international analysis and commentary

How the EU can foster a global climate transition through its consumer power

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The European Union has a good story about itself as the climate leader. By 2030, the EU’s carbon emissions from its own continent will be below 5% of the global total. Its European Green Deal is more comprehensive and is moving faster than the US effort through the Inflation Reduction Act. The EU lacks the federal fiscal power of the US government but it has greater regulatory powers to shape new markets for green products. The EU can deploy the stick of regulatory constraints as well as the carrot of subsidies in order to change the incentives to move out of fossil fuels, adopt cleaner technology and create a circular economy.

 

But look more closely and this picture of European virtue is not so rosy. The account of the EU’s overall impact on the planet needs to include also its role as a consumer. Then a different story emerges, one of greater responsibility and a need for more radical action.

The EU is a wealthy market that imports a vast range of commodities, manufactures and consumer goods. These imports are made on other continents in processes that cause pollution, carbon emissions, freshwater consumptions and other environmental damage. If the embedded water and carbon in the EU’s imports is included in calculation of its global impact, Europeans are much bigger polluters. This matters because the atmosphere doesn’t care where the emissions come from on the earth. Destruction of carbon sinks and habitats in other parts of the world to provide Europeans with imports still has a devastating impact on the climate and on biodiversity.

 

How the EU’s economic role will change

Because of its global impact, the European economy needs to change to consume fewer natural resources. The demand side needs to be brought into its policies so that climate and environment goals are not only about what happens on the European continent. The EU needs to develop an advanced circular economy in which products are designed for longest possible life and least use of raw materials. The 2019 European Green Deal set out this objective at the start, of reaching no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. But the latter goal was eclipsed by the targets for reducing net emissions in the first years of legislative action.

 

Read also: Economics and climate change: the complexity of transition

 

To achieve this part of the European Green Deal, the EU will need not only to decarbonise its economy but also to “dematerialise”, that is, to improve resource efficiency and use fewer raw materials. Extraction and processing of resources from nature is highly damaging. It drives 90% of land-related biodiversity loss and water stress, 50% of greenhouse gas emissions, and one-third of health-related pollution impacts. The trends are alarming. According to the International Resource Panel of the UN Environment Program, material use, which comprises everything extracted from the earth, has tripled since 1970. Without transformative change, it will double again by 2060.[i]

 

The effects of dematerializing and decarbonizing economic ecosystems in the EU

A systemic transition in the European economy will have profound implications for international trade flows and relationships. In trade dynamics, the flow of some products and commodities is likely to decrease or even stop entirely if the EU develops an advanced circular economy.

Stricter standards for certain products imported into Europe might become de facto trade barriers, for example when standards are set on the carbon content of materials. This will Increase EU imports of materials that enable more circular and climate-friendly solutions, for example the components of batteries or digital equipment.

To avoid carbon leakage, whereby companies move dirty production to other continents to circumvent higher environmental standards, the EU is planning to introduce a Carbon Border Adjustment Mechanism (CBAM) from 2026, and it already seeks to lower its environmental impact through the recent Deforestation Regulation.[ii] The EU’s alignment of the standards for imported products with its domestic rules will drive up standards elsewhere in the world, meaning a better outcome for the whole planet. But it will have major transitional effects on other countries that the EU needs to address through its external policies.

 

From “competitive sustainability” to win-win partnerships

A range of short- and mid-term tensions are set to emerge during Europe’s green transition. Many countries will be affected by lower EU demand for raw materials and by the introduction of higher import standards. In some cases, the flows of certain imports from trading partners might drastically decrease or stop entirely, potentially leading to a significant loss of jobs. For example, as European demand for fast fashion falls, that will affect the 4.5 million workers in Bangladesh’s textile industry, 90% of whose production is destined for European markets.

 

Read also: Idrogeno verde, la partnership possibile tra India e UE

 

The decline of EU fossil fuel imports is likely to cause economic downturns in primary exporting countries, including Algeria, Iraq, Kazakhstan, Libya, Nigeria, Qatar and Saudi Arabia. It will also affect, Australia, Norway and the United States .[iii] That could create tensions in the EU’s relationships with these countries, but it will also bring significant geo-political shifts.

The EU must make sure that the transition in Europe not only reduces its own international environmental footprint, but also avoids short- and mid-term negative impacts on its trade partners. If well designed, the implementation of the European Green Deal can create opportunities for them to achieve their own environmental and social policy goals and continue trading with Europe. The EU’s Global Gateway initiative offers a promising start in this regard, but other policies also need to incorporate these goals.

The EU needs to develop policies that address many different implications, depending on levels of export-dependence by product, sector and exporting country, and the ramifications of a decline in EU imports according to the overall condition of the exporter’s economy. The good news is that although there will be several different tensions caused by implementation of the European Green Deal, there is a correspondingly broad array of potential solutions. Some can even become mutual opportunities. Examples of policies and measures that the EU should scale up include:

  • Natural capital accounting and payments for ecosystem services – operationalized to guarantee a fair price to resource- and biodiversity-rich countries.
  • The creation of investment incentives, guarantees and start-up funds that ultimately lead to a much improved ratio of private-to-public green investment in least developed and lower-middle-income countries.
  • Technology transfer to assist countries that are currently dependent on raw resource export to produce greener products higher up the value chain.
  • Assistance to countries that are aiming to diversify their economies away from exports of fossil fuels and virgin resource and towards digital cooperation, educational and vocational exchanges, and other sustainable economic activities.
  • Clean energy partnerships, for example to produce green hydrogen, in order to create revenue streams but also to build capacity in lower-income countries.
  • Temporary exemptions from the Carbon Border Adjustment Mechanism linked to levels of economic development (with safeguard provisions tied to surges in imports from an exempt country as a result of carbon leakage), and a re-investment of CBAM revenues into greening affected economies and industries in low-income countries.[iv] [v]

Ultimately, this means designing a new model of international partnerships and associated means of assistance that will contribute to lower-income countries’ efforts to leapfrog the ‘dirty’ stage of economic development. If designed well, that will help those countries to move up the value chain, for example by enabling them to make circular tools instead of basic materials like cement, or machinery specialised on remanufacturing.

The EU has a moral responsibility to make this effort, given its historical impact on the planet through industrialisation and colonialism. Failure to do so threatens the green transition as a whole because it will exacerbate North-South injustice, and leave economic problems to fester in countries that are undertaking costly adjustments for the global green transition and to cope with the physical effects of climate change.

Europe’s role in the world will suffer if the European Green Deal simply replaces one era of extractivism with another. The 21st century model cannot be a continuation of that of centuries past, of poor countries having no option but to dig up their raw materials for export—and live with the toxic waste and depleted nature that result—in order to build beautiful, green, and clean cities in the Global North. This model would be unjust, politically unsustainable, and would not deliver the emissions reductions and bio-diversity needed for the planet to be habitable in future. The global transition must be served by the European Green Deal if it is to deliver on its great promise.

For that to happen, the EU needs to move rapidly to a circular economy that consumes much less energy and virgin materials. The EU responded to Russia’s invasion of Ukraine in 2022 with rapid and radical moves to change its energy system. To prevent future crises caused by environmental degradation in many parts of the world, Europe needs to move equally rapidly to address its over-consumption of resources that are depriving communities of water and destroying bio-diversity.

Ultimately, the transition in Europe must ensure that the environmental footprint of the EU’s exports is reduced, while mitigating potential short-term negative impacts and creating opportunities for trade partners that allow them to achieve their own environmental and social policy goals and continue trading with Europe. The EU has to reduce its demand while helping its trade partners to manage their own transitions to sustainable economies. Europe must become greener, and it must help the rest of the world to do so too, which means it needs a holistic set of policies that recognise and address the international implications of the European Green Deal. That will create a net positive for the global transition.

 

 


Footnotes:

[i] International Resource Panel (2019), Global Resource Outlook, UN Environment Program, https://www.resourcepanel.org/file/1172/download?token=muaePxOQ.

[ii] Lowe, S. (2021), The EU’s carbon border adjustment mechanism- How to make it work for developing countries, Centre for European Reform,

https://www.cer.eu/sites/default/files/pbrief_cbam_sl_21.4.21.pdf

[iii] European Commission (2022), From where do we import energy?,  https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html

[iv] Lowe, S. (2021).

[v] Cornago, E. (2022), The EU emissions trading system after the energy price spike, Centre for European Reform, https://www.cer.eu/sites/default/files/pbrief_ets_EC_4.4.22.pdf