Greening the EU: New targets and less regulation – especially in the automotive sector

Written by Felix Schulz, Member of the Editorial Team of Libertas 

The European Commission introduced a new CO2 target of 55% by 2030. It is not a mere number which increased by 15%, but a paradigm shift during a global pandemic which will affect every corner of our economic life for the next years to come.

Ursula von der Leyen, President of the European Commission, introduced more ambitious emission targets during her State of the Union speech. On the 16^th of September she proposed to reduce EU greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels and substantially increased the former 40% target. Now the European Parliament and the Council of the European Union have to approve her ambitions, which is expected to go through smoothly.

The new target is a remarkable step towards a carbon free continent by 2050. Remarkable not only because of the ambitiousness, but also because of the circumstances. We still live in a global pandemic, which threatens our health and economic wellbeing. However, the Commission’s impact assessment not only suggested the feasibility of a more ambitious CO2 target, but also promised economic growth and additional jobs in Europe. Nevertheless, real implications of a steeper pathway towards decarbonization are unpredictable and how to fully address these challenges ahead is still an open question.

But several things are certain so far. For instance the reform of several important initiatives next summer, which have to comply with the new target. Those reforms include: directives about renewables, energy efficiency and taxation, the EU emission trading system (EU ETS) and a feasible carbon border adjustment mechanism. Despite from that, I identify two main approaches, which are paramount for a successful transition towards a carbon free economy. First, the EU ETS should be expanded to all sectors. Second, the EU should have a coordinated industrial policy, which provides investments for reaching market maturity in many necessary carbon neutral technologies and also provides enough leeway for Member States to address individual challenges like just transition.

But why is the ETS paramount? So far it covers around half of the CO2 emissions in the EU and reaches all its emission targets. But transport, agriculture, buildings and waste are not included. These sectors are part of the “effort sharing legislation”. Here, each Member State has individual and binding emission targets, which collectively deliver a comprehensive emission reduction. In the automotive sector for example many different policies are at play. The main instrument is on the EU level the directive for “CO2 emission performance standards for new passenger cars and for new light commercial vehicles”. It sets emission targets for automobile manufacturers and penalizes breaching the objectives. On the national level various complementing measures exist. Since passenger cars are responsible for two thirds of all emissions it is absolutely necessary to set incentives for decarbonization. At the same tim overregulating and a planned economy in times of Corona will weaken the innovative potential of the industry. That is why expanding the EU ETS to all sectors would be instead be a better option.

The automotive sector is part of the key technologies within the EU and its supply chains are present all over Europe. It provides innovation, creates jobs and wants to contribute to the Paris Agreement, but at the same time, the Corona crisis torments the industry. Hence, we face a challenging situation: On the one hand the industry needs to become more sustainable and on the other hand the economic outlook worsens. Instead of the current rigid legislation in place, EU ETS provides the opportunity to overcome this situation. The market based instrument is flexible enough in times of crises, because it reacts to demand and supply changes, and ensures the compliance with emission targets after the economy starts growing again. For the automotive sector it would mean creating an incentive for emission free cars. Once the price of allowances increases, consumers will shift towards battery electric or fuel cell cars. Furthermore, it generates revenues which can be reinvested for fast charging and other necessary innovations.

Additionally, we need to complement the EU ETS with substantial public funding. The most recent report of the International Energy Agency (IEA) has found that most low-carbon technologies needed for a climate-neutral future are still in their prototype stage. The next big investment round to commercialize these will only begin around 2030. The recovery fund of the EU delivers a good opportunity to accelerate this transition process and shift technologies towards the demonstration phase before finally reaching market maturity. But EU investments are not enough and national funding has to complement necessary investments for demonstration projects. For the automotive sector it would imply R&D for batteries, fuel cells, and charging infrastructure.  Furthermore, the additional funding is also important for a just transition of supply chains. Across Europe manufacturers have to find ways of how to transition from high-maintenance and complex fuel engines towards low-maintenance and simple battery technologies. Taking all this into consideration public investment in innovation is the stepping stone towards a feasible transitioning of the automotive sector.

Yes, politicians love regulating, but it is not what our society needs. Our society needs to emit less CO2 in all sectors. Therefore, we should trust climate instruments like the EU ETS, which already proved valuable, and expand it to other sectors, as the automotive one. Combined with a coordinated industry strategy, looking at innovation and just transition, Europe might become the first carbon free continent. But we cannot afford to change targets as we go.

About the author: 

Felix Schulz is a young liberal from Germany. Since 2015, he is a member of the FDP in Germany and joined the young liberals in the beginning of the year, where he is also a member of the editorial team. Just after his studies, he went to Ukraine for the Friedrich-Naumann-Foundation.