Past problems remain and will not go away
The unstoppable global health emergency has ripped away the fabric of normality. Every day brings news of developments which, only a few weeks ago, would have felt utterly impossible. Who would have believed, in mid-February, that schools and universities would be closed by mid-March, public gatherings cancelled, cities and whole nations and billions of people would be put under lock-down, and hundreds of millions of people around the world would be out of work? Who would have predicted that many governments would work tirelessly to put together some of the largest economic stimulus packages in history, to support (big, and sometimes also small) firms and give income protection to workers and households, that central banks would (again) provide emergency liquidity, commercial banks would be waiving mortgage payments, and landlords would refrain from collecting rents?
Who could have imagined that the majority of people, forced to remain at home, are glued to their computers and/or smart phones, more dependent than ever on the Big Tech companies, feeding them – willingly or unwillingly – with ever more private information, thereby putting the already fast growth of surveillance capitalism on steroids? Or that governments would be using drones to impose social distancing on their populations and/or using mobile phone tracking to do the same?
While the world will not be the same once this is over, we must recognize that novel disasters and emergencies do not remove or resolve older, existing problems—the biggest one of which is, without doubt, accelerating climate change. Despite clear differences, the Covid-19 calamity and global warming share important similarities: both problems present catastrophic risks to humanity which were long identified by scientists and both have been willfully neglected by governments and most political parties unable to see beyond the next election; both problems require unprecedented levels of global co-operation to be sorted and both demand transformative change today in order to prevent catastrophic outcomes in future; and redressing the risks of pandemics and global warming will require new innovative effective forms of coordinated, government-led action worldwide, rather than reliance on the ‘logic of the marketplace’ and private-sector initiative.
This brings me back to the future: if we manage to get to a post-covid-19 world, humanity still will have to confront the problem and risks of global warming. The one credible strategy to bring about ‘climate neutrality’ is the European Union’s Green Deal, which is almost forgotten in the corona-tragedy and the coming global recession. It is deserving of a closer look.
The European Union’s ‘man-on-the-moon’ moment …..
The European Union (EU) has done it, or so it appears. Its “Green Deal”, an ambitious rethinking of the European economy, transport, building and energy sectors, unveiled by the European Commission in December 2019, has been hailed as the first comprehensive plan to achieve “climate-neutrality” at a continental scale. It involves a €1 trillion, 10-year investment plan to fund a drastic reduction of the EU’s greenhouse gas (GHG) emissions in 2030 by 55% compared with 1990 — and to realize zero (net) emissions or “climate neutrality” by 2050. The investment programme of €1 trillion is to be financed from leveraged public and private funds and to be channelled into greening the economy. Ursula von der Leyen, the President of the European Commission calls the Green Deal “Europe’s man-on-the-moon moment” and has outlined a detailed roadmap of more than 50 actions the EU will have to take over the next decade to reach its emissions goal.
The Green Deal has received a mostly warm welcome. Most commentators see it as a courageous, bold and even visionary step in the right direction of a prosperous, socially inclusive and environmentally sustainable economy. Jeffrey Sachs hails it “a demonstration of European social democracy at work. A mixed economy, combining markets, government regulation, the public sector, and civil society, will pursue a mixed strategy, combining public goals, public and private investments, and public support”.
Predictably, business interests and centre-right economists fear the Green Deal will cripple European industries, as the new rules will raise cost of production, the proposed carbon border tax will hurt international trade, and the EU’s moral grandstanding on a go-it-alone transition to a carbon-neutral economy will do nothing to stop global warming from accelerating. Perhaps surprisingly, strong critiques have been voiced by climate scientists, environmental activists and critical economists, to whom Europe’s Green Deal is not ambitious and transformative enough, offering too little, too late.
The latter critics are, in turn, accused of not offering constructive engagement with the Green Deal and, by burning down what is in essence a far-reaching reform of the EU policy orientation, they are accused of promoting fatalism and cynicism. Indeed, this is the dilemma: if Otto von Bismarck was right that “politics is the art of the possible, the attainable — the art of the next best”, then the Green Deal does constitute a major advance and all efforts should be concentrated on expanding what is “attainable”.
I am not so sure. First, all the evidence is telling us that ‘business-as-usual’ is over, as the climate emergency is building fast: on present trends, humanity will have exhausted the remaining global carbon budget in a decade. Either we act decisively, or we don’t — in which case we have to brace ourselves for the damage coming from runaway warming, and adaptation to climate change becomes a must. Half-hearted tinkering will not bring us anywhere. Second, the Green Deal is the new signature mission of the Union, its new raison d’être, and a failure to bring about a green and economically inclusive and just transformation of the EU economy cannot but give the project of European unification a fatal blow. The stakes are high, therefore, and a dispassionate, constructive look at the Green Deal is needed in light of the climate reality. This is what the Working Paper does.
Ambition and speed
To achieve the Green Deal emission reduction target of 55% by 2030, GHG emissions by the EU-27 have to decline by as much as 5.2% per year during the next decade — which is three times faster than during 1990-2020. The ambition level is certainly commendable, yet it still falls short of what is, according to climate science, needed to prevent the global mean temperature from rising above the safe threshold of 1.5° Celsius (with a probability of 66%). The EU-27 have an obligation and ability to do more, in order to protect enough the ‘carbon development space’ for the more than six billion people in the developing countries. Bigger reductions in GHG emissions will require even faster decarbonisation and a shift toward 100% renewable energy of the EU as soon as possible — the ‘binding’ target of achieving a renewable energy share of final energy use of at least 32% in 2030 falls short of what is necessary.
Scale of the Green Deal
The European Commission estimates that the EU27 need € 260 billion of green investments per year over the next decade to bring down GHG emissions by 40% in 2030. €260 billion amounts to around 2% of GDP of the EU27. These numbers do not take into account the new stricter target to reduce GHG emissions in 2030 by 55% (and not 40%). The higher reduction target will require higher capital expenditures; the investment requirement for a 55% emission reduction target would roughly be around 3% of GDP (or €400 billion) each year, and for a more ambitious goal to cut emissions by 65% in 2030 investment would amount to around 4.5% of GDP per annum. The current Green Deal is under-funded.
Furthermore, almost all of the public Green Deal funding is money reshuffled from existing EU funds or based on national co-financing or founded on promises to leverage private-sector capital by taking away the risk for these investors, whose investments will be guaranteed by the EU budget. National co-financing is unlikely to involve additional spending, because member states have to stick to the deflationary straightjacket of the Stability and Growth Pact. All in all, the Green Deal will generate only € 1.1 billion per year in new expenditures by the European Commission under the Just Transition Mechanism (JTM).
This reprogramming of already projected expenditures makes it a bit of a stretch to call the Green Deal a ‘growth strategy’. The extent to which it will spur private investment is highly uncertain. The transition to a carbon-neutral economy will lead to massive disinvestment and ‘stranded assets’ (in fossil-fuel based industries) and the destruction of large numbers of jobs in extractive industries (coal mining), fossil-fuel energy-producing and manufacturing industries (such as automobiles). True, the Green Deal will be creating new jobs in renewable energy generation, housing renovation, building and maintaining low-carbon energy infrastructures and in services. But the transformation will be upsetting, massive and risky, and the slower the radical restructuring and the reallocation of labour across industries, and the larger the distributional impacts, the higher will be the overall transition costs and the more economic growth will be hurt. The European Commission takes too narrow a view of the distributional consequences of the Green Deal, which makes it look rather badly prepared to guide the process of structural transformation — and this is careless in view of the rather low level of popular support for the climate transition.
Substance of the Deal
On paper the Green Deal looks impressive: it includes a ‘farm-to-fork’ sustainable agriculture strategy and plans for a carbon-neutral ‘circular economy’; it proposes to start a ‘renovation wave’ to improve energy efficiency of the building stock; it favours the rapid development of renewable energy generation; it proposes a carbon border tax on carbon-polluting foreign firms in an effort to provide space to EU firms to decarbonize; and it wants to reform the EU Emissions Trading System (EU-ETS) and raise carbon prices to make it more effective. All this makes sense, but the capacity to bring about a structural transformation of the EU27 economy and society is compromised by the under-funding of the investment plan, an unwillingness to envision how the green transition can be made to generate significant co-benefits (in terms of job growth, improved health outcomes and a more fair income distribution) and an under-estimation of restructuring costs, distributional impacts and uncertainties.
Consider the Green Deal’s “Just Transition Mechanism” (JTM), which was put forward as a “pledge of solidarity and fairness”. The JTM will mobilize €100 billion over 10 years, mostly to support the economic restructuring of the regional coal-producing economies of the EU. However, the proposed JTM budget likely falls short of what will be needed to shoulder the social restructuring cost of the ‘coal exit’ and destruction of mining jobs in the EU27. But the EU climate transition is not just affecting the more than 400,000 miners, but is estimated to lead to the destruction of around 4.7 million jobs in so-called ‘brown’ industries (including in automobile manufacturing). What, if anything, does the Green Deal promise these workers in terms of ‘solidarity and fairness’?
To be clear, the job destruction is only one side of the transition. The shift to EVs will create jobs in building the (fast) charging infrastructure and in producing EV components and batteries (which are now mainly imported from China). There is enormous potential for the growth of green jobs in energy-saving renovation of the building stock and in smart public transport (zero-emission electric buses, trams and light-rail). Hence, when managed properly, the Green Deal will create new jobs in renewable energy generation, housing renovation, and transport. According to ILO (2018), green job growth in the EU during 2020-2030 could exceed ‘brown’ job destruction by around 2 million jobs. But to achieve the green job growth, the EU would need to considerably broaden its current focus — on building charging and refuelling infrastructures for the 13 million zero- and low-emission (mostly private and very expensive) vehicles expected to be on Europe’s roads by 2050 — to smart (and cheap) public transport systems, and from imposing the cost of energy-efficiency renovation on households to socialize the investment cost of housing stock renovation.
Rapidly phasing out fossil fuels in power plants (burning coal), industrial facilities, buildings and vehicles will improve air quality by reducing ambient air pollution and this could reduce premature deaths in the EU27 by 300,000 persons each and every year and also drastically lower morbidity, lost working days, and healthcare care (Boyce 2020). The relatively high additional mortality in Europe caused by air pollution has much to do with burning coal. Thirty-three of the 50 most polluted towns in Europe are in Poland, where burning coal is deemed ‘patriotic’ by the government. In a back-of-the-envelope calculation, using the official EU default value of € 3.387 million for the value of a statistical life (VSL), an in itself dubious concept to put a euro-value on human mortality, I estimate that the “co-pollutant cost of carbon” in the EU27 would amount to €1 trillion per year.
Strategic reliance on ‘green finance’
The European Commission puts its faith in private finance to fund the climate transition by promoting green capital formation through a favourable regulatory treatment of green finance, de-risking and credit subsidies. Having lost the battles for tougher regulation and higher taxation and spending, the Commission’s hope is that private finance will do the job of greening the economy. Hence, the idea is to do ‘whatever it takes’ to persuade institutional investors to redirect the trillions of money they are managing to specific activities that are officially labelled as being ‘green’ or ‘sustainable’ according to an official EU Taxonomy. Global finance will only do this of its own accord if it serves its interest. What makes these ‘green investments’ attractive for private finance is the fact that such green assets will be de-risked through EU subsidies and ECB guarantees to support the liquidity of these assets (Gabor 2020a). The EU provides a first-loss guarantee, enabling the EIB to fund riskier (climate-related) investment under the heading of the InvestEU programme.
The problem with this periphrastic strategy is that it relies heavily on private global financiers — such as BlackRock and Goldman Sachs — who are all waist-deep in fossil-fuel investments and, as large shareholders, have been routinely voting against shareholder motions directing corporate boards to take climate action and to integrate environmental concerns in their activities (Gabor 2020a). The Green Deal will be subsidizing carbon financiers, allowing them to make a profit from the climate transition, rather than holding them liable for the GHG emissions (see Richard Heede 2017). The Green Deal offers long-time fossil-fuel financiers a rather easy way out, by providing a cushioned, subsidized exit from fossil-fuel investments toward de-risked ‘green assets’.
The new class of highly liquid ‘de-risked’ assets, which will be as safe as German Bunds because they are guaranteed by EU (German) taxpayers and the ECB, will be in high demand. After all, the global shadow banking system is permanently short of safe securities, which it can use to collateralize global institutional cash pools (Storm 2018). That is, the ‘de-risked’ assets will further enable the already excessive liquidity preference of global financial investors, who have parked at least $ 5 trillion in collateralized spaces within the global shadow banking system, ready for immediate use in privately very profitable, but socially unproductive financial speculation in short-term exotic derivative instruments. The Green Deal thus ‘rewards’ an already malfunctioning global financial system, rather than ‘punishes’ and regulates it in ways which make ‘brown assets’ more expensive and liable for the (environmental, social and economic) damage it is causing.
Incentivizing private finance will not be enough to bring about the fast and just transition to climate neutrality promised by the European Commission — which requires green industrial policies to catalyze and support private-sector investment and leaning in zero-carbon activities, and proper management of aggregate demand. Industrial policy will be indispensable if the Green Deal is to exploit the considerable potential for energy savings and job growth of large-scale energy-efficiency renovation in buildings. Further, smart public transport requires building up the (charging) infrastructure, using public procurement (of electric buses, trams and trains) to promote the new mobility model, and investing in the development and demonstration of early-phase (battery) technologies and electro-fuels. However, large multinational corporations could, after benefiting from public money, offshore their clean-tech innovations to low-wage countries; indeed, battery production for EVs is currently concentrated in Asia (in China, Japan and South Korea). Green Deal spending should therefore include social clauses, requiring companies to base their production in countries with certain wage levels and labour and environmental legal standards (Gaddi and Garbellini 2019).
Another issue is that the Green Deal spending will require European planning in order to promote the construction of integrated European value chains (to make the most of economies of scale) and to actively reduce the existing regional imbalances in employment and industrial capabilities between Member States (Gaddi and Garbellini 2019). These tasks cannot be delegated to green financial markets, but require an actual industrial plan—which, so far, is missing. Finally, the industrial plan must include tougher (national) regulation and standards. Regulation should not be regarded as a cost, a hindrance or an obstruction. This is a very static view, and a view which neglects the potential “technology-forcing” impacts of norms, rules, standards which may well force firms to become more innovative; the EU should use this potential in support of the climate transition.
Greening the economy will not lower living standards …..
The EU’s Bismarckian approach to the Green Deal is best illustrated by the following comment by European Commissioner Josep Borrell, a leading Spanish social democrat:
“I would like to know if young people demonstrating in Berlin calling for measures against climate change are aware of what such measures will cost them” [….] “and if they are willing to lower their living standards to offer compensation to Polish miners, because if we fight against climate change for real, they will lose their jobs and will have to be subsidized.”
Mr. Borrell’s comment brings out the Commission’s view that the massive investments needed for the climate transition can only be financed by raising taxes on and lowering living standards of ordinary citizens. This argument is not just bereft of any political vision or plan, but it is also disingenuous, because it is supposes (and wrongly so) that there are no other sources than higher income taxes for the 99% to finance the climate investment. If Mr. Borrell’s statement reflects the mood in Brussels, it is indistinguishable from sentiments in Eastern-European Member States, where conservative parties are framing the debate on the climate transition as a hard choice between ‘investments in infrastructure and growth’ versus ‘greening the economy while lowering living standards’. Quite like centre-right politicians in Poland, Hungary and Romania, Mr. Borrell is ignoring the considerable potential for job growth, health co-benefits as well as income growth for ordinary citizens.
But let me help Mr. Borrell and highlight a couple of realistic sources of funding the Green Deal, which do not put the burden on ordinary people nor give preferential treatment to global private finance:
· Abolishing existing fossil-fuel subsidies of €250 billion per year. This will raise Member States’ government revenue by an estimated €100 billion per year.
· Introducing a tax on carbon of €75 per tonne of CO2eq. This will generate some €270 billion as annual tax revenue — of which €200 billion can be used to compensate the one-third poorest households, most affected by higher energy prices.
· Raising the rate of corporate profit taxation back to the level of the late 1990s (and being tough on corporate tax evasion). This will raise annual tax revenues by €55 billion. Doing this makes sense: corporations will, without doubt, be major beneficiaries of the Green Deal investment programme and industrial policy.
· Introduce a modest wealth tax to channel some of the mostly unearned capital and wealth gains into the public coffers to fund the Green Deal. This could generate around €175 billion per year for the EU27 as a whole. Note that tax revenues can be increased by a similar amount, even without higher or new taxation, by reducing or eliminating exemptions, loopholes and shelters and reducing (corporate) tax avoidance.
Hence, contrary to Mr. Borrell’s claim, the Green Deal could be financed without lowering the living standards of 99% of European citizens. On top of all this, the European Commission can leverage more funding without begging private financiers for money. Pension funds in the EU27 hold assets worth more than €4 trillion. The European Commission could oblige European pension funds to channel (say) one-fourth of their assets (i.e. €1 trillion or €100 billion per year during 2020-30) into officially approved Green Deal activities with the risk-free guarantee of a net return of (say) 4%.
Concluding observations
Investing these resources (some €500 billion per year) in renewable energy, housing renovation and public transport will create millions of extra jobs, reduce emissions and save hundreds of thousands of lives — each year. Compared to the €250 billion of annual fossil-fuel subsidies paid by the EU and to the (fossil-fuel caused) negative public health externality of €1 trillion per annum, this package looks like a bargain.
This is not the mind set in Brussels, unfortunately, where Mr. Borrell and some of his colleagues in the European Commission worry about the need to choose between ‘paying for climate action’ versus ‘maintaining or raising living standards’. The inconvenient truth is that a transition to climate neutrality is a condition for sustainable economic prosperity. A failure to decarbonize and transit to a zero-carbon economy will inflict considerable economic damage, drastically reduce living standards and increase inequality within the EU, as is clearly shown by the scenarios developed in the European Commission’s PESETA III study (2018).
In addition, when properly managed, this Green Deal would generate massive co-benefits in the form of millions of well-paid jobs, an improved quality of life (because of lower air pollution and lower mortality), and reduced inequalities in mobility, life expectancy, and incomes and wealth. The failure to recognize an existential threat (global warming in this case) for what it is and the incapacity to envision an inclusive strategic response to achieve climate neutrality while improving living standards are, to say the least, not very Bismarckian. We cannot leave it to social democrats such as Mr. Borrell or to conservative governments in Central and Eastern Europe to define ‘what is politically possible’.
Despite of all good intentions, the Commission’s Green Deal (as it is) will not work, because the Commission decided to work with and through (financial) markets, taking what Gabor 2020b has called a “politics as usual, third-way approach that seeks to nudge the market towards decarbonisation.” By choosing to make the Green Deal dependent on global finance, the European Commission itself is closing down all avenues for systemic change through tougher regulation, higher taxation and higher spending, as well as for an ambitious green macroeconomics and green industrial policies, which would enable achieving climate neutrality in a socially and economically inclusive manner. Jeffrey Sachs’ assessment is wrong, in other words: what ails the EU Green Deal is exactly what troubles the Union in general — an absence of social democracy at work. Public finances should be made to work for the common good and be protected from carbon financiers.
Post-script The way the European Union is responding to the covid-19 pandemic, or failing to respond, does not augur well for its Green Deal. The coronavirus crisis response so far was a complete car crash: the request for the one-off issuance of “corona bonds” as a means of European solidarity by the most crisis-struck countries Italy and Spain was rudely rejected by the “frugal four” – Germany, the Netherlands, Austria and Finland – who argued that the issuance of a common debt instrument would punish the ‘frugal’ countries, which (arguably) had ‘saved’ to create sufficient fiscal policy space to respond to the pandemic, but would encourage further fiscal mismanagement by those ‘spend-thrift’ countries which did not. Solidarity creates just moral hazard, is what my compatriot Wopke Hoekstra, the Dutch minister of finance, incorrectly claims. As a Dutch citizen, I apologise for the disturbing lack of international solidarity as well as the alarming absence of basic political, historical and economic understanding of the process of European economic unification shown by the Dutch government. Italy’s prime minister, Giuseppe Conte, has it right, when saying: “If Europe does not rise to this unprecedented challenge, the whole European structure loses its raison d’être to the people. We are at a critical point in European history.” If the Union cannot solve the covid-19 catastrophe in a rational, and therefore solidaristic, manner, the Green Deal will be doomed.