European Green Deal – One Trillion Euros in Ten Years for Sustainable Energy Transition

At the end of last year, the European Commission officially presented a plan that is the political-economic framework of the new Commission led by Ursula von der Leyen. The European Green Deal, which dreams of a carbon-neutral European Union by 2050, is a comprehensive plan for sustainable economic development of the continent based on the revision of existing laws in accordance with the requirements of combating climate change and the adoption of new ones in the areas of circular economy, energy renovation of buildings, biodiversity, agriculture, and innovation.

To ensure that the plan does not remain just a nice collection of lofty goals, the Commission anticipates that achieving it will require at least one trillion euros over the next ten years, although this may be a conservative estimate considering that the plan actually aims to completely restructure not only the European economy but also society as a whole in a direction that has so far been inconceivable for a market economy. Instead of an economy based on consumption and waste, the Commission envisions a recycling and resource-efficient economy fully aligned with the needs of the planet and human health, which is why it is likely the most ambitious such plan in the world. Although this will, quite obviously, require profound changes in almost every segment of the economy, from energy, through food to transport, production, and construction, Europe is not starting from scratch.

Solid Foundations

A series of laws and standards adopted over the past decade and longer has laid solid foundations in many areas. Pollution and renewable energy are not new concepts, but what has been achieved so far is far from sufficient, significantly because initiatives have been scattered and diluted to benefit various industries and member states unwilling to make a real paradigm shift. The Green Deal aims to change this by uniting all initiatives and setting clear goals, legal frameworks, funding, and deadlines. About half of the anticipated amount should come from the European treasury, which is estimated to pull in another 114 billion euros in national co-financing.

In addition, the private sector would contribute around 280 billion euros, spurred by guarantees from the European Investment Bank, which will assist in greening Europe by gradually eliminating loans for fossil fuel-related projects. Finally, one hundred billion euros is earmarked under the Just Transition Fund to finance the retraining of workers affected by the closure of undesirable industries such as coal mines or steelworks.

Wishes and Budget

On the other hand, Europeans have not yet agreed on a new seven-year budget, so for now, it is only about wishes, at least regarding finances. The coronavirus has further muddied the waters as the priority now is to find money to save the existing European economy, but it is increasingly likely that recovery plans could serve as an ideal excuse to push green initiatives.

The recently presented German recovery plan for the economy from the damage caused by the coronavirus seems to confirm this, as a large part of the money is intended for the industries of the future. It is particularly intriguing that the state has decided this time to offer money to the beloved automotive industry only for electric and hybrid models, completely disregarding those with internal combustion engines, even though they constitute the majority of production. Therefore, more and more people believe that a similar model will be transferred to the European level, meaning that green plans could gain additional momentum due to the coronavirus.

Currently, greater concern is raised by the very low price of crude oil, which, in the context of a global economic crisis, makes it an extremely attractive option compared to generally more expensive green energy solutions. Nevertheless, the plan has been adopted and will certainly be implemented to some extent, although experience suggests that a large part of the original plan will be modified as it goes through various phases of implementation and negotiation.

The document from last year is relatively short (24 pages) and functions more as a general outline based on which concrete strategies and regulations will be developed over time. In the meantime, for example, the Commission has proposed the adoption of a European climate law that would make the green direction part of common legislation, and then a legal obligation.

Single-use Discouraged

Although details will be seen in the coming months and years in documents and measures that will elaborate these general goals, there are already more concrete data for some areas. For example, in the energy sector, the EU has been actively pursuing a policy of transitioning from fossil fuels to renewable sources and electric vehicles for some time. A large part of the legislation on this already exists, so some revolutionary interventions in this area are not necessary, and greater emphasis is placed on the implementation and acceleration of ongoing processes.

Establishing a circular economy will therefore require much more effort and money because European production and consumption still predominantly operate according to the classic recipe of consumer goods. The emphasis is therefore on discouraging certain industries such as cement or steel production and reducing the use of extremely harmful materials and preventing single-use wherever possible. Specifically, this means changes in the use of plastics, electronic products, clothing, and construction materials as major barriers to a circular economy where materials are reused.

Similarly, agriculture and the food industry in general are one of the bigger problems due to deeply rooted interests and poor implementation of previous measures. Some of the goals are to ensure that 25 percent of European agriculture is organic by 2030, reduce pesticide use by 50 percent, fertilizer use by 20 percent, and food waste by 50 percent by 2030, and invest ten billion euros in research and development in this area.

Signals of Available Money

The key to the whole story, of course, is money, and the path to it, as usual, is not entirely clear. The Commission likes to simplify things by sticking catchy amounts, but many are skeptical when it comes to the trillions of euros that the proposal mentions, especially since it relies heavily on the multiannual budget that is yet to be negotiated, and the result is regularly far from what is initially proposed. There is also the usual habit of the Commission to record various private sector investments as a done deal that it estimates will materialize.

However, what has been proposed can serve as a solid indicator of the money that will be available and the ways to access it. Within the next multiannual budget (from 2021 to 2027), the Commission proposes allocating 25 percent for climate policy and the environment, for example through the European Agricultural Fund for Rural Development, the European Agricultural Guarantee Fund, the European Regional Development Fund, the Cohesion Fund, the Horizon program, and Life funds. The total amount is expected to reach 503 billion euros with national co-financing of 114 billion.

Just Transition

Under the ‘InvestEU’ program from 2021 to 2030, it will mobilize private investments and investments related to climate and the environment worth around 279 billion euros. A budget guarantee from the European Union will be provided so that the EIB Group and other implementation partners can invest in more projects and riskier projects, attracting private investors. Considering that for some countries, such as Poland, the transition to renewable energy will be extremely painful (about 80 percent of energy comes from coal), the Commission has envisaged a Just Transition mechanism that should help fossil fuel-dependent member states transition to acceptable alternatives with at least one hundred billion euros in investments from 2021 to 2027.

The last elements in the calculation are the Innovation Fund and the Modernization Fund, which are not part of the Union’s budget but are financed partly from the revenues of the main policy instrument – the auctioning of emission units under the EU’s emissions trading system. This will ensure approximately 25 billion euros for the European Union’s transition to climate neutrality, with a special emphasis on poorer member states in the case of the Modernization Fund.

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