Countering Europe’s Backlash to the Green Transition

In the lead-up to the European Parliament elections in June, during which far-right parties across Europe made gains while green parties and liberals suffered losses, the EU’s Green Deal, launched in 2020, and environmental policies generally were attacked—blamed for the economic downturn in many European countries, as well as inflation and the energy price crisis. Opposition to climate targets and the Green Deal has also been a theme in the recent French national elections. The policy platform of the far-right Rassemblement National—which won the first round of the elections—contains many proposals that would see backpedaling on existing greenhouse gas reduction targets, and a moratorium on wind energy development.

Tapping into a widespread sense of economic insecurity, both right-wing and centrist parties adopted this narrative and sparked a politicized debate that frames pro-green and pro-competitiveness policies as opposing forces. Italian co-leader of the hard-right European Conservatives and Reformists (ECR) group Nicola Procaccini called the Green Deal “crazy and sort of a religion,” while Peter Liese of the center-right European People’s Party (EPP) said the planned phase-out of the internal combustion engine—a central policy of the Green Deal’s plan to decarbonize the transport sector—was a mistake.

European policymakers now face the challenge of crafting a green industrial strategy that meets climate and sustainability targets and competes economically with the U.S. and China—but also addresses the concerns of disenfranchised voters who have turned to extremist parties, particularly regarding the cost-of-living crisis and the perception that green policies are out of touch. Ensuring a just transition for workers in declining industries will be essential for the strategy to be economically effective and politically feasible.

What would be the key pillars of a European green industrial strategy, and how can they be designed to ensure both environmental sustainability, economic competitiveness, and societal acceptance? How can a green industrial strategy avoid becoming overly protectionist to ensure that trade policies support rather than hinder the cost-effective deployment of green technologies? And how can it benefit disenfranchised voters and appeal to the rising political right?

Rather than having a cohesive, long-term strategy, the EU’s industrial policy often consists of disjointed measures that respond to immediate pressures and development—such as competitive actions from global powers such as the United States and China.  China’s industrial policy has supported green industries for over a decade, especially in in the clean energy sector, and created challenges for European companies. Meanwhile the Inflation Reduction Act (IRA), which became law in the U.S. in August 2022, caught European policymakers by surprise, as its tax credits to promote the deployment of climate technologies has affected European companies’ investment decisions.

During its latest meeting in June, the European Council agreed on the Strategic Agenda 2024-2029, which calls to strengthen European competitiveness while at the same time retains the goal of making Europe the first climate-neutral continent by 2050. It emphasizes the importance of bolstering the European Single Market, but also highlights the need for strengthening Europe’s industrial base in order to decarbonize European industry, develop the Union’s competitive edge in digital and clean technologies and diversify strategic supply chains.

The good news is that Europe does not need to start from scratch. First of all, while an easy political target in the recent elections, the Green Deal—the set of proposals which guided the EU’s climate, energy, transport, and taxation policymaking over the last five years—contains several legislative acts as well as mid-term targets which can guide the new green industrial policy. Despite political stigma, key components of the Green Deal, such as policies that drive decarbonization in industry and support resource efficiency through circular economy business models, are essential for European competitiveness and economic security and must be upheld. These policies must also provide tangible benefits for small businesses and communities and generate employment by stimulating local economies.

Second, the financing aspect of an industrial strategy will be crucial. Increased government funding for innovation in net-zero and circular economy technologies is needed, with a particular focus on scaling-up successful pilots and innovations. Initiating mission-oriented public-private partnerships and continuous funding support from early-stage development to large-scale implementation has been recommended by the Corporate Leaders Group Europe. Furthermore, well-structured funding opportunities for green infrastructure projects and businesses, coupled with project de-risking measures such as government-backed guarantees and demand-side incentives will enhance the leverage of private capital.

To maintain leadership in the green transition, the EU must also invest more heavily in research and development to support the scaling and commercialization of green innovations in Europe, but also across entire value chains. European innovation ecosystems and networks will increasingly need to extend and include trading partners, especially upstream producer countries. This will also support European green tech companies to export their products globally.

Third, it will be important to ensure that a European green industrial strategy does not become overly protectionist and unnecessarily increases the costs of the green transition. A green industrial policy that erects trade barriers that do more harm than good would be self-defeating. However, protectionist policies are often supported by far-right groups in Europe such as the Rassemblement National who typically emphasize national sovereignty and economic self-sufficiency. They advocate for protectionist policies to shield domestic industries from foreign competition, out of a belief this preserves jobs and strengthen the national economy. Protectionist rhetoric also resonates with European voters who feel left behind by economic globalization, such as those in declining industrial regions.

While there is a case for green industrial policy in support of the development and adoption of early-stage clean technologies, it is important to avoid protectionist tariffs on mature technologies that increase costs for end users and could trigger retaliatory measures from trade partners. Favoring domestic firms and products by relying on tariffs, discriminatory public procurement, or investment-screening controls can be distortive, leading to less efficient resource allocation globally and to higher prices and fewer choices for European consumers.

An example are the recently announced EU tariffs on Chinese electric vehicles that follow earlier tariffs imposed by the U.S. While these new tariffs will affect Chinese EV manufacturers’ prospects in EU and U.S. markets, they will raise prices for European and American households and exacerbate the affordability issues of the energy transition for low-income social groups, who already perceive green policies as main contributor to the cost-of-living crisis. Additionally, such tariffs might provoke retaliatory measures from China, potentially impacting other sectors and posing new economic challenges, particularly for France’s agricultural sector and producers of cognac and pork. Also, tariffs will cushion and protect domestic manufacturers from Chinese competition rather than making them more competitive, as well as delay the transition to low-carbon electric mobility systems.

Rather than become inward-looking, Europe will need to increase its international cooperation with trading partners, especially low- and middle-income countries. The COVID-19 pandemic highlighted the issues arising from concentrated semiconductor supply, emphasizing the need for diversification in the supply of critical goods like semiconductors and raw materials. Since then the EU has initiated critical raw material partnerships with several resource-rich countries, including Namibia, Kazakhstan, the Democratic Republic of Congo, Zambia and Uzbekistan. These partnerships are crucial for European competitiveness (ensuring access to materials needed for the twin digital and green transitions), but must also support industrialization and value-added industries in partner countries beyond mere extraction to achieve mutually beneficial outcomes.

Fourth, the link between environmental regulation and industrial policy needs to be further strengthened. One common argument has been that Europe’s environmental regulation and reporting requirements hampers competitiveness. For example, the leader of the German liberal Free Democratic Party, Christian Lindner, opposed the EU Corporate Sustainability Due Diligence Directive as it would place additional administrative burdens on companies. Eventually adopted in May 2024 after much political bargaining, companies are still concerned about increased compliance costs and administrative burdens associated with implementing comprehensive due diligence processes.

This, however, overlooks that the EU’s global leadership in setting environmental legislation and standards has been a cornerstone of its competitiveness and international influence for the last two decades. By setting stringent environmental standards and regulations, the EU has not only driven innovation within its borders but also shaped global norms and practices, compelling other regions to follow suit. Recent economic analyses show that Green Deal regulation has positively impacted innovation and European competitiveness internationally.

After the EU election outcomes, mainstream parties such as the EEP are already backpedaling on climate policy and have announced that they will oppose the planned phase-out of the combustion engine by 2035—partly because many far-right parties strongly oppose this policy. This, however, would not help competitiveness of European car manufacturers. Maintaining a focus on internal combustion engines cars could leave EU manufacturers lagging behind in the global EV markets and fall further behind technologically.

Instead, establishing unified EU-wide standards for green products and technologies and strategically advancing these standards internationally is crucial. It is essential to engage closely with Europe’s trading partners, particularly suppliers of materials and components in developing countries. These suppliers are integral to various value chains, including those for batteries, electronics, textiles, electric vehicles, semiconductors, and plastics. Without such engagement, Europe’s environmental policies and new standards run the risk of becoming trade barriers, restricting market access and causing disruptions for European brands and their suppliers, which would cause pushback.

Fifth, a green industrial strategy that identifies and supports leading sectors must also consider those negatively impacted by the transition. Therefore, principles of a just transition and social inclusivity are crucial. This includes implementing policies through the existing Just Transition Mechanism to support workers and communities affected by the shift to a green economy, minimizing social and economic disruptions. The mechanism, which includes training programs, will mobilize around €55 billion from 2021 to 2027 to the most affected regions, especially coal mining. Expanding the mechanism to other industries, for example the car manufacturing industry which is expected to lose up to half a million jobs in the shift to EV manufacturing, will be needed.

When it comes to consumer acceptance, the bottom line is affordability. If new green technologies are not affordable for most consumers, there will be political backlash, as seen with home heating systems in Germany. Heat pumps, a common piece of green home heating technology, became a major political issue used by the far-right AfD in Germany’s local and European Parliament elections. Thus, it is essential to design policies that keep the green transition affordable for consumers, avoiding regressive measures that disproportionately impact low-income households.

To remain competitive, the EU must reaffirm its commitment to leading the global green transition. By building on existing policies established under the Green Deal, Europe can develop a strategic green industrial strategy that not only matches the economic and technological advances of the U.S. and China but also reinforces its commitment to environmental sustainability and climate protection, but also social inclusion and equity. A political shift is underway in Europe, but this transition is inevitable. To make it more politically feasible and inclusive in the short term, it’s essential to implement strategies that address public concerns and demonstrate clear benefits. By doing so, the existing Green Deal can become a visible catalyst for economic and social transformation and the industries of the future.