Executive summary

European Commission president-designate Ursula von der Leyen has made climate change a top priority, promising to propose a European Green Deal that would make Europe climate neutral by 2050. The European Green Deal should be conceived as a reallocation mechanism, fostering investment shifts and labour substitution in key economic sectors, while supporting the most vulnerable segments of society throughout the decarbonisation process. The deal’s four pillars would be carbon pricing, sustainable investment, industrial policy and a just transition.

First: a meaningful carbon price should be established for all sectors, by strengthening the EU emissions trading system (ETS) and by pushing EU countries to increase the price for emissions not covered by the ETS. To ensure a robust mechanism against carbon leakage, a carbon border tax should be prepared. However, such a measure will be extremely politically challenging, and the EU’s future climate policy should not rely on its successful implementation. Other instruments should therefore be put in place first, including subsidies for low-carbon exports and stricter environmental standards importers would have to comply with to access the EU market.

Second: the carbon price should be complemented by a sustainable investment strategy that pushes companies to switch technologies and promotes behavioural change among citizens, offsetting any rising costs they face because of higher carbon prices. Green investment should be promoted by shifting current EU funds towards this purpose while enabling EU countries to support green investment, and by incentivising private investment through regulatory measures and through support for European promotional banks.

Third: European industry should be strengthened through support for disruptive green innovation; by creating the conditions for innovative, green, European companies to flourish (for example through new product standards and via carbon-based contracts for difference to ensure competition between companies for the most efficient technologies); and through measures to export the European Green Deal on the back of a reform of EU neighbourhood and development policy.

Fourth: the adverse social consequences of climate policies should be taken into account and minimised in each European climate policy proposal. Unavoidable impacts should be addressed by targeted compensation measures. The scope of the European Globalisation Adjustment Fund can be broadened and the mechanism adjusted to aid the transition in coal-mining regions.