Widening the EU’s Geoeconomic and Regulatory Approach to Climate Policy
The EU’s regulatory approach to decarbonization advances sustainability but falls short of promoting regeneration. A just transition for the union, as well as for the world, necessitates Brussels to consider the geoeconomic and political implications of its climate and energy strategies.
This text was published as a chapter in the Carnegie Europe report "The EU and Climate Security: Toward Ecological Diplomacy". You can download the full report here.
The global energy transition is seen as an important response to the growing security challenge of climate change. Going low-carbon will alter the way we produce, what we trade, and with whom we exchange goods and services. It will also impact the security landscape: the pathways toward carbon neutrality will unleash political tensions between those with more and those with less ambition and lead to heated debate around how to get to the final destination. As the EU positions itself as a global climate leader through its European Green Deal, it needs to prepare for new types of external policy challenges and must retool its approach to climate security to meet those challenges. This will involve not just the mainstreaming of climate security into standard instruments of EU foreign policy but also questioning how the EU’s determination to be a global decarbonization leader will impact ecological security more broadly.
The EU’s decarbonization efforts first need to be understood through a regulatory lens. The EU has an extensive regulatory toolbox, which is core to both the EU’s domestic and international power. Indeed, it is in the regulatory and geoeconomic spheres—rather than the hard security sphere—that the EU has real power and better developed tools. Yet, so far, the union has not used these tools strategically in pursuing its external climate security goals. Moreover, the geopolitical spillover effects of the EU’s decarbonization efforts remain underappreciated and unaddressed. As part of a formal, central strategy, the EU needs to determine how to effectively use its geoeconomic and regulatory powers when implementing climate, trade, and foreign economic policies if it is to mitigate the severe external security impacts of decarbonization.
The EU has already experimented with using regulatory tools for geoeconomic ends in relation to energy and climate. In the energy domain, the EU has selectively employed a single market regulation to target Gazprom, Russia’s state monopolist, so as to counter Moscow’s assertive foreign policy. Brussels has also tied some trade agreements to climate action, which clearly is an attempt to use economic means for nonmarket ends. However, none of these efforts is the result of a well-rounded and consistent external climate and energy strategy. Policies regarding the energy transition, in particular, remain in their infancy, and it will be important to invest more in developing an integrated approach to ecological diplomacy so that the EU can help promote a just transition at the global level.
Decarbonization as a Regulatory State Project
The EU acts more like a regulatory state actor than a full-fledged security actor. This logically affects how the EU operates and how it addresses internal and external policy challenges. In essence, the union works through the use of regulations, directives, and communications rather than the ownership, treasury, or direct provision of public services. Liberal by design, the EU cares about economic integration and growth and the creation and maintenance of functioning markets. And by extension, it has developed an elaborate toolbox to deal with all kinds of externalities and to foster the provision of public goods or the prevention of public bads.
The EU’s regulatory approach to energy is reflected in three packages (1996/1998, 2003, and 2009) that liberalize and integrate the EU’s gas and electricity markets; in the 2017 Clean Energy for All Europeans package that aims to move the EU energy system away from fossil fuels; and in the Regulation on the Governance of the Energy Union that synchronizes the planning, reporting, and monitoring of energy and climate measures across the union. These comprehensive legislative measures are designed to shape market structures and the behavior of economic actors.
The EU also takes a regulatory approach to climate change, viewing the problem as stemming from negative externalities. This has led to policies that internalize such externalities. For example, the European Emissions Trading System, the world’s first carbon market, aims to cap and put a price on carbon emissions across the union. The European Green Deal, essentially the EU’s decarbonization megaproject, aims to redesign the economic incentive systems underpinning individual sectors—from the power sector to the housing, industry, transport, and agricultural sectors. For instance, it is rolling out a common classification system detailing which investments are considered sustainable and which are not.
However, the EU does not always follow a liberal doctrine. When it comes to energy security, the EU has adopted a more catalytic role so as to enhance its energy diplomacy, for example by facilitating strategically important liquefied natural gas projects. The European Commission, in particular, has used its considerable agency to erode national energy decisionmaking, shifting powers in external energy policy to the supranational level. Moreover, the EU has proved that it can use or “weaponize” its regulatory toolbox strategically in the geoeconomic space.
The key problem is that the EU is not designed or structured to think about the climate challenge in a strategic, foreign policy–centered way. Climate security is not yet—but should be—at the center of EU external action. While significant, the EU’s climate policy competences are scattered across several directorates and governance levels, including the Directorate-General for Climate Action, Directorate-General for Energy, and even the Directorate-General for Taxation and Customs Union. And though the commission is mandated to negotiate climate agreements on behalf of the EU at the UN Framework Convention on Climate Change, climate policies remain primarily inward-looking. This explains why the EU’s climate security efforts are by and large indirect (see chapter 1), focused on mainstreaming and context shaping.
In primarily taking a regulatory approach, the EU has failed to conceive decarbonization as part of a fully comprehensive ecological diplomacy. Clearly, the preservation of biodiversity and natural habitats are EU policy goals, as is environmental protection (see chapter 6). A plethora of pertinent legal acts—including the Habitats Directive, the Birds Directive, the Water Framework Directive, and the chemicals directive (known as REACH)—testify to that. But the EU’s standing as a global environmental leader has to date derived mainly from its export of domestic rules as part of international regulatory competition. This means the EU has more of an indirect and somewhat passive approach to shaping the global environment than a proactive one. It also means the EU remains a far cry from adopting holistic measures to protect the ecological integrity of ecosystems (see chapter 2).
Emerging Climate-Trade Links
The EU is known for its penchant for proactively shaping global rules and standards. In fact, this is where the EU has arguably exerted most of its policy efforts as an external actor, including in the climate and environmental space. The EU has therefore been described as a formidable global regulatory power. The size of the EU market is second only to the United States’ market. It is fair to argue that the European Single Market was the crucial precondition for the EU regulatory state to emerge as a global actor.
Recognizing that market size is not enough, however, the EU, and more specifically the European Commission, leverages the European Single Market to make market access conditional upon compliance with EU regulations. And because of the market’s prominence globally, EU rules end up becoming global norms. Thus, as a promoter of stringent climate and environmental goals through market regulations, the EU’s sustainability targets become globalized as well and impact the production of goods and services worldwide.
Yet, arguably, conditional market access still is a rather soft approach to exerting external influence. What is more, global sustainability-related norm diffusion is indirect and can be argued to merely constitute a positive side effect of the EU being a lead market with high environmental ambition. This brings in trade as a means to exert direct influence. Because the EU does not have a fully developed foreign policy toolbox, trade increasingly emerges as the second-best mechanism to address external challenges, including climate change. Indeed, the EU is highly competent in leveraging external trade policy to project power.
Over the past ten years, multifaceted climate-trade links have emerged as a result of the EU’s decarbonization ambitions. Free trade agreements (FTAs) now tend to include explicit references and commitments to climate targets. For example, a recent Japan-EU free trade agreement specifically mentions the Paris Agreement and carbon emission reductions. And FTAs with Ecuador, Georgia, and South Korea include sections on trade and sustainable development. In fact, the EU has announced it will no longer conclude FTAs with third parties unless the latter subscribe to the Paris Agreement and ambitious climate targets. Unsurprisingly, the EU-Mercosur Trade Agreement was put on hold due to environmental concerns and some partner countries such as Brazil lacking determined climate action.
The EU’s ambition of being an early decarbonizer is clearly driven by its determination to adhere to the Paris Agreement and to achieve climate neutrality by 2050. Global differences in levels of climate ambition, however, raise the specter of carbon leakage—that is, the offshoring of energy-intensive sectors to countries with less stringent decarbonization targets. To level the playing field for European industries competing against outside competitors that face lower climate policy pressure, the European Commission has proposed a carbon adjustment for imported goods and services at the border, also known as the Border Carbon Adjustment Mechanism (CBAM). A March 2021 resolution by the European Parliament calls for the inclusion of all products covered by the Emissions Trading System and for the revenues from a border carbon levy to be used to fund implementation of the EU Green Deal.
There is, however, another element driving the EU’s ambition. Decarbonizing early will ensure that the EU enjoys a competitive edge in a future low-carbon economy. As such, the CBAM must also be seen as a strategic trade measure that supports European (green) industrial policy goals. While the Green Deal forces European companies to reposition themselves in promising strategic sectors and to future-proof their businesses for a low-carbon environment, the CBAM props up the EU in an emerging global “green race.”
External Security Spillovers
The EU’s regulatory approach as described above may advance the cause of sustainability, but it falls short on promoting regeneration. This deficiency, combined with the EU’s tendency to look inward, may result in significant security spillover problems. There are at least three distinct ways in which the EU’s policies could cause severe negative side effects, beyond those identified in chapter 2.
First, the EU risks putting pressure on the social contracts that characterize some of its neighboring states. Many, if not most, of these states have positioned themselves as the EU’s preferred trading partners. But given that their economies tend to be relatively carbon-intensive, a CBAM could make their export products less competitive, with potentially severe consequences for their domestic economies and people’s livelihoods. As estimates show, countries in northern Africa, the Balkans, and the former Soviet Union would be significantly affected by a CBAM. With few alternative trading options and slow decarbonization pathways, these states are highly vulnerable to this type of trade-related EU climate action. Unsurprisingly, some emerging economies have criticized both the CBAM, calling it “green protectionism,” and the EU’s emerging trade-climate linkages more generally.
Moreover, given that the energy transition will drastically reduce fossil fuel imports, particularly after 2030, assets in oil-rich economies will be stranded, with likely consequences for economic and political stability. Many such economies are located in the EU’s neighborhood (for example, Algeria). This problem—coupled with, say, exports from Morocco and Tunisia potentially facing restricted access to EU markets and the already strained social contracts in states characterized by a relatively young population—could cause growth to stagnate and authoritarian rule to break out across the North Africa.
The European External Action Service recognizes the importance of keeping resource-rich economies stable. However, the EU needs to do more to mitigate the potentially explosive external consequences of a CBAM: the fact that the Directorate-General for Taxation and Customs Union is to oversee a CBAM speaks volumes about how the issue has so far been perceived: as a technical and regulatory one rather than a clear climate diplomacy one.
Second, the EU risks leaving developing countries behind. The EU sees clean technology leadership—in the energy domain and beyond—primarily as a domestic precondition for excelling in a Paris-compatible future. The flip side of the coin, however, is that not everyone will share in the benefits of this know-how due to intellectual property rights (IPRs). While manufactured products such as solar photovoltaic panels or clean tech appliances are increasingly available to all at accessible prices, the know-how underpinning their production and the advanced business models coming with their deployment is not.
This presents a problem particularly for the Global South. The envisaged co-benefits of ambitious decarbonization and stringent climate change policies have been, among others, green job creation and the prospect of leapfrogging toward a green economy. But these benefits will not materialize if low-carbon technology transfers do not happen in developing nations. Though the EU has pledged to forge clean energy partnerships, it sticks to its position on IPR protection, noting that it “incentivises investments in green and climate change mitigation technologies.” This stance clearly reflects the interest of a sizeable industrial sector and the perceived imperative of strategic positioning in an emerging green race. It may also reflect the fact that the EU—as a regulatory state actor that promotes liberal market economies—cannot relax its IPRs as a principle.
A low-carbon energy transition that gives the EU a competitive edge certainly is not a problem per se. But a green race among clean technology leaders will end up depriving less developed nations of economic opportunity. Moreover, recent research shows that an already existing divide between leaders and laggards in the energy transition is being further deepened by the direction of the financial and policy responses to the coronavirus pandemic. If the EU is unable to connect the dots here, it risks creating new cleavages and climate security challenges, with potentially unsettling geopolitical consequences in developing or fragile countries as well as in Europe’s neighborhood.
Third, the EU risks exacerbating the human security challenge, which includes issues directly related to climate and energy justice. As research shows, the energy transition will likely fuel a “decarbonization divide” between those enjoying clean technologies and those bearing the costs (for example, exposure to toxic e-waste scrapyards, child exploitation in cobalt mines, or gender disempowerment in the extraction of resources and raw materials needed for manufacturing low-carbon technologies) (see chapter 2). The security impact at the individual and group levels is no less important than at the national and regional levels, and as such, it is important to consider the negative impacts of decarbonization on habitats, equality, and social inclusion. Questions need to be raised around energy justice—that is, justice related to the distribution of costs and benefits, procedure (for example, inclusive decisionmaking), and recognition of different social groups and their needs.
The EU has not fully assessed its decarbonization efforts in the context of ecological destruction, gender inequality, or child labor outside its territory. Creating a regenerative circular economy, a key objective of the EU Green Deal, will help alleviate some of the challenge here, as it lowers import needs. But again, this is not because human and ecological security considerations drive the circular economy. Instead, the European Commission cites concerns such as a limited supply of critical raw materials, excess waste, and lower throughput. Going forward, questions also will emerge around forging privileged energy partnerships for the production and export of green hydrogen. Here, the challenges will be to ensure the socially and environmentally sustainable production of green hydrogen and to balance local development needs with the EU’s interest in securing, in a climate-friendly way, a sufficient hydrogen supply for their hard-to-decarbonize sectors.
The Call for EU Action
The world’s second-largest economy going low-carbon has significant geoeconomic and political implications, but the EU’s institutions are not set up to effectively manage them. It is time this changed. Clearly, as pointed out in chapter 6, a mere “internationalization” of the European Green Deal approach will not be sufficient to address the wider geopolitical and human security challenges borne from the EU decarbonization pathway. So what should the EU do to attune its geoeconomic strategies and regulatory power in support of a fully developed understanding of climate security or ecological diplomacy? The answer lies in a three-pronged approach.
First, the EU needs to adopt a whole-of-government approach to mitigating the external effects of the EU Green Deal. The potential security implications of the CBAM need to be vetted. Sectoral stovepipes need to be broken up. And institutions responsible for the Green Deal should align their objectives and efforts. This will help achieve the broader goal of ensuring that decarbonization does not remain an inward-looking bureaucratic process and that the EU takes a holistic approach to managing decarbonization’s inevitable external side effects. This will also spur the EU to design a comprehensive strategy for managing the transition to a low-carbon global economy. It will enable the EU to design a visionary foreign policy that works in synergy with the EU’s commercial, regulatory, and industrial policies rather than separately as a short-term, reactionary, and constrained European arm.
Second, the EU should better link its approaches to climate, trade, and development policy. This is crucial for enabling the EU to fully engage with China and Africa, as called for in chapter 5. It is also critical to ensure that an ambitious domestic decarbonization agenda coupled with determined global climate diplomacy works to support poorer nations in their decarbonization efforts. The European Commission has hinted it may exempt some developing nations from carbon levies. But even if it does, these nations will still face structural barriers in accessing clean finance and technology. For example, a recent report by Sustainable Energy for All on twenty high-impact countries concluded that renewable finance remains at only one-third of what is needed to achieve UN Sustainable Development Goal 7 by 2030. Reducing the low-carbon gap, or at least preventing it from widening further, is essential to secure economic prospects and opportunity in many countries of the Global South. This requires focused technology transfers for low-carbon solutions, well-targeted energy partnerships that facilitate clean energy investment, and a specific geographical focus on the EU’s neighborhood.
Third, the EU needs to start integrating energy and climate justice components into its processes and institutional procedures. The EU is aware of the distributional consequences of going low-carbon and has set up a Just Transition Fund to buffer the economic and job effects for mining communities and coal-dependent regions. But this applies only internally; the EU’s external support is by and large limited to contributing to the UN-operated Green Climate Fund that supports the Global South. The union should do more to reconcile its pursuit of a domestic green development pathway with its ambition to be a global norm setter. To this end, the core justice notions related to distribution, procedure, and recognition could underpin the EU’s external action on decarbonization.
The EU must acknowledge that the threat to planetary and human security not only lies in exogenous climate change but also in the ways the union chooses to fight the climate crisis. Decarbonization is a necessary step toward stemming climate change, but it is just one element of a necessary broader response and could have severe negative side effects. Some are calling for a system-level approach to EU external climate relations in order to move toward an ecological diplomacy. Rethinking competencies regarding the Green Deal, integrating policy approaches, and mainstreaming justice principles in EU action across all levels may not be enough to achieve this, but these efforts could help the EU come to grips with the important normative, environmental, and distributional consequences of its decarbonization megaproject.