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European Green Deal Could Alter Trade, Investments and Politics Around the World

January 14, 2022 by Kate Michael
European Green Deal Could Alter Trade, Investments and Politics Around the World
Jeremy Shapiro, research director at the European Council on Foreign Relations.

WASHINGTON — The European Union has claimed the role of global climate champion by taking charge of climate change discussions and passing an ambitious set of policy initiatives that codify the bloc’s push for climate neutrality by 2050. But the EU’s plan to get to net-zero emissions may impact more than the environment worldwide. The European Green Deal might also alter trade and investment patterns, which could economically and politically destabilize partners around the globe. 

“Climate policy is intensely geopolitical. That implies that climate policy is going to have both elements of international cooperation and elements of international coercion,” Jeremy Shapiro, research director at the European Council on Foreign Relations, shared with the Wilson Center, a nonpartisan policy forum. 

“To make Europe climate neutral by 2050, the EU has to reshape the way energy is used. … Elements of the [European] Green Deal are going to be resisted by some parties and … engender a response.”

The EGD, legislation passed in July 2021, is an effort to transform the European economy while reducing greenhouse gas emissions and achieving climate neutrality. The initiative defines EU environmental priorities in the decades ahead, but doesn’t clearly outline how other arrangements will need to be reimagined as a result of the push toward greening.

Because of the EGD’s wide-reaching effects, it will undoubtedly alter trade and investment patterns and have profound consequences for global policy priorities and foreign relations as well.  

“If the foreign policy component doesn’t move, then the entire effort is going to collapse,” warned Shapiro, outlining four essential channels for repercussions that the European Council on Foreign Relations detailed in a recently published report

First, a move away from using fossil fuels will starkly affect oil- and gas-producing countries in EU neighborhoods — like Russia, Algeria and Norway — and deprive those countries of the market for what is likely their main export. For regimes who rely on fossil fuels for survival, there will be economic and political destabilization that will impact the region, if not the world. 

Even if they do not trade with European countries, the bloc’s transition to alternative energy sources will negatively affect oil- and gas-producing countries. Without Europe’s crude oil imports, global energy markets will experience a decrease in demand, which will result in depressed prices, leaving these countries with lower GDPs.

European Green Deal policy initiatives promote clean energy and clean technologies but create energy security risks. 

Europe may import less petroleum as a result of its commitment to reduce emissions, but will likely remain a major net importer of energy, including green hydrogen, which is produced in China and other places that have an abundance of sun. And, since Europe itself has no significant mining and processing capabilities of the critical raw materials and metals underpinning new, green technologies, the EU will be trading a dependency on Russian oil for a dependency on rare earth minerals, which also generally come from China.

“If Europe just changes [dependency] from Russia to China, that will hardly be a significant advance,” Shapiro said. 

Lastly, he worries about the repercussions of the deal on Europe’s international competitiveness. 

Complying with EGD regulations will undoubtedly come at significant cost for European firms. There may be friction from emissions-intensive companies in Europe that experience this and want protection from competition that doesn’t have the same carbon requirements. Such companies may seek to lessen their losses by relocating out of the EU. 

Additionally, there may be retaliation from trade partners or competitors who are unhappy with proposed measures placed on them when doing business within the bloc. 

To avoid this, the EU has already suggested carbon tariffs — or carbon border adjustment mechanisms — that ensure all goods consumed in the EU are treated the same, but many trading partners are viewing this as a trade barrier or a form of green trade protectionism.

If the EU can’t export its standards, incentivize other countries to decarbonize, and create enforceable multilateral agreements, the bloc’s overall competitiveness may be compromised as companies seek to do business elsewhere.

Shapiro contends that the EGD, while ostensibly an environmental policy, is actually a foreign policy because climate change is a global concern, and the deal’s environmental policies necessitate trade and investment policy adjustments as well. 

“I’m very worried about the politics of the [European] Green Deal in Europe right now,” Shapiro admitted, citing a general revolt about increasing energy prices and a backlash against some other policies.

“Expect to see some difficult politics on climate in the EU [that] haven’t been seen up to this point,” he said. “Anybody who tells you that climate policy is merely about getting together to solve a global problem is, I think, trying to sell you something.”

Kate can be reached at [email protected]

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