Europe’s climate dilemma

The European Union aims to achieve carbon neutrality by 2050 and to establish itself as a world leader in green industries while maintaining budgetary discipline. But achieving these goals simultaneously is impossible, and the bloc must decide what it is willing to sacrifice.

As Europe aims to become the world’s first carbon-neutral continent, it must perform a delicate balancing act. Can the European Union transform its economy while strengthening its competitiveness? And can it achieve these goals while maintaining its status as a global standard setter and adhering to its principles of fiscal responsibility?

The answer to these questions is a resounding no. Trade-offs are inevitable, and identifying the trade-offs needed to strike the right balance may prove more difficult than policymakers realize.

In 2019, when the EU unveiled its Green Deal and pledged to achieve carbon neutrality by 2050, its main objective was to reinforce the 2015 Paris climate agreement and help limit emissions of greenhouse gases. But policymakers had a second, clearly defined goal: to make the EU a green industrial leader. That is why European Commission President Ursula von der Leyen has described the policy framework as Europe’s “man on the moon moment”.

Nobody knows if the Paris agreement would have collapsed without Europe’s commitment to carbon neutrality. Nevertheless, the EU deserves praise for designing a comprehensive legislative package in a few years, which many had considered impossible. The European Green Deal relies on a wide range of tools, from regulation (such as banning the sale of new internal combustion cars after 2035) to carbon pricing (via the expansion of emissions trading). emissions).
But things have changed since 2019. First, China has become a world leader in various green technologies, including solar panels and electric vehicle (EV) batteries. The scale and speed with which it pursued a green industrial policy may have enhanced its comparative advantage.

Second, former US President Donald Trump’s tariffs on Chinese imports, which remain in place under his successor, Joe Biden, have caused lasting damage to the multilateral system. For all intents and purposes, the World Trade Organization is a shell of itself.

Finally, the United States has joined the global fight against climate change, but in its own way. The Cut Inflation Act, Biden’s landmark climate legislation, excludes carbon pricing, does not cap subsidies, and conditions their access to skewed local content requirements. These characteristics make the IRA a game-changer, leaving the cohesive and carefully planned strategy of the EU increasingly vulnerable.

Despite these challenges, the EU has remained steadfast in its commitment to achieve carbon neutrality by 2050. While seeking to position itself as a global player in emerging green industries, it is also determined to respect multilateral principles and rules. . Moreover, the bloc plans to do all this while maintaining its existing fiscal framework. In fact, it is currently exploring reforms that offer barely any flexibility to deal with the expected fiscal consequences of transitioning to net zero.

However, the new reality may soon force the EU to reconsider its position. Given the substantial political capital that has been invested in the pursuit of carbon neutrality, it is hard to imagine the bloc explicitly giving it up. But he could continue to pretend to work on it, fail to meet his 2030 goals, and then gradually accept his new position as a follower rather than a leader. This scenario looks increasingly likely, as the EU has not put in place the internal governance mechanisms necessary to ensure compliance by member states.

While the EU retains direct control over certain measures, such as banning the sale of new carbon-emitting vehicles and allocating emissions quotas, support policies are still largely within the competence of member states. Unless European governments implement policies to discourage the continued use of aging combustion engine cars or subsidize investment in new electric vehicles, for example, these cars could stay on the road for many years. years yet.

In order to reduce the costs of achieving carbon neutrality, Europe could be tempted to sacrifice its competitiveness. If Chinese electric vehicles turn out to be more affordable than European-made ones, ardent climate advocates could make the case for buying Chinese cars. But Europe cannot afford to waste the opportunity to revitalize its automotive industry.

Since 2019, the EU seems to have become more willing to sacrifice its global role as a creator of rules and standards in the interest of improving its competitiveness. But the EU’s commitment to a rules-based global order is in its DNA, and it has no substitute of comparable weight. By giving up its role as legislator, the EU could accelerate the disappearance of multilateralism. Given that a weakened EU would lack the resources to save the existing global system, this outcome seems increasingly likely.

The safest course would be for the bloc to ease budget constraints through a green carve-out or common debt program, backed by an agreement to boost its own resources. Admittedly, such a move would risk triggering macroeconomic instability. But that would be less damaging than sacrificing competitiveness or letting the multilateral system collapse.

Unfortunately, these policies do not enjoy sufficient support within the EU. German Finance Minister Christian Lindner recently reaffirmed his country’s commitment to existing fiscal rules. But insisting on fiscal rectitude can confront the EU with significant losses on other fronts. Contrary to what some European policymakers may believe, the transition to clean energy will not be free. The choice facing European policymakers is simple: act now to meet these costs, or pay a much higher price later.

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