EU can’t meet green global goals alone

SINCE the pandemic and the Ukraine war, the European Union has doubled down on the green economy to meet global goals such as those in the 2015 Paris climate agreement. However, it is increasingly clear that Brussels needs more help not just from the private sector, but also from the wider international community, to get close to success with this vital agenda for the world.

To be sure, the EU’s commitment to the green economy is substantial already, including the growing momentum behind the European Green Deal mega project. One example of this is the more than 50 major sustainability initiatives announced by Brussels since the signature policy agenda was announced by the European Commission.

In the first half of 2023 alone, these key announcements include the European Parliament and the European Council reaching a political agreement on the ReFuelEU Aviation proposal; and the European Council adopting key pieces of legislation delivering on the “Fit for 55” 2030 climate targets. The European Commission has also unveiled the Critical Raw Materials Act; set out new rules for renewable hydrogen; presented a Green Deal Industrial Plan to enhance the competitiveness of Europe’s net-zero industry and support the fast transition to climate neutrality; and proposed a 2030 zero-emissions target for new city buses and 90 per cent emissions reductions for new trucks by 2040.

This regular flow of initiatives has helped the 27-member bloc rebrand itself as a global green superpower which it hopes can secure a renewed political lease of life. This after several difficult decades that saw the rise of challenges such as growing Euroscepticism and multiple financial crises.

However, meeting global green goals cannot be achieved simply by announcing major new political initiatives from Brussels. Growing help from the private sector, and also international allies, will be key in meeting this key agenda.

The monumental scale of the task ahead for the 27 EU member states is reflected in the fact that EU officials themselves estimate that reaching net-zero emissions by 2050 will require some 700 billion euros (S$1 trillion) in additional investment by the bloc each year. That is a staggering sum, and this is why the role of the private sector is key.

This is where the EU’s green taxonomy comes in. This cornerstone of EU green strategy is a sustainable finance framework in which Europe is yet again a global pioneer.

The taxonomy provides companies and investors with appropriate definitions for which economic activities can be considered environmentally sustainable. It therefore helps direct capital to the economic activities most needed for the transition, in line with the European Green Deal objectives. This includes climate change mitigation and adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.

Perhaps inevitably, there have been some controversies over this sensitive agenda. For instance, the Commission is facing several legal challenges from multiple environmental campaigners and from the Austrian and Luxembourg governments over the inclusion of nuclear and gas in the taxonomy, which some of these dissenters argue is a backward step that amounts to “greenwashing”.

However, the taxonomy has also already had some successes, including turning sustainable investment into a larger financial category. There is also some evidence that the taxonomy is increasingly being used by Europe-based firms to signal their sustainability performance and efforts.

However, the end goal of this journey is far from being realised. For example, an EU-wide survey of nearly 700 European firms released by ESG Book in July shows that nearly two-thirds do not have any revenue that meets the EU’s list of taxonomy-friendly activities. Moreover, half have no planned capital expenditure that can be considered green in this way either.

So there is a significant way ahead to help the EU 27 nations scale up such sustainable investment, creating security for investors, protecting investors from greenwashing, and helping companies become more climate-friendly and mitigating market fragmentation. An essential ingredient here will be continual dialogue between Brussels and the private sector.

One way that this is being achieved is through a series of communications since the taxonomy was launched, including one in June, to further provide signals to investors. In June, the European Commission made a series of taxonomy changes, including extending the rules to shipping; only allowing plastics made from biowaste to be considered “green”; while setting a threshold for use of chemicals that are considered high-risk.

There will be further changes going forward, including the possibility that critical raw materials might be included in the taxonomy in the future. This prospect reflects the high priority status that this issue has with EU policymakers now, especially following the launch of the Critical Raw Materials Act earlier this year. With this measure, Brussels aims to ensure secure and sustainable supply of critical raw materials for Europe’s industry and significantly lower the dependency of the 27 member states on imports from single-country suppliers.

In the near term, however, there are unlikely to be any big further taxonomy announcements at least until after the June 2024 European Parliament elections, and after the next European Commission is formed, which may take until 2025. While it is uncertain how exactly the taxonomy will evolve in coming years, after the EU’s big election year in 2024, one thing that is already clear is that Brussels cannot go it alone internationally on this agenda.

One very plausible future pathway here would be for alignment of the European taxonomy with the international measures (and equivalent mechanisms) of other nations, which will not be identical to that of Europe. Bodies such as the International Sustainable Standards Board could have a vital role to play here around alignment and/or equivalence of standards with other key powers with a huge stake in this agenda, including Japan and the United States, despite wider disagreements on this agenda over issues such as the US Inflation Reduction Act subsidy regime.

To be sure, there is unlikely to be complete convergence on this agenda. However, divergences should hopefully be manageable to help meet the ultimate, shared global green objectives such as those in the 2015 Paris climate deal. In so doing, the EU taxonomy and international counterparts could help create a foundation stone for global sustainable development in the decades ahead.

Andrew Hammond is an associate at LSE IDEAS at the London School of Economics