The EU Can’t Separate Climate Policy From Foreign Policy

In December 2019, the European Commission introduced the European Green Deal, an ambitious policy package intended to make the European Union’s economy environmentally sustainable. The goal is to decouple economic growth from the reliance on natural resources, especially fossil fuels, and to create an EU economy with zero net emissions of greenhouse gases by 2050. This represents, to date, the most aggressive and far-reaching effort undertaken by a major economy to counter climate change. 

To achieve this ambitious target, the EU will have to unleash a torrent of new climate and energy legislation. Among other steps, the bloc will need to expand its emission trading system—a “cap and trade” program that allows companies to swap allowances to emit greenhouse gases—to new sectors and close loopholes that allow some emissions to escape regulation. Meanwhile, the union will have to tighten energy efficiency standards, promote sustainable agriculture, and create incentives for producers and consumers to switch to renewable energy sources.

But the European Green Deal is more than just a domestic policy measure: it is an overhaul of the EU economy that will fundamentally change relations between the union and its trading partners. Its effects will be felt far beyond Europe’s borders. A transition away from fossil fuels that merely reduced the EU’s dependence would not do much to mitigate climate change, since the EU accounts for less than ten percent of global greenhouse gas emissions. Worse, if the Green Deal reduced European emissions only by encouraging the EU’s trading partners to burn more fossil fuels, it would have no positive impact at all. The only way the policy can substantially affect climate change is if the EU works closely with countries outside the union, especially the energy exporters on which the EU relies. Simply put, the Green Deal cannot represent merely an environmental or economic reform: EU policymakers must treat it as a foreign policy initiative.

WINNERS AND LOSERS

The EU imported more than 320 billion euros worth of fossil fuel energy products in 2019. A massive reduction in this flow would restructure EU relations with major suppliers, such as Algeria, Azerbaijan, Kazakhstan, Libya, and Russia, whose economies depend heavily on energy exports to the EU. The end of Europe’s fossil fuel dependency would adversely affect them and could even destabilize their governments. And because Europe accounts for around 20 percent of global crude oil imports, a steep drop in demand from the EU would also affect the global oil market by depressing prices, hurting even producers that export relatively little energy to the EU, such as Canada, Saudi Arabia, and the United States.

What is more, the Green Deal’s effects will extend far beyond energy markets. European businesses worry about their competitiveness against foreign peers, as they will have to face higher energy prices and more stringent environmental regulations. The Green Deal seeks to protect such firms by introducing a so-called border adjustment mechanism that would place a tariff on imported goods based on the amount of greenhouse gases emitted when they were manufactured. The EU would likely introduce this measure gradually, first targeting carbon-intensive products, such as cement, aluminum, and steel, before extending it to all imported goods. Inevitably, some EU trading partners will claim that such border taxes constitute an illegal trade barrier even if their intent is not protectionist.  

But although such measures would hurt some non-EU countries, they would help others. A greener Europe would need to import more products and raw materials that serve as inputs for clean-energy technologies. One country that would benefit is China, since it dominates the market for rare earth minerals, which are essential for manufacturing, among other things, the magnets used in wind turbine generators and electric vehicle motors. Moreover, even if the EU reduces its use of fossil fuels, it will remain a major net importer of energy. That energy will now have to come from less carbon-intensive sources, such as renewable electricity and so-called green hydrogen, which might be imported from countries with the potential to provide solar and wind energy, such as Algeria or Morocco, and then transported to Europe via undersea cables and pipelines. A green Europe will therefore still have energy security concerns, but they will no longer focus on pipelines from Russia but rather on mineral supplies from China and renewable energy delivery from North Africa.

POWER PLAYERS

These changes are certain to generate responses from countries outside the EU. Some might launch complementary climate initiatives of their own. Others might redirect trade and investment flows away from Europe. And still others might take downright hostile steps to counter the effects of the Green Deal. 

Energy exporters close to Europe will feel the greatest impact. In Algeria, for example, revenues from exporting fossil fuel products, especially natural gas, account for 95 percent of the value of the country’s exports and pay for 60 percent of its national budget. The vast majority of those exports go to the EU, and Algeria has few alternative markets for its energy resources. For Algeria and other countries in Europe’s periphery, major declines in demand from the EU would be wrenching, potentially leading to a slow-motion collapse that would breed instability in North Africa and inspire mass migration to the EU.

To forestall such outcomes, the EU has pledged to help countries in its neighborhood diversify their economies by promoting solar energy and, more speculatively, developing hydrogen markets. It is not at all clear, however, that governments in those countries will be interested in diversifying: for many of them, control over energy resources sustains authoritarian rule. In Algeria, for example, the Green Deal will strike at the heart of the government’s control of society by threatening a rentier economy that enables corruption among regime cronies and funds subsidies that grant the regime some degree of popular acceptance. The chances are therefore high that the current leadership will continue to delay diversification and aim to maintain a strong control on rents, even if doing so threatens Algeria’s overall economic well-being. 

The European Green Deal is more than just a domestic policy measure: it is an overhaul of the EU economy.

The Green Deal will pose challenges to larger, richer countries, as well. Take Russia, for example. In 2016, oil and gas revenues made up 36 percent of the country’s budget, and Europe absorbed 75 percent of Russia’s natural gas exports and 60 percent of its crude oil exports. An EU border adjustment mechanism would vastly reduce those revenues and would also negatively affect a broad array of Russian manufactured products, many of which tend to be carbon intensive. Meanwhile, Saudi Arabia’s oil extraction creates only roughly half the carbon footprint of Russia’s, so a carbon border adjustment mechanism would make Russian oil more expensive than Saudi oil in the EU, even before EU oil consumption declines.  

Nevertheless, Russian President Vladimir Putin continues to deny that climate change is caused by human activity and insists that Russia has “the greenest energy system in the world.” The EU could try to work with Russia on increasing its use of renewables, avoiding the methane leakage that makes its natural gas production particularly harmful to the climate, and improving energy efficiency. But Russia’s most likely response to the EU Green Deal will be to simply move away from selling to Europe and shift its focus to China. That strategy, however, is not without difficulties: Russian energy companies have not been able to scale up their presence in Asian markets to a degree that might remotely compensate for their likely coming losses in Western markets.

The Chinese, by contrast, can afford a much more subtle approach to the Green Deal. A reduction of European demand for fossil fuels would reduce global energy prices, which would be beneficial for China, a net importer of energy. Moreover, China is a major supplier of the rare earth minerals that are essential for powering a green economy. Thus, Beijing’s principal response to the Green Deal could come in its relations with third parties. Europe will likely seek to complement the Green Deal by offering affected countries such as Algeria and Russia investments in areas such as renewable energy and hydrogen. Those offers, however, might come with conditions that could threaten the grip of authoritarian regimes in those places. For example, EU financial support for renewables in Algeria might be accompanied by requests for the country to liberalize its energy markets and phase out its subsidies to domestic producers. China will likely counter with offers of its own, which would come with no such conditions and thus would not challenge authoritarian rule.

Some countries might take downright hostile steps to counter the effects of the Green Deal.

Both Washington and Brussels would like to frame their cooperation on climate issues as a response to this challenge from China. But U.S.-European cooperation could prove difficult. During the U.S. presidential campaign, Joe Biden proposed policies similar to those in the European Green Deal, including achieving climate neutrality by 2050 and developing an electricity sector fully powered by renewables by 2035. But opposition to his agenda in the U.S. Congress may limit his ability to deliver.

A cooperative U.S. response to the Green Deal is possible, however, including even a common carbon border adjustment mechanism. Such cooperation will depend on Brussels’ willingness to negotiate a package deal with Washington and to compromise on certain issues: for example, Brussels might need to accept lower automotive emission standards than it would prefer, and it might have to reduce the amount of government aid it intends to give to developing green industries. Such concessions might be painful. But they would be worth it: if the United States and the EU were to adopt similarly ambitious plans for reducing their emissions and other states’ reliance on fossil fuel exports, it would effectively create what the economist William Nordhaus has dubbed a “climate club,” one that would create incentives for other countries, China included, to take similar steps in order to avoid being shut out of major global markets. What is more, institutionalizing U.S.-European climate cooperation would also guard against the risk that in the future, a less climate-friendly U.S. administration could undo whatever progress might be made.

LET THE GAMES BEGIN

If the Green Deal fails as a matter of foreign policy, the entire effort will have been in vain. There are, however, many steps the EU can take to increase its chances of success. Most immediately, the EU needs to manage the Green Deal’s likely repercussions on countries that supply it with oil and gas and other countries that will be negatively affected by the carbon border adjustment mechanism.

The EU and the countries that supply it with fossil fuels have time to properly plan this transition. Up to 2030, the EU will keep importing oil and gas, and significant declines will start only after that date. In the meantime, countries that supply Europe should use their revenues from oil and gas exports to diversify their economies by developing their renewable energy sectors and advancing green hydrogen. For its part, the EU should provide financial support for such initiatives and take steps to limit its dependence on China by finding new suppliers for raw materials (even carbon-neutral ones such as rare earth minerals), investing in the recycling of such materials, and funding research into substitutes for them.

The EU has rarely been an effective or even a purposeful geopolitical actor. Europeans often assume that common global challenges such as the fight against climate change can be addressed by technocratic, multilateral processes. But in China, Russia, the United States, and most other places, powerful interests are far more attentive to the question of who gains and who loses from the profound shifts the green transformation will produce. Those countries will compete fiercely and not always fairly for any relative advantage. Europeans need to recognize and accept this competitive dynamic. Only then can they lead the world in managing climate change.