EU Green Deal

A key theme coming out of the side events taking place at COP25 is that private sector involvement is critical in the transition to net-zero emissions by 2050. The investment needed to achieve a 1.5 target is estimated at US$3.8 trillion per year, and it is clear that the public sector balance sheet won’t be sufficient to achieve this.

In this context, the European Investment Bank (EIB) has recently approved a new climate strategy which has at its heart the aim of mobilising €1 trillion into climate action and environmental sustainable investment up to 2030.¹ The EIB proposes to increase its financing activity into these sectors so that by 2025 it comprises 50 percent at a value of €30 billion per year. The bank has also committed to aligning all of its financing principles to reflect the goals of the Paris Agreement from the end of 2020.

Notably, the EIB’s new energy lending policy includes a cessation of financing for all energy projects based on fossil fuels, including gas, by the end of 2021. Aligned with this policy, is an acknowledgment of the need for a ‘just transition’ and the support required for the coal dependent regions. As stated by  Emma Navarro, Vice President at the EIB, “The transition must work for all, otherwise it will not work at all.”

The EIB and private finance is likely to be pivotal to realizing the European Union (EU)’s Green Deal, announced on December 11² and the subject of much discussion at COP25. At the core of the Green Deal is the ambition that the EU will achieve net-zero emissions in 2050, a target which will be enshrined in the first European Climate Law by March 2020. The EU’s 2030 emissions reduction target will also be strengthened under the proposals to at least 50 percent and towards 55 percent reductions, compared with 1990 levels.

The Green Deal’s primary objective is economic growth, with the aim of decoupling economic growth from resource use and protecting natural capital. The transition will be achieved by aligning policy across every sector of the economy, including energy, buildings, mobility, industry, food and agriculture, as well as taxation and social benefits. Maintaining the competitiveness of EU industry is therefore front of mind. Seeking to reduce the risk of carbon leakage, the Commission has announced as part of the Green Deal that it will propose a carbon border adjustment mechanism for selected sectors, a proposal which is likely to draw controversy.

Still, there is recognition in the Green Deal that transition can only succeed if it is conducted in a fair and inclusive way. In a presentation by Mauro Petriccione, Director General of Climate Action at the European Commission, he noted that it is essential that any strategy ensures continued economic growth, but in a way that supports economic transformation and technological change. The aim behind the Green Deal is to integrate economic policy with environmental and social policy, with the overall objective of increasing ambition. In light of the impending urgency, there is a strong desire to front load much of the required change, including the associated investment. The Just Transition Mechanism to support those regions and sectors most impacted by the transition is designed to enable this, including a Just Transition Fund comprising funds from the EU, the EIB as well as private investment; this is expected to mobilise as much as €100 billion in investment over the next seven years.

Two fundamental elements underpin the strategy: innovation and solidarity. In relation to the former, there appears to be a recognition that market intervention will be required. An example of the success that market mechanisms or incentives can provide is the rapid growth in the renewables sector, particularly offshore wind, and more recently, large scale solar. With the faster and deeper transition that is now required, there is a recognition that this will present a greater risk of dislocation and accordingly, the Green Deal seeks to enshrine fairness, honesty and effectiveness in its approach.

The intention behind the Green Deal is to give the economy a clear signal for where future investment should be directed.  It does not intend to invest in non-climate resilient sectors, and business as usual will not be considered ‘good business.’ The EU’s leadership in this space should not be underestimated, and if implementation of the Green Deal is successful, it is likely to set a model for other countries and regions to follow.