[co-author: Sara Feijao]

On 11 December 2019, the new European Commission announced its much-awaited European Green Deal (EGD)¹, which sets out a wide range of major policy and legislative proposals to transition Europe to be ‘climate neutral’ by 2050.

It is, by far, the Commission’s most ambitious environmental and climate programme to date and seeks to affirm Europe as a global leader on climate change. If the vision is realised, it will have far reaching consequences for operators and investors across a wide range of sectors, as well as those international exporters for whom Europe is a key market.

The EGD, which is set out in a Communication^[1], is the flagship policy of Ursula von der Leyen, the new European Commission President, and will be spearheaded by Frans Timmermans, Commission Executive Vice-President and head of climate policy. The Communication is only meant to be an “initial roadmap” of the key policies and measures needed to achieve the EGD and will need be updated as policy evolves. It is therefore not surprising that the Communication is light on the detail of how the Commission proposes to deliver the EGD despite setting out an indicative timeline^[2] for implementation of the programme.

The EGD is being touted as the EU’s new growth strategy, which aims to decouple economic growth from resource use and put the EU on a new path of sustainable growth. It also aims to position the EU as the global climate leader by making Europe the first ‘climate neutral’ continent by 2050. In the words of Ursula von der Leyen: “by showing the rest of the world how to be sustainable and competitive, we can convince other countries to move with us”^[3]. The Commission is hoping that its ambitions will encourage other major global economies to follow suit at the COP26 climate summit in Glasgow next year.

Key elements of the proposals

The following measures in the EGD will be key to delivering the EU’s ambition for climate neutrality and sustainable growth.

Ramping up the EU’s 2030 target

The Commission has said it will develop a comprehensive plan, by Summer 2020, to increase the EU’s 2030 greenhouse gas (GHG) emissions reduction target from 40% (compared with 1990 levels) to at least 50%, and towards 55%, in a “responsible way”.

The ratcheting up of the medium-term target is seen as essential if the EU is to reach climate neutrality by 2050. However, this will require a careful impact assessment, meaning that changes to the 2030 target will not initially be included in the climate law that is expected to be proposed by March 2020. The importance of, and difficulty in, agreeing an increase in the 2030 target should not be underestimated.

Just Transition Mechanism

Certain member states that are heavily reliant on fossil fuels (such as Poland, Hungary and the Czech Republic) have raised concerns over the proposed 2030 and 2050 targets. This is why the Commission is proposing to create a “Just Transition Mechanism”, which will include a Just Transition Fund of EUR100bn, to help certain regions and industries transition to a zero carbon position. As noted by Frans Timmermans: “our responsibility is to make sure that this transition is a just transition and that nobody is left behind as we deliver the European Green Deal”^[5].

Details of the EUR100bn fund are expected in January 2020.

Carbon border adjustment mechanism

Rather than proposing an outright “carbon border tax” (as was initially expected), the Commission is proposing a more cautiously worded “carbon border adjustment mechanism” for selected sectors “should differences in levels of ambition worldwide persist”. There has been speculation in the press that cement could be the first sector targeted^[6].

The aim is to ensure that European products are not at risk of carbon leakage or disadvantaged by more carbon-intensive imports from countries outside the EU bloc that have less stringent standards. The Communication states that the measure will ensure the price of imports reflect more accurately their carbon content and will be designed to comply with WTO rules. It also proposes that any such measure would be an alternative to the current measures designed to address the risk of carbon leakage in the EU Emissions Trading System (EU ETS), such as the free allocation of allowances.

No further details about the new mechanism have been included in the EGD documents and a detailed proposal is not expected until 2021. It is widely accepted that drafting a mechanism that complies with WTO rules and does not antagonise the EU’s largest trading partners is no easy task.

Changes to EU ETS and other EU legislation

The 2050 commitments enshrined in the EU climate law will need to be accompanied by a number of changes to existing EU legislation, including the EU ETS Directive^[7], Energy Efficiency Directive^[8], Renewable Energy Directive^[9] and Energy Taxation Directive^[10].

With regard to the EU ETS, the Commission is proposing to include emissions from the maritime sector and reduce the number of free allowances allocated to the aviation sector. Also, as buildings account for 40% of energy consumed in the EU^[11], the Commission has said it will consider whether to include emissions from buildings in the EU ETS and that it will rigorously enforce EU legislation on the energy efficiency of buildings.

Industrial Strategy and Circular Economy Action Plan

The Commission estimates that about half of total GHG emissions and more than 90% of biodiversity loss and water stress come from resource extraction and the processing of materials, fuels and food. To accelerate the move to a more sustainable economy, the Commission will present a new Industrial Strategy and Circular Economy Action Plan in March 2020.

The Industrial Strategy is intended to address the twin challenge of the green and digital transformation, with digital technologies (such as AI, 5G, cloud and edge computing and the internet of things) being seen as a key enabler of the EGD objectives. The decarbonisation of energy-intensive industries (such as steel, chemicals and cement) is also seen as essential, as is the need to ensure the supply of sustainable raw materials for clean technologies.

The EGD is clear in its support for the development of emerging technologies that are expected to play a role in Europe achieving its ambitious 2050 target. These include clean hydrogen, carbon capture and storage, fuel cell, energy storage and alternative fuels. The Commission wants EU “climate and resource frontrunners” to develop the first commercial applications of these type of breakthrough technologies in key industrial sectors by 2030.

The Circular Economy Action Plan will include a sustainable products policy (to support the circular design of all products based on a common methodology), prioritise reducing and reusing materials before recycling them, and strengthen extended producer responsibility. Action will focus on resource-intensive sectors such as textiles, construction, electronics and plastics. The Commission will analyse the need for a “right to repair” and curb the built-in obsolescence of devices (in particular electronics). It will also step up its regulatory efforts to tackle false green claims.

A more circular economy will necessitate changes to waste rules, including new legislation to tackle over-packaging and waste generation, as well as revisiting the rules on waste shipments (as the Commission is of the view that the EU should stop exporting its waste outside the EU). We also expect to see a new model for separate waste collections and possibly mandatory recycled content targets for packaging, vehicles, construction materials and batteries.

Other associated strategies

The Communication also promises a number of other initiatives across a range of areas. These include:

• a chemicals strategy for sustainability, by Summer 2020;
• a zero pollution action plan for water, air and soil, by 2021;
• a strategy on offshore wind, in 2020;
• an EU Biodiversity Strategy for 2030, by March 2020;
• a Farm to Fork Strategy, by Spring 2020; and
• a strategy for sustainable and smart mobility, by 2020.

Each of these is likely to require substantial legislative and policy changes in the coming decades.

Sustainable Finance Strategy

The Commission estimates that meeting the current 2030 GHG emissions reduction target will require EUR260bn of additional annual investment. It is proposing that at least 25% of the EU’s long-term budget should be dedicated to climate action to meet the ambitious new targets, with the European Investment Bank (which the Commission calls Europe’s “climate bank”) providing additional support.

The Commission is aware that delivering the EGD will require significant public and private investment and has said it will present a renewed Sustainable Finance Strategy in Autumn 2020, in addition to a Sustainable Europe Investment Plan expected in early 2020.

Key to the renewed Sustainable Finance Strategy will be the adoption of the EU’s taxonomy for environmentally sustainable investment^[12]. However, although a provisional agreement on the draft EU Taxonomy Regulation was reached on 5 December 2019, it now looks like final adoption by the Council and Parliament may be delayed into 2020 due to disagreements over the treatment of nuclear energy.

The renewed Sustainable Finance Strategy is also expected to include announcements on an EU green bond standard and an EU ecolabel for retail investment products (both based on the forthcoming EU taxonomy), as well as proposals on how to better integrate climate and environmental risks into the financial system.

Interestingly, the EGD Communication also notes that the Commission is proposing to review the Non-Financial Reporting Directive^[13] in 2020 to encourage greater disclosure of climate-related information by companies and financial institutions.

Using trade agreements to drive environmental improvements

As we have seen in recent trade negotiations, the EU is keen to enshrine environmental commitments into its free trade agreements with third countries^[14]. This is an area we can expect to see continued focus and the EGD proposes to make respect for the Paris Agreement an essential element for all future comprehensive trade agreements.

“Moving first” and “moving fast”?

The Commission has been explicit in its ambition to move first and fast and there is no doubt that the EGD represents a bold statement of intent. The obvious question arises as to how achievable these ambitions are. Aside from legislative change, the plans will depend on the ability of Europe to direct private capital into the right areas and for businesses (and member states) to adapt through what may prove to be a rapid phase of transition.

As the UN COP25 climate negotiations in Madrid at the end of 2019 have shown, moving fast is the exact opposite of where many global leaders are currently positioned. The EGD is certainly a significant step for the EU but any hopes of this being translated into fast action are likely to be overly optimistic.

The private sector has been clamouring for clear, long-term signals from policymakers so that they can adapt and, in many cases, redirect capital flows to low-carbon investment with greater confidence. Whilst the EGD is a start, it remains to be seen what actually materialises in the renewed Sustainable Finance Strategy in Autumn 2020 and whether the EU’s ambitious objectives can be translated into equally meaningful action.

Next steps

The Commission has invited the European Council and Parliament to endorse the EGD. However, the EGD hit its first roadblock at a Council summit on 12 December. All member states, apart from Poland, have agreed to the 2050 climate neutrality target. Poland, however, wants further assurances about the funding that will be made available for carbon-intensive regions in the transition to net zero. The Commission is due to present details of the EUR100bn Just Transition Mechanism in January 2020, which will then enable the Council to revisit the 2050 target.

Agreement to an increase in the 2030 GHG emissions target could prove to be even trickier than agreeing the 2050 target. It’s one thing to agree a target that is still 30 years away. It’s quite a different challenge when the target in question much be achieved within a 10-year horizon and therefore necessitates immediate action.

Achieving climate neutrality by 2050 will require significant political, legislative and economic attention in the coming years. The Commission clearly does not want for environmental ambition. Business will be watching closely as detailed policy proposals follow. For a number of sectors, there may well be a difficult transition ahead. For others, there are clear opportunities as European governments and central banks look to drive public and private sector investment into new and emerging technologies. Perhaps Ursula von der Leyen was right when she likened her mission to “Europe’s man on the moon” moment.

The following table sets out some of the EGD’s key milestones. For a full list, please see the Roadmap^[15].

Footnotes

1. https://ec.europa.eu/commission/presscorner/detail/en/ip_19_6691
2. https://ec.europa.eu/info/files/communication-european-green-deal_en
3. https://ec.europa.eu/info/files/annex-roadmap-and-key-actions_en
4. https://ec.europa.eu/commission/presscorner/detail/en/ip_19_6691
5. https://ec.europa.eu/commission/presscorner/detail/en/ip_19_6691
6. https://ec.europa.eu/commission/presscorner/detail/en/ip_19_6691
7. https://www.politico.eu/pro/eu-looks-to-cement-as-first-target-for-carbon-border-charge/
8. Directive 2003/87/EC
9. Directive 2012/27/EU
10. Directive 2009/28/EC and Directive (EU) 2018/2001
11. Council Directive 2003/96/EC
12. https://www.allenovery.com/en-gb/global/news-and-insights/publications/sustainable-finance-the-eu-taxonomy
13. Directive 2014/95/EU
14. https://www.allenovery.com/en-gb/global/news-and-insights/publications/the-eu-trade-agreement-with-mercosur-trade-and-sustainability
15. https://ec.europa.eu/info/files/annex-roadmap-and-key-actions_en