EU Decarbonisation and Competitiveness

On 9 September, in Brussels, former European Central Bank President Mario Draghi presented his report on the “The future of European competitiveness”. The document outlines the challenges that EU businesses face in being both productive and environmentally friendly. The report proposes around 170 policy recommendations across several sectors, with a focus on the clean and digital transitions. It also suggests that significant additional investments of at least €750-800bn each year (4.4-4.7% of EU GDP) are needed to fund decarbonisation, digitalisation, and defence improvements.ⁱ

In his press conference, Draghi emphasised that, to stay competitive, the EU needs to work on closing the innovation gap (in particular with the United States and with China), and to combine decarbonisation with competitiveness. He also advocated a focus on innovation because it would decrease insecurities and dependencies by securing supply chains for critical raw materials and technologies and increasing domestic production capacity in strategic sectors. Newly re-elected President of the European Commission, Ursula von der Leyen, has endorsed the report and summarised the guideline for the future of the EU by stating: “To be competitive, we have to be resilient”.ⁱⁱ

The Draghi report had been much anticipated and, following its launch, has generated intense debate among the range of stakeholders – especially on whether Europe’s ambitious climate targets and related policies are hindering EU economic growth. Planet Tracker and Carbon Tracker have identified four major points of discussion, which are detailed below.

Is decarbonisation holding back EU growth?

The report suggests that the process of decarbonisation undertaken by the EU, especially since the launch of the Green Deal in 2019, must be carried out in a way that decarbonisation represents a source of economic growth. According to Draghi’s press conference comments, “If all the policies are in sync with our climate goals, decarbonisation will be an opportunity for growth”.ⁱⁱⁱ The report also details how high energy costs in Europe are an obstacle to growth and that lack of generation and grid capacity impede the spread of digital tech and transport electrification. Additionally, it highlights that EU’s decarbonisation goals are more ambitious than most competitors, like the US or China, and this creates a greater near-term investment need for EU companies which foreign competitors do not have to face up to. This is why the report recommends a joint decarbonisation and competitiveness plan which includes lowering energy costs, capturing industrial opportunities and levelling the playing field in sectors more exposed to unfair competition from abroad.^iv

Key Point 1: decarbonisation can be a source of growth, and an opportunity for European industry, provided it’s approached smartly.

Is the EU a leader in decarbonisation technologies?

While the report recognises that the EU is a world leader in clean tech innovation, it also acknowledges that industry faces barriers to innovation, commercialisation and the scaling-up of these products because of the lack of finance, especially at a later stage. This is caused, as explained in the report, by a lack of industrial strategy when compared to other major economies, with China and US providing subsidies to clean tech manufacturers. The criticism raised in the report highlights that a lot of young tech companies exited the EU for more favourable conditions elsewhere, in particular the US. This has been a handicap to European competitiveness.^v

Key Point 2: the EU needs to do better in nurturing the new clean tech industries and technologies.

Are climate change regulations a significant burden on EU companies?

In our view, the report does not say that regulations – and in particular climate-related ones – are intrinsically a competitive burden to EU companies. However, Draghi does imply that regulations can present a burden when there is a lack of coherence and alignment among those. The report does highlight, that, since 2019, the EU has passed around 13,000 pieces of legislation; while in other political and legislative systems, such as US and China, numbers have been much lower. We should acknowledge that the EU Commission has been promoting the “Better Regulation Initiative” with the aim of “making EU laws simpler and better and avoiding unnecessary burdens” via different tools for evaluation and public consultation. However, the Draghi report makes the point that policy objectives still vary across different pieces of legislation and therefore result in a less effective and joined-up regulatory landscape. One example as of misalignment evidenced is the Carbon Border Adjustment Mechanism (CBAM)^vi and the Corporate Sustainability Reporting Directive (CSRD), for which the CBAM excludes Scope 3^vii emissions whereas the CSRD includes them.^viii To address this overall issue, the report suggests adopting a single, clear methodology to quantify the cost of a new programme of regulation.

Key Point 3: misaligned policies can be a hindrance to business: “If we fail to coordinate our policies, there is a risk that it could run contrary to competitiveness – and ultimately be delayed or even rejected.” There is no argument for a rollback of climate change regulation.

What about nature and biodiversity?

Nature is mentioned only once in the longer version of the report. Part B of the report, (In-depth analysis and recommendations), references nature only when discussing the role of mining, notably the recycling of critical raw materials and associated biodiversity considerations.

Key Point 4: European policymakers are still not doing enough to bring together climate and nature, even if some progress is being made at the international level and with the adoption of the Nature Restoration Law.

A New EU Commission: what next for the Draghi report?

It now remains to see how this report will inform the actions that will be put forward by the newly proposed EU Commissioners, which von der Leyen has recently announced.^ix A sense of direction can already be identified in the political guidelines presented over summer, in which the President of the European Commission calls for “a Union that is faster and simpler, more focused and more united, more supportive of people and companies”.^x She further affirms that she plans to stay the course on the goals set out in the EU Green Deal. Her Cabinet announcements would seem to support that approach, and von der Leyen will be reassured by Draghi’s support for the decarbonisation opportunity. This is in line with one of the report’s main recommendations.

And if European politicians fail to heed the recommendations, the Draghi Report provides a concise response: “If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions.”