Towards ‘Greener Pastures’: The Economic Impact of Europe’s Green Deal
By: Rachele Foo, Joshua Yuen
Research Head: Mrunali Doshi
Editor: Sakshi Sanganeria
Illustration by Jasmine
Abstract The European Union (EU) has come up with an ambitious deal under a new leadership to convert the whole of the EU into a carbon-neutral bloc by 2050. This would involve huge costs to overhaul all sectors of the economy, while the EU predicts that this will transform them into new economic growths while being sustainable. However, the first step will be to get all member states to be onboard for this deal to move ahead and be successful, or else the deal will be at risk of being ineffective. We will do a cost-benefit analysis and look into the trade implications in this article.
The European Union (EU) has released a Green Deal in 2019, aiming to reach climate neutrality by 2050 (European Union, 2019). In order achieve this goal, every sector will need to rally together to change and improve on sustainability. This builds on the EU’s effort to reduce carbon emissions with economic growth, where they have achieved a 23% reduction as compared to 1990 while enjoying a GDP growth of 61% (European Union, 2019). This will be a great step towards a greener earth as it will help to slow down global warming and be beneficial to Europe itself because many cities face the risk of flooding as sea levels rise. However, not all member countries are on board with this deal, as these countries may not have the financial ability to carry out such transformations or have criticized the deal. Sweden has voiced its concerns about how the focus seemed to be ‘not the earth’ but to ‘create new jobs’. The country believes this deal will not guarantee reduced emissions from other countries which are following in Europe’s footsteps(Stegrud, 2020). Increasing internal debates amongst the EU members will result in either less ambitious goals attained or a delayed timeline- and both these factors would result in the Green Deal being less effective than it is set out to be. 1. Benefits of the Green Deal One part of the deal is to create a circular economy, such that waste is minimized and more parts used in manufacturing can be recycled, reused or repaired (Simon, 2020). This new economy is expected to help boost the EU's GDP by 0.5% and create 70,000 jobs by 2030 (Simon, 2020). With the growth of 5G and Industry 4.0, jobs in areas such as automation and electric vehicles will be created. Technology-skilled workers will be in demand as companies innovate to go green. Shifting to renewable sources and sustainability can help improve economic development in poorer European countries that rely heavily on carbon-intensive industries, such as Poland, Hungary and Czech Republic (Bershidsky, 2019). These countries can tap onto the funds set aside such as the ‘Just Transition Fund’ (Barbière, 2020) and use this money to transition and retrain the less-skilled workers so that they possess new technology skills. This can eventually lead to increased wages for these workers, as well as increased productivity and output as a whole. New jobs will also be created in these countries, where they can increase the GDP to be comparative to the wealthier European countries (Bershidsky, 2019). The EU also intends to include clauses for environmental sustainability in their trade agreements and relook at its agreements with countries that do not comply with their environmental standards in production (Bettie, 2019). If this goes successfully, it will push other countries with Europe as its largest trading partner to follow the standards set by the Green Deal. This way, Sweden’s fears that the EU will be less competitive and the green deal will not be followed by other countries can be put aside. By being the first mover in reduction of carbon emissions, it sets new standards of sustainability for every other country to emulate.
2. €1tn is ‘just the start’: The cost of The Green Deal With such an ambitious green deal, the costs incurred would no doubt be formidable. According to the European Commission, at least 1 trillion euros would be needed-funded by both public and private parties (European Parliament, 2020). It is estimated that €503 billion would come from the EU budget which would lead to a further €114 billion from governments of EU countries (Harvey & Rankin, 2020). Another €300 billion will be raised through the EU Emissions trading system and ‘InvestEU’ fund (European Parliament, 2020).The funds raised would be used for investments in technology and projects that could potentially help the EU achieve its green deal targets. Additionally, the last €100 billion would be obtained through the ‘Just Transition’ mechanism which was set up to help regions that would be negatively affected by this move towards a greener economy financially (European Parliament, 2020). One significant industry affected would be the coal industry-which under the green deal would slowly disappear. This would mean 238,000 people could lose their livelihoods (Harvey & Rankin, 2020). Hence, part of the fund would be used to help the workers pick up new skills so as to find other jobs. While the funds seem to be neatly allocated, Breugel claims that for the EU to meet its green deal targets, 1 trillion is not enough. The EU would need 3 times of that! This is highly plausible as the funds might not be used in the most efficient way. In fact, in 2017, the European Court of Auditors found that the payment towards farmers to encourage them to become more environmentally friendly were expensive but not useful. The payment amounted to €12 billion per year and yet only resulted in improvements on about 5% of EU farmlands which was not entirely due to the payments (European Court of Auditors, 2017). It was also found that a lot of the changes towards more environmentally friendly farming practices that were subsidised by the EU would have happened even without thesesubsidies (European Court of Auditors, 2017). Furthermore, according to German MEP NiklasNienass, the €100 billion fund which is to be used for the transition is insufficient (Morgan, 2020). Frans Timmermans, the EU climate Chief also stated that the amount was “just a start” (Morgan, 2020). Hence, the cost would only go up from there. Additionally, investments in research and innovations do not always yield returns, which would lead to funds wasted. Hence, more funds would be needed to compensate for such situations if the EU remains persistent in reaching their target. 3. Threats to Trade In the short run, efforts to move towards a greener economy would hurt the EU’s competitiveness as firms would have to increase costs to meet stringent environmental regulations such as limits on carbon emissions. As the EU’s export competitiveness falls, the EU’s net exports would suffer and their economy would take a hit. To protect their economy while working towards their goal, the EU might enforce protectionist measures which would result in even lower competitiveness. Additionally, consumers’ cost of living might also rise which could lead to displeasure among the people.
In fact, under the green deal, new regulations in trade might be added. There could be a new ‘carbon border tax’ which would result in additional costs on imports from countries with less control on emissions (Guarascio&Ekblom, 2019). This could be seen as a protectionist measure by other countries which could lead to retaliation, hurting trade relations and the economy. Furthermore, as the EU moves towards a greener future, less oil and gas would be needed and hence imports for such commodities will fall. This threatens trade relationships with several countries, especially Russia as 30% of crude oil imports and 40% of gas imports in the EU come from Russia (eurostat, 2019). Hence, the negative impact of the green deal on trade could be substantial. 4. Advising Caution Whether the green deal is beneficial or detrimental to the economy depends on how the EU chooses to use its funds as well as how they manage their trade relations. Countries must also play their part to contribute and persist in making the changes, instead of being in full reliance of funding from the EU. The costs to transition is high, but we cannot put a price tag on the irreversible damage done to Earth. As climate activists continue to push for environmental conservation, it is time that countries take action and we believe that this deal is able to make an impact for other countries and regional blocs to follow. The EU would have to make careful choices on what projects to invest in and what subsidies to give. Furthermore, they have to ensure that the funds set aside for transition reach the people affected through strict regulations and oversight. This will help the people affected find new jobs and contribute to the economy. Lastly, the EU would have to consider the balance between their green deal targets and their trade relations. If they were to sacrifice trade relations to try and reach their green deal targets, they might end up failing to meet their economic and environmental targets.
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