Part of Our EU-27 Green Tax Wiki.

Overview

Our earth is headed for climate destruction. If we don't make momentous changes now, humanity may not survive the twenty-first century. According to a report from the U.N. Intergovernmental Panel on Climate Change, it is imperative that emissions of greenhouse gases be reduced by 55% by 2030 and to net zero by 2050 in order to limit warming of global temperatures to 1.5 degrees. All nations of the world face disastrous consequences if there's failure to do so, yet one country's individual actions are not enough to meet needed climate goals. All nations must take action, but none have incentive to act unless other do so as well. The European Union has thus initiated a cooperative agreement among Member States to tackle climate action together.

On December 1, 2019, the European Council appointed Ursula von der Leyen to lead the 7th Commission of the EU. On her first day as commissioner, she opened the COP25 summit in Madrid with a bold new environmental vision for Europe: "Our goal is to be the first climate-neutral continent by 2050." The summit concluded ten days later with the announcement of the European Green Deal, a set of policy goals for the next ten years that represent some of the strongest, most comprehensive, and most innovative climate protection measures in the world.

In this wiki, we first outline (1) the history and (2) core values of the European Green Deal. We then examine several major initiatives of the Deal, including (3) the European Climate Law, (4) the Farm2Fork sustainable food strategy, (5) the EGD investment plan and Joint Trust Mechanism, and (6) the Energy Taxation Directive and Carbon Border Adjustment Mechanism. Europe's unique economic situation due to the 2020 COVID-19 crisis has also added a further perspective to the EGD, which is covered in (7) NextGenerationEU - "the Green Recovery Instrument".

1. The von der Leyen Commission's initial environmental platform

Intro: Ursula von der Leyen, the president-elect of the European Commission, is leading the charge towards a climate-neutral future in Europe. In a “mission letter” to her vice-president-elect, Frans Timmermans, she highlights the mission of the European Commission. Before Covid struck, the overall vision of the Von Der Leyen Commision was to speed up Europe’s progress towards becoming climate-neutral. In working with people across Europe and with the governments, parliaments, and institutions that serve them, Von Der Leyen hopes to tackle the many issues and challenges that stand in the way of a climate-neutral environment. In her letter, Von Der Leyen outlines the main goals of the new European Commission and describes the steps necessary for Europe to achieve climate-neutrality by 2050.

Underlying Goals: Before detailing the specific steps, Von Der Leyen informs Frans that he should place an emphasis on cooperation and inclusivity among the people on the commission. There are many groups within the commission with each group having a specific focus. One of her ideas is to have a council of eight “vice-presidents” who will take on leadership roles and make sure the groups are working towards a common goal. She also explains the construction of a “college”, where all members of the commission meet and discuss their progress. Along with the groups and the college meetings, Von Der Leyen makes it clear that achieving full transparency with the European Parliament is a high priority. She states “the more we build a consensus when designing policy, the quicker it can become law and make a difference to people’s lives” (Von Der Leyen). These actions will lead to full transparency and cooperation amongst the Commission and other high-level political institutions.

Not only does Von Der Leyen hope to achieve full transparency within the high-level political institutions, she deems it necessary to do the same with the general public. In order to explicitly communicate what the Commission is doing and to establish a greater sense of trust amongst the people of Europe in its mission towards climate-neutrality, Von Der Leyen declares that the meaning of each and every proposal must be made clear to the general public. The Commission must engage with all Europeans, not just those who are well-educated about the European Commission. Overall, Von Der Leyen’s goal is for there to be no room for doubt about the Commission’s behavior and integrity.

Detailed Steps: After highlighting her vision for the cooperation and transparency of the Commission, Von Der Leyen details the steps that will lead to Europe’s climate-neutrality. She places the responsibility of achieving climate-neutrality solely on our generation and says that Europe's Green deal should be the “hallmark of Europe” (Von Der Leyen).

The steps and goals of the European Green Deal are explicitly outlined in Von Der Leyen’s letter. First, she states that the Commission must aim to reduce emissions by 50% by 2030, which is 10% more than what was originally planned. In conjunction with this goal, Von Der Leyen mandates Frans to increase the ambition of other countries to achieve climate-neutrality. This will lead to widespread climate-neutrality and will hopefully lead to a cultural shift in which a higher priority is placed on sustainability. Next, she highlights the importance of transitioning workers in industrial, coal, and energy intensive regions. This should ensure full cooperation and create a greater sense of trust amongst the general public. Along with transitioning the industrial workers to more stable jobs, a priority should be placed on protecting Europe’s biodiversity. She states that the Commission must mainstream biodiversity priorities across all policy areas, notably trade, industry, agriculture and maritime affairs.

Von Der Leyen mentions many more steps that will help her achieve her vision of climate-neutrality in Europe by 2050. She states that working towards producing zero pollution is essential. This will require a wide-ranging approach looking at air, water, and noise pollution from transport, agriculture and food production, water quality, hazardous chemicals and other key areas. The transportation sector should also look to reduce its immense carbon footprint. This would further contribute to less emissions in Europe. Another important step for the Commission is to work towards the Farm to Fork strategy. The Farm to Fork strategy is a plan that makes food production and consumption more sustainable, and is an essential step in Europe’s progress towards climate-neutrality. Finally, making sure that Europe’s tax policies will contribute to a climate-neutral environment is also necessary.

Overall, Von Der Leyen mandates Frans to enshrine the 2050 climate-neutrality target into legislation. This will take careful execution of implementation and cooperation, but ideally will lead to a new climate culture in Europe. This new culture will lead to communities placing higher value on climate-neutrality, and will result in society designing and committing to a set of pledges.

2. The European Green Deal

The European Green Deal aims to decouple economic growth from environmentally destructive use of resources, constructing an economy for the twenty-first century and beyond that is profitable, just, and environmentally sustainable. In accordance with the U.N. 2030 agenda, it specifically aims to achieve net zero greenhouse gas emissions by 2050 and restore biodiversity, thus substantially limiting global warming and climate destruction. This new economic system will be designed as circular and resource efficient. However, it is also critical that the transition put the people first--it must be competitive, yet fair, and deliver prosperity inclusively. Change at such a scale demands the public’s active participation and confidence and citizens across the EU will have to work closely together and make major lifestyle changes. To meet such goals are strategic policies to cover the transformation of several different sectors:

Climate action. An ambitious reduction in greenhouse gas emissions is necessary to achieve climate neutrality by 2050. The Commission will therefore present a plan to cut emissions by 50%-55% of 1990 levels by 2030, using policy reform to secure effective carbon pricing and shift market behavior. In the incidence of “carbon leakage” across borders, the Commission will propose measures to implement a “carbon border” against products of carbon-intensive processes. To enshrine climate action into legislation and ensure irreversibility, the Commission will additionally propose the first European “Climate Law.”

Clean energy. The EU energy sector must rapidly transition away from fossil fuels and implement a system of renewable energy that is affordable and secure for the consumer. The Commission will evaluate Member States’ climate plans to ensure these goals are met, providing guidance on smart integration, regional cooperation, and addressing energy poverty.

Sustainable industry. As industry currently contributes 20% of Europe’s greenhouse gas emissions, full mobilization of the industrial sector and adoption of a circular economy is crucial to mitigating climate change. Key to this transition is the digital transformation and economic modernization, which will serve as a major boon to economic activity and job creation. To aid this transition, the Commission will develop regulation against “greenwashing” and other guidelines, promote collaboration between different sub-industries, and craft detailed plans for pollution reduction strategies.

Building and renovating. Construction, use, and renovation of buildings is a significant driver of energy and mineral use. However, renovations to bolster energy efficiency reduce overall use and cost of energy and energy poverty. As the renovation rate of building stock per year must at least double to reach climate goals, EU states should fund a “renovation wave” for both public and private buildings. Legislation should also address standards for building energy performance, barriers to renovation and sustainable investment, and organization strategies in order to utilize economies of scale.

Sustainable mobility. The EU must reduce emissions from transport by 90% by 2050 and shift towards more efficient multimodal transportation. This system must be safe, affordable, healthy, and accessible to users. The Commission will propose to end subsidies and tax exemptions for pollution-intensive transport so that price better reflects environmental costs and to expand production and deployment of sustainable transport fuel alternatives.

From farm to fork. The Commission will work with fishermen and farmers to transition food and agricultural production to better protect biodiversity, reduce pollution, and adopt sustainable practices. The Commission also proposes that significant proportions of food production organizations’ budgets go to mitigating climate change.

Biodiversity. The Commission’s intended plan aims to suspend biodiversity loss and restore degraded ecosystems to the EU. The primary strategies the Commission is likely to propose include expanding the extent of land and sea under protection, bolstering biodiversity in urban areas, and engaging in afforestation efforts. Healthy ecosystems could play an important role in tackling climate change; restored and preserved forests will serve as crucial carbon absorption sinks and food products from robust maritime populations could reduce demand for agricultural production.

Eliminating pollution. In 2021 the Commission will implement a strategy for zero pollution in water, air, and soil. Such will include restoring natural functions of water systems, reducing pollution from urban runoff, chemical, and microplastic pollution, and improving air quality. EU Member States must additionally evaluate existing policy and regulation and make necessary changes to better monitor, prevent, and reduce pollution.

Equity and Financing:

Implementation of European Green Deal policies will require €260 billion per year in additional investment, equivalent to 1.5% of Europe’s 2018 GDP. To finance this sizable investment, the Commission will present a Sustainable Europe Investment Plan. Funding needs will be met with allocations from the budgets of various EU programs, planned new revenue streams, action from the InvestEU Fund and European Investment Bank, and private sector sources aided by an improved enabling framework for green investment. National governments must additionally “green” their budgets, shifting taxation and investment policies towards green and sustainable practices. Key to all of this is the Just Transition Mechanism. It is imperative for the success of the EGD and future sustainable world that no one is left behind. Marginalized groups are the most at risk from the destructive effects of climate change. However, they are also most vulnerable to negative consequences of the transitions’ major structural reform, including from job loss or housing displacement. The JTM will implement programs targeted to address these concerns and ensure an inclusive and equitable transition.

Sources:

European Commission. (2019, December 11). European Green Deal. European Commission, Brussels. https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1576150542719&uri=COM%3A2019%3A640%3AFIN.

3. The European Climate Law

In order to take committed action towards curbing, and by 2050 nullifying greenhouse gas emissions the von der Leyen Commission proposed the European Climate Law that was published in March 2020.

Summary of the European Climate Law

The European Union (EU) will curb all greenhouse gas emissions by 2050, a proposal that comes from the von der Leyen Commission in the form of the European Climate Law. This legally binding goal includes a 55% reduction of greenhouse gas emissions by 2030, using the year 1990 as the comparison for the law. The Commission will look over, amend, and advise on the policy before June 2021 concerning the 2030 deadline; ensuring it is feasible and that the EU will be able to deliver. All 27 Member States are obliged to diminish emissions in compliance with the law to meet the set target. Member States are also expected to produce plans in order to reduce liability felt by changing climate effects to become more resilient. A key goal of the European Climate Law is to use policy to ensure cost-efficient and socially fair implementation of long-term goals.

Every five years the Commission will evaluate if the EU is remaining on track to meet this climate-neutrality goal for 2030 and 2050. They will evaluate each Member State and if there are states that are faltering in the net-zero objective the EU reserves the authority to recommend action.

The climate law was given to the European Parliament, council, economic and social committee, and the committee of the regions for reflection in the typical process of legislature system. The end goal set by the EU is for the climate neutrality to be irreversible.

Amendments due to COVID-19 pandemic

The pandemic due to COVID-19 highlighted new ways that the EU should be targeting climate change, and altered the economy from the original legislation. Amendments were made to the original proposal considering the drastic impact of COVID-19 on the EU. The Commission noted necessary efforts to strengthen European Alliances. Looking forward to post-COVID-19 recovery having these alliances will ease the recovery and enhance the goal of structural change; the Commission will focus on battery and hydrogen sectors. The legal requirements outlined would include a climate-friendly structure on mobility and energy generation. Importantly, European Alliances would assume proper funding as well as being included in trade agreements.

In these reforms there also is emphasis placed to increase efforts of an internal-energy market suggesting that COVID-19 recovery efforts focus on advanced techonoligcal gas and electricity networks.

The Commission in the new amendment also focused an assessment of impact that COVID-19 has had, and will have, towards environmental, economic, and social effects. A main part is evaluating how sectors can use this moment in time to reduce and improve emissions towards the EU climate goals. With the result of Brexit the impact of the emissions from the European Union may shift and the Comission will need to address the impact and potentially amend again the Union 2030 goal.

PRIMES modeling tool

The PRIMES model is used to obtain insight into each energy sector and their production of CO2 emissions. It is a modeling technique in partial stability that mimics the energy exchange equilibrium in the European Union and Member States and incluedes the EU carbon price projections.

There are two main ways the model evaluates data: showing the main energy contributors and the main consumers. This supply and demand model shows a broad analysis that allows for targeted reduction of greenhouse gases by allowing for in depth information into each sector. Demand sectors: Commercial, Industry, Residential, and Transports. Supply sectors: Electricity production, natural gas, and refineries.

After splitting up each sector the model analyzes “what is the optimal least-cost configuration of the sector so as to generate a certain level of value-added while satisfying constraints that represent technical, fuel availability and emission restrictions.” (Hendriks et al., 2003. pg. 10)

Currently, the PRIMES model is set to analyze between the years 1990- 2030 in 5 year periods.

EmissionReductionPath1.5TECH.JPG

As an example of PRIMES application is the graph above that assisted in depicting one way to achieve carbon neutrality by 2050. The model shows how different sectors are emitting different amounts of CO2, and which ones may have the most success at gaining Carbon neutrality with the least resistance. It is shown that the power sector- through ample, affordable, and researched alternatives - is one of the easiest sectors for the EU to decarbonize. Carbon recapture technology will also begin to increase closer to 2050 as technology evolves and it will allows to balance some sectors that are still producing CO2.

Citations:

CABUZEL, T. (2020, March 4). European Climate Law [Text]. Climate Action - European Commission. https://ec.europa.eu/clima/policies/eu-climate-action/law_en

EUR-Lex (2020, March 3). Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Establishing the Framework for Achieving Climate Neutrality and Amending Regulation (EU) 2018/1999 (European Climate Law). Retrieved December 7, 2020, from https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1588581905912&uri=CELEX:52020PC0080

EUR-Lex (2020, September 17). Amended Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Establishing the Framework for Achieving Climate Neutrality and Amending Regulation (EU) 2018/1999 (European Climate Law). https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020PC0563

Hendriks, C., Dejager, D., Harnisch, J., Bates, J., Mantzos, L., & Vainio, M. (2003). Economic Evaluation of Sectoral Emission Reduction Objectives for Climate Change. In Greenhouse Gas Control Technologies—6th International Conference: Vol. II (pp. 1201–1206). Elsevier. https://doi.org/10.1016/B978-008044276-1/50190-2

European Commission. (2018). IN-DEPTH ANALYSIS IN SUPPORT OF THE COMMISSION COMMUNICATION COM(2018) 773.

4. "Farm2Fork": The Farm to Fork Strategy

At the heart of the European Green Deal is the Farm to Fork Strategy. The Farm to Fork strategy strives to create a sustainable food strategy – one that both protects the future of the Earth and produces enough nutritious, affordable food for all people.

The Plan

The EU’s plan is to “reduce the environmental and climate footprint of the EU food system and strengthen its resilience, ensure food security in the face of climate change and biodiversity loss and lead a global transition towards competitive sustainability from farm to fork and tapping into new opportunities” (European Commission, 2020).

This plan requires that the food chain has a neutral or positive environmental impact, that everyone has access to sufficient, nutritious, and sustainable food, and that food is affordable so that ultimately the most sustainable food will be the most affordable. This plan aims to not only increase environmental sustainability, but also provide a huge economic opportunity for farmers, fishers, aquaculture producers, and food processors.

At its most basic, the Farm to Fork plan works to balance sustainable, environmentally friendly solutions with also providing nutritious and affordable food for all people. It hopes to also ultimately help the economy – from the farmers to the producers to the consumers. It is a bit of a dreamy plan, with a hopeful utopic ending where the environmental impact of producing food is minimized, food security for all people is guaranteed, and food is affordable while still an economic spur. That said, it is ambitious and would be cutting edge if achieved.

Implementation

The implementation of such a comprehensive plan is complicated.

Legislation

Much legislation has been put into place to make this possible. This legislation includes new policy initiatives as well the enforcement of existing legislation, especially existing legislation on pesticide use, animal welfare, and environmental protection legislation. Notably, the EU Commission plans to make a legislative proposal in 2023 for a framework for a sustainable food system that will promote policy coherence, ensure sustainability is at the forefront of all food-related policies, and work on the resilience of food systems. Existing EU instruments, such as the European Agricultural Fund for Rural Development and cohesion funds, will support the legislative transition. There is much more legislation involved, and other things are noted in sections below.

Research

The EU plans to spend around 10 billion dollars on research and innovation under Horizon Europe, an ambitious European research and innovation program. This research will center on food, bioeconomy, natural resources, agriculture, and more. The European Regional Development Fund also plans on investing in innovation and collaboration along the food value chains. The Commission also plans to roll out broadband internet in rural areas in order to connect all farmers to broadband internet so they can benefit from cost reductions, improved access to resources on soil management, and more. Finally, the InvestEU Fund will de-risk investments by European corporations in order to foster private investment in the agro-food sector.

Sustainable Food Production and Consumption

The EU has many suggestions for new green business models for farmers, fishers and aquaculture producers in order for them to transform their production methods. These initiatives include utilizing the circular bio-based economy and getting rid of chemical pesticides.

The EU envisions food security and sustainable consumption as tandem achievable goals. The EU wants the food industry to increase the availability and affordability of sustainable food options and will develop an EU Code of conduct for responsible business and marketing practice to help ensure this vision. In terms of packaging, the Commission plans to revise legislation on food packaging to both improve food safety and work to encourage more sustainable packaging solutions.

New nutrition labeling, improved availability and cheaper prices of sustainable food, and tax incentives will work to drive the transition to a sustainable food system on the consumers’ side.

Effects of Covid-19

The COVID-19 pandemic has highlighted the need for a resilient food system that functions in all circumstances for all citizens. It has demonstrated how interrelated our health, ecosystems, consumption patterns, and supply chains are. Europe has noted that crises such as COVID-19 could have put food security at risk and has noted that there is a need for monitoring of food security and the competitiveness of farmers and food operators. In addition, COVID-19 has increased awareness for the importance of critical workers across all sectors, but in this context agri-food workers. The Farm to Fork Strategy is committed to mitigating the socio-economic consequences impacting the food chain and taking consideration of workers’ social protection, housing and working conditions, and health and safety. Especially in the aftermath of the COVID-19 pandemic and the subsequent economic downturn, Europe is committed to making sure that all citizens and providers worldwide benefit from a just transition to a sustainable food system.

Citations:

European Commission. (2020). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Farm to Fork Strategy for a fair, healthy, and environmentally-friendly food system.

European Commission, J. (2019, December 10). Farm to Fork Strategy – for a fair, healthy and environmentally-friendly food system. Food Safety - European Commission. https://ec.europa.eu/food/farm2fork_en

European Union. (2020a). Farm to Fork Strategy. https://ec.europa.eu/food/sites/food/files/safety/docs/f2f_action-plan_2020_strategy-info_en.pdf

European Union. (2020b). Farm2Fork. https://audiovisual.ec.europa.eu/en/video/I-196217

5. The European Green Deal Investment Plan and Just Transition Mechanism (JTM)

Goals of the EU Investments

The main goal of the European Green Deal in 2020 is to recover the European economy sustainably. Funding is focused on research and innovation, the assistance of modernization and transition into a more sustainable economy, stable and cohesive agriculture plans, abatement of climate change, and protection of biodiversity. Focusing on these areas works towards the goals of decreasing disparities between states as well as creating sustainable jobs in the long run.

Long run climate goals are also still in place despite the current global pandemic. The EU has set the goal of reducing greenhouse gas emissions by 55% by 2030 and to be carbon neutral by 2050. Transition away from greenhouse gases may be more difficult for some member states so the Just Transition Fund is set to assist countries that are heavily reliant on fossil fuels. These goals are implemented in their Paris Agreement Nationally Determined Contribution which is set to be revised by November of 2021. These goals are set based on what the EU believes it can contribute to keeping the global temperature increase to under 1.5 ºC.

EU Funding

Funding from the European Union’s budget comes from payments from member states as well as import fees and disciplinary fees from companies that are not complying with EU regulations. The budget is usually set years ahead of time under the principle that all expenditures must be matched with revenue from the EU’s gross national income. However, with the unpredictable circumstances of the COVID-19 pandemic, the budget may be more flexible this year and a deficit may be necessary.

However, the commission is working on how to pay for the extra demand for funds and will have a proposal by June of 2021. These include revisions of the market for emissions in the EU, taxing of digital companies, and carbon border adjustments. By 2024 a further plan to increase revenue will be proposed including corporate sector financial contributions and financial transaction taxes.

The Green Deal budget must align with the EU’s Multiannual Financial Framework. This consists of approval from the parliament and the majority of the council. However, the European Parliament has historically supported climate change-related movements. Currently, 30% of the EU’s budget is going towards fighting climate change which is an increase from the previous 20%. Allocation of that budget may vary depending on proposals from the commission and compromises from the parliament. The decision of loans and loan use is not up to the parliament but rather the investment banks and borrowers.

Next Generation EU

The European Union issues a €1.8 trillion relief fund including an organization called Next Generation EU which focuses on social and economic recovery and increasing output of the capital market. Of the budget for Next Generation EU, 37% goes towards the European Green Deal. This consists of the Recovery and Resiliency Facility which provides grants and loans for member countries once they have made proposals of use and amount. Next Generation EU also provides funds for REACT-EU which aims for a more resilient and green EU economy through the European Regional Development Fund, European Social Fund, and the European Fund for Aid to the Most Deprived. Next Generation EU also assists with funding Invest EU and the Just Transition Fund.

Just Transition Fund

Grants from the Just Transition Fund are aimed towards more sustainable infrastructure in areas that are currently more reliant on fossil fuels therefore will have a harder time transitioning to the carbon neutrality goals set by the EU by 2050. This fund is financed partly by the EU budget, partly by Next Generation EU, and partially by loan schemes.

This fund was established in December of 2019 but has since been revised. The commission proposed an increase in funding for the Just Transition to €10 billion from the EU budget and €30 billion from the Next Generation EU fund in light of the COVID-19 pandemic. This higher budget would help with assistance and recovery for those affected by the harsh economic recession. The parliament settled on a lower increase in funding of €7.5 billion from the EU budget and €10 billion from Next Generation EU. By 2050 there are expected to be €150 billion circulating grants and loans of the Just Transition Funds.

InvestEU

InvestEU aims to stimulate the European economy through loans to sustainable projects such as infrastructure changes as well as support for small businesses that may be disproportionately affected by the lack of economic activity. InvestEU has a guaranteed budget of €75 billion from the EU. Loan requests are reviewed by a team of experts from Invest EU for security, sustainability, and economic benefit.

The European Commission recently called for more universal regulations and data availability based on the sustainability of companies’ budgets however the parliament is skeptical of the ability to contextualize data into hard definitions of sustainable uses of funding and that companies should be able to control the availability of their data. However, they have invited the commission to speak further upon the determining factors and benefits of the project.

European Investment Bank

The European Investment Bank is partners with InvestEU as a form of financial security as well as for advisory purposes. They also help advise the European Commission on its partnership with InvestEU and green bonds. The EIB made a promise to have 50% of all activity be towards abating climate change starting in 2025. Should the commission be able to establish a more universal of green bonds in the EU, it will be easier to hold the EIB accountable for these goals.

No Harm Policy

The EU has implemented the “no harm policy” into their strategy for recovery from the COVID-19 pandemic. With each project aimed towards recovery in the EU, there must be an assessment of the environmental, climate, and alignment of rights.

Citations

Kefalogiannis, Manolis. Legislative Train Schedule A European Green Deal. European Parliament, 2020, www.europarl.europa.eu/legislative-train/theme-a-european-green-deal/file-just-transition-fund

“Questions and Answers: The Proposed InvestEU Programme.” Press Corner, European Commission , 2020, ec.europa.eu/commission/presscorner/detail/en/qanda_20_947

“Recovery Plan for Europe.” European Commission - European Commission, 1 Dec. 2020, ec.europa.eu/info/strategy/recovery-plan-europe_en.

“EU Budget Own Resources.” European Commission - European Commission, 2 Oct. 2020, ec.europa.eu/info/strategy/eu-budget/long-term-eu-budget/eu-budget-2014-2020/revenue/own-resources_en.

“Text Adopted by Parliament, Single Reading .” Legislative Observatory, European Parliament, 13 Nov. 2020, oeil.secure.europarl.europa.eu/oeil/popups/summary.do?id=1639234&t=d&l=en.

Just Transition Fund - Think Tank, 13 Oct. 2020, www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI%282020%29646180.

“COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS.” EU Biodiversity Strategy for 2030, European Commission, 20 May 2020.

6. New Targets for 2030 and 2050, and New Ways to Achieve Them: A Revised Energy Tax Directive (ETD) and a Carbon Border Adjustment Mechanism (CBAM)

New Targets and New Instruments

In advance of a submission of the EU's Revised First NDC in December 2019, the European Commission announced its "objective of achieving a climate-neutral EU by 2050" by means of the European Green Deal [1]. This objective was strengthened in September 2020 in an internal EU communication, amending its proposal to target "at least 55% net greenhouse gas emissions reductions compared to 1990" [2]. This target represents a 50% more ambitious target than the one adopted in 2019. One important mechanism outlined in the EGD for reaching these targets is fiscal policy. The EU writes "the Green Deal acknowledges the crucial use of taxation in the transition towards greener and more sustainable growth" and that well-designed taxes can "help reduce greenhouse gas emissions by ensuring effective carbon pricing" while also promoting economic growth [3]. The two main tax initiatives in the EDG are (1) Revising the Energy Tax Directive and (2) Creating a Carbon Border Adjustment Mechanism (CBAM).

(1) Energy Taxation Directive (ETD)

In 2003, the EU adopted the Energy Taxation Directive (ETD), which harmonized EU rules for the taxation of energy products used for motor fuel, heating, or electricity. The "primary function of the ETD is to support the proper functioning of the internal market by avoiding double taxation and other distortions of trade", but is also intended to contribute to the achievement of EU goals in other fields, like environment, energy, and climate [3]. However, efforts to update the directive have thus far failed, and so it "is no longer in line with the EU climate objectives." Specifically, it (a) does not promote emissions reductions, (b) allows for exemptions that incentivize fossil fuel use, and (c) does not provide sufficient incentives for investments in renewable technologies.

How exactly the EU Commission plans to update the directive is currently unknown. The revised directive will "reflect more accurately the climate impact of the various sources of energy" and "encourage consumers and businesses to change their behavior" [3]. Presumably, this will include renewable energy subsidies and higher taxes for fossil fuels. Additionally, we may expect to see other incentives for switching to low-carbon technologies. The proposed amendments to the ETD will be presented in June 2021.

(2) Carbon Border Adjustment Mechanism (CBA)

In 2005, the EU launched the Emissions Trading Scheme (ETS), which is essentially a cap-and-trade system for carbon emissions in energy-intensive industry sectors. The major limitation to this scheme is that it only counts against production in the EU itself. As a result, companies are incentivized (when possible) to move production outside the EU to regions with fewer environmental regulations, meaning carbon emissions are not reduced. This phenomenon is called 'carbon leakage'. While the ETS has some built-in prevention mechanisms, the CBAM is expected to be much stronger against carbon leakage.

The aim of the CBAM is to ensure "the price of imports reflect more accurately their carbon content" [3]. While the mechanisms are yet to be defined as of December 2020, it is expected that it will take the form of a tax levied on imports based on their carbon content. Whether this tax is proportional for individual products or will represent classes of similar products has yet to be determined. Furthermore, the EU has yet to say how they determine the carbon content of a product. For example, do sustainable goods (eg. electric vehicles) that require carbon-intensive production processes have as much 'carbon cost' as carbon-rich goods, like plastic?

The CBA and the WTO

The largest hurdle the CBA faces - however it is implemented - is WTO regulation. Specifically, several potential mechanisms for the CBA are either legally questionable or flat-out illegal under the General Agreement on Trade and Tariffs (GATT). According to GATT, any tax levied on imports must "impose an equivalent burden both on the products that are produced domestically, and those that are imported from abroad" [4]. In other words, if the CBA taxes products made outside the EU in countries with fewer environmental regulations, the EU must then levy the same tax on equivalent products made in the EU. This presents an obvious scenario in which carbon emissions are not reduced, and the overall price level of goods increases.

Another core restriction of GATT that limits the CBA is that taxes can not be levied on processes, only products. Therefore, the CBA cannot target products made using less-efficient, carbon-intensive techniques that are more prevalent outside the EU. This again will fail to address carbon leakage, as stricter regulations and the ETS in the EU increase production costs that can be alleviated by producing abroad. Another consequence of this law is that taxes can not be levied on energy imports. The EU could levy a tax on fuel for electricity (so long as it also levies one domestically), like on Russian natural gas, but it could not tax natural gas-created electricity imported from Russia, for instance. This will elongate the transition time to a 100% renewable energy EU, as it would still be reliant on imported fossil fuels to provide cheap electricity when during off-production hours for RE systems.

Internal discussions have proposed addressing the restrictions above by applying a tax on imports equivalent to the cost of acquiring carbon permits under ETS. Such a system has never been tried, and so its admissibility under GATT remains questionable. The WTO may rule that this tax may effectively represent a process-based ETS, rendering it illegal. A further complication is that the ETS framework grants free carbon permits to energy-intensive industries. If the WTO permits this CBAM idea, it is likely that these zero-factor permits would also have to be given out for foreign-made products. This would severely limit the CBAM's effectiveness, as such a system would fail to address 'carbon leakage'.

Sources

[1] "Submission by Croatia and the European Commission on behalf of the European Union and its Member States," Croatian Presidency of the Council of the European Union, 2020.

[2] "Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Stepping up Europe's 2030 climate ambition: Investing in a climate-neutral future for the benefit of our people," European Commission, 2020.

[3] "European Green Deal: what role can taxation play?" Taxation and Customs Union, European Commission, 2020.

[4] Falcao, M. "The EU Green New Deal and the Proposed Carbon Adjustment Mechanism," Kluwer International Tax Blog, 2020.

7. NextGenerationEU, the New Post-COVID-19 "Green Recovery Instrument"

NextGenerationEU, together with the long-term (2021-2027) EU budget, the Multiannual Financial Framework, was approved by the European Parliament and EU Member States in the Council on 10 November 2020. NextGenerationEU and the long-term budget together total €1.8 trillion, which is the most expensive package ever financed by the EU budget [1]. Its goal is to “help rebuild a post-COVID-19 Europe, which will be greener, more digital, more resilient and better fit for the current and forthcoming challenges.” The highest share of an EU budget ever, 30% of the package will go towards combating climate change. The budget will also include flexibility mechanisms to make sure it can address further unforeseen circumstances. Of the 1.8 trillion, “more than 50% of the amount will support modernisation through policies that include research and innovation...; fair climate and digital transitions...; [and] preparedness, recovery and resilience.” [9]

To finance this, the EU will “borrow on the markets at more favourable costs than many Member States and redistribute the amounts” [3]. To help repay the debt, the European Commission has plans for a carbon border adjustment mechanism, a levy on large tech companies, and a tax on non-recycled plastics [3, 5]. This is one of many green facets of the new budget.

NextGenerationEU aims to avoid the mistakes of the past, in particular Europe’s initial handling of the Coronavirus pandemic, and help Europe recover. It is a temporary recovery agent and has €750 billion in total funds [2]. It will address three main pillars of investment:

(1) The first is a temporary measure to facilitate recovery from the Coronavirus pandemic. This category accounts for more than 80% of the funding [6]. The main agent of NextGenerationEU is the Recovery and Resilience Facility, which is designed to aid the recovery and “will provide an unprecedented €672.5 billion of loans and grants in frontloaded financial support for the crucial first years” [8]. It will be available to all member states and concentrated where it is needed the most, with a focus on environmental sustainability alongside modernization and economic growth. NextGenerationEU also adds funds to the Just Transition Fund, which helps member states move towards carbon neutrality, and the European Agricultural Fund for Rural Development, which helps rural areas adapt to meet the goals of the European Green Deal.

(2) The second category involves programs to incentivise private investment to help grow the EU economy, with a focus on those involved in the “green and digital transition.” In particular, the Solvency Support Instrument will provide support to otherwise sound companies put at risk by the pandemic [6]. Speaking on the proposal in July before it was passed, President of the European Commission Ursula von der Leyen said, “If we get it right, I believe NextGenerationEU can be one of the largest stimulus for investment and reforms anywhere in the world – investing in roll-out of 5G, in grid infrastructure, in AI and industrial digitisation, in renewables, sustainable transport, energy-efficient buildings, you name it” [7]. The goal is that these investments are two for the price of one: they simultaneously help the recovery and the green transition.

(3) The third is to learn from this crisis and better prepare for future events. This involves strengthening health security and health research, humanitarian aid, and instruments to make responses to crises more flexible. This approach includes the European Globalisation Adjustment Fund, which will provide support for people who become unemployed due to “unexpected major restructuring events such as a financial or economic crisis,” the Solidarity and Emergency Aid Reserve, which provides rapid financial support when necessary (such as after major disasters), and aid to member states affected by Brexit [3]. Additional funding will be provided to Horizon Europe, a research initiative focused on health, resilience, and green and digital transitions, as well as other programs like the Common Agricultural Policy and the European Maritime and Fisheries Fund [6].

The goal of the recovery, as described by NextGenerationEU, is to grow towards the European Green Deal while strengthening and modernizing the market (go big or go home). The plan also includes programs to make sure all EU citizens benefit from the recovery, like unemployment insurance, digital education plans, and “fair minimum wages and binding pay transparency measures [to] help vulnerable workers, particularly women” [9].

President von der Leyen writes, “In past crises, the better off survived while the most vulnerable paid a heavy price. But this time it has to be different. This time we can only get back to our feet if we all pull each other up. This is why most of NextGenerationEU funds will be distributed in grants to Member States to finance crucial reforms and investment.” This package, she argues, should be embraced by all member states because it will benefit Europe as a whole. Different countries will have different needs, but “all will contribute to the goals of the European Green Deal.” [5]

Sources:

[1] “2021-2027 long-term EU budget & Next Generation EU” https://ec.europa.eu/info/strategy/eu-budget/long-term-eu-budget/eu-budget-2021-2027_en

[2] “EU’s Next Long-Term Budget & NextGenerationEU: Key Facts and Figures”
https://ec.europa.eu/info/sites/info/files/about_the_european_commission/eu_budget/mff_factsheet_agreement_en_web_20.11.pdf

[3] “Questions and Answers on the agreement on the €1.8 trillion package to help build greener, more digital and more resilient Europe”
https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_2088

[4] “Europe's moment: Repair and prepare for the next generation” https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940

[5] “Making Europe's future rhyme for the Next Generation: op-ed by President of the European Commission Ursula von der Leyen”
https://ec.europa.eu/commission/presscorner/detail/en/ac_20_1425

[6] “The EU Budget Powering the Recovery Plan for Europe”
https://ec.europa.eu/info/sites/info/files/factsheet_1_en.pdf

[7] “Speech by President von der Leyen at the European Parliament Plenary on the conclusions of the Special European Council meeting of 17-21 July 2020”
https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_20_1396

[8] “NextGenerationEU: Commission presents next steps for €672.5 billion Recovery and Resilience Facility in 2021 Annual Sustainable Growth Strategy”
https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1658

[9] “EU budget: European Commission welcomes agreement on €1.8 trillion package to help build greener, more digital and more resilient Europe”
https://ec.europa.eu/commission/presscorner/detail/en/IP_20_2073

Summary

The European Green Deal aims to achieve climate-neutrality by 2050 by implementing a series of targeted policies to transition to a sustainable, inclusive, resource-efficient economy. The European Climate Law sets out clear legislation to reduce emissions by 55% in 2030 and be net zero emissions in 2050.

After Ursula Von Der Leyen's bold sustainable vision for Europe was published, the European Green Deal was put into action with an extensive list of initiatives.

The Farm to Fork plan, as with the whole EU Green Plan, hopes to have a smooth global transition that helps the EU, and the world, not only environmentally but also socially and economically.

NextGenerationEU was passed in November 2020 to facilitate recovery from the Coronavirus pandemic, in particular through environmentally sustainable investment.

The Just Transition Fund aims at creating moire sustainable infrastructure in areas currently more reliant on fossil fuels to aid the transition to carbon neutrality.

By adhering to the Farm to Fork sustainable food production plan, implementing the Just Transition Investment Plan, and enforcing taxes that will incentivize more sustainable behavior, the European Union will implement the Green Deal and ultimately try to change public perception towards climate change for the better.