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1. Section 232 reloaded: the false promise of the transatlantic ‘climate club’ for steel and aluminium

Author:
David Kleimann
Publication Date:
07-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In using the removal of Section 232 ‘national security’ tariffs on steel and aluminium imports as a bargaining chip, the United States demands that the European Union engage in negotiations on “global steel and aluminium arrangements to restore market-oriented conditions and address carbon intensity”. The US demand has reportedly been inspired by a blueprint that would establish an international institutional arrangement – labelled a ‘climate club’ – which would externalise market-access restrictions afforded by US Section 232 tariffs to the customs borders of club members. While the declared objective is to incentivise non-members to adopt low-carbon steel (and aluminium) production methods the US blueprint suffers from various design flaws including inefficient incentives, WTO inconsistency and incompatibility with the EU Carbon Border Adjustment Mechanism. The effectiveness of the proposed US scheme is severely compromised by the plethora of policy objectives it pursues, which go far beyond the goal of incentivising industrial decarbonisation in third countries, including secondary (ie protectionism) and tertiary (ie global power competition with China) objectives. The initial negotiation proposal submitted by the United States Trade Representative (USTR) to European Commission trade negotiators incorporates many if not all the problematic elements of this blueprint, setting the US on a collision course with the negotiation proposal put forward by the European Commission. This paper concludes that the adoption of the scheme proposed by USTR would result in a step backwards for international climate and trade cooperation, whereas not adopting the EU proposal would make for a missed opportunity. Given the sharply diverging negotiation positions and associated respective domestic constraints on both sides, however, policymakers should start to engage stakeholders now to manage expectations towards a low-ambition negotiation result, if any.
Topic:
Security, Climate Change, Industrial Policy, Governance, European Union, Economy, Trade Policy, and Transatlantic Relations
Political Geography:
Global Focus

2. Rebooting the European Union’s Net Zero Industry Act

Author:
Simone Tagliapietra, Reinhilde Veugelers, and Jeromin Zettelmeyer
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In March 2023, the European Commission published a legislative proposal for an EU response to the US Inflation Reduction Act: the Net Zero Industry Act (NZIA). It is an unconvincing policy proposal, both for what is in it and for what is not in it. The proposal has five problematic aspects. First, it takes a top-down approach, in which specific technologies are selected for preferential treatment. Preferable would be a technology-neutral approach open to all current and future technologies that help tackle the net-zero challenge. Second, its blanket 40 percent self-sufficiency benchmark for EU domestic cleantech manufacturing by 2030 sends a protectionist signal, is poorly defined and does not reflect the differences in EU capacity in the cleantech sector. Third, it relies on the acceleration of permitting procedures as the main policy instrument, although this is not the main obstacle to cleantech investment in the EU. Fourth, it proposes more strategic use of public procurement. While this is an objective to be supported, the specific proposals are likely to be ineffective because of the way they are designed. Fifth and not least, the NZIA would lack a governance structure that would ensure effective implementation. In addition, the NZIA does not tackle three critical issues. It does not address investment obstacles related to failures of the single market. It does not tackle the coordination problem at the core of developing an EU green industrial policy. Finally, it does not develop an EU-level funding strategy, but rather relies on state aid, with the related risk of fragmentation. The European Parliament and EU countries in the Council of the EU should reboot the proposal and refocus its objectives, sharpening its limited instruments, improving its governance, and adding financial incentives to ensure implementation. In parallel, the EU should develop a broader green industrial policy strategy that leverages the single market in a credible manner, building a solid new governance framework and a new EU-level funding approach.
Topic:
Climate Change, Industrial Policy, Governance, European Union, Trade Policy, and Industry
Political Geography:
Europe

3. The potential of sovereign sustainability-linked bonds in the drive for net-zero

Author:
Alexander Lehmann and Catarina Martins
Publication Date:
03-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
European Union governments have for some years issued green bonds that raise funds for climate-related spending. These bonds have been received well in capital markets but because they promise a certain use of proceeds, they complicate budget management and may not match investors’ claims of having an impact on national climate policies. Public commitments made by major investors and asset owners suggest that limiting climate transition risks and the assessment of the alignment of sovereigns with net-zero targets will now become key determinants of portfolio allocation. Yield differentials in bond markets are already beginning to reflect transition risks that arise from the inadequate pursuit by issuers of climate targets. Unlike standard green bonds, sustainability-linked bonds (SLBs) create a link between performance (outcome) indicators and the financial terms of the bonds. SLBs have grown rapidly in importance in private markets and are now being assessed by sovereign issuers. We show that sovereign SLBs could help incentivise climate policies in EU countries, and accelerate emission reductions. They would be an effective tool for signalling commitment. A common EU framework for issuance by EU countries would enhance capital market integration and the transparency of national policies, and would limit climate transition risks in EU capital markets more broadly.
Topic:
Climate Change, European Union, Finance, Carbon Emissions, and Sovereign Bonds
Political Geography:
Europe

4. Climate versus trade? Reconciling international subsidy rules with industrial decarbonisation

Author:
David Kleimann
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The vast environmental subsidies that may be required for the transition to net-zero greenhouse gas emissions are starting to generate international trade and political frictions between the world’s largest economies. This puts (supra-)national industrial decarbonisation efforts on a collision course with international subsidies rules and national countervailing duty (ie anti-foreign subsidy) laws and regulations. International cooperation will be essential to defuse such tensions before they escalate and impede effective climate policy rollouts, and before they lead to economic countermeasures that create new barriers to trade in environmental goods. This requires agreement on permissible environmental subsidy practices that minimise distortions. Meanwhile, it will be crucial to provide financial transfers to assist poorer economies with industrial decarbonisation at the same time as those poorer economies are suffering from the cross-border negative economic impacts of otherwise net-global-welfare enhancing environmental subsidies paid out by wealthy countries. Various forums can host the technical and political negotiations necessary to set the parameters of net global-welfare enhancing subsidies. These include the G7, the G20, the Organisation for Economic Co-operation and Development, the World Trade Organisation’s Trade and Environment Committee and WTO Trade and Environmental Sustainability Structured Discussions, and the Coalition of Trade Ministers on Climate.
Topic:
Climate Change, Political Economy, Trade, Carbon Emissions, Subsidies, and Decarbonization
Political Geography:
Global Focus

5. Decarbonisation of the energy system

Author:
Georg Zachmann, Alexander Roth, Ben McWilliams, Franziska Holz, Robin Sogalla, Frank Meissner, and Claudia Kemfert
Publication Date:
01-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Three quarters of the European Union’s greenhouse gas emissions stem from burning coal, oil and natural gas to produce energy services, including heating for buildings, transportation and operation of machinery. The transition to climate neutrality means these services must be provided without associated emissions. It is not possible today to determine tomorrow’s optimal clean energy system, largely because the cost, limitations and capability developments of competing technologies cannot be predicted. Energy systems with widely diverging shares of ‘green fuels’, in the form of electricity, hydrogen and synthetic hydrocarbons, remain conceivable. We find the overall cost of these systems to be of the same order of magnitude, but they involve larger investments at different stages of value chains. A large share of synthetic hydrocarbons would require more investment outside the EU, but less in domestic infrastructure and demand-side appliances, while electrification requires large investment in domestic infrastructure and appliances. Current projections show an overall cost advantage for direct electrification, but projections will evolve and critical players may push hard for alternative fuels. Policy will thus play a major role in shaping this balance. Political decisions should, first, push out carbon-emitting technology, primarily through carbon pricing. The more credible and predictable this strategy is over the coming decades, the smoother will be both divestment from brown technologies and investment in green technologies. Second, policy needs to help ensure that enough climate-neutral alternatives are available in time. Clear public support should be given to three system decisions about which we are sufficiently confident: the massive roll-out of renewable electricity generation; the electrification of significant shares of final energy consumption; and rapid phase-out of coal from electricity generation. For energy services where no dominant system has yet emerged, policy should forcefully explore different solutions by supporting technological and regulatory experimentation. Given the size and urgency of the transition, the current knowledge infrastructure in Europe is insufficient. Data on the current and projected state of the energy system remains inconsistent, either published in different places or not at all. This impedes the societal discussion. The transition to climate neutrality in Europe and elsewhere will be unnecessarily expensive without a knowledge infrastructure that allows society to learn which technologies, systems, and polices work best under which circumstances.
Topic:
Climate Change, European Union, Carbon Emissions, Decarbonization, and Energy
Political Geography:
Europe

6. The role of competition in the transition to climate neutrality

Author:
Georg Zachmann
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The transition to climate neutrality requires the reallocation of production factors from polluting activities to non-polluting activities. The main push for this reallocation will come from governmental decarbonisation targets that are translated into stringent climate policy tools, such as carbon pricing and emissions standards. But the complex process of recombining production factors will require the coordination of millions of individuals and firms. The efficiency of this recombination process will be a main driver of the cost of the transition. Based on a consistent analytical framework, I argue that much more political attention should be paid to the markets and regulators that guide the re-allocation of production factors, to bring them in line with a carbon-neutral economy at the best service of European consumers. Three main issues should be considered: 1. The transition will change the role and efficiency of markets in allocating resources; 2. Competitive markets can make the transition more efficient; 3. In some areas, a too-narrow focus on competition can be detrimental, and needs to be discussed. To improve the institutions for resource allocation in the transition, policymakers should revisit three levels of intervention: 1) competition rules and enforcement should be adjusted to meet the new challenges of the transition; 2) efficient markets that are central to a climate-neutral economy – such as for electricity, emission rights or circular logistics – need to be properly designed; 3) the advantages and disadvantages of more direct state control in specific sectors should be revisited in light of the challenges of the transition. In summary, policymakers need to get away from simplistic state-or-market narratives. The focus should be on developing politically feasible frameworks for leveraging the benefits of competition for efficient resource allocation in the transition. Institutions should not focus solely on static efficiency, but must forcefully encourage investments in new systems and innovation. The role of institutions that determine resource allocation in the transition is an underappreciated but crucial area for future research and policy action.
Topic:
Climate Change, Institutions, Pollution, Carbon Emissions, Neutrality, and Decarbonization
Political Geography:
Global Focus

7. Legal options for a green golden rule in the European Union’s fiscal framework

Author:
Zsolt Darvas
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Achieving the European Union’s climate goals and decoupling from Russian energy will require a massive increase in green public spending, which will be difficult when EU fiscal rules requiring fiscal consolidation are reinstated. The two major proposals to address the conflicting goals of fiscal consolidation and increased green public investment needs are a possible new European climate investment fund and a green golden rule. The latter would exclude any increase in net green public investment from the fiscal indicators used to measure compliance with fiscal rules, for countries with sound public finances. An EU climate fund and a well-designed green golden rule would be equivalent in terms of project selection, implementation and control procedures. If the climate fund does not involve redistribution across member states, then the treatment of related spending and consequent borrowing in national fiscal indicators and in the EU’s fiscal framework would be the same. New regulations would be needed to set up both the climate fund and the green golden rule. Special legislation would be needed to exempt the subsequent climate expenditures from EU fiscal rules in both cases. A climate fund financed by EU borrowing with redistributive effects across countries would likely result in the exclusion of the fund’s activities from national fiscal indicators and EU fiscal rules without any legislative changes. There are question marks about the desirability and political feasibility of redistribution across the EU for climate purposes. An EU climate fund, irrespective of whether or not it involves redistribution, would mainly benefit southern and eastern EU countries. An instrument is needed to foster green public investment in western and northern EU countries as well. The green golden rule would be such an instrument. While there are some pragmatic options to mimic a green golden rule in the current EU fiscal framework, such as amending the so-called ‘investment clause’ and adjusting the medium-term objective for the structural balance, ultimately, elements of the 2011 Six-Pack legislation and the 2012 Treaty on Stability, Coordination and Governance should be revised to include a green golden rules.
Topic:
Climate Change, Law, European Union, Fiscal Policy, and Energy
Political Geography:
Europe

8. The risks from climate change to sovereign debt in Europe

Author:
Stavros Zenios
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The exposure of European Union sovereigns to climate risks can be acute, from extreme weather, or chronic, from the productivity effects of gradual temperature increase, increased sea levels and the transition to a low-carbon economy that results in repricing of assets. Climate-related innovations can also spur growth. These risks are priced by investors and can affect sovereign credit ratings. Governments and fiscal stability authorities have an interest in the sovereign-debt implications of climate change being transparent. To this end, we look at the exposure of EU sovereigns to climate risks, study international best practices, and describe the transmission channels from climate change to public finance. European union institutions and national fiscal authorities should mainstream climate risk analysis in public finance. Stress testing of debt dynamic requires a link between regional climate scenarios and country debt dynamics. We argue for the adoption of an architecture of narrative climate scenarios, to guide national policymaking. Narrative Scenarios can be generated using integrated assessment models. As an illustration, we apply two prominent models to generate rough bounds on the extent of the risk for Italian debt from climate change. This raises issues about the models used. Coordination by EU institutions to develop regional scenarios will ensure acceptability, raise ambitions in dealing with climate risks and encourage the fiscal authorities to think of solutions. A network for climate-proofing public finance will bring together EU and member-state institutions. We also recommend budgeting for climate expenditures and contingent liabilities, and using risk-sharing instruments, with disclosure of the risks to public finance from climate change.
Topic:
Climate Change, Government, European Union, Fiscal Policy, and Sovereign Debt
Political Geography:
Europe

9. A green fiscal pact: climate investment in times of budget consolidation

Author:
Zsolt Darvas and Guntram Wolff
Publication Date:
09-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The additional public investment need required to meet the European Union’s climate goals is between 0.5 percent and 1 percent of GDP annually during this decade. Increasing green public investment while consolidating deficits will be a major challenge. While our simulations show that budget consolidation can be done at a moderate pace in line with EU rules if those rules are interpreted flexibly, past consolidation episodes resulted in major public investment cuts. This time, there is a need for a major increase in investment. A ‘green golden rule’ (excluding net green investment from the fiscal indicators used to measure fiscal rule compliance) is the most promising option to address this tension. Relaxing the strictness of the EU fiscal framework beyond its existing flexibility and the proposed green golden rule does not appear necessary in the next few years. The uncertain growth impact of green public spending and the risks to growth from climate change create difficult trade offs in fiscally weaker countries. In any case, better regulatory policy and a higher price on emissions should incentivise private green investment and reduce public costs. These ingredients should be combined to form a ‘green fiscal pact’.
Topic:
Climate Change, Budget, European Union, and Public Investment
Political Geography:
Europe

10. Can climate change be tackled without ditching economic growth?

Author:
Guntram Wolff, Simone Tagliapietra, and Klaas Lenaerts
Publication Date:
09-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Higher levels of economic activity tend to go hand-in-hand with additional energy use and consumption of natural resources. As fossil fuels still account for 80 percent of the global energy mix, energy consumption remains closely related to greenhouse gas emissions and hence to climate forcing. This paper explores whether decarbonisation and economic growth are compatible or whether the world economy needs to grow less to be able to reduce greenhouse gas emissions fast enough to reach net zero in 2050. The literature provides profoundly different answers to this question, with scholars positioning along a spectrum that extends from the most optimist version of ‘green growth’ theories to sceptical ‘degrowth’ theories. While globally, CO2 emissions per unit of GDP are declining, the decoupling rate from 1995 to 2018 was only -1.8 percent annually. To achieve net zero by 2050, the rate would have to accelerate to -8.7 percent, assuming population and GDP growth projections as given, or by a factor of almost five. To keep GDP growth and population at their projections and thus reject the proposition of de-growth, decoupling would have to accelerate massively. Two avenues are crucial: reducing the energy intensity of production and/or the emissions intensity of energy. The huge fall in the price of renewable energy provides hope that decoupling can accelerate. Decoupling rates have accelerated in the last decade and decoupling is substantially faster in the European Union. In the EU, we estimate that decoupling only has to accelerate by a factor of 2.5. We do not think degrowth propositions advanced in the literature will be pursued and therefore focus on the main challenges that must be tackled to achieve decoupling. Unprecedented efforts are required to achieve green growth. But hoping for humanity to sacrifice growth appears unrealistic.
Topic:
Climate Change, Economic Growth, Fossil Fuels, Carbon Emissions, and Decarbonization
Political Geography:
Global Focus

11. Commercialisation contracts: European support for low-carbon technology deployment

Author:
Ben McWilliams and Georg Zachmann
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Many of the technologies that can help the European Union become a net-zero emissions economy by 2050 have been shown to work but are not yet commercially competitive with incumbent fossil-fuel technologies. There is not enough private investment to drive the deployment of new low-carbon alternatives. This is primarily because carbon prices are neither high enough nor stable. There are a number of benefits from the deployment of low-carbon technologies that private firms do not factor in. These include the benefits of decreasing industry-wide costs over time, and the global climate benefits from the development of low-carbon technologies within the EU that can subsequently be exported. The result is an investment level below the socially optimal value in the EU. Commercialisation contracts could be implemented as a temporary measure to remove the risk associated with uncertain carbon prices for ambitious low-carbon projects. The aim of the contracts would be to increase private investment to the socially optimal level. Contracts would be allocated through auctions in which fixed prices for abated emissions over a fixed duration would be agreed on a project-by-project basis. On an annual basis, public subsidies amounting to the difference between the agreed carbon price and the actual EU carbon price would be provided to investors, depending on the total carbon emissions abated. As long as EU carbon prices are low, investors would receive larger subsidies to ensure their competitiveness. Contracts would be auctioned at EU level. This would generate increased competition compared to national auctions, leading to more efficient outcomes and preventing fragmentation of the single market. From about €3 billion to €6 billion would be provided to the main industrial emitting sectors annually, with the amount reducing as the EU carbon price rises and low-carbon technologies become competitive without subsidy.
Topic:
Climate Change, Energy Policy, Science and Technology, Investment, Trade, Carbon Emissions, and Decarbonization
Political Geography:
Europe

12. Accounting for climate policies in Europe’s sovereign debt market

Author:
Marta Dominguez-Jimenez and Alexander Lehmann
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
International debt investors increasingly demand assets that are aligned with environmental, social and governance objectives. Sovereign debt is being belatedly swept up in this change. This huge asset class represents a uniquely long-term claim and funds a wide range of public expenditure, both brown and green. Public capital expenditures will be a central part of the roughly €3 trillion investment budget needed to pay for the European Green Deal. European Union countries have so far met investor appetite for climate-aligned assets through sovereign green bonds, the issuance of which has rapidly grown since 2017. The EU itself will also issue green bonds in large volumes. However, because of some inherent flaws in such instruments and as their still-weak frameworks, these bonds are unlikely to meet the environmental criteria demanded by investors, and will complicate established principles in sovereign debt management. Much more comprehensive information is needed on the climate related aspects of the public budgets of EU countries. Greater transparency in this respect would support stability and improve the functioning of capital markets, given that sovereign debt plays a pivotal role in all investor portfolios and also in regulatory and monetary policy. Adoption by sovereign issuers of green budgeting principles, based on a common taxonomy of sustainable activities, would enhance transparency. It could also be driven by investors who, under new EU rules, must disclose the climate-related aspects of all financial instruments offered in the capital market.
Topic:
Climate Change, Debt, Markets, Sovereignty, European Union, Finance, and Sustainability
Political Geography:
Europe

13. Navigating through hydrogen

Author:
Ben McWilliams and Georg Zachmann
Publication Date:
04-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Hydrogen is seen as a means to decarbonise sectors with greenhouse gas emissions that are hard to reduce, as a medium for energy storage, and as a fallback in case halted fossil-fuel imports lead to energy shortages. Hydrogen is likely to play at least some role in the European Union’s achievement by 2050 of a net-zero greenhouse gas emissions target. However, production of hydrogen in the EU is currently emissions intensive. Hydrogen supply could be decarbonised if produced via electrolysis based on electricity from renewable sources, or produced from natural gas with carbon, capture, and storage. The theoretical production potential of low-carbon hydrogen is virtually unlimited and production volumes will thus depend only on demand and supply cost. Estimates of final hydrogen demand in 2050 range from levels similar to today’s in a low-demand scenario, to ten times today’s level in a high-demand scenario. Hydrogen is used as either a chemical feedstock or an energy source. A base level of 2050 demand can be derived from looking at sectors that already consume hydrogen and others that are likely to adopt hydrogen. The use of hydrogen in many sectors has been demonstrated. Whether use will increase depends on the complex interplay between competing energy supplies, public policy, technological and systems innovation, and consumer preferences. Policymakers must address the need to displace carbon-intensive hydrogen with low-carbon hydrogen, and incentivise the uptake of hydrogen as a means to decarbonise sectors with hard-to-reduce emissions. Certain key principles can be followed without regret: driving down supply costs of low-carbon hydrogen production; accelerating initial deployment with public support to test the economic viability and enable learning; and continued strengthening of climate policies such as the EU emissions trading system to stimulate the growth of hydrogen-based solutions in the areas for which hydrogen is most suitable.
Topic:
Climate Change, Energy Policy, European Union, Carbon Emissions, Decarbonization, and Hydrogen
Political Geography:
Europe and Global Focus

14. A whole-economy carbon price for Europe and how to get there

Author:
Ottmar Edenhofer, Mirjam Kosch, Michael Pahle, and Georg Zachmann
Publication Date:
03-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Putting carbon pricing at the centre of the EU climate policy architecture would provide major benefits. Obtaining these benefits requires a uniform, credible and durable carbon price – the economic first-best solution, however, several preconditions required to attain this solution are not yet met. This paper proposes a sequenced approach to ensure convergence of the policy mix on the first-best in the long run.
Topic:
Climate Change, Energy Policy, European Union, Carbon Tax, and Carbon Emissions
Political Geography:
Europe

15. The geopolitics of the European Green Deal

Author:
Mark Leonard, Jeremy Shapiro, Jean Pisani-Ferry, Simone Tagliapietra, and Guntram B. Wolff
Publication Date:
02-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Green Deal is a plan to decarbonise the EU economy by 2050, revolutionise the EU’s energy system, profoundly transform the economy and inspire efforts to combat climate change. But the plan will also have profound geopolitical repercussions. The Green Deal will affect geopolitics through its impact on the EU energy balance and global markets; on oil and gas-producing countries in the EU neighbourhood; on European energy security; and on global trade patterns, notably via the carbon border adjustment mechanism. At least some of these changes are likely to impact partner countries adversely. The EU needs to wake up to the consequences abroad of its domestic decisions. It should prepare to help manage the geopolitical aspects of the European Green Deal. Relationships with important neighbourhood countries such as Russia and Algeria, and with global players including the United States, China and Saudi Arabia, are central to this effort, which can be structured around seven actions: Help neighbouring oil and gas-exporting countries manage the repercussions of the European Green Deal. The EU should engage with these countries to foster their economic diversification, including into renewable energy and green hydrogen that could in the future be exported to Europe. Improve the security of critical raw materials supply and limit dependence, first and foremost on China. Essential measures include greater supply diversification, increased recycling volumes and substitution of critical materials. Work with the US and other partners to establish a ‘climate club’ whose members will apply similar carbon border adjustment measures. All countries, including China, would be welcome to join if they commit to abide by the club’s objectives and rules. Become a global standard-setter for the energy transition, particularly in hydrogen and green bonds. Requiring compliance with strict environmental regulations as a condition to access the EU market will be strong encouragement to go green for all countries. Internationalise the European Green Deal by mobilising the EU budget, the EU Recovery and Resilience Fund, and EU development policy. Promote global coalitions for climate change mitigation, for example through a global coalition for the permafrost, which would fund measures to contain the permafrost thaw. Promote a global platform on the new economics of climate action to share lessons learned and best practices.
Topic:
Climate Change, Energy Policy, European Union, and Geopolitics
Political Geography:
Europe

16. A green industrial policy for Europe

Author:
Simone Tagliapietra and Reinhilde Veugelers
Publication Date:
12-2020
Content Type:
Special Report
Institution:
Bruegel
Abstract:
The European Green Deal aims to make Europe the first climate-neutral continent by 2050. This is not going to be an easy journey. To be successful, the European Green Deal will have to foster major shifts in the European industrial structure, including transitions from fossil fuels to renewable energy and from combustion engine cars to electric cars. Shifting economies from brown to green would be a major, historic socio-economic transformation. In this context of broad, paradigmatic, change for European industry, a ‘green industrial policy’ will be fundamental to Europe’s climate change ambitions. But what is green industrial policy? What market failures must it address? Unlike traditional industrial policy, green industrial policy must be directed to twin goals of climate protection and social welfare. Green industrial policy initiatives in the European Union so far, however, have been piecemeal and fragmented. This Blueprint examines how past mistakes can be avoided and how the EU can develop a coherent green industrial policy that will serve the goals of the European Green Deal.
Topic:
Climate Change, Industrial Policy, European Union, and Green Deal
Political Geography:
Europe

17. Green certificates: a better version of green bonds

Author:
Dion Bongaerts and Dirk Schoenmaker
Publication Date:
11-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The market for green bonds is growing rapidly and has been boosted by the European Commission’s plan to raise through green bonds 30 percent of the up to €750 billion that will be borrowed under the Next Generation EU coronavirus economic recovery programme. But while green bonds can reduce the financing costs of green projects and technologies, their current design means they fall short of fulfilling their full potential. Issuing green bonds alongside regular bonds fragments bond issues, reducing liquidity and thus increasing financing costs. Moreover, green bond prices reflect liquidity, credit risk and environmental performance jointly, which makes it difficult to isolate the part of the return on the bonds that relates to environmental performance. We propose an alternative: issuance of regular bonds with attached green certificates that ensure earmarking for green purposes. The new design would lead to more liquid securities (as only regular bonds are issued), which would reduce financing costs and in turn would provide incentives to start a greater number of environmentally-friendly projects. The new design would also make market prices more informative about environmental performance. In addition, green certificates would address the criticism that green bonds are used mostly for refinancing existing green projects rather than for new projects. Sovereigns are among the largest issuers of bonds and are therefore natural candidates for implementation of green certificates. The European Commission could also issue regular bonds and green certificates to finance the European Union’s recovery package, and should include green certificates in the under-preparation EU Green Bond standard. Commission issuance of green certificates would give a major boost to EU bonds as liquid safe assets while promoting green investment.
Topic:
Climate Change, Energy Policy, Finance, and Sustainability
Political Geography:
Global Focus

18. Understanding the European Union’s regional potential in low-carbon technologies

Author:
Enrico Bergamini and Georg Zachmann
Publication Date:
11-2020
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This research identifies existing and potential specialisation in green technologies in European Union regions, and proposes an approach to identify policies that can help to realise this potential. Using the Organisation for Economic Cooperation and Development’s REGPAT database for regionalised patent data, we estimate the potential advantage European NUTS2 regions could have in 14 green technologies. We use network proximity between technologies and between regions to understand technological/regional clusters, and build the regressors for estimating potential regional advantage in specific technologies via zero-inflated beta regressions. We construct a dataset of lagged potentials and labour market, economic and demographic variables, and perform an elastic net regularisation to understand the association with current revealed advantages. Our approach indicates an association between technological advantage in green technologies in EU regions and participation rates in labour markets, sectoral employment in science and technology, general higher education, duration of employment, percentage of GDP spent on research and development (public and private), and other expenditure on R&D. If confirmed by causality tests, the established associations could help in designing horizontal economic policies to enable specific regions to realise their specialisation potential in specific green technologies.
Topic:
Climate Change, Energy Policy, Industrial Policy, European Union, Green Technology, and Decarbonization
Political Geography:
Europe

19. Greening the recovery by greening the fiscal consolidation

Author:
Ben McWilliams, Simone Tagliapietra, and Georg Zachmann
Publication Date:
07-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In the wake of COVID-19, some economic recovery policies will help green the economy – for example, energy renovation of buildings. But there are limits to the share of stimulus that can be explicitly green. The European Union should therefore also green the fiscal consolidation by setting out the path to much higher carbon prices than today. This would guide investment and provide revenues to help the fiscal consolidation.
Topic:
Climate Change, Energy Policy, European Union, Economy, Renewable Energy, and COVID-19
Political Geography:
Europe

20. Rebooting Europe: a framework for a post COVID-19 economic recovery

Author:
Julia Anderson, Simone Tagliapietra, and Guntram B. Wolff
Publication Date:
05-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.
Topic:
Climate Change, Energy Policy, Global Recession, European Union, and COVID-19
Political Geography:
Europe

21. Bruegel annual report 2019

Author:
Bruegel
Publication Date:
05-2020
Content Type:
Special Report
Institution:
Bruegel
Abstract:
The annual report includes an overview of Bruegel’s research, governance and financial statements, and takes stock of Bruegel’s accomplishments and impact during 2019. Bruegel will continue to work to develop a proactive European strategy to deal with all the challenges ahead, providing free and open access to its research.
Topic:
Climate Change and Energy Policy
Political Geography:
Europe and Global Focus

22. A European carbon border tax: much pain, little gain

Author:
Ben McWilliams and Georg Zachmann
Publication Date:
03-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Commission should not make the implementation of a carbon border adjustment mechanism into a must-have element of its climate policy. There is little in the way of strong empirical evidence that would justify a carbon-adjustment measure. Moreover, significant logistical, legal and political challenges will arise during the design. The EU should instead focus upon the implementation of measures to trigger the development of a competitive low-carbon industry in Europe.
Topic:
Climate Change, Energy Policy, European Union, Trade Policy, and Carbon Tax
Political Geography:
Europe

23. How good is the European Commission’s Just Transition Fund proposal?

Author:
Alienor Cameron, Gregory Claeys, Catarina Midoes, and Simone Tagliapietra
Publication Date:
02-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
On 14 January 2020, the European Commission published its proposal for a Just Transition Mechanism, intended to provide support to territories facing serious socioeconomic challenges related to the transition towards climate neutrality. This brief provides an overview and a critical assessment of the first pillar of this Mechanism, the Just Transition Fund (JTF).
Topic:
Climate Change, Governance, Budget, European Union, Macroeconomics, Renewable Energy, and Transition
Political Geography:
Europe

24. How to make the European Green Deal work

Author:
Gregory Claeys, Simone Tagliapietra, and Georg Zachmann
Publication Date:
11-2019
Content Type:
Special Report
Institution:
Bruegel
Abstract:
European Commission president-designate Ursula von der Leyen has made climate change a top priority, promising to propose a European Green Deal that would make Europe climate neutral by 2050. Th e European Green Deal should be conceived as a reallocation mechanism, fostering investment shifts and labour substitution in key economic sectors, while supporting the most vulnerable segments of society throughout the decarbonisation process. Th e deal’s four pillars would be carbon pricing, sustainable investment, industrial policy and a just transition.
Topic:
Climate Change, International Security, Sustainable Development Goals, Global Warming, and Green Technology
Political Geography:
Europe, Global Focus, and European Union

25. The European Union-Russia-China energy triangle

Author:
Georg Zachmann
Publication Date:
12-2019
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
We argue that energy relations between the EU and Russia and between China and Russia influence each other. We analyse their interactions in terms of four areas: oil and gas trading, electricity exchanges, energy technology exports and energy investments. We discuss five key hypotheses that describe the likely developments in these four areas in the next decade and their potential impact on Europe: 1. There is no direct competition between the EU and China for Russian oil and gas 2. China and the EU both have an interest in curbing excessive Russian energy rents 3. The EU, Russia and China compete on the global energy technology market, but specialise in different technologies 4. Intercontinental electricity exchange is unlikely 5. Russia seems more worried about Chinese energy investments with strategic/political goals, than about EU investments We find no evidence of a negative spillover for the EU from the developing Russia-China energy relationship. But, eventually, if these risks – and in particular the risk of structural financial disintermediation – do materialise, central banks would have various instruments to counter them.
Topic:
Climate Change, Energy Policy, Oil, and Europe Union
Political Geography:
Russia, China, and Europe