries tend to prefer continued expenditure on infrastructure and general and social issues. The net contributors to the EU budget, while in general more ecologically inclined, refuse stubbornly to fund it appropriately, insisting on a ceiling of 1% of GDP. Without appropriate missions and the money to finance them the Green Deal won’t go far—and it’s not Brussels we have to blame for that.

What the EU needs

What the EU would need is a streamlining of the current funds and programmes (instead of new ones) and reorienting them towards greening the EU economy. Currently the EU spends 0.35% of EU GDP annually on industrial policy. This could serve as a good base, provided industrial policy efforts at the EU level, including the European structural funds, are geared towards the structural transformations required to meet the goals of the EGD (there are also 27 national industrial policies to deal with other issues). In this respect, cutting the number of thematic objectives within the structural funds and specifying the fields of innovation and types of infrastructure to ensure alignment with the EGD would be a first important step. That this is possible, at least in principle, was demonstrated by the EIB, as mentioned above. Within such streamlined and more specific thematic objectives Member States and regions would continue to be free to design and choose the projects to be supported. This way there would be no contradiction between focusing EU industrial policy measures on the objectives of the EGD and continued support for internal EU cohesion. In all likelihood such a move would make the cohesion policy more effective, since the ecological transformation is not really a priority in the national policy agendas of Cohesion countries. Hence, it would create more complementarities between national and EU policies and eliminate duplications.

What is also needed is a small number of concrete missions, for which we have a proposal above (i.e. making the EU carbon-independent). The conflicting policy priorities make this a very difficult endeavour. Still, with the carbon border adjustment (essentially a tax on imported products that compensates for the costs to EU industry associated with emission certificates issued within the EU Emissions Trading System), which is mentioned as an option in the Commission’s EGD communication, the EU might have an instrument that could unite member states and at the same time provide additional funding for the EGD.