Is the Green Deal a good deal?
I have also written a short version of this article.
On July 14, 2021, the European Commission proposed a historic plan to make the EU climate neutral by 2050: Fit for 55. With this catchy name, the Commission is signaling that it has a comprehensive and coherent plan to achieve the interim goal of reducing European emissions by 55% in 2030 compared to 1990. What is this plan at the core of the European Green Deal[1] all about? Will it shake up our lifestyles? Is it socially just? Does it constitute a sufficient contribution by the EU to stop climate change? At a time when the Parliament and the European Council are seeking to rework this plan before adopting it, its analysis allows us to understand its scope and to judge the debates that it triggers.
The objective of climate neutrality
As is climate change is due to the accumulation of greenhouse gases in the atmosphere, stopping climate change requires climate neutrality. Climate neutrality is the compensation of greenhouse gas emissions by an equivalent sequestration of atmospheric CO2. Sequestration can be achieved by an increase in biomass (for example, by expanding the world’s forests, contrary to the current deforestation) or by industrial processes known as direct air capture, whose deployment is expected in the second half of the 21st century. Between the EU, China, the US, and about twenty others, a group of countries representing two thirds of global emissions has announced a goal of climate neutrality in 2050 or 2060.
To avoid the most devastating effects of global warming, we must not only stop it, but we must also limit it to a moderate level. In the 2015 Paris Agreement, the international community agreed to “hold the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels.” Given the time needed to replace energy infrastructure and the inertia of our consumption habits, the 1.5°C target will certainly be exceeded. CO2 sequestration will then have to exceed emissions to bring us back towards the target. In particular, if the Commission’s plan proceeds as planned to climate neutrality in 2050, the EU will still need to continue its efforts beyond that, because net zero emissions after 2050 would correspond to a warming of about 2°C (assuming that other countries have the same per capita emission path as the EU). The Commission knows this well, and is forecasting negative net emissions in the second half of the century.
European climate policy
Given its past successes, the EU is credible in its long-term planning. In Kyoto, the EU committed to a 20% reduction in emissions by 2020 (compared to 1990); by 2019, its emissions had fallen by 24%. But the next target will be much more difficult: –55% in 2030 corresponds to –41% in a decade, a pace four times more intense than before 2020. To reach this goal, the Commission intends to capitalize on existing policies and strengthen their ambition. To control its emissions, the EU has separated them into three categories, subject to specific regulations: industry, land use, and the rest. Large industrial installations (power plants, steel mills, cement factories, refineries, etc.) are subject to an emissions trading scheme (ETS). Their emissions are verified, and the cap on allowances put into circulation each year ensures that industrial emissions do not exceed the planned values, forcing industries to adapt either by closing down the most polluting units or through energy efficiency gains. While the ETS covers 40% of EU emissions, land use has a much smaller contribution and even… a negative one! This sector, called LULUCF (for Land Use, Land-use Change, and Forestry) sequesters 7% of the EU’s net emissions, mainly thanks to the extension of forests (occurring both naturally and through afforestation efforts, financed in particular by the Common Agricultural Policy). The rest includes most of the emissions: transport, buildings (excluding electricity), agriculture, waste, and small industrial installations. Although separate, the regulations for land and the rest follow the same logic. Emissions are subject to a binding target at the European level, broken down for each Member State according to a distribution key designed to ensure equity. In the case of land, the contribution required from each State depends on its geographical specificities. For the rest, however, it depends on the State’s average income and is defined in the Effort Sharing Regulation (ESR). In the same way that the ETS sets up a market for allowances between industries, the ESR allows States that do not meet their targets to buy Annual Emission Allowances from States that have exceeded theirs. This market flexibility allows emission reductions to be made where they are least costly. It makes this regulation a mechanism for sharing the financial effort of decarbonization, rather than establishing strict national constraints in terms of emissions reductions. While Member States remain free to choose national measures to meet the targets set for them, the EU is accompanying them by introducing standards intended to ensure the unity of the common market. Firstly, the CO2 emission standards for new vehicles. These increasingly strict standards on emission factors have pushed car manufacturers to adopt technological improvements and have helped to reduce these factors from 177 gCO2/km in 2000 to 108 gCO2/km in 2020. However, this success is only relative, as we do not yet know whether the target of 95 gCO2/km in 2021 will be met, not to mention the fact that the apparent reductions were partly achieved by ploys to falsify the homologation tests. Second, the Energy Taxation Directive (ETD) requires states to adopt a minimum tax rate on fossil fuels. One of the aims of this directive is to avoid tax dumping, but it is quite ineffective, since almost all Member States have taxes on petrol well above the minimum rate, with significant variations between countries. Add to this the preferential rate for diesel and multiple exemptions that make it totally incoherent, and you can see why the Commission has been trying for years to reform this directive. Unfortunately, these attempts have always failed because of the difficulty of achieving the unanimity in the Council required for tax issues. Third, the Energy Efficiency Directive (EED), the Renewable Energy Directive (RED) and the Energy Performance of Buildings Directive (EPBD) have established energy efficiency standards and 2020 targets for the reduction of total energy consumption as well as the deployment of renewable energy. While the EU target of 20% energy savings has not been exactly met, the target of 20% of final energy from renewable sources has been met.
Fit for 55
Let’s look at the Commission’s various proposals one by one.
Allowance market for industry, ETS
Beyond a few adjustments (incorporation of the maritime sector, technical corrections to the Market Stability Reserve mechanism aimed at price stability), the main change for industry consists of reducing its emission cap twice as fast as before, so that it falls by 42% in a decade. Free allocations of allowances — decried as gifts to polluters — are reduced by only 15% for 2021–2030, but they are now conditional on decarbonization efforts, and will be withdrawn for installations that do not implement the recommendations of their audit report.
Carbon border adjustment mechanism, CBAM
In order to circumvent the massive decarbonization effort, industries will be tempted to relocate their production outside the EU, where their emissions will not be regulated. The Carbon Border Adjustment Mechanism (CBAM) will help avoid these “carbon leaks”. CBAM takes the form of a tax on the carbon footprint of imports (set at the ETS market price minus the carbon price already paid in the country of origin), and ensures that the imports concerned are subject to the same climate requirements as European production. When implemented in 2026, CBAM will be limited to the most polluting products (such as steel, cement, electricity), which represent the bulk of carbon leakage risks. If the importer is not able to quantify the carbon footprint of its products, the Commission will use the average footprint of the country of origin or, in the absence of data, will calculate it on the basis of the tenth of the most polluting equivalent products manufactured in the EU. To be compatible with WTO rules, the CBAM will be reduced in proportion to the free allowances allocated to European industries, which will themselves be phased out between 2026 and 2035. Indeed, free allowances are an (imperfect) substitute for protecting European producers from untaxed imports.
Land (LULUCF)
Soil and forests sequester 250 million tons (Mt) of CO2 each year. The Commission proposes a binding target of 310 Mt in 2030. For 2035, the objective is to achieve climate neutrality of a land sector extended to non-CO2 emissions from agriculture (including bovine enteric methane and nitrous oxide from fertilizers). In addition to agricultural emission reductions, this objective would imply increasing sequestration to around 350 Mt in 2035, and even more beyond that, so that this extended sector would contribute negatively to emissions. The climate neutrality target is less ambitious than it sounds, since it could be achieved with a CO2 price of €25/t, half the current ETS market price. Moreover, the recent reform of the Common Agricultural Policy is only a small step towards making agriculture more sustainable, and will not bring about structural change in this sector, key for the climate. That said, the Commission promises additional proposals in 2023 and 2025, in particular to certify the sequestrations made.
Effort Sharing Regulation (ESR)
As with the ETS, the main development of the ESR is to lower Member States’ emissions caps so that they are consistent with the Green Deal target.
New vehicles emission standards
With the target of selling only carbon-neutral vehicles from 2035, the EU is taking a decisive step to reduce household emissions. The measure comes with funds to help reach one million public charging stations by 2025 and three million eventually. Homologation tests are tightened, as are intermediate targets: by 2030, manufacturers will have to sell vehicles emitting no more than 40 gCO2/km (compared to the 60 gCO2/km currently planned). In addition, small manufacturers (selling less than 10,000 cars per year) will lose their exemption in 2030. However, these new rules will not ensure that no new combustion engine cars will be sold in 2035. For one, manufacturers selling less than 1,000 cars per year (such as Rolls Royce or Lamborghini) will still be exempted. Above all, the standard is not equivalent to a ban, and a car manufacturer is allowed to exceed the standard as long as it pays a premium of €95 per excess emission (in gCO2/km). In other words, if new BMWs emit an average of 100 gCO2/km in 2035, BMW will simply have to pay €9,500 per vehicle sold. Such an additional cost corresponds to the cost of a license plate in Shanghai, and does not prevent the Chinese city from hosting millions of vehicles…
Allowance market for transport and buildings, new ETS
To ensure that emissions in transport and buildings fall as much as desired, a new emission market is planned for these sectors from 2026. Refineries will have to buy allowances corresponding to their production, and the price of CO2 will ultimately be reflected in the price of motor and heating fuels. Unlike the existing ETS, all allowances will be auctioned. Although separate, the Commission predicts a similar price for each of the two ETSs, between €50 and €80/tCO2 by 2030, which would imply an increase of 10 to 16 cents per liter in the gasoline price. While such a price would only help to reduce fuel demand by 1–3%, the two ETSs combined will ensure that 70% of European emissions are capped and fall in line with the target. Spared sectors include waste and small industrial installations (“to avoid carbon leakage”). Revenues from the new ETS will be used to protect vulnerable households. In the existing ETS, revenues accrue to the States where emissions occur, which must use them to finance climate-related policies or compensate households for price increases. In the new ETS, 75% of the revenues will go to the states in this way, let’s call it direct revenues. The remaining 25% will flow into a Social Climate Fund, which will redistribute it to the States on condition that certain criteria are met. Each state will have to propose a plan to ensure that energy poor households are not negatively impacted (e.g. through direct transfers to households — which will however have to cease in 2032) and will have to finance a national plan for thermal renovation and zero-emission mobility (e.g. through subsidies for renovation work). At most half of the financing of the plans will be provided by the Fund, and it will be up to the States to supplement it, for example by drawing on direct revenues. A convoluted formula determines the share of the 25% accruing to each State, which results in some (cold and low-income) countries receiving 2.5 times more as their per capita share while some (rich) others receive 4 times less. Although it is not spelled out, this distribution key ensures that, taking into account direct revenues, States poorer than Spain almost all receive a share at least equal to what they would have received if the revenues had been redistributed equally among all Europeans. This is a clever system for approaching a fair distribution — the same right to pollute for each person — while remaining acceptable to the rich countries, since seemingly only 25% of the revenue is shared.
Energy Taxation Directive (ETD)
The reform of energy taxation covers two points. On the one hand, minimum rates are harmonized: within the same sector, all fuels will be taxed in proportion to their energy content, with the main effect of ending the preferential treatment of diesel. On the other hand, exemptions will be progressively lifted for those sectors that benefit from them: heating, agriculture, industry, fishing, maritime, and aviation… with the notable exception of private jets and cargo planes. Since the minimum rates defined by the ETD will not be significantly increased, this reform will have only a moderate effect: by 2035, it would lead to a 20% increase in revenues from these taxes and a 2% reduction in emissions. It is therefore difficult to understand the logic of this directive, which taxes energy rather than pollution, taxes transport ten times more than heating, taxes fossil or nuclear electricity but not renewable electricity.
Renewable Energy Directive (RED)
The target for renewables in final energy consumption is raised to 40% by 2030. The share of renewable energy in buildings will be increased by ambitious targets for each State, with a view to reaching 49% by 2030 for the whole EU. Comparable targets will apply to industry, transport and offshore wind. Biomass will be treated like fossil fuels, unless it meets very strict criteria to ensure its sustainability. Finally, the new rules favor hydrogen and methane from renewable sources.
Energy Efficiency Directive (EED)
In addition to the many standards it sets, the Energy Efficiency Directive establishes binding energy consumption targets for each Member State, to reduce energy consumption by at least 11% within a decade, which is still well below the optimal energy savings according to the Commission’s techno-economic models. The energy saving works will have to focus on energy poor households. In addition, Member States will be required to retrofit 3% of public buildings each year to a Near Zero Energy Buildings standard.
Aviation and maritime
In line with the vision of green growth, the Commission does not plan to limit the growth of aviation and maritime traffic. To contain emissions from these sectors, the option chosen is to decarbonize fuels. To stabilize aviation emissions at their current level, the share of sustainable fuel, currently zero, will gradually increase until it reaches 63% in 2050, of which 28% will be from green hydrogen or green hydrocarbon (produced from electricity and water), with the rest coming from second-generation biofuels. At berth, ships can draw their energy from electricity, so the maritime mandate is expressed in carbon intensity per joule: this will be progressively reduced, up to –75% in 2050. Biomass will play a decisive role in the decarbonization of the maritime sector, mainly from forests but also from agricultural residues and waste.
To ensure compliance with all these regulations, penalties are imposed in case of violation: an industrial installation that does not surrender enough allowances at the end of the year must pay a fine of €100 per excess ton of CO2, without this releasing it from the duty to surrender allowances corresponding to its emissions; a similar sanction is foreseen concerning air and maritime fuels; a State’s compliance gap from the ESR allowance must be made up in subsequent years and is sanctioned by an additional contribution (equal to 8% of the gap); States that miss their targets must submit corrective plans, and may be judged by the EU Court of Justice in case of repeated failure.
A plan to defend despite its imperfections
When one aspires to a sustainable and just society as soon as possible, the Green Deal can disappoint. Compared to the more sustainable option of sobriety, it favors the consumer society. Its scope is open to criticism: the –55% target excludes air and sea emissions linked to destinations outside the EU; instead of focusing on the carbon footprint, it only concerns the EU’s territorial emissions, and therefore does not set limits on imported emissions. Above all, the EU refuses to grant substantial transfers to Africa and South Asia, even though these countries make this a condition for their decarbonization. This is a legitimate condition, given their low incomes and the West’s historical responsibility for climate change. The EU should follow the recommendation of the Blanchard-Tirole report and open the ETS to the whole world, by allocating to each country a quota proportional to its population, which would de facto induce the necessary transfers. Finally, some of the provisions of the Green Deal could be improved. Rather than exempting private jets, the EU could further embrace zero-emission mobility for the wealthiest, by clearly banning combustion vehicles in 2035, or at least by increasing the excess emissions premium to several thousand euros. The ETS could introduce a price floor to reduce the uncertainty faced by investors; and include more sectors such as international aviation. Its free allocation of allowances could be abolished when the CBAM comes into force in 2026. To cap imported emissions, they could be included in the ETS rather than taxed.
However, while the Green Deal could be strengthened, the challenge now is to ensure that its provisions are not rejected or watered down by the Parliament and the Council, and that Member States take the necessary measures to meet their targets. In particular, States could seize the opportunity of near-zero interest rates to finance the energy transition through public debt. Given the European unemployment rate, this additional demand would be absorbed without having to cut other activities through tax increases. Thus, instead of dipping into the revenues of the new ETS to finance thermal renovation or public transport, the States could redistribute the totality of these revenues to citizens in the form of a climate income. This would ensure that a majority of people, and in particular the poorest, would benefit financially. Finally, we must not forget the necessity of disseminating knowledge so that all citizens are aware of the challenges facing our world and understand the efforts required for sustainability. This could take the form of a weekly documentary evening for all television and radio channels.
In conclusion, let us remember that politics is a matter of compromise, and that one could hardly expect more from the present forces, which represent voters who are rather concerned with preserving their material comfort. The Commission has been able to propose a coherent plan which, provided it is respected, will make it possible to achieve ambitious objectives, whilst distributing the efforts fairly within the EU (it is another story outside). Now, the key is to defend the Green Deal against attempts to weaken it. As the plan’s designers keep saying: you can propose to withdraw part of the plan, but only if you add a measure that ensures equivalent emission reductions.
Adrien Fabre, Post-doctoral fellow in environmental economics at ETH Zürich. Feel free to write me for any comment, or to get access to my highlights and annotations of the Fit for 55 proposals or get any other reference: fabre.adri1@gmail.com.
[1] Because it includes most of the measures, I will assimilate this plan to the European Green Deal, and leave aside the Green Deal’s complementary proposals that have yet to be unveiled at the time of writing (notably those about biodiversity, the circular economy and building standards).