Many governments around the world have adopted recovery packages to overcome the damaging economic and social impacts of the Covid-19 pandemic. Interestingly, at the same time a growing number of countries, and also companies, have started committing themselves to carbon dioxide (CO2) neutrality.
Although only a few of them have backed these commitments up legally and instrumentally with visible measures, public awareness for a “green” recovery has emerged. Currently, the global landscape of recovery packages in terms of their degree of being green is very heterogeneous.
The European Union (EU) and Germany, for instance, are using their recovery agendas specifically to strengthen their ambitious climate agendas. For emerging and developing countries, in particular, it remains a challenge to find a balance between wealth-creating economic growth and climate protection.
Moreover, the high economic growth rates of today are to be found only in Asia, not Europe. This is where the largest energy consumers and most important trade markets are located, as seen in the conclusion of the Regional Comprehensive Economic Partnership, the world’s largest trade agreement.
Many countries in Southeast Asia, which are highly affected by the impacts of climate change, have not given priority to green recovery packages. However, imposing the specific European approach to other regions or countries would certainly not be the right way to go. Ultimately, each country must find its own way. However, some aspects of the European sustainability agenda might provide some ideas and opportunities for climate cooperation.
In July last year, the EU heads of state or government engaged in hectic negotiations which lasted for four days and nights at the Special European Council meeting in Brussels before endorsing the next long-term budget and NextGenerationEU for Covid-19 recovery.
Credit: European Union
The role of “green” recovery in the EU must be considered above all in the context of the European Green Deal (EGD). The EGD pursues the goal of leading the EU to climate neutrality by 2050. As an intermediate step, it was recently decided to reduce CO2 emissions by 55 percent by 2030 compared to 1990.
The EGD was politically adopted shortly before the outbreak of the Covid-19 pandemic and after a new EU Commission took up its work under the leadership of EU Commission President Ursula von der Leyen. Since then, the EGD has been in the implementation phase, affecting broad areas of European economic policy in the EU but also beyond.
To achieve the goals of the EGD, the EU’s multi-annual financial framework for 2021-2027 is approximately 1 trillion euros. Some 30 percent of all spending will be used for climate targets. A key element of the EGD is the Just Transition Fund, intended to help countries such as Poland, the Czech Republic, Greece and Bulgaria, which still generate a large part of their electricity from coal-fired power plants, to transition to clean energy sources while lessening corresponding social impacts.
In addition, there are numerous other initiatives and measures of the EU Commission that are intended to reduce climate-damaging greenhouse gases in a wide variety of sectors. These include a hydrogen strategy for the energy sector that envisages blue hydrogen as a transitional energy carrier in combination with CCS technology in order to level the technological path towards competitive green hydrogen.
An action plan for the circular economy was adopted, which aims to reduce waste by legally anchoring reuse or recycling and a right to repair. This is followed by mandatory sustainability criteria for battery production and recycling to reduce dependence on key raw materials, such as nickel, cobalt, copper and lithium.
A renovation wave is to be triggered to reduce energy consumption for heating. Home-owners are to comply with EU energy standards in the future. Wind power plants on the oceans are to be increased fivefold in the next ten years. A European transport concept is to successively promote zero-emission cars, ships and large aircraft and contribute to sustainable mobility.
The EU financial market is also affected by the EGD. For example, an EU taxonomy for investments is in the works, which defines which investments are considered sustainable. This is of key importance for the EU, as it links a part of its budget for implementing the EGD to these verifiable criteria. In a further step, this also applies to European and non-European financial market players if they want to declare investments in the EU as sustainable.
The European Emission Trading (ETS) is under revision. In the future, the ETS could be expanded to include not only the electricity sector but also the transport and heating sectors. Germany has already taken this step at the national level last year.
The planned European CO2 border adjustment is currently of particular political interest. Non-European companies exporting goods to the EU will have to pay a CO2 levy equivalent to the CO2 price for comparable goods in the EU. This is intended to solve the carbon leakage problem. The next big step will be the “fit-for-55 package” provided in July 2021 by the EU Commission. It is a legal package containing many measures which bring the EGD to a considerable level of maturity.
All of these measures have a broad impact on the fundamentals of the European economy. Discussions, political resistance and broad social debates, therefore, characterize the implementation of the EGD.
However, the EGD experienced its greatest challenge in early 2020 with the Corona pandemic. Europe gradually went into lockdown and had to bear considerable economic consequences. There were increasing calls for the EU to shift its priorities from implementing the EGD to supporting the economy and securing incomes. However, this debate actually only existed for a short time. The EGD was instead refocused by a green recovery program. The motto “Build better back” became the overarching narrative.
The Covid-19 recovery program includes additional funding of approximately €750 billion. It complements the EGD budget. Part of the additional budget is to go directly to EGD programs, such as the Just Transition Fund.
However, a large part of approximately €672 billion is to go directly to the member states in the form of loans and grants (Recover and Resilience Facility). This is the first time the EU has borrowed as an institution for this budget. That in itself is a paradigm shift.
To date, the budget came from the EU member states. Moreover, in order to use the funds, the member states had to draw up plans and submit them to the EU Commission, which in turn checks whether the funds are in line with the purpose of dealing with the Corona crisis.
The EU Commission is assessing whether the plans contribute to environmental sustainability, productivity, fairness and macroeconomic stability. Other conditions are that 37 percent of the funds must contribute directly to achieving EU climate targets and 20 percent to digitalization. The earmarking of funds for “green” recovery is directly linked to the EGD targets.
The funds are distributed according to a certain key that takes into account the various possibilities of the EU member states and the degree to which the funds are drawn down. Accordingly, Germany receives approximately €25.6 billion. Germany only calls up non-repayable grants. On the other side, Italy receives the largest amount, with over €68.9 billion in grants and an additional loan of €122.6 billion.
Germany is using its funds mainly for climate and energy policy – around €12.5 billion – and the digitalization of the economy and infrastructure – around €6 billion. In addition, the education and healthcare sectors as well as the social sector are also supported.
In the climate protection area, this will be used to finance grants for the purchase of e-cars, among other things. It will also be used to fund building refurbishment measures. In addition, there is funding for the hydrogen sector. In the second case, projects for the development of microelectronics and communication technologies as well as investments in the vehicle manufacturing and supply industry will be funded.
Germany’s use of funds from the EU Recover and Resilience Facility is aligned with its national economic stimulus and future package, which was already adopted by the German government in June 2020 to mitigate the consequences of the Corona pandemic.
The size of the national economic stimulus program is €130 billion. Key elements for promoting German climate policy were already included in the package. This includes €11 billion to absorb the costs of promoting renewable energies under the Renewable Energy Sources Act, which would otherwise have led to a substantial increase in electricity costs for end consumers.
In addition, the increase in subsidies for e-car purchases has already been included there. There is also support for the expansion of the nationwide charging infrastructure for e-cars. There are also subsidies in the load transport sector.
The expansion of the hydrogen sector is also of great importance. A total of €9 billion will be used to promote international production partnerships (€2 billion) and the development of domestic electrolysis capacities (€7 billion). For Germany, the reduction of climate-damaging greenhouse gases is of particular political importance. Only recently the German government decided to be climate-neutral by as early as 2045.
The European Recovery Program and Germany’s national Corona Recovery Program dovetail within the framework of the EGD and contribute to achieving the European and German climate neutrality targets with a huge budget. For Europe’s and Germany’s trading partners, this of course will have consequences.
Not only because it will involve instruments such as CO2 border adjustment or a European sustainability taxonomy, but also because it will set a completely different economic growth course. This new course could be a good economic opportunity for new cooperation, especially with Southeast Asia.
The countries of Southeast Asia launched their own comprehensive economic stimulus programs. And there are promising green stimulus approaches. However, green stimulus in the regional perspective, as compared to what has been spent on other sectors, plays only a subordinate role.
Climate protection is often not seen there as an opportunity for economic growth, although a green recovery agenda could prop up the economy enormously. In Southeast Asia, there exists a great economic potential for land and sea management, urban development, the transport sector, the development of a circular economy or the expansion of clean energy supply, which includes the creation of new jobs.
The area of nature-based solutions, in particular, could be an economic driver. On the other side, green practices and green products could enhance the competitiveness of the region in a global market, especially the trade with the EU which has stringent environmental regulations and is paying more and more attention to environmental and greenhouse gas footprints.
The recovery approaches of the EU and Southeast Asia are quite different but cooperation opportunities are growing. The only question is whether Europe`s Green Deal, with its extensive green spending, will create enough market gravity to convince other regions like Southeast Asia to follow.
Dr. Christian Hübner is the Director of the Regional Programme Energy Security and Climate Change in Asia-Pacific of the Konrad-Adenauer Foundation (KAS) based in Hong Kong SAR/PR China. Before 2019, he was the Head of the KAS’s Regional Programme Energy Security and Climate Change in Latin America based in Peru, and also Coordinator for environmental, climate and energy policy within the KAS department of European and International Cooperation in Berlin.
His thematic priorities are energy transition policy, geopolitics of energy security, economic evaluation of climate policy instruments and Blockchain-Technology.