How Europe can get the Green Deal done
Since the European Green Deal was introduced in 2019, European Commission President Ursula von der Leyen has touted it as the European Union’s new economic-growth agenda. After all, while the strategy’s core objective is climate-related – to reduce the EU’s greenhouse-gas emissions to net-zero by 2050 – it aims to achieve that by modernising the economy and fostering innovation. But not everyone is convinced.
In recent months, European drivers have complained about the EU’s looming ban on the production and sale of cars with internal combustion engines, households have resisted plans to phase out gas boilers, and farmers have revolted against environmental regulations they view as overbearing. With the approach of next month’s European Parliament elections, far-right parties are jostling to establish themselves as the official standard-bearers of this growing discontent and preparing to use any power they win to sabotage the green agenda.
The protesters make some legitimate points. The radical transformation that the European Green Deal entails raises difficult questions about who should bear the costs of climate action, both within and among countries. If those costs end up falling disproportionately on ordinary workers – let alone the poorest and most vulnerable communities – the transformation will exacerbate inequality, with potentially serious social and political knock-on effects. Fortunately, properly designed climate policies can avert that outcome and actually lead to greater social equality.
The European Green Deal has accounted for climate-justice considerations since the beginning. Advocates always knew that they would need to secure the political support of coal-intensive Poland, and they had not forgotten the “yellow vest” revolt that erupted in France in 2018, after President Emmanuel Macron attempted to introduce a carbon tax in road transport.
It is no coincidence that the first flagship initiative under the European Green Deal was the Just Transition Fund, which will dedicate €20bn ($21.6bn) in 2021-27 to support the “economic diversification and reconversion” of the territories expected to be the most negatively affected by the green transition. Nor is it a coincidence that, while creating the first-ever carbon market for buildings and road transport, the European Commission established the Social Climate Fund, which is expected to mobilize at least €86.7bn between 2026 and 2032 to compensate the most vulnerable groups for higher energy prices.
These policy initiatives reflect the advice one would find in the economic literature on carbon dividends. But they will prove insufficient to offset the profound distributional effects of climate policy, particularly as decarbonisation accelerates and includes sectors that directly affect ordinary people’s daily lives, such as buildings and transport. That is why Europe also needs a new green social contract, which focuses primarily on these sectors.
To this end, the EU should streamline and simplify existing funding instruments to deliver even more decisive support for the transformation of coal and carbon-intensive regions. It should also take steps to ensure that EU countries make better, more targeted use of carbon-market revenues to support the uptake of green alternatives, from electric vehicles to home heating systems. And it should push for a “Rural Green Deal” that supports small farmers while requiring the agri-food industry to transform its systems. While such EU-level action would not eliminate the distributional consequences of climate policy, it would help significantly.
The EU must also turn decarbonisation into a real economic opportunity by developing a solid green industrial policy. This will require, first and foremost, revitalising the “boring” EU single-market agenda, in order to leverage the bloc’s greatest asset – a huge shared market for goods, financial services, energy, workers, and ideas – to incentivise new investments in clean tech.
Interventions in specific technology areas will also be needed. Rather than mimic the broad-based US Inflation Reduction Act, the EU should make the most of its limited resources by delivering targeted support in areas where it already has a solid comparative advantage on which to build. While some incumbent industries might need support as they decarbonise, supporting breakthrough innovations should be the primary goal.
The European Green Deal has come a long way since it was conceived five years ago. But if the EU is to achieve its 2030 climate goals and achieve net-zero emissions by 2050, it must act now to ensure that it can weather the inevitable political headwinds. A new green social contract and industrial policy can make all the difference. – Project Syndicate
- Simone Tagliapietra, a senior fellow at the Brussels-based think-tank Bruegel, is an adjunct professor at the Johns Hopkins University School of Advanced International Studies, Bologna.
By contrast, assistance to Ethiopia has declined in recent years. As a result, Ethiopia recently defaulted on its external debt, even though it amounts to just 25% of GDP. While the Kenya approach is not the solution – providing similar levels of support to all illiquid countries would require a tripling of MDB flows – this is clearly unacceptable.
A better approach would focus on closing the gap between short-term debt concerns and long-term investment needs, by unlocking net-positive inflows for countries facing liquidity constraints. As the FDL has proposed, an agreement among debtors, creditors, and MDBs to permit countries to reschedule debts coming due – delaying maturities by 5-10 years – would create fiscal space for climate-friendly investments, financed by MDBs.
For this liquidity bridge to work, MDBs would have to accelerate progress on implementing existing reform plans and increase funding substantially, while the IMF helps manage debt-rollover risks. Importantly, private and bilateral creditors would have to agree to the rescheduling. That is why, compared to the Debt Service Suspension Initiative that the G20 introduced in 2020, the proposal includes stronger incentives for private-sector creditors to participate, in addition to longer time horizons.
There are good reasons to believe that creditors can be convinced to join the program voluntarily. It is, after all, in their best interest to remain invested in solvent countries with strong growth prospects; no one benefits from debt crises like those that have ensnared Zambia and Sri Lanka. In any case, creditors would continue receiving interest payments, and as global interest rates fall and economic-growth prospects improve in the coming years, debtors may well be able to return to capital markets and resume repayment of the principal.
Shaping a workable blueprint along these lines is a task for upcoming international gatherings, such as the G20 summit in Brazil later this year. Logistical and financial coordination will be needed to ensure sufficient liquidity. Coordination among the IMF, the World Bank, and regional development banks will also be essential to ensure that participating debtor countries pursue investments that genuinely support green growth.
If nothing is done to help countries facing liquidity crises, the world will risk a wave of destabilizing debt defaults, and progress on the green transition will be severely undermined, with catastrophic implications for the entire world. Because promising solutions like the liquidity bridge can prevent such outcomes, they deserve broad global support.