The European Green Deal - overview and status report

On 11 December 2019, coinciding with the UN's COP 25 climate summit in Madrid, the EU Commission launched a major climate package, the European Green Deal. The initiative is a roadmap for achievement of the EU's aim to be climate neutral by 2050, with measures to be rolled out over the coming years. The package focuses not just on cuts but also on economic development – decoupling growth from resource use.

The cornerstone of the Green Deal is the EU Climate Law which will enshrine the objective of carbon neutrality by 2050. Poland, which still produces 80% of its energy from coal, refused to commit to this pledge and its prime minister said that Poland had secured an exemption from the net zero target. This is not the first time that Polish interests in fossil fuels have caused difficulties for EU climate and energy negotiations – in December 2018, the EU's "clean energy package" was agreed with a carve-out for Poland, allowing it to continue subsidising its coal industry. Earlier this year, Poland, Czech Republic and Hungary all refused to support the 2050 goal. In the Green Deal announcement, the Commission states that it will press ahead with implementation of the Green Deal, whilst noting Poland's refusal to do so. Poland, together with certain other Central and Eastern European countries, may further resist any short-term binding measures aimed at securing a 2030 emissions reduction target.

The Green Deal Communication is exceptionally broad and is accompanied by a roadmap timetabling the introduction of the various measures throughout 2020 and 2021. The Commission is careful to note that no single measure will be sufficient to achieve the objective of transforming the EU's economy, which the Commission states will take 25 years. Digitalisation and innovation is a key theme, at the same time both future-proofing the package but also creating a risk of failure if the required new technologies do not deliver. At least 35% of the Horizon Europe funding for research and innovation (the successor programme to Horizon 2020) will be allocated to climate innovation projects to minimise that risk.

Although the Commission frequently releases "packages" as a basis for legislation in the environmental sphere, the Green Deal feels more ambitious and holistic in its approach than any recent package. Indeed the Commission refers to "mainstreaming sustainability in all EU policies", with all new initiatives to include an assessment of how they uphold the principle of "do no harm". The role that the Commission describes for itself in the Communication is one of global leader in the climate field, internationally through the Paris Agreement framework, bilaterally with G20 countries and locally with the Western Balkans countries who are seeking EU membership.

The costs of such ambitious measures have not been overlooked. 25% of the EU's overall budget is expected to be dedicated to "climate mainstreaming" across all EU programmes. A proportion of the EU ETS income, as well as new revenue streams such as a non-recycled plastic tax, will contribute to the costs of the Green Deal.

The Commission clearly aims to ensure that its ambition is not undermined by fiscal and taxation policies in Member States, despite this being an area largely outside its competence. The Commission states that it will work with Member States to screen and benchmark green budgeting practices and "create the context for broad-based tax reforms". 

To achieve current 2030 targets, an estimated €260 billion of additional annual investment will be needed.  On 14 January 2020, the Commission announced details of its Sustainable Europe Investment Plan ("SEIP"), to support €1 trillion of investment over the next 10 years, providing both dedicated funding and a favourable framework for green investments, "to unlock and redirect public and private investment". The three key aims of the SEIP are to:

• mobilise at least EUR1 trillion of sustainable investment by 2030 through the EU budget;
  
  
• create an enabling framework for private investors and the public sector, including by making the identification of sustainable investments easier (notably via the Taxonomy Regulation, finally published in late June 2020);
  
  
• provide tailored support to public administrations and project promoters in identifying, structuring and executing sustainable projects.

The Commission will also work with the European Investment Bank Group ("EIB"), national banks and institutions. The EIB announced in November 2019 that it would double its climate-focused activities, aiming to use 50% of EIB financing for climate action and sustainability by 2025.

Green Deal financing will be supported by changes to State Aid rules, facilitating projects consistent with the zero carbon transition and supporting only those genuinely at risk of carbon leakage; in the meantime the Commission commits to apply the current rules "with flexibility" in areas crucial for the transition, including energy and waste. Other regulatory changes, for example, on mandatory green procurement, will also be part of the package.

The Commission expects the Green Deal to be a driver of sustainable investment. An acceleration of the already evident shift from "brown" to "green" investments by the financial markets is considered critical for the achievement of the net zero target. Work on this issue has been ongoing for some time – the Green Deal will develop and pick up workstreams started under the 2018 Action Plan on Financing Sustainable Growth, itself the basis for the Sustainable Finance Disclosure Regulation ("SFDR"), the Taxonomy Regulation and a draft Green Bond Standard. One of the Commission's first actions under the Green Deal was the launch of its Sustainable Europe Investment Plan, which sets out in further detail how EU funding will be mobilised and both public and private investment facilitated.

A draft Renewed Sustainable Finance Strategy was published in April 2020. One of its aims – "strengthening the foundations for sustainable finance" – is focused on improving the volume, reliability and accessibility of information on climate, environmental and social risks and impacts faced by companies. Using such information, investors can make sound business decisions. The Non-Financial Reporting Directive ("NFRD") will be reviewed to ensure that it contributes to achieving this transparency goal; the Commission launched a consultation in February 2020 to explore options for the NFRD review, which include a legislative amendment, but also further non-binding guidelines or use of a standard for reporting.

In addition, the Commission is restarting work on an EU Green Bond Standard, though key details such as whether the standard will be voluntary or mandatory are yet to be decided. The Renewed Sustainable Finance Strategy consultation also invites views on whether the market would welcome a new (eco)label for investment funds with an ESG or green focus.

Financial market participants may be concerned about the potential proliferation of new or amended ESG disclosure requirements, even before the first requirements of the SFDR begin to apply in March 2021. Though the finance pillar communications make brief mention of it, there is no clear indication that new requirements will be streamlined with the SFDR; certain firms could be faced with a complex and costly patchwork of compliance requirements in the next 5 years.

The Just Transition Mechanism aims to mobilise a Just Transition Fund to benefit the most vulnerable regions and sectors, recognising that implementing ambitious climate policies in fossil-fuel-dependent or less prosperous Member States represents a bigger challenge than in those Member States which already have progressive national policies in place. The Fund has been criticised however, as representing only a fraction of the overall sums needed to aid the transition. Clearing up the initial confusion around the potential value of these measures, the Commission announced in January 2020 that the Just Transition Mechanism would be comprised of three pillars of financing:

• a Just Transition Fund ("JTF"), which would make vast sums available to Member States; for example, almost EUR11.3 billion would be available to support jobs and growth, with a further EUR32.8 billion under the European Union Recovery Instrument (these amounts were significant increased as part of the EU's post-COVID-19 green recovery plan). These funds are additional to the Commission's long term budget proposal, with contributions from Member States via the European Regional Development Fund and the European Social Fund Plus, and national co-financing under the cohesion policy rules; the draft JTF regulation states that the Fund will contribute to a single specific objective, being "enabling regions and people to address the social, economic and environmental impacts of the transition towards a climate neutral economy" and it will support activities ranging from investments in clean energy to assistance for job seekers; despite its reticence to commit to the climate targets, Poland will be the biggest beneficiary of the Just Transition Fund;
  
  
• a dedicated scheme under InvestEU to mobilise EUR45 billion of investments, expected to comprise EUR1.8 billion from the EU budget and additional private investments operating under a preferential framework;
  
  
• a public sector loan facility with the EIB backed by the EU budget, to mobilise EUR25-30 billion of investments; EUR1.5 billion will come from the EU budget and EUR10 billion from the EIB at its own risk.

One of the most newsworthy aspects of the Green Deal is the enshrining into law of the objective of carbon neutrality by 2050. The "European Climate Law" was published on 4 March, but has already been widely criticised for its lack of ambition. Much of this criticism is focused on timing: twelve Member States, writing to the Commissioner leading on the EU Green Deal, Frans Timmermans, called for the Commission to adopt an interim 2030 target prior to the planned COP26 in Glasgow in November 2020. Adopting such a target, according to the letter, would contribute to creating the international momentum needed for all parties to scale up their ambition. Despite the postponement of COP26, Frans Timmermans does appear intent on driving the proposal forward as quickly as possible (taking account of differing positions across the bloc), though reports that the law could be agreed before the end of 2020 may be overly optimistic.

Key points from the draft Regulation include:

• Union-wide emissions to be net zero by 2050 at the latest. A previous leaked draft had included a commitment to negative emissions after this date, whereas the official draft does not contain such a commitment. The text recognises that emissions removals will continue to be required to balance sectors where absolute decarbonisation is not possible.
  
  
• By September 2020, the Commission will present an impact assessed plan to revise the existing target in Regulation (EU) 2018/1999 for 40% emissions reductions by 2030, with a view to increasing the target to 50-55%.
  
  
• The Commission may set a trajectory of interim reduction targets to achieve the 2050 goal, reviewing those targets every five years, after each global emissions stocktake under the Paris Agreement.
  
  
• Starting from 2023, the Commission will regularly review progress of Member States and the consistency and adequacy of Union measures to achieve the net zero objective, measured against the trajectory.

This increase in ambition will require swift and effective implementation of the Green Deal's other policies in order to be achieved. Additionally, by June 2021 the Commission commits to review and, where necessary, propose revisions to existing legislation which implements the current 40% target, such as the EU Emissions Trading Scheme (EU ETS). A draft Climate Target Plan was consulted on in the first half of 2020, with a final communication expected after the summer.

One of the more controversial aspects of the Green Deal is the proposed carbon tax. The Communication notes the possibility – arguably increased as regulation tightens on EU operators – of carbon leakage, whereby businesses transfer operations to third countries with less stringent requirements, resulting in carbon-intensive imports. The net effect of such leakage is that global emissions do not reduce in line with the EU's own reductions. The Commission has therefore held a short, early stage consultation on its proposed Carbon Border Adjustment mechanism, with more details to follow in a further consultation after the summer. The published inception impact assessment pre-empts any opposition based on consistency with WTO rules (the measure could be viewed as a barrier to trade). In terms of products or services that may be subject to the carbon tax, the Commission will examine the results of its study of carbon leakage under the third and fourth trading phases of the EU ETS. The January 2020 draft guidelines on ETS State aid guidelines suggest that these sectors could include production of aluminium, iron and steel, and manufacture of pulp and paper.

The Commission will also adopt a new strategy on climate change adaptation, and a draft was published for consultation in May 2020. Building on the 2013 adaptation strategy, the renewed strategy will be more ambitious and accelerate adaptation activities in all Member States, considering that there is currently divergence in this area between Member States. Financing adaptation actions, such as protecting infrastructure, will require both public and private investment. The financial system will also be required to review its approach to climate risk allocation and financial resilience.

ENERGY

Energy measures will target both production and use. Security of supply and affordability for consumers and businesses should be achieved in part through progression of the internal energy market and promotion of interconnectors between EU Member States. Offshore wind is the only technology specifically mentioned. Decarbonisation of the gas sector – to date lagging far behind the electricity sector – will also be progressed. Improvement in energy systems assumes a level of technological innovation, across the sector, in fuel, infrastructure and energy services. Priority areas where breakthrough technologies are needed – and may be subsidised - include clean hydrogen, fuel cells, energy storage and carbon capture, storage and utilisation. The Hydrogen Strategy, published on 8 July 2020, shows that the Commission is placing a large bet on the scale development of renewable hydrogen, particularly for those industries which are hard to electrify or otherwise decarbonise.

A Strategy for Energy System Integration was also published on 8 July 2020. This initiative aims to increase efficiency and reduce carbon emissions by better linking the different energy systems across the EU, including not just electricity and gas but also vehicles (vehicle-to-grid) and industry as a producer of heat.

The Commission will rely on Member States' National Energy and Climate Plans to mirror its ambition and provide the specifics of achieving energy sector decarbonisation. How it reacts when that ambition is misaligned with its own remains to be seen (for example, Germany recently announced a coal phase-out by 2038).

CIRCULAR ECONOMY

The Commission cites raw material extraction and material processing as responsible for 90% of biodiversity loss and water stress. Although the EU considers itself on the right track – it first proposed circular economy measures in 2014 – new measures will be designed to accelerate progress. A new circular economy strategy was published in March 2020, which aims to "make sustainable products, services and business models the norm and transform consumption patterns so that no waste is produced in the first place". Although an earlier version of the communication, leaked in January 2020, provided that only "safe, circular and sustainable products" may be placed on the market by 2030, this concrete commitment was missing from the final plan.

A sustainable product framework initiative will address high impact products including textiles, construction products, electronics and plastics. Ecodesign measures for electrical products have traditionally regulated energy efficiency and only more recently included requirements such as durability and recyclability. These aspects are likely to take a more central role in upcoming proposals, which could include requirements to use recycled content in product materials and a consumer "right to repair". Sustainable, recyclable and reusable products will also support the reduction of waste. Products are likely to be accompanied by an "electronic product passport", which will contain mandatory digital information allowing for easier management of the product whether in terms of reuse, repair, upgrade or remanufacturing. The market for "secondary raw materials" will be improved by standardisation and harmonisation of rules on end-of-waste status and by-products.

The EU will take further action against "green washing", including introducing a standard methodology for the assessment of environmental claims to prevent those which are unsubstantiated or false reaching consumers.

An early stage consultation on consumer information on the environment and sustainability, launched in June 2020, addresses several of the above issues, including repairability, early obsolescence, greenwashing and green labelling, but there is, as yet, no firm commitment to a product passport.

A consultation on the revision of rules on waste shipments was launched in March 2020, and the existing Waste Shipments Regulation is to be amended to shift the focus away from waste exports, where waste can be prepared for reuse or recycling or treated within the EU, with a possible ban on exports of waste with harmful environmental or health impacts. A commitment to dispose of waste at home is a natural consequence, perhaps, of the Chinese waste ban and measures against plastic waste by countries like Indonesia and India.

New and amended waste rules are expected to cover food, end-of-life vehicles, and electronic products, and proposals have already been released in respect of batteries (where new battery technologies will be addressed) and packaging, both in June 2020. It is expected that a revision to the 1994 Packaging Directive may require all plastic packaging to be reusable or recyclable by 2030.

The Commission intends to level the playing field for European businesses by supporting a global agreement on plastics which would address the entire lifecycle of products, reducing land, water and ocean pollution as a result.

TRANSPORT

Transport emissions must be reduced by 90% in 2050 in order to meet the carbon neutrality goal. The Commission's proposals for a Transport Strategy were published for consultation in July 2020. A shift in transport policy will have a particular impact on individuals, with the Commission noting that viable alternatives will have to be offered and pricing based on environmental impact may be needed in order to change travellers' current habits. Railways and inland waterways should absorb some of the inland freight traffic; measures to increase their capacity will be proposed by 2021. The shipping sector will be encouraged to adopt renewable fuels, via the new FuelEU Maritime initiative – a consultation on a new directive was launched in July 2020. Aviation emissions are to be tackled by resurrecting the Single European Sky (SES) programme, which would adjust aircraft routes to minimise the amount of fuel burned. Originally launched in 1999, SES aimed to reduce emissions by up to 10% but has not delivered to date and largely been abandoned.

The EU ETS will be extended to shipping, and airline allocations will decrease as the Commission implements the ICAO's Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) (a consultation was launched in July 2020). This should drive the move towards greener aviation fuels. Extensive new infrastructure will be needed to support a rapid growth in electric vehicles, with diesel and petrol vehicles being squeezed out of the market by stricter emissions limits from mid-2021. The Commission has published a consultation on proposed new Euro 7 emissions standards for cars, vans, lorries and buses, possibly to include previously unregulated pollutants.

BUILDING EFFICIENCY

The focus of energy efficiency measures in the construction sector has been on the efficiency of new buildings and has been successful, resulting in approximately 50% energy savings between buildings constructed in 2019 compared to 1980. As well as improving enforcement of existing building efficiency measures and potentially bringing buildings inside the EU ETS, the Green Deal will focus on a "Renovation Wave" for existing buildings, as detailed in a consultation published in May 2020. Public and private, commercial and residential buildings will all be covered.

POLLUTION

The Commission will propose a "zero pollution action plan" for air, water and soil in 2021. This will include revising air quality standards aligning them more closely (possibly not completely) with WHO recommendations. It notes the need to both simplify and strengthen the chemicals regulatory framework (despite the chemicals industry having now come to terms with the fiendishly complex REACH Regulation), in order to improve health and environmental protection and increase global competitiveness. Further substances could be subject to restriction, notably endocrine disruptors, chemicals in products, and substances causing harm through a combination effect. 

ECOSYSTEMS AND BIODIVERSITY

The Commission notes that the EU is not meeting all of its international obligations under the Convention on Biological Diversity. Its new Biodiversity Strategy was published in May 2020, and will be presented to the Convention's Conference of the Parties in October 2020. The Commission will prepare a new forest strategy (a public consultation on the roadmap has already taken place), with the aim of preserving and restoring existing forests and creating new ones, with a focus on the impact of wood and timber products placed on the EU market. A maritime strategy will take account of the IPCC's special report on oceans and recognise the importance of offshore renewable energy; an Ocean Energy roadmap was published in May 2020.

FOOD AND FARMING

The Commission's aim is for European food to become "the global standard for sustainability". The "Farm to Fork" communication was published in May 2020. The Green Deal approach addresses all stages of the food chain, from primary production of animal and plant foods, through consumer food choices and food waste. Member States' national strategic plans for agriculture should focus on and reward performance rather than compliance.

Of course, the UK's departure from the EU on 31 January 2020 and the end of the Brexit transition period on 31 December 2020 puts a large question mark over the relevance of the Green Deal to UK businesses and consumers.

However, at the time of writing, the UK is in the midst of a difficult trade negotiation with the EU and the Green Deal Communication explicitly notes that trade policy can be used as a tool to drive progress in climate and sustainability. The EU's negotiating position includes a statement that there must be "robust level playing field safeguards to avoid unfair competitive advantages" in, amongst others, environmental matters. The UK Government's negotiating position states that any free trade agreement should include "reciprocal commitments not to weaken or reduce the level of protection afforded by environmental laws in order to encourage trade or investment", whilst at the same time recognising "the right of each party to set its environmental priorities and adopt or modify its environmental laws". Similarly, the UK Government unequivocally states that it "will not negotiate any arrangement in which the UK does not have control of its own laws… That means that we will not agree to any obligations for our laws to be aligned with the EU's….". The head of the European Parliament's Environment Committee has already raised the possibility of the carbon tax mechanism (not expected to be proposed until late 2020 or early 2021) being used against the UK should it undercut EU environmental standards, in order to restore the level playing field.

Whilst the press has previously reported that a compromise on environmental standards could be required in order to ensure other aspects can be agreed expeditiously (possibly emotive issues such as fisheries policy), the EU's current position on the "level playing field" is firmly fixed. Equally, regulatory alignment is a very difficult concession for Boris Johnson's Government to make.

Even without a commitment to regulatory alignment, the EU and the UK are on the same path in terms of environmental ambition: the UK also has its own legally binding commitment to be carbon neutral by 2050, and re-using the EU's advanced thinking about how to achieve that makes good sense. Inevitably, there are signs of overlap between the Green Deal and the UK's emerging (and accelerating) net zero workstreams, with the UK launching a publicly funded buildings renovation initiative as the first stage of its green recovery package. Whatever the outcome of the trade negotiations, the EU is clearly carving out for itself a role as the driver of international climate policy, and the laws and regulations it is shaping now are likely to become the de facto global standards of the future. UK businesses would be well-advised to continue to watch this space.