Good for Europe, bad for the rest?

The Green Deal was first announced by European Commission President Ursula von der Leyen in December 2019. This “jobs and growth agenda for Europe” was the talk of the town in Brussels. “They can’t do it” was the talk of the town in Ankara. It simply seemed too radical, too disruptive.

It is now dawning on Ankara that the Europeans are actually serious. On July 14, with the “Fit for 55” program of the European Commission, which aims to lower carbon emissions by 55 percent by 2030 compared to 1990 levels, will come into effect. This will mean that the Green Deal will be the EU’s industrial policy. It’s an ambitious start. The plan is to make companies pay more for their carbon emissions and for the first time, charge whole new sectors such as transportation, for emissions.

So why should countries like Turkey care about green policy in the EU? We care because the EU designs these policies not only to transform their own economy, but also those that come into contact with it. The Green Deal works through the Carbon Border Adjustment Mechanism (CBAM), the transmitter of the European green thumb to countries like Turkey. Currently there are five sectors already chosen by the Fit for 55 programs, all high emitters: Iron and steel, aluminum, cement, fertilizers and electricity. The CBAM makes sure that if you are in these sectors, and you don’t comply with green regulations, you can’t simply move to a country like Turkey and keep polluting (known as “carbon leakage”). Countries that trade with the EU also need to impose stricter regulations to become fit for the EU market.

UNCTAD has already prepared a 30-page report on the trade, carbon emissions, employment and welfare effects of the program that is taking shape. Welfare gains for Europe, welfare losses for some trading partners, though not all.

Trading partners like Norway and Switzerland are not going to be impacted directly. Both had their own emission trading systems (ETSs) to adjust carbon emissions prices to the ones in the EU. Carbon price already paid in these countries will be taken into account while bringing these goods into the EU market. They have kind of vouchers to be used to pay for CBAM.

Russia, China and Turkey are the most exposed neighbors to the mechanism designed in this first Green Deal Package. There are no ETS mechanisms in these countries yet, so they don’t have a tool that adjusts their economies to the requirements of the EU. This means they have to pay a border tax when sending goods to the EU’s single market.

Turkey, by the way, announced its own Green Deal Action Plan on July 17, just three days after the EU announcement of the Fit for 55 Plan. Compared to the concrete action plan of the EU’s Fit for 55, the Turkish version is more of a checklist of things to do in order to catch up with the EU. We have a Green Deal Working Group, made up of various government agencies. There are no private sector representatives among the working group participants.

The challenge in Turkey will be not only about designing a commensurate and effective industrial policy strategy, but also in finding the means to fund the transformation process. With CDS risk premiums still near 400, troubled bank balance sheets, highly indebted companies and weak rule of law credibility, the country is badly exposed to transition risks.

The Green Deal transformation in the periphery requires massive, fixed capital investments. Greening, as we now know, is a capital-intensive process. In countries with populations younger than those of the EU, capital-intensive technological change may not be the best option for a jobs and growth agenda. This is important for Turkey, but still more important for Mozambique.

In this era of systematic migration from the South to the North, job creation is as important as climate change, if you ask me. Is capital-intensive technological change our fate here, or is it related with the fact that all new technologies are coming out of western labs? It is a promising new revenue stream for the aging West, nobody can deny that. It’s not so good for the youth bulge in the South. Yes, global warming is an existential threat, but so are billions of people who feel shut out of paradise. The EU ignores that at its own peril.