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EU’s Green Deal threatens seismic shift

Proposals to achieve net zero promise to turn bloc’s economy upside down

Ursula von der Leyen, the incoming president of the European Commission, unveiled at the start of her tenure a 30-year project that aims at nothing less than the total transformation of Europe’s economy into a zero-carbon and sustainable system that will help achieve the goals of the 2015 Paris Agreement. 

The headlines are bold: to achieve net zero greenhouse gas emissions by 2050; to build a ‘circular’ economy that uses fewer resources and recycles and reuses more; to develop climate-neutral transport systems; to ‘green’ the agricultural sector; to double or triple the rate of building renovation across the bloc; to eliminate toxins emitted during production; and to reverse biodiversity loss. 

The sums of money involved are also appropriately astronomical. The Commission intends to spend and mobilise some €1tn in public and private funds over the next ten years to get the project rolling. The European Green Deal investment plan, or the Sustainable Europe investment plan as it is also called, will devote more than half-a-trillion euros from the EU budget over the period 2021 to 2030 to the plan, and will leverage an equivalent amount from other public and private sources. 

In addition to generating the funding, the Green Deal will create “an enabling framework for private investors and the public sector to facilitate sustainable investments and provide support to public administrations and project promoters in identifying, structuring and executing sustainable projects”. 

To achieve its goal, the Commission, member state governments and private investors will need to identify investment projects that cover all the elements of the Deal, but in addition, make appropriate regulatory changes to enable the changes. 

Carbon imports 

One of the most potentially controversial proposals is for a EU “border carbon adjustment”—in essence, a tariff on the carbon content of imports from regions where carbon emissions are not priced. President von der Leyen has said that there is little point to the EU cutting its carbon emissions and continuing to import embedded emissions from abroad. 

Transport electrification will need to extend to 100pc of all train networks and to road vehicle charging points across the entire European landmass

A carbon tariff would involve immense data-gathering and administration, but observers point out that the EU has considerable competence in this field. 

Already there have been warning shots fired by EU trade partners, who have raised the prospect of a tariff war. “Depending on what form the carbon tax takes, we will react to it—but if it is in its essence protectionist, like digital taxes, we will react,” says US commerce secretary Wilbur Ross. 

What are the Deal’s chances? 

A project of such complexity and scope as the Green Deal needs to be viewed over the long-term, and since its overarching goal is to turn the EU into a net-zero carbon economy, its success will by and large be judged on the bloc’s carbon account in 2050. A few of the main goals, such as reversing biodiversity loss, may take even longer to judge. 

But some of the consumer-facing initiatives should take effect much sooner, including regulations governing packaging, durable products and potentially the sharing or renting of products and services. New digital packaging and labeling rules would allow manufacturers to highlight reusable, durable and repairable products, while ‘smart’ goods and services would offer energy efficiency and additional choice to consumers. It is not difficult to envisage measures such as these being in place closer to 2030. 

The infrastructure investments—zero-carbon transport systems and power networks, as well as some of the industrial transitions to zero-carbon (steel, aluminium and cement, for example)—will take much longer to roll out. The Deal commits to supporting the R&D that some of these projects will require. 

Whither the energy sector? 

Even before the Green Deal was unveiled last year, a number of EU member states had committed themselves to phasing out the use of coal-fired power generation. Germany has pledged to close all its coal plants by 2038, while at least nine other countries have deadlines to quit coal by 2030. 

The coal phase-out comes on the heels of a period of considerable investment in both gas-fired and renewable energy, which has enabled countries to reduce their coal dependence. Natural gas is seen in some quarters as a bridge fuel on the path to zero emissions—although there is an element in Brussels that has turned entirely against unconstrained gas, while research into grid-scale battery technology that could reduce the role for the fuel in balancing renewables’ intermittency is booming. 

Moving away from fossil fuels will mean that electricity becomes the energy source for much more of the economy

The impact on the power generation sector and its suppliers may be relatively subdued, since the bulk of its activity is already covered by existing regulation, namely the EU emissions trading directive, the renewables directive and even the energy efficiency Directive. These and other rules will, admittedly, be tightened up as part of the Deal’s implementation. But the likelihood remains that the EU is relying on a combination of national commitments and its carbon price mechanism to do most of the hard work in generation. 

One area where opportunities are more likely to arise is in power delivery. Electricity grids will need to be made considerably more agile to deal with the likely proliferation of battery technology and distributed generation (domestic photovoltaic). Smart grids are already on the EU’s list of goals, but the Green Deal will likely make them far more important. 

This development signals the need for electricity grids to become far more robust and far-reaching. Moving away from fossil fuels will mean that electricity becomes the energy source for much more of the economy, and this will require grids to access parts of the economy they currently do not reach. 

Transport challenge 

Transport electrification will need to extend to 100pc of all train networks and to road vehicle charging points across the entire European landmass. This may require distributed generation from solar or wind where main grid connections are too distant or expensive to build. 

Transport is seen as a central element of the transition to net-zero carbon, and considerable research is already being devoted to hydrogen as a fuel to replace oil products. Electric vehicles (EVs) have also seen remarkable uptake in some countries, such as Norway, where there are 56 EVs for every 1,000 people, compared to 8.4 in the Netherlands and 3.4 in the US. 

The Green Deal sets a target of 1mn charging points across the bloc by 2025, although some observers suggest a goal of 3mn would be more ambitious, given that EV penetration is expected to rise to more than 40pc of all sales by 2035 from less than 5pc today. There is already plenty of competition in this field, but it is likely to intensify as the Green Deal targets greater penetration in eastern Europe. 

Shifting corporate landscape 

For liquid fuel companies, the outlook is bleak, assuming the EU meets its targets. Coal companies, as a potential analogy, did not react swiftly enough to a paradigm shift that began more than 15 years ago and many, particularly in the US, have entered bankruptcy. 

Large oil and gas firms are already, though, starting to shift their emphasis, as evidenced by BP’s recent pledge to achieve net-zero emissions for its operations and to cut the emissions intensity of its products by 2050. Shell, too, has said it will “continue to sell the oil and gas that society needs, while preparing our portfolio to move into lower-carbon energy, when this makes commercial sense”. 

Others have gone further, and been rewarded by equity markets. Denmark’s Orsted sold its coal, oil and gas businesses in 2017 and has refocused as an electricity supplier and renewables operator. Since the start of 2019 the company’s share price has risen by more than 55pc. US utility NextEra Energy bills itself as the world’s largest operator of wind and energy generation; its share price has jumped by 51pc in the last 12 months. 

All told, the Green Deal aims to revolutionise infrastructure, and probably the way that Europe does business as well. There are more than 40 separate legislative and regulatory projects involved in the undertaking, which could each take up to five years to pass through scrutiny in Brussels. It will be a long road, but the goal is a sustainable future, and that is seen as worth the effort.

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