(Bloomberg) -- In late 2019, the European Union kicked off its Green Deal with the aim of leading the world into a sustainable future. Then came Covid, surging inflation, broken supply chains and Russia’s invasion of Ukraine.

All of that elevated energy costs, protectionism and competition on the EU agenda, making the ambitious clean shift more politically and economically challenging. 

So while now should be a time of progress as the plans move from policy papers in Brussels to reality in homes from Lisbon to Helsinki, the vastly changed world means officials need to rethink some parts to keep Europe’s industry going and avoid a backlash from voters.

Consumers, still scarred by the cost-of-living crisis, are wary of anything that might hit their pockets, and businesses are pushing back against excessive regulation. 

On top of that, climate-skeptic far-right parties are gaining traction with the public ahead of European elections in June. Already this year, some measures were relaxed after protests by farmers, who opposed the green push before it had barely started affecting agriculture.

Reversing course isn’t an option, but it’s increasingly clear that Europe can’t afford to mess up. Getting the overhaul wrong would mean companies and consumers foot a huge multi-trillion-euro bill for the green transition while handing an edge to China and the US. 

Amid such concerns, EU diplomats say industrial competitiveness is set to shoot up the list of priorities once a new European Commission takes office after the elections.

The risk of the EU losing new clean tech investment at a time when it’s most needed has been compounded by the US Inflation Reduction Act, which includes about $500 billion in new green spending and tax breaks over a decade. 

While there’s debate over which continent is offering a more effective pathway, most agree that the EU framework is more complex and relies on a regulatory stick rather than a carrot.

Investors need “a business case and not prescriptive regulations,“ said Martin Brudermueller, chief executive officer of Germany’s BASF SE and president of the European chemical industry association Cefic. “Regulations in Europe are complicated, lengthy and they are not providing the incentives that would encourage you to invest.”

Grand Ambitions

When Commission President Ursula von der Leyen unveiled plans to make the continent climate neutral by 2050, she pitched it as Europe’s moonshot moment.

The idea was that the quicker the EU cut emissions and rolled out low-carbon technologies, creating new jobs at the same time, the stronger position it would have in the new global economy. 

The changes needed to meet the aggressive targets were hammered out over the following years in often-heated negotiations with member states and the bloc’s parliament. Dozens of measures have become law, ranging from a de facto ban on combustion engines in new cars by 2035 to tougher pollution caps on companies and a new carbon market for fuels.

But in that time, the repercussions of the pandemic disrupted global supply chains and highlighted Europe’s dependence on imports of critical raw materials. Then Russia’s invasion of Ukraine boosted energy costs, hitting an economy trying to recover from lockdowns.

“If we don’t deliver at home, if we sent a message out that the Green Deal caused a social upheaval, it will become an example for other countries not to follow,” said Simone Tagliapietra, a senior researcher at the Bruegel think tank. 

Keeping a lid on energy costs is one of the biggest challenges. Energy has historically been more expensive than in the US or China, but the war made the difference more pronounced, undermining competitiveness. 

In the run-up to the European Parliament elections across the bloc, the commission and some member states are becoming more receptive to pleas from business. Last month, von der Leyen joined the launch of the European Industrial Deal, an initiative supported by almost 1,000 businesses, unions and associations urging cheaper energy, less red tape and more clean-tech funding.

“We need to explain better and simpler the benefits of the transition,” said Petros Varelidis, an advisor at the Greek environment ministry. “Widespread social acceptance is a prerequisite for a successful transition.”

Europe is already — by its own estimate — behind track on its binding 2030 goal to cut emissions by 55% compared with 1990 levels. But it’s determined to push on, and has floated the idea of another interim objective — 90% by 2040.

Most of the measures for 2030 have yet to start biting. The recent actions by farmers highlight how tough it will be for the commission not only to forge ahead with new regulations but even to stick to what’s been agreed. 

It must be a “just transition, with competitiveness for the various industries in our member states,” Climate Commissioner Wopke Hoekstra told EU environment ministers last month. “One should not be at the expense of the other.”

To avoid backlash from voters, the EU earmarked billions of euros in funding to protect the most vulnerable and encourage companies to invest in low-carbon technologies. 

Still, massive private spending will be needed, and policy makers are scrambling to design new mechanisms to attract funds. The EU estimates that meeting the 2040 target will require around €1.5 trillion ($1.6 trillion) every year from 2031.

In a paper in March, the EU said Europe will be 3 degrees celsius hotter even if the world succeeds in limiting global warming to 1.5 degrees above preindustrial levels, causing trillions of euros of damage to the economy. A “conservative estimate” shows that climate change could reduce economic output by around 7% by the end of the century. 

“What we agreed so far is ambitious,” said Jos Delbeke, a professor at the European University Institute in Florence and a former senior climate official at the commission. “No backtracking should happen but at the same time new regulation shouldn’t make the transition more difficult either.”

--With assistance from John Ainger and Gina Turner.

©2024 Bloomberg L.P.