Research
June 6, 2024
European Union
Economic Studies
Center on Regulation and Markets
The European Commission1 has established six priority areas outlining the political goals for its current governing period (2019-2024) aimed at creating a sustainable and resilient Europe. The European Green Deal is one of these priorities2, aimed at making Europe the first climate-neutral continent, and a leader in sustainable development. This article will outline the Green Deal and its policies, goals, and measures, with a focus on the challenges and solutions involved for companies.
EU Commission President Ursula von der Leyen describes the 2020s as the “make or break decade” for climate action. A stunning example is the summer of 2022: Almost 50% of the area of the EU suffered from the most severe drought in the last 500 years, yet another sign that climate change is accelerating. The Green Deal has three central goals in response to this global crisis: (1) no net emissions of greenhouse gases by 2050, (2) economic growth decoupled from resource use, and (3) no person and no place should be left behind. The first goal is a direct response to the global climate crisis and should ensure that the European Union fulfills its obligation under the Paris Agreement. The second goal addresses the challenge that economic growth and development can lead to higher material and energy use and thus to more waste, emissions, and destruction of nature. The third goal acknowledges the importance of ensuring societal stability during the transformation to become a climate neutral continent.
On the path towards climate neutrality by 2050, the EU aims to reduce its Greenhouse Gas emissions by 55% from 1990 levels and to increase the share of renewable energy sources to 40%. Both goals are to be achieved by 2030. In addition, energy efficiency should increase by 32.5% by 2030. The achievement of these objectives depends on investments in climate action and environmental sustainability, and the European Investment Bank (EIB) intends to help facilitate €1 trillion of investment until 2030. Furthermore, “all relevant EU legislation and policies” are planned “to be consistent with, and contribute to, the fulfillment of the climate neutrality objective.”
A major challenge will be the decarbonization of the energy sector, industry, and buildings. The focus here will be on innovations and new technologies, for instance for hard-to-abate industries like steel and cement, or on increasing the share of renewable energies and improving energy efficiency. The main policy measure for decarbonization of these sectors is to further expand the European Emission Trading Systems (ETS). To prevent carbon leakage, sectors at risk are currently being supported through free certificates for the ETS. However, within the Green Deal framework this approach is planned to be replaced by a new carbon border adjustment mechanism to address the issue of unfair competition between EU-based production required to participate in the ETS and imports with lower greenhouse gas (GHG) costs. The focus of the Green Deal regarding buildings is on energy efficiency, for instance via insulation and substituting fossil heating systems with clean district heating or with heat pumps. Mobility policies in the Deal focus on stricter CO2 limits for cars and vans and the electrification of individual mobility (55% reduction of CO2 emissions from cars by 2030 and zero emissions from new cars by 2035) and on the expansion of public transport.
To reach the goal “no person and no place is left behind,” the Green Deal proposes a new Social Climate Fund to provide dedicated funding to Member States to help citizens finance investments in energy efficiency, new heating and cooling systems, and cleaner mobility. The Social Climate Fund will provide at least €86.7 billion of funding to Member States for the period 2026-2032, based on a targeted amendment to the multiannual financial framework. The majority of this funding will come from the auctioning of allowances from a new emission trading system (ETS2), which will cover buildings and road transport fuels and be introduced in 2027, as well as of allowances from the existing ETS. The remaining budget will be covered by a mandatory co-financing of 25 % by the receiving Member States.
A further pillar to achieve climate neutrality is the transition towards a circular economic system. This is described in the EU circular economy action plan, which focuses on key value chains, i.e., electronics and information technology, batteries and vehicles, packaging, plastics, textiles, construction and buildings, and finally on food, water, and nutrients. In the EU´s own words, the bloc “needs to accelerate the transition towards a regenerative growth model that gives back to the planet more than it takes, advance towards keeping its resource consumption within planetary boundaries, and therefore strive to reduce its consumption footprint and double its circular material use rate in the coming decade.”
Sustainable and circular products, services, and business models should become the norm within the EU’s plan. The circular economy action plan employs a lifecycle perspective that puts the entire physical flow of materials and products under scrutiny, from production to consumption to repair, reuse, remanufacturing, and recycling. Companies are compelled to optimize their processes and linear value chains to circular, decarbonized, and sustainable systems. Examples of circular activities and an analysis of the development of the topic of circular economy are described by Schöggl, J.-P., Stumpf, L., and Baumgartner, R.J. (2020).3 As such, the European idea of a circular economy goes far beyond a better waste management system, although strict recycling targets are also defined. One main component of this action plan is the sustainable product policy legislative initiative. The established Ecodesign directive4 that currently focuses on the energy efficiency of products will be extended and aims to establish sustainability principles that will improve product durability, reusability, upgradability, and reparability. It also seeks to address hazardous chemicals in products, increase recycled content in products, enable remanufacturing, and restrict single-use plastics. Additionally, it introduces a ban on the destruction of unsold durable goods and incentivizes product-as-a-service business models, mobilizes the potential of digitalization, and rewards product sustainability performance. By employing these principles, the aim is to reduce carbon and environmental footprints.
The proposal also suggests the creation of a digital product passport to electronically register, process, and share product-related information amongst supply chain businesses, authorities, and consumers. This is expected to increase transparency both for supply chain businesses and for the general public and increase efficiencies in terms of information transfer. It will probably also provide a market-intelligence tool that may be used for revising and refining obligations in the future. While regulatory work is still ongoing, research is providing first concepts of digital passports and initiatives such as Gaia-X and Catena-X are actively developing technological frameworks.
Furthermore, the Green Deal addresses circularity in production processes. Specifically, the industrial emission directive, on which a provisional agreement was reached, will integrate circularity into the best available technique reference documents. These documents describe the technological standards that industrial plants must adhere to in order to obtain permits. By integrating circularity into these documents, the industrial emission directive aims to encourage industrial plants to adopt circular production processes that reduce waste and increase the reuse of materials. Additional elements address the support of industry symbiosis by industry-led reporting and certification systems, the use of digital technologies for tracking, tracing, and mapping of resources, and the promotion of the uptake of green technologies via the EU environmental technology verification system, which offers a voluntary verification of whether new technologies can be considered green. Waste policies will be updated to increase recycling rates and waste exports are in focus so that recycling takes place within the EU. This is complemented by the goal to establish markets for secondary raw materials. The commission further stresses the job growth potential of a circular economy and aims to support the social dimension of this transition with European Pillar of Social Rights (COM(2020) 14 final).
The EU Taxonomy (Regulation (EU) 2020/852) and the Corporate Sustainability Reporting Directive (CSRD) (Directive (EU) 2022/2464) are two other central elements of the Green Deal focused on companies. The EU Taxonomy provides a classification scheme that guides investment towards more environmentally sustainable activities. The CSRD mandates sustainability reporting according to common standards.
Additionally, the EU aims to enhance international collaboration to support the transition towards a circular economy. This involves proposing a Global Circular Economy Alliance and establishing a stronger partnership with Africa. The EU also promotes circular economy principles by integrating them into the accession process with the Western Balkans and into free trade agreements. The goal is to achieve a global agreement on plastics and to create a more sustainable future for all.
The Green Deal as a comprehensive policy approach will have major implications for companies doing business in the EU, both in terms of compliance with new regulations and opportunity for innovation and investment. Compliance costs could be significant for some companies, but there are also potential benefits derived from being at the forefront of developing sustainable and circular business strategies or from developing new green technologies. EU leadership expect that the benefits will outweigh the costs for businesses as well as citizens and the environment.
To respond to this new comprehensive regulatory environment and to meet the increasing consumer demand for green and sustainable products and services, we recommended that companies integrate sustainability into their business models and strategies. Such strategies have gained traction in recent years as businesses have realized the importance of taking environmental and social responsibility into account. The benefits of implementing a corporate sustainability strategy include enhanced branding opportunities, technological and business model innovations, decreased costs through increased resource and energy efficiency, and improved public image and license to operate. There is no one-size-fits-all approach to developing a corporate sustainability strategy; each company will have to develop its plan specifically to meet its own needs and objectives.
That said, the following points describe the general steps that should be taken during the planning and implementation of such a strategy.5 The starting point of this process is the definition of the vision for the company regarding sustainability. Questions to consider are: What is the purpose of a company from a sustainability perspective? How does a company aim to contribute to the solution of global sustainability challenges? General and systemic sustainability principles (for instance, those defined by the Natural Step) can inspire the definition of the vision.
The second step is to determine the baseline—what is the status of the company in terms of sustainability? Where are gaps between the vision and the current status? Resource consumption, including water and energy, emission to air, water and soil, the amount of (toxic) waste, recycling activities, and environmental issues along the value chain of products and services are determined from an environmental sustainability perspective. In addition, social sustainability issues like workers’ health and safety, the human rights situation within the company and along its value chain, consumer safety, and consumer rights are to be analyzed. And business risks and opportunities related to sustainability should be identified.
The next task—based on this analysis—is to define the strategic focus. This focus can be on risk management and compliance, on efficiency, on license-to-operate and growth, or on true sustainability leadership. Depending on the strategic focus, specific goals are defined. Each goal is further specified with target values, a target date, responsibilities to achieve the goal, and resources for their implementation. These goals thus translate vision and strategy into activities. Examples include reduction targets for greenhouse gases in order to at least be compatible with the UN Paris Agreement and the EU climate targets (-55% by 2030). Other goals can address other emissions, energy requirements, waste, or packaging. With regard to social sustainability, goals can address a fair and healthy working environment, stakeholder relations and partnerships, or human rights along the value chain. From an economic perspective, the core element of a sustainability strategy is to differentiate from competitors to ensure the long-term success of the company. From a sustainability perspective, this can only be achieved if stakeholders, society, and nature are fully accounted for beyond conventional customer orientation.
It is essential that a positive contribution is made to sustainable development in addition to avoiding negative effects. In other words, the company itself should act sustainably and help its customers, suppliers, stakeholders, and society become sustainable. Additional key components of a successful corporate sustainability strategy are effective communication, coordinated implementation, and ongoing monitoring and review. Effective communication ensures that all stakeholders (employees, customers, investors) understand the company’s stance on environmentalism and social responsibility. Coordinated implementation allows for quick action when necessary while ensuring that projects are completed properly and within budget. Ongoing monitoring and review allow for adjustments to be made as needed based on actual results rather than assumptions or initial projections.
The era of the naïve globalization is over; the geopolitical situation is more challenging compared to the period of 1990 to 2014. Especially for Europe, Russia´s invasion of Ukraine is shaking the European idea that free trade and economic cooperation will positively influence international relations. Companies must deal with this multipolar, less predictable world while facing global sustainability crises like climate change and biodiversity loss. Thus, a more resilient approach for companies is needed and implementing a corporate sustainability strategy is a starting point. Such a strategy can enhance their adaptability in navigating geopolitical uncertainties while strengthening competitiveness, as sustainability engagement can mitigate risks, foster innovation, and open new markets. This means that a smart sustainability transformation of a company can be beneficial for creating economic value for the company while contributing to the goals of the Green Deal and to a more sustainable future.
The European Green Deal is a comprehensive plan to make the EU climate neutral by 2050. It includes several ambitious targets, including reducing greenhouse gas emissions (GHG) by at least 55% below 1990 levels by 2030, and investing in renewable energy sources. In comparison, the U.S. Inflation Reduction Act (U.S. IRA) is estimated to reduce U.S. GHG emissions by 31-44% by 2030 relative to 2005 levels.6 However, the EU fears an unfair economic competition due to higher subsidies coming with the U.S. IRA. Therefore, a Green Deal Industrial Plan was announced in February 2023 aiming to provide a more supportive environment for the scaling up of the EU’s manufacturing capacity for net-zero technologies and products required to meet Europe’s ambitious climate targets.
The Green Deal has been welcomed by many as a necessary step to address the climate crisis, but success of the European Green Deal will depend on the long-term willingness of member states to invest in its implementation and on their ability to work together to meet its objectives. This especially holds in the face of growing political division and concerns about the Deal’s impact on the European economy. This fueled resistance from member states against the ban on internal combustion engines, the Nature Restoration Law (COM(2022) 304 final, 2022/0195(COD), or the Corporate Sustainability Due Diligence Directive (2022/0051(COD). Document No. 6145/24). Despite these challenges, the Green Deal offers opportunities for companies to innovate their strategies and business models. Companies can be active change agents in this transformation and gain advantages by doing so. One should not expect the EU to lower its political ambition in this policy area in the coming years.
Authors
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Economic Studies
Europe European Union
Center on Regulation and Markets
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