The Economic Challenge of Europe's Green Energy Transition
The European Union's (EU) energy project to move towards green and sustainable energy that respects the environment faces several challenges, the main one being to find the funds to carry it out because it involves very significant costs.
The European Green Pact is a great challenge to move towards a greater implementation of clean energy and this implies important economic transformations. The aim is to achieve 40% renewable energy production and to reduce carbon emissions by at least 55% by 2030 in the Old Continent. The main objective of the European Green Pact is to achieve climate neutrality or net zero emissions by 2050. A major challenge.
The Bruegel Foundation has highlighted this issue in a report on the cost of the EU's green energy transition.
The Bruegel think tank divides the huge amount of money to be spent on the transition into three categories: energy supply, energy demand and transport.
Here the EU can err on the side of not taking everything into account because it does not include all the costs associated with the transition and ignores, for example, financing costs that can be significant in themselves.
As the Brueghel Foundation points out, ‘the cost of financing investment will be significant for cash-constrained agents, and public finances will need to intervene with risk mitigation tools for private investors’.
In addition, a report published on the Oil Price website also points out that the EU will need to increase subsidies for the energy transition in order to motivate private investors to provide funding in the face of the large amount of financing required.
Private investment is essential for this task in the energy sector and the business and economic fabric in general in order to be able to take on this great challenge, and guarantees and aid or subsidies must be given to the private sector (such as direct aid or tax exemptions) to encourage them to put their money into this sector. This would entail a large outlay for the public coffers.
It is estimated that the European Union will need to spend 1.3 trillion euros each year until 2030 for this energy transition. Looking further ahead, the price tag for the energy transition rises to 1.5 trillion euros per year and remains so until 2050 to achieve the goal of climate neutrality or net zero emissions balance by that year, as planned by the EU.
This grand target entails emitting into the atmosphere only those greenhouse gases that nature can absorb, i.e. forests, oceans and soil.
To achieve climate neutrality, as officially stated, the European Union is deploying a plan with actions that are geared towards these main goals:
- Ensure a just and balanced ecological transition.
- Protecting human life, restoring biodiversity and reducing pollution
- Moving towards a clean and circular economy
- Helping companies to become leaders in clean products and technologies.
Key initiatives of the European Green Pact
According to official information, the European Union has taken ambitious and innovative measures under the main priorities of the European Green Pact, including the following:
Climate
The Target 55 package, adopted in 2021, includes a series of legislative measures to meet the target of reducing net greenhouse gas emissions by at least 55% by 2030, an intermediate step towards achieving climate neutrality.
Among the measures in the package are the reform of the EU Emissions Trading Scheme and the implementation of the carbon border adjustment mechanism, which seeks to ensure that the EU's emission reduction efforts are not undermined by the offshoring of production abroad.
The Social Climate Fund has also been established to support households, micro-enterprises and transport users, which are the sectors most vulnerable to the effects of the new emissions trading scheme.
In addition, the European climate regulation has been approved, which converts climate commitments into legal obligations, ensuring that climate neutrality targets are achievable and verifiable. This regulation establishes a framework for monitoring and reviewing Member States' progress towards achieving these targets.
Energy
Decarbonisation of the energy system is fundamental to achieving climate objectives. The European Green Pact focuses on three key principles for the clean energy transition:
- Ensuring secure and affordable energy supply.
- Developing a fully integrated, interconnected and digitised EU energy market.
- Prioritising energy efficiency, improving the energy performance of buildings and developing an energy sector based largely on renewable sources.
The European Commission's main objectives to achieve this are diverse, such as building interconnected energy systems and better integrated grids to support renewable energy sources, developing the potential of offshore wind energy or promoting innovative technologies and modern infrastructures.
To meet the EU's 2030 energy and climate targets, EU countries must establish a 10-year national plan for the period 2021-2030.
Industry
The European Industrial Strategy supports the competitiveness and sustainability of European industry. It promotes innovation, sustainable growth and resilience, helping industry to lead the transition to a green and digital economy.
Biodiversity and ecosystems
The protection and restoration of biodiversity is the essential component of the Biodiversity Strategy 2030. This includes expanding protected areas, restoring degraded ecosystems and reducing the use of pesticides to promote healthy ecosystems.
In addition, the Green Deal promotes a circular economy, where production and consumption cycles are designed to minimise waste and empower consumers. To this end, a Circular Economy Action Plan is envisaged with more than 30 measures covering the entire life cycle of products: from design to repair and reuse, including waste management.
Agriculture
The Farm to Fork Strategy aims to ensure sufficient food while supporting and promoting more sustainable food production, consumption and healthy diets.
Transport and mobility
The Green Deal aims to reduce transport emissions by 90% by 2050. Decarbonisation of the transport sector is therefore at the heart of the green transition. The European Green Pact promotes more sustainable mobility by ensuring EU connectivity.
In this framework, the Euro 7 regulation sets additional standards for vehicle emissions that also cover other pollutants. In addition, the development of infrastructures for electric vehicles, research into alternative fuels such as hydrogen and the greening of freight transport are encouraged.
Funding and development
The Commission is committed to mobilising at least ¤1 trillion in sustainable investment over the next decade. EU countries must devote at least 37% of the funding they receive from the Recovery and Resilience Mechanism to achieving climate goals.
In addition, the Commission has launched the European Green Deal Investment Plan. This also includes the Just Transition Facility, which aims to promote a fair and just transition to a green economy that leaves no one behind.