By Fabian Wintersberger, Rates Trader and Economist, based in Austria
Today, the European Parliament and EU governments closed a deal on how far to go in requiring EU member states to cut emissions over the next decade, agreeing to raise the EU’s 2030 CO emissions reduction target to a net 55 percent cut, up from the current 40 percent target, despite the lack of estimate of how much this would cost to the European economy.
This was agreed in the context of the so-called “European Green Deal”, which – according to the EU Commission’s website – is about “striving to be the first climate-neutral continent“ in order to “transform the Union into a modern, resource-efficient and competitive economy, where
- There are no net emissions of greenhouse gases by 2050
- Economic growth is decoupled from resource use
- No person and no place is left behind”
According to the European Commission, things like “investing in environmentally-friendly technologies” are not only supposed to benefit the environment, but should also to “create jobs”.
Despite these lofty ambitions, there are severe problems underpinning the idea that governments or the central EU planning level are able to promote sustainable economic growth by investing in this kind of projects. In combination with the EU’s 1200 billion euro multiannual budget, the EU’s “temporary” recovery fund “NextGenerationEU” involves a spending package of in total 1.8 trillion Euros. The European Commission has pledged that not less than “30%” of these EU funds “will be spent to fight climate change.”
On top of this, the European Commission is also aiming to raise 30% of the “NextGenerationEU” cash, which is financed through jointly issued EU debt, through “NextGenerationEU green bonds”. It intends to “use the funds to finance Europe’s green future”:
.@EU_Commission will aim to raise 30% of #NextGenerationEU through NextGenerationEU green bonds and use the funds to finance Europe’s green future. 🇪🇺🌿🌲🤝
What does this entail? 🧵
— Gert Jan Koopman (@GertJanEU) April 20, 2021
This means that the EU would “reassure investors that funds from #NextGenerationEU green bond issuance will go to green investment”
A least in the short run, it will not be a problem to raise the money for this kind of projects. The first issuance of jointly issued debt, for another “temporary” EU spending scheme, “SURE”, showed that there apparently is strong demand for such bonds from investors. Obviously, the Green Deal will not fail because of a lack of investment. Actually, as a result of the ECB’s pledge to buy more green bonds, the demand for such bonds may increase further.
There are more profound issues with the EU’s “Green Deal” however. Underpinning it, is the fallacy that if only a sufficient number of funds is deployed by the government, wonderful things that we have desired forever are possible. Underpinning it is a belief in central planning, despite the fact that this is a failed concept from the past.
The narrative is really always the same. Policy makers urge to invest in “XYZ”, which supposedly will generate a lot of jobs and growth. The devil however always lies within the details, because most of those proposals sound nice and plausible at first glance. Nobody could argue against creating jobs or saving the environment.
Problems typically emerge when politicians need to agree on which projects to spend the money on. This is also the case with the EU’s “Green Deal”.
There are often different ways to achieve the desired goal, which in this case is to reduce CO2 emissions. One could achieve this through building nuclear power plants, which hardly emit CO2, or one could build hydropower plants. Electric vehicles fueled by hydrogen could be developed. Even if money can be printed, there are still scarcities, such as the supply of labor, so choices need to be made.
The EU’s so-called sustainable finance “taxonomy” rules cover a set of technical criteria for what can be labelled a “green” investment in the EU, meant to make these tricky choices on how to reduce CO2 levels. Today, the European Commission is presenting its first batch of implementing rules on this.
Whether nuclear, biomass or gas should be considered climate-friendly has been subject to a fierce debate, which has been dubbed “taxonomy wars”.
The fierce politicization of all of this, with EU member states with nuclear power, like France, predictably supporting nuclear, while Eastern European member states standing up for coal, is an indication of how politics instead of scientific evidence may guide the decision making process.
🔔Brussels in the next hour will publish its fraught draft taxonomy rules. Nuclear, gas, agriculture have been kicked into long grass and will be subject to separate classification due after the summer. Green NGOs due to disavow exercise as 'greenwashing' https://t.co/5UZh6iI340
— Mehreen Khan (@MehreenKhn) April 21, 2021
Maybe the cost-benefit trade-off for option A will be greater than for option B, but because of political considerations, policy makers may still go for B, which in turn deprives resources from being used elsewhere.
One example:
The United States did not sign the Kyoto protocol, whose goal it was to reduce CO2 emissions, but nevertheless, U.S. CO2 emissions decreased more quickly than elsewhere. Why? Because of fracking, which has been heavily opposed by environmentalists in Europe, demand for energy sources like coal decreased.
Of course, there are legitimate environmental concerns surrounding fracking, but that’s beside the point here. In the United States, CO2 emissions were reduced as an unintended side effect of innovation that was banned in Europe, something which would not have been achieved with central planning.
Tho Trump took America out of the Paris climate pact in 2017, US CO2 emissions continued to fall, reaching lowest level since 1992 in 2019 and lowest per capita since 1950, thanks largely to shale gas (which Team Biden want to curtail).
— Andrew Neil (@afneil) April 20, 2021
China is still committed to its Paris pledges — which don't involve emission declines til 2030. Meanwhile its emissions continue to rise: it's now building much more coal-fired capacity than it envisaged even last year.
— Andrew Neil (@afneil) April 20, 2021
Publicly funded projects tend to turn out to be more expensive than intended. A mere look at the never-ending sage of Berlin’s new airport or recent EU – funded multi-billion-euro projects for rail, road and water links can serve as an example.
Also the EU’s “Green Deal” may well turn out to be nothing else than an expensive prestige project of Ursula von der Leyen, her deputy Frans Timmermans, who’s responsible for the “Green Deal”, and other EU big shots. If the EU wants to be appreciated more, announcing lofty ambitions followed by yet another round of central planning won’t do the trick. Especially Ursula von der Leyen has a long track record in German politics of engaging in this kind of ventures.
The fact that the EU cannot go broke and that nobody in the EU institutions is being held accountable for mistakes, something which is visible with the EU’s deficient vaccine procurement, does not bode well for the chances of success of the “European Green Deal”. A centrally planned approach has failed in the past and is unlikely to succeed this time around, which may well be proven once the bills of the “Green Deal” come due.
Disclaimer: www.BrusselsReport.eu will under no circumstance be held legally responsible or liable for the content of any article appearing on the website, as only the author of an article is legally responsible for that, also in accordance with the terms of use.
