Valdai Club

While environmental social and governance criteria remain context dependent and cannot be universally applied, it is key to balance these factors with real world market realities through a technology agnostic approach, writes Valdai Club expert Christof Van Agt.

Policymakers in Glasgow for climate talks this month would do well to remember that climate policy and energy technology choices bring about real-world change when aligned with market fundamentals, the physics of energy technologies, and the producer-consumer partnerships on which energy investment and trade rely.

Policy-driven approaches by signatories to the Paris Agreement or by the European Union (EU) may guide but will not replace the physical and financial market dynamics of interconnected energy systems which are integral to human economic life. Climate neutrality secures the prosperity of people by cutting greenhouse gas emissions not the markets, technologies, and partnerships by which we live. 

On 14 July 2021, the European Commission tabled a comprehensive set of proposals to enable the EU to reduce greenhouse gas emissions by at least 55 percent compared to 1990 levels over the next nine years. When adopted, the EU’s “Fit for 55” package of climate, energy, land-use, transport, and taxation measures will set the EU on course to become the first climate neutral continent in the world by 2050, as the President of the European Commission announced at the launch of the EU Green Deal on 11 December 2019. On 29 July the objective to reduce emissions by 55 percent by 2030 and reach climate neutrality by 2050 entered into force after the European Parliament and Council adopted the first ‘European Climate Law’. 

The clarion call to action implies a considerable rise in the level of climate ambition by EU Member States and introduces new requirements on EU trade partners as well. Fit for 55 proposals include no less than 13 pieces of legislation to enhance and expand carbon abatement measures across sectors and along the EU external trade border. A new carbon border adjustment mechanism will ringfence the EU’s achievements, incent investment, and reinforce its trade policy with a new climate dimension. This levy on carbon will prevent the loss of economic competitiveness by imposing a cost on overseas markets that do not take measures with similar effect and rewarding EU trade partners that heed its call on climate with more favorable market access. when fully implemented after a transitional period, these proposals will cement the EU’s climate leadership on global markets while also protecting EU industries, skills, and jobs.

The National Recovery and Resiliency Plans already anticipate implementation of the Green Deal’s Fit for 55 proposals. EU Member States’ submissions to gain access to the 900 billion euros earmarked by the NextGenerationEU recovery plan and seven-year budget, suggest allocating around 40 percent of available funds to climate investment and 20 percent to digital opportunities to build back better while overcoming the impact of the COVID-19 pandemic. 

Apart from mitigating and adapting to climate change from the perspective of good governance of global commons and prudent risk management, other benefits of EU climate action include:
 

• Increasing support for the EU project among younger citizens that regard the EU’s four fundamental freedoms as a given, but see future uncertainties loom large,
• Enhancing cohesion among its diverse member states, now that economic integration on core values and governance principles from human rights to competition law are agreed and implementation all but complete, and 
• Asserting the EU’s leadership in a complex world by engaging international partners on the climate aspects of foreign trade and investment relations with reciprocal access to markets as the new prize.

Rationales that could well apply to other regional integration organizations and governments. The EU is a global leader in the transition towards climate neutrality, and determined to raise global ambition and to strengthen the global response to climate change, using all tools at its disposal including climate diplomacy the European Climate Law reads. 

The launch of the EU Green Deal and its embodiment in the EU Climate Law and Fit for 55 proposals come at a time of great change in other parts of the world. These include the swift collective government responses to the unprecedented impacts of the pandemic under the G20 Presidency of Saudi Arabia in 2020, and the abrupt shift from climate skepticism to climate action by the United States government in 2021. 

This has inspired a new ‘energy and climate solidarity’ to maintain market stability and accelerate a more inclusive and sustainable recovery at a time when energy prices and investment were at relative lows. However, when the Italian G20 Presidency hosted Energy and Climate Ministers in Naples on 23 July this year, reaching consensus was not straightforward. The UN Climate Conference of Parties (COP26) that the UK will host in Glasgow early November with Italy as a co-host will give further indications as to whether energy and climate solidarity can withstand the price rises that have accompanied the economic recovery. 

Making progress at COP26 is critical, but the EU’s drive is not contingent on its success. Other countries must make up their mind when to pursue an independent policy line or team up with allies, and whether to take on the role of trailblazer or trend follower on the steep learning curves ahead. As signposts on the road to net-zero greenhouse gas emissions mid-century are few and far between, eyes will turn from COP26 in Glasgow back to Fit for 55 in Brussels. How quickly will the European Parliament and European Council adopt the Commission’s Fit For 55 proposals?

So, aligning climate policy and energy technology choices with market fundamentals, the physics of energy technologies, and international dialogue will be critical. Policy-driven carbon price mechanisms and sustainable technology choices governed by the EU Green Deal’s Fit for 55 instruments may guide but will not replace the market dynamics of energy systems. 

The same could be said of the EU Taxonomy—a nomenclature that defines ‘environmentally sustainable’ to establish greater predictability and stimulate climate investment. The Peoples Bank of China was the first to introduce guidelines for green finance in September 2016 and green finance was included in the G20 communique under the Chinese G20 Presidency but China is more practical about which technologies are eligible. “It doesn’t matter whether a cat is black or white, as long as it captures carbon.” to paraphrase Deng Xiaoping. Not the energy technology but it’s functionality in context determines its sustainability.

While environmental social and governance criteria remain context dependent and cannot be universally applied, it is key to balance these factors with real world market realities through a technology agnostic approach. An overly rigid application of environmental or social criteria is regressive by locking in suboptimal solutions that will keep climate and sustainable development goals out of reach for all.

Ambitious greenhouse gas emission reductions goals become empty rhetoric without the full power of markets, technologies, and partnerships as organizing principles. As we face the highly anticipated COP26 negotiations and the EU’s Fit for 55 adoption process, we must urgently step up real world dialogue and strengthen solidarity to preserve global cohesion around the principles that will govern these momentous policy shifts.