- Introduction
In December 2019, the European Commission presented the European Green Deal committing to climate nutrality by 2050. The European Green Deal (EGD) can be considered as a roadmap of key policies for the EU’s climate agenda, based on which the Commission has started, and will continue to develop, legislative proposals and strategies from 2020 onwards (Siddi, 2021). The European Green Pact sets out an action plan aimed at achieving two initial targets: boosting resource efficiency by moving to a clean, circular economy, and restoring biodiversity and reducing pollution (Rando, 2021). The Commission construed its work programme through the concept of environmental re-orientation of EU activities in areas identified as leading actions of the European Green Deal Communication (COM(2019) 640 final) such as climate ambition, clean affordable and secure energy, industrial strategy for a clean and circular economy, sustainable and smart mobility, agriculture and fisheries, biodiversity, zero pollution and toxic-free environment, mainstreaming sustainability and trade and foreign policy.
The EGD is viewed as a long-term and short-term opportunity to change a horizontal regulatory framework based on effective and efficient instruments (Sikora, 2020). This opportunity has arisen as a result of a number of legal developments and political commitments that have made climate law a part of the EU legal order, as formally heralded in the Lisbon Treaty following substantive steps of international law such as Paris Agreement, UN 2030 Agenda and the sustainable development goals.
The European Green Deal, in purely legal terms, is a Communication of the Commission, which is to be considered as an instrument of the EU soft-law. Hence, the EDG is a policy tool to be translated into the legal measures and anchored in the duty of sincere cooperation between Member States and the EU by virtue of article 4.3 TFUE (Sikora, 2020).
In March 2020, the Commission proposed the European Climate Law to write the 2050 climate neutrality target into a binding legislation to the European Parliament, the Council, the Economic and Social Committee and the Committee of Regions. Additionally, in September 2020, the Commission proposed to add the new EU target to reduce net emissions by at least 55% by 2030 compared to 1990 levels to the European Climate Law. Finally, on 21 April 2021, the European Parliament and the Member States reached a political agreement on the European Climate Law, which entered into force in June 2021.
All 27 EU Member States committed to turning the EU into the first climate neutral continent by 2050 (European Commission, 2020). The EU leadership in the field of climate neutrality is conceived in a transversal way that includes sectors that are interrelated among themselves but also are protagonists in their achievement, from the economy, the health, the quality of life or the protection of nature (Pascual, 2020).
However, the EU is not the unique economic power trying to achieve climate neutrality. On April 22, 2021, the Biden administration revealed its plan to reduce greenhouse gas (GHG) emissions by 50-52 percent by 2030, compared to 2005 levels. In a similar line, the United Kingdom pledged in December 2020 to reduce GHG emissions by at least 68 percent by 2030 compared to 1990 levels, a target it has since updated to a 78 percent reduction by 2035 compared to 1990 levels. Both the United Kingdom and the United States committed to achieving net zero emissions by 2050 as the EU, while China aims to achieve that goal in 2060.
- The European Climate Law: the binding instrument to achieve climate neutrality
The European Commission’s proposal, which was officially adopted on Thursday 24 June, 2021 by the European Parliament aims to make the objectives of the European Green Pact legally binding. In other words, the search for a climate-neutral society-not to release more greenhouse gases than can be absorbed-by 2050 is, today, a commitment that must be fulfilled mandatorily, leaving behind the voluntary nature that usually defined this type of action (Rando, 2021).
The proposal for a Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999, takes as its reference framework Title XX of the Treaty on the Functioning of the European Union (TFEU), devoted to the environment and consisting of Articles 191 to 193, which regulate the EU’s competences in the field of climate change. Particularly, article 191.1 TFUE sets out the objectives that the Union policy on the environment shall follow and article 192.1 TFUE provides for the ordinary legislative procedure in order to achieve these objectives, without prejudice of the proportionality and subsidiarity principles of the EU law.
In this context, the proposal for a binding Regulation justifies this as the most appropriate legal tool for achieving the objectives pursued, so as to ensure the direct applicability of the provisions and the correct fulfillment of the requirements imposed on Member States to contribute to the achievement of the long-term objective.
According to the European Commission, the European Climate Law pursues the following objectives; to set the long-term direction of travel for meeting the 2050 climate-neutrality objective through all policies, in a socially-fair and cost-efficient manner, to create a system for monitoring progress, to provide predictability for investors and other economic actors and to ensure that the transition to climate neutrality is irreversible.
The regulation sets out a framework for “the irreversible and gradual reduction of greenhouse gas emissions by sources and enhancement of removals by sinks regulated in Union law” as well as a binding climate-neutral target for the EU «by 2050» with the aim of achieving the long-term temperature target (art 2 PA) and the overall adaptation objective (art. 7 PA) provided in the Paris Agreement.
The objective of climate neutrality implies, in accordance with Article 2 of the Regulation, that emissions and removals of greenhouse gases regulated by Union legislation shall be balanced by 2050, therefore, net emissions should be reduced to zero by that date. The 2050 target is collective and relates to Union-wide emissions, without requiring net zero emissions at the level of each individual Member State (O’Brien, 2021). According to the Commission press release on april 2021, negotiators committed to negative emissions in the EU after 2050 as it is stated in article 2 of the EU Climate Law.
This objective should be shared and acted upon in a coordinated manner by both the EU and the Member States, without ignoring the importance of promoting equity and solidarity between Member States.
The Regulation provides for the establishment of the European Scientific Advisory Board on Climate Change to serve as an independent and technical expert of the field of climate change. According to article 3 of Regulation, its tasks include advising and monitoring functions as well as the promotion dialogue and cooperation between scientific bodies of the Union.
Article 4 gathers what comes to be called «Intermediate climate targets», empowering the Commission to adopt delegated acts in order to complete the Regulation itself by establishing an EU-wide trajectory to enable the climate-neutral target. As it is provided in the text, “The binding Union 2030 climate target shall be a domestic reduction of net greenhouse gas emissions (emissions after deduction of removals) by at least 55 % compared to 1990 levels by 2030”. Particularly, article 4 limits the contribution of net removals to the Union 2030 climate target to 225 million tonnes of CO2. To this end, the Commission shall review and monitor the trajectory and effects of the Regulation and it is empowered to adopt legislative proposals to enable the achievement of the climate target. The article provides for a list of circumstances to be considered when assessing and proposing the revised Union’s climate change target for 2040. Among other factors, the list includes; cost-effectiveness and economic efficiency; competitiveness of the Union’s economy, energy efficiency, energy affordability and security of supply; fairness and solidarity between and within Member States; need of environmental effectiveness and investment needs and opportunities.
Similarly, this Regulation provides a mandate to the EU institutions and Member States to ensure continued progress in building adaptive capacity, strengthening resilience and reducing vulnerability to climate change as well as it urges Member States to develop and implement adaptation strategies and plans that include comprehensive risk management frameworks (article 5 of the Regulation).
Concerning the assessment of progress, the Commission shall assess every five years the collective progress made by all Member States and it is empowered to take any necessary measures in accordance with the Treaties to reconduct the situation towards the climate target. Concerning the assessment of national measures, the Commission is empowered to issue recommendations to those Member States whose actions are not consistent with the climate neutrality objectives.
Finally, the European Climate Law pays attention to the public participation and provides that the Commission shall engage citizens, social partners and stakeholders and foster dialogue and the diffusion of science-based information about climate change and its social and gender equality aspects.
- Transition to a new circular economy: challenges and prospects
The EU has recently proposed a plan to achieve climate neutrality by 2050. Reaching this objective requires a transformation of Europe’s society and economy that will need to be cost-effective, just, and socially balanced (Council of the European Union, “European Green Deal”). The European Green Deal can be viewed as an outline of crucial strategies for the EU’s climate policy, from which the European Commission has established legislative schemes and policies from 2020 to encourage movements in society through green projects and to eliminate the obstacles for implementing them (Ganzevles et al in Kuci and Fogarassy, 2021). The EU Green Deal underlines the need for a holistic approach in which all EU actions and policies contribute to the Green Deal’s objectives. The initiatives cover a number of policy areas, including climate, the environment, energy, transport, industry, agriculture and sustainable finance, all of which are strongly interlinked (Council of the European Union, “European Green Deal).
However, reaching the goal of being climate-neutral by 2050 is so far the biggest challenge as well as the greatest opportunity for Europe (Montanarella and Panagos in Kuci and Fogarassy, 2021). This ambition requires transition towards a regenerative growth model, minimizing resource consumption within planetary boundaries and support for the circular material use (ibid). Achieving a climate-neutral economy demands eliminating carbon emission by a minimum of fifty percent until 2030 and to reach a low-carbon future by the mid-century (Tsiropoulos et al, 2020). One of the most important actions is considered to be the transition to a circular and clean economy that is regarded as a pathway towards sustainability. The plan presents a set of interrelated initiatives to establish a strong and coherent product policy framework that will make sustainable products, services and business models and transform consumption patterns so that no waste is produced in the first place (Council of the European Union, “European Green Deal).
The call for reducing greenhouse gas emissions and to reach carbon neutrality by 2050 has become a serious and urgent matter for lawmakers in Europe (Kuci and Fogarassy, 2021). Considering the serious concerns regarding global warming, climate change, the EU has indicated its significant political engagement towards these issues by presenting various goals on renewable resources, energy efficiency, and GHG elimination (Hafner and Raimondi, 2020). The Commission proposes sustainability principles to regulate the product durability, reusability, upgradability and reparability, among other it includes avoiding presence of hazardous chemicals in products, and increasing their energy and resource efficiency; increasing recycled content in products, while ensuring their performance and safety; introducing a ban on the destruction of unsold durable goods; mobilising the potential of digitalisation of product information, including solutions such as digital passports, tagging and watermarks; rewarding products based on their different sustainability (Council of the European Union, “European Green Deal).
While in the linear model of industrial production inputs are extracted, combined and processed, consumed and discarded, promoting sustainability has focused primarily on the last stage of the linear process through waste management, recycling, and reuse (Hartley et al, 2020). A core normative idea in the conceptualization of CE is that environmental sustainability, economic prosperity, and social equity are valid objectives of CE and should be treated accordingly in practice. The CE model prescribes that waste be not only minimized but also cycled back into production processes (Geisendorf, S., & Pietrulla, F., 2018). Accordingly, studies of CE policies focus primarily on waste treatment, including production process-based approaches to eliminating waste.
The transition towards a circular economy could be seen as a paradigm shift in the way things are made, how we work, what we buy and how we live. This means putting sustainability and green growth at the heart of business models and industrial organizations. The main idea of CE is that the finite resources such as minerals, metals etc. are not discarded but captured and reused (Preston, 2012). The above mentioned practice demands for structural modifications and upgrades in production and technology processes. The manufacturing requires modern technologies that entirely replace the previous ones. Moreover, the development and progress of economic structures require investment in new technologies, establishing new manufacturing capacities, larger use of know-how and development of new socio-economic activities. To make this progress, the high economic and revenue disparities that have appeared in South-Eastern Europe countries should be taken into consideration (Kuci and Fogarassy, 2021). As a further challenge, there lacks a clear explanation as to how disparity, deindustrialization and climate change will be approached, and with no clear vision of how an undivergenced and environmentally friendly economy will arise in Europe (MacArthur, 2013).
On the other hand, modifications in productions, service and technology systems could highly affect the number and quality of employment, salaries and capacities. Hence, the CE policies should guarantee that employers receive the benefits of sustainability relating to higher salaries, employment and capacities, and ensuring that industrial divergences are reduced (Siddi, 2020). There is another concern regarding the relation among EU national and local policies, which can play a huge role in approaching climate change. The concern is related in terms of how to develop strategies that consider the disparities between the capital, production and capacities among different countries and regions in the EU (Bailey et al 2019). In order to acquire the positive impacts of an environmentally friendly and unbiased economy, modifications in production structure should comply with relevant changes in social motilities and institutional environments (Perez in Kuci and Fogarassy). Public institutions could establish universal objectives for the green economy evolution, arrange unanimity supporters between socio-economic performers and leaders; create the necessary knowledge jointly with universities and companies through establishing research technological divisions and establishing or reinforcing funding projects (ibid).
Moreover, the Member States are required to provide 7.5 billion funds to the Just Transition Mechanism, while targeting a total of 100 billion private and public funds to be used from 2021-2027(Kuci and Fogarassy, 2021). Yet, this total of funds does not manifest the capital that is required to guarantee society engagement in following with climate evolution and there is a socio-economic disparity, high inequality of capacities to increase resources for green investment and green technologies among the EU countries (ibid).
The EU Commission itself admits that a wide EU industrial policy is needed for the European Green Deal Agenda (MacArthur, 2013). However, the actual actions for industrial strategy continue to be limited in application and it is not clear as to if the EU regulations will be considered regarding the non – support state institutions towards companies which include green activities in their business. The Green Deal agenda lacks clear proposals on how the price network will be adjusted, consisting of the price of C02 – which has made businesses follow up with unfriendly environmental actions (Pianta and Lucchese, 2020). The traditional development model is driven by heavy industrial growth and resource-intensive infrastructure. The emerging economies in developing countries greatly follow the same model where the physical infrastructure of international production, consumption and trade is highly dependent on fossil fuels and geared to once-through manufacturing models. While the need for a less resource-intensive model of development is needed, there are no tangible models to follow (Preston, 2012).
We can identify the main barriers for implementing CE: financial, structural, operational, attitudinal and technological (Ritzén and Sandström, 2017). The identified barriers are partly similar to barriers for integrating sustainability issues in general, however, they reveal even more severe difficulties as the business perspective needs to be integrated, taking sustainability issues to a critical strategic level (Ritzén and Sandström, 2017). In this regard, the success of the EU Green Deal relies on the stakeholder’s effective and continuous commitment to accomplish the strategy. A comparison analysis on the CE transition in the 27 EU Member States indicates that in order to reduce the gap within the 27 EU Member States, it is necessary to develop ambitious government actions to support the best possible transition in each country (Marino and Pariso, 2020).
The transition requires a strong economic structure, a willingness of the governments in terms of policies, an entrepreneurial culture on the territory able to understand the economic opportunities behind this change, and a population awareness and receptivity able to see in this transition an opportunity to enhance its social context and wellbeing (ibid). Further international cooperation is important for progress on the CE because trade in waste and resources is rising and supply chains for many products today involve multiple countries, so that separate domestic policies can only address part of the problem. Key technologies will need to spread across borders and be adapted to local needs. Coordination of national policies in key areas and standardization could help to create a level playing field across major markets, easing competitiveness concerns and reducing the costs of implementation for business (Preston, 2012). It is important to focus on circularity in international value chains and to agree on common rules and principles. The role of the policy makers are decisive in this process as they need to put CE in the agenda at the international level and to promote conversation between different stakeholders, those who invest political and financial capital in CE globally.
- European Supply Chain Proposal
Tying into the comprehensive package of very targeted legislation relating to financing and the green transition more broadly there is a legislative proposal that aims at cleaning up the global supply chains of the companies. If implemented, it would require member states of the EU to have a law in place that requires monitoring of the company’s supply chain. The targets of this monitoring would be gross and systematic human rights abuses, but also environmental damage caused by the supply chain. The present status of this law is undecided; it has been a working progress for 2 years and shows no further signs of development until after the EU’s summer break. However, this does not mean it is not instrumental in the green transition that the EU is aiming to achieve. In this part of the report there will be a comprehensive consideration of the European Supply Chain proposal, its present status and some possible recommendations to help keep the process moving. For the purposes of clarity, the name European Supply Chain legislation will be used although the same proposal sometimes goes by names such due diligence legislation.
Proposal
The European Parliament under the auspices of special rapporteur Laura Wouters have produced a draft proposal and have asked the EU Commission, DG Justice, to take this up and produce a formal legislative proposal to deal with EU company’s supply chains. The appetite for a supply chain law in the European Parliament is not a new item as this institution has been calling for action since 2018, however there is a renewed importance in wake of ongoing environmental degradation. Since then, DG Justice has commissioned a study and impact assessments on what a supply chain law could look like and what the outcomes would be, ranging from full harmonization to no action at all.
In the wake of this report a draft proposal was adopted by the European Parliament. In this section there will be a brief overview of the contents and key points.
The scope of the proposal would cover all undertakings whose balance sheet has 20 million EUR, has a net turnover of 40 million EUR or has 250 employees on average. To be within the scope then two out of these three criteria would need to be fulfilled. It would apply to both EU based companies and those non-EU based undertakings who operate in the internal market. The rights that the proposal is trying to protect can be roughly categorized into three subcategories; human rights abuses, those recognized in the Charter of Fundamental Rights the ECHR and other generally applicable human rights treaties; environmental damages, this could include pollution, deforestation the over exploitation of natural resources etc; and finally good governance practices, for example avoiding corruption, tax avoidance bribery etc. The obligation this would create for undertakings is rather broad. They would be required to identify and assess all of the above potential damages using a risk-based monitoring mechanism taking into account all aspects of their supply chain, both vertical and horizontal, upstream and downstream relationship, and indeed the actions of other ancillary related business partners where appropriate. They must publish statements that include the results and methodology of their undertakings. Finally, the proposal includes a section on sanctions for non-compliance. It ultimately leaves the burden to provide a punishment in the hands of the member-states but provides guidance on what these punishments could look like, this could include civil actions, fines and in particularly egregious violations criminal sanctions.
This has been a very introductory consideration of what this supply chain law could look like, the reason for this is, at present it is at a very formative stage, it has the possibility of changing dramatically, however there should at least be some sort of consideration as to the direction that it has started with.
Current Status
At present, the proposal has been postponed for consideration until after the summer recession of the EU. A large amount of the deliberation and development of this proposal has not been very well covered and so the exact reason why this might be the case is hard to ascertain, however it could be speculated that the push back from business and the lack of political will to do something against business interests could have played a role. It is hoped that in Autumn of 2021 the legislative process will restart with a renewed sense of importance. It may be the case that some of these freak weather events that have been taking place across northern Europe this summer, especially in Germany, may provide a new impetus towards facilitating legislation whose aim is the stabilisation and improvement of the environment.
Commentary by affected groups
It is without doubt, as with most new pieces of regulation, that there will be many affected groups, and this is no different here. Many different interest groups have expressed concerns, support and reservations about the present proposal. Some of the major interest groups are, business/industry groups, trade unions and of course civil society groups like environmental groups and human rights advocates. In this section there will be a brief consideration of each of these groups, their concerns but also their praise of the present proposal.
Undoubtedly there have been some serious reservations on behalf of organized business groups, most prominently BusinessEurope, as well as some large car manufactures. The crux of their concern focuses on the burden that this will place on businesses and the effects that this onerous burden will have with respect to their ability to compete with global competitors. This is a very legitimate concern from a business perspective, as many services are now provided by private companies a major blow to the private business sector could also see huge disruptions to life for the average citizen. A further concern from business groups is the avenue that this law may open to litigation for victims of environmental harm or human rights abuses. The level of litigation that some companies believe could happen would cause immense burdens on the business themselves as well as possibly the civil courts of a country. These two major concerns are legitimately held, and should the legislation go ahead, it would need to be very mindful about what solutions it can over to these grievances.
A further group that has expressed some concerns but also support is trade unions. Broadly, they support the idea of promoting human rights throughout the supply chain and see this as a huge positive, that any direct benefits applied to workers abroad through the companies supply chain will inevitably lead to knock-on benefits for local workers. Of course, they do have some reservations generally speaking. The principal one being that with an increased burden on companies this may make them less competitive on a global market, it may lead to increased overheads, this in turn could create a space for jobs to be innovated away in order to recuperate the new costs from having to pay higher or fairer wages to foreign workers in the supply chain.
A final set of interests that will be considered are those of civic groups like environmental and human rights-based organizations. These groups can be roughly characterized as in support of the proposal but with some slight reservations about the fact it may not be far enough or enforcement and about ensuring the rules are complied with. They are happy that there is a universalized attempt to clean up company’s supply chains and that there is due consideration for the externalities that these companies create in the sphere of environmental degradation as well as human rights. However, they have legitimate concerns that this mechanism may be a little too late and that it is primarily a ‘conduct focused’ measure. Namely, that it does not, or at least very limitedly, focuses on the result of the company but rather on them having followed a proper due diligence assessment. It considers the procedure rather than the substance of abuse. There are also concerns about the implementation of monitoring and enforcement of this mechanism.
Conclusion
In conclusion, the implementation of some sort of universal, comprehensive directive/regulation is absolutely imperative for the future of a meaningful EU Green Deal. The patchwork of regulations that currently govern due diligence within the supply chains of companies is massively insufficient. It is very limited in its scope and does not provide real obligations for companies. Multinational companies and other huge companies have a disproportionate impact on the lives of many people around the world and the environment more broadly, so it is definitely time to force them to consider more carefully their supply chains and the damage that they do. Of course, it cannot be the case that this is forced on companies without due consideration for their bottom line or for their practical ability to comply with a new burdensome piece of legislation. There are also very real practical concerns about the competences and mechanism used by the EU and how this may comply with the idea of subsidiarity without the mechanism becoming a toothless platitude. All of these concerns will need to be measured carefully and weighed up, however it does not change the necessity of a regulation that would govern the conduct of companies and their supply chain.
Recommendations
The first recommendation that would have to be made for this particular piece of legislation is very simple: go back to the discussion table and don’t allow this key piece of legislation to be forgotten. At present this is merely a vague intention of DG Justice and a proposal by its counterpart in the European Parliament. It will not be picked up again until after the summer recession in Brussels. It should absolutely not be forgotten. Forcing companies to more meticulously consider their externalities within their own supply chains could, alongside other systemic changes, have an incredibly positive impact on the success of the green transition within the EU.
A further recommendation would be to establish forums of good practice or something similar for companies to learn from each other. No one company is going to have the best practices or be able to conceive of ideas that keep costs reasonable for them while, at the same time fulfilling the new due diligence obligations under the proposal. A solution to this could be to establish a forum whereby a mixture of actors come together to exchange ideas and expectations. What this could look like is major trade association leaders, union representatives, or civic actors as well as representatives from the EU’s legal and political sphere, coming together to discuss areas for improve as well as constructive feedback done with a view to improve compliance in a consensual way rather than through litigation or naming and shaming.
Another possible recommendation would be to speak with counterparts in other power countries. There is a partially more understanding administration in Washington at present and this could be a good opportunity to seek to build a more global regime for supply chain legislation. With a partner like the US, it could have an even broad range of applicability and would only further its future success. It could also help assuage business and general economists concerns about a lack of competitiveness within the EU with respect to other business around the world.
- Financing the European Green Deal – in theory and in practice
According to the European Commission (2020) the European Green Deal Investment Fund is a framework to increase public and private spending, thus mobilizing at least €1 trillion of ‘sustainable’ investments over a decade to finance the EGD. The plan is based on three pillars: the largest part will come from the total EU budget, another one will come from the IncestEU program, and lastly, a part will come from the European Investment Bank Group (EIB).
First of all, a larger share of the total EU budget shall be dedicated to climate and environmental action, in fact, 25% of the aggregate EU budget which will flow into different programs and funds. Extrapolated from past figures, by this measure around €500 billion should be accessible; at the same time, this amount of funds should “trigger additional national co-financing of around €114 billion” (Commission, 2020). InvestEU shall attract around €279 billion of private and public investments until 2030 as well as provide an EU budget guarantee to the EIB for “more and higher-risk projects” (ibid.). In turn, the Just Transition Mechanism shall additionally come up with €43 billion over ten years with financing stemming from InvestEU and the EIB. Additional Innovation and Modernisation funds – Commission projections say – shall generate a further €25 billion coming from the auctioning of carbon allowances under the EU Emissions Trading System.
The Just Transition Mechanism shall benefit the “the most affected regions, to alleviate the socio-economic impact of the transition” (Commission, 2020). The Commission wants to provide a Just Transition Platform to give technical assistance to member states as well as investors and ensure that affected stakeholders in the Just Transition regions will be involved; also, public authorities in these selected regions shall encourage ‘green’ budgeting and procurement, also making it easier to apply for state aids (ibid.). Member states shall match every euro from the Just Transition Fund with at least €1.5 and at most €3 from the European Regional Development Fund and the European Social Fund Plus. National co-financing in accordance with cohesion policy rules shall contribute to this Fund. This Fund is aimed at regions where many people work in greenhouse gas-intensive industries and help to retrain workers and create new jobs. Further financial support would also come from the InvestEU scheme to accelerate decarbonization and economic diversification, improve infrastructure and interconnectivity.
The last pillar is represented by financing from the EIB. In the first place, it will offer 75% of all guarantees to the Just Transition Mechanism. Secondly, it will contribute to a public sector loan facility backed by the EU budget to mobilize €25 – 30 billion of investments in energy and transport infrastructure, district heating networks, renovation or insulation of buildings, etc. The loan facility will rely on a contribution of €1.5 billion from the EU budget and an EIB lending of €10 billion at its own risk.
Analyzing the details many question marks how this Investment Fund should work in practice. And how to cover the costs is the essential point of the EGDl. Undoubtedly, the encouraging ‘greening’ trends among investors and corporations in the private sector have been driven by three phenomena (PwC, 2021). Firstly, 43% of consumers (in a 2020 Survey carried out by PwC) globally expect businesses to account for their environmental impact; in business-to-business relations, increasingly integrated supply chains help to pass companies’ expectations on to suppliers; in the financial sector, an increase in sustainable projects and correlated financing has been taking place; for example, participatory enterprises adhering to the UN’s Principles for Responsible Investment grew from 63 with $6.5 trillion in assets under management in 2006 to 1,715 worth $81.7 trillion in 2018 (Eccles & Klimenko, 2019). Secondly, some enterprises have adapted to the ‘green’ trend in anticipation of future government and policy regulations. Lastly, the profitability of some sustainable investments has increased, in particular in the renewable energy sector. Global investments in this sector have swelled steadily for more than a decade (EEA, 2020). The cost of energy for most renewable sources has fallen since 2010: solar by 82%, onshore wind by 39%, offshore wind by 29% (IRENA, 2019).
Analyzing more closely the different pillars of the Investment Plan will show several weaknesses and misleading information. For a start, what the Commission proclaimed in regard to a 25% allocation of its entire budget to the EGD, is nothing more than window dressing. Looking at the exact composition of contributions they are very diverse spanning from agriculture subsidies to research and innovation funding. At the moment, around 20% of the EU budget is already spent on those areas; so, in fact, there will only be a 5% increase in spending representing €10 billion instead of €50 billion per annum. Also, the methodology of how spending should be accounted for is being revised by the Commission and is missing from its proposal (Claeys & Tagliapetra, 2020). Such a crucial point absent makes this pillar appear less impressive than at first glance. Secondly, the InvestEU fund – as the EU’s main instrument to generate investments – does not offer anything fundamentally new. To increase ‘green’ investments has been already agreed upon in 2019, and the EIB has previously, in late 2019, decided to double its sustainable financing from a quarter to half of all investments. Furthermore, national co-financing looks like a moot point since governments do not have any incentive to raise their funding in this area (Claeys & Tagliapetra, 2020). Still more unclear is how the public sector loan scheme should work. The Commission does not offer any explanation where this money should come from and which other EU programs would be sacrificed to account for funding – except that a €1.5 billion guarantee from the EU budget will be granted (ibid.). And lastly, the Just Transition Fund per se does not even cover expenditures of the selected regions and national governments will have to use other European funds as well as self-generated money to stem the transition (ibid.).
The anticipated ‘green investment gap’ by the Commission’s own estimates of €260 billion a year is based on calculations taking a greenhouse gas emissions reduction of 40% by 2030 compared to 1990 levels (PwC, 2021). However, Commission President von der Leyen already announced that these targets will be increased to 50-55% entailing logically larger investment sums. If the EU hypothetically succeeded in amassing €1 trillion in financing, still a gap twice as large as this amount would remain to be bridged. This means that national governments and private investors would have to provide the missing sums (Claeys & Tagliapetra, 2020). In sum it can be said that the financing of the EGD is shrouded in mystery and the Commission has so far not been keen on unraveling how to solve it.
In the context of the ongoing pandemic and the temporary shutdown of whole national economies, the question of how feasible the whole financing scheme could be has resurfaced (Trippel, 2020). Adopting an optimistic outlook, the EGD may facilitate a global economic recovery. However, the strain on national budgets cannot be easily brushed aside and needs to be taken into account. Lower national tax revenues mean also that the EU budget will shrink in correlation. If raising taxes would be the best solution is doubtful as it disincentivizes economic activity.
Apart from the (re)shuffling of finances, there are more questions in regard to the Investment Plan. In order to avoid greenwashing (the practice of acquiring a ‘green’ label despite negative environmental impact of a product), the Commission has been negotiating a ‘green taxonomy’ of assets and activities that are considered sustainable and that would eventually become eligible to obtain EU subsidies or financial guarantees. However, private lobbying seems to be leading to the inclusion of a broader category of assets, which could provide loopholes for activities that are not sustainable (Siddi, 2020). The European Council for an Energy Efficient Economy (2021) lays out that this EU taxonomy classification system aims to provide security to investors, protect private investors from greenwashing, help businesses to plan ahead, move investments to areas most in need of financing; also 37% of funding from the Recovery and Resilience Facility plan are required to go into ‘green’ investments. However, throughout this year, member states will still have to develop Territorial Just Transition Plans specifying which regions should receive funds to wean off of fossil energy use.
Another point is that EU money could be abused to actually greenwash although the intention is to preclude such practices. Here, the EU taxonomy may fall victim to political negotiations and activities considered positive for a ‘green’ transition diluted. That way loopholes can be created for companies to feign false facts (Gabor, 2020). The conundrum lies in the fact that the EU taxonomy is binary which means it only includes activities classified as sustainable but does not exclude explicitly other activities deemed harmful (Trippel, 2020). In practice, corporations can haggle with the political elites to include dubious practices not listed, and thus, undermine the EGD’s efficiency.
One of the crucial points is to engage the support from the finance industry. That the EU hopes to gain the missing revenues from private investors is very uncertain. As Storm (2020) points out a transition to a ‘greener’ economy will lead to large disinvestment and what he calls ‘stranded assets’ (based on fossil-fuel energy) as well as the elimination of a massive number of jobs in areas connected to fossil fuels. In the mining industry alone, more than 400,000 jobs would disappear; estimates of the number of affected jobs in those fields (often referred to as ‘brown’ jobs) reach about 4.7 million jobs. According to the International Labor Organization (2018) ‘green’ job growth may surpass ‘brown’ jobs lost by 2 million. Despite this opportunity of the creation of new jobs, a transformation of a whole economic system will have radical and widespread consequences. Much will depend on the distributional impact across industries which will affect total transition costs and economic growth. The Commission does not take all contingencies into perspective and presents an ill-prepared plan which also does not have much popular support after all.
Even on a more basic level, the heavy reliance of the whole process on large private investors is ethically hazardous since many of them are substantially invested in the fossil fuel industry, and hence, have low incentives to forsake short-term profits in favor of long-term climate concerns (Siddi, 2020). Only if projects will serve its interests and can be attractive to investors, i.e. if they are ‘de-risked’ with EU subsidies and ECB guarantees, there is the chance that large amounts can be created. Therefore, guarantees from the EU, and consequently, from taxpayers will subsidize these investors (Storm, 2020). To go a step further, these ‘de-risked’ and highly liquid assets propped up by European taxpayer money will attract the global shadow banking system always in search of safe securities (ibid.). Assuming that these large multinational corporations shall invest in the EGD projects (and hence cashing in public money), they still may offshore their clean-tech innovations to third countries with cheaper labor (ibid.). Hence, the EGD may incentivize a vicious circle of speculating to the detriment of its own objectives.
If we still consider the extra funds of the EU Emissions Trading System which should contribute to the Investment Plan, it does not seem to occur to the Commission that in fact this system has a foreign policy aspect. Carbon taxing of foreign (i.e. non-EU) companies means imposing a tariff on imports and is a form of protectionism with all its negative results.
Indeed, there is a further point which endangers the financing scheme. EU subsidies – in other words European taxpayer money – may not reach their intended recipients, but instead may be misappropriated. Local elites and their associates could funnel EU funds into their private pockets just as large agronomical corporations which embezzled subsidies of the Common Agricultural Policy from small farmers who had been actually intended to profit from those funds. That this is not only a theoretical concern, has already been playing out in Romania, for example. In the mining area of Valea Jiului, re-skilling services to help find miners a new profession has benefitted merely decarbonization firms since they had the closest connections to political elites. Private investments or new jobs were not created as a result (Gabor, 2020).
Further obstacles to the EGD lie in technology and regulatory risks. The new and nascent technologies are laden with uncertainties so the question still remains who will carry that risk. Larger financial incentives would be needed for high-risk projects to attract funding as no data about profitability/risk mitigation exist (PwC, 2021). Regulatory and policy risks turn around the volatility of lawmakers in regard to the ‘green’ transition which ultimately de-incentivizes investors as ever-changing legislation deters long-term planning. Hence, the EGD needs a clearer investment plan, with a coherent and constant regulatory framework. This is crucial for businesses to know what investments to make. Of course, it also means a further bureaucratization of the decision-making process which draws them out in time. And time – as widely professed – is of the essence.
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By Mahmoud Refaat: The European Institute for International Law and International Relations.
