A clean Europe in a dirty world

After decades of failure and frustration, the environmental lobby is beginning to assume a significant role in European politics. The implications will be profound, not least for business and for global trade.

The past six months have demonstrated the growing strength of the green cause across the EU. Protests in London, and many other cities, not only caused major disruption but also appeared to capture the attention of previously uncommitted voters. Reinforced by some serious new reports, including work from Nasa and the International Energy Agency, the protests put the environment on the mainstream political agenda.

In May’s European Parliament elections the Greens won 10.8 per cent of the vote and a record 75 seats. At the national level, a number of countries, led by the UK and France, have committed to achieving net-zero emissions by 2050, although four eastern European nations this week blocked the EU from doing the same.

These new targets come from governments of varying political persuasions and have been accepted without serious challenge. Individual countries have also taken important steps towards a low-carbon economy. Germany, for example, has set a timetable to phase out the use of coal-fired power. This suggests that there has been a material change in opinion among both the public and policymakers. The green agenda now cuts across all other ideological differences that separate the parties.

Companies and investors must be beginning to see that, through a combination of regulation, fiscal measures and technical progress, Europe is set to become a low-carbon economy. According to the latest BP Statistical Review of World Energy, 75 per cent of Europe’s energy needs are now met by hydrocarbons. Given the falling demand for oil, gas and coal it is possible to envisage that figure falling to 60 per cent or less by 2030.

All this may be good for the environment but it represents a substantial loss of value for many assets — from refineries and petrol stations to coal and possibly gas-fired power stations and much of the associated infrastructure.

That is one factor the energy industry and its investors must take into account. The other is the growing recognition among policymakers that climate policy on just one continent cannot be effective, and the likely pace of change could weigh on Europe’s competitiveness and employment prospects.

BP’s Statistical Review shows Europe accounts for 10.1 per cent of global CO2 emissions. On the IEA’s central estimate, by 2040 that could fall to 7 per cent. But global emissions will still be growing and, while positive, Europe’s actions will not have solved climate change. To strive for a clean, emissions-free Europe in a dirty world is pointless.

The UK’s Committee on Climate Change, for example, claims that emissions have fallen by 43 per cent since 1990. While true if measured by production within the UK’s borders, this does not account for emissions from UK consumption, including imports.

This is where the climate agenda begins to shape trade policy. Vague clauses relating to the environment are already part of the EU’s trade treaties but something much more substantive is now in prospect.

France’s President Emmanuel Macron has in recent weeks spoken of the importance of “a border adjustment mechanism” to protect “our companies because of our climate commitments”. A new paper from Think 2030, the platform for scientific policy solutions in Europe, describes what an environmentally oriented trade policy could look like. Given the strength of the Green vote the issue will be high on the agenda of the next European Commission and will shape trade negotiations with the US and others.

Cynics may describe the shift in policy as a protectionist response to the decline of European manufacturing and the pressures of globalisation. The UK’s departure from the EU will weaken the voices of free-trade advocates in Brussels, but the climate agenda is genuine and a strong driving force. Within the international trading system, Europe could begin to demand that environmental standards take primacy over the principle that trade should be open and free of barriers. Extraterritoriality is not unique to America.

The impact will not be instant but could soon begin to affect a wide range of sectors from food to vehicles and even energy itself. Many countries that have been slow to adopt the climate agenda or actively resistant to it could be affected — from the US and Australia to emerging economies such as India and Indonesia.

The open question, of course, is whether tariffs and associated environmental regulations will lead to changes in the climate policies of the US, India and the rest, or whether they will simply provoke retaliation.

The writer is an FT energy commentator and chair of The Policy Institute at King’s College London