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Figure 1. EU energy mix evolution (55 percent lower emissions in 2030 compared to 1990 and climate neutrality in 2050)
Figure 2. Evolution of EU energy imports (55 percent lower emissions in 2030 compared to 1990 and climate neutrality in 2050)
Figure 3. Fossil fuel exports to EU as % of total exports, selected countries
Figure 4. Oil balance by region, 2019
Figure 5. Break-even oil price, selected countries (2015)
Figure 6. EU imports of oil and natural gas by main trading partner, 2018
Figure 7. Main suppliers to the EU of critical raw materials, average from 2010-2014
Figure 8. EU27 imports of carbon-intensive goods by country of origin (share of imports)
![Global players: Saudi Arabia Saudi Arabia is the world’s biggest oil exporter. Oil and gas revenues amounted to 80 percent of Saudi Arabia’s total exports in 2018 and accounted for 67 percent of its government revenues in 2017 (Tagliapietra, 2019). More fundamentally, Saudi Arabia’s long dependence on the rent from hydrocarbons has created an economy that relies on public sector employment (30 percent of the workforce) and expensive and economically inefficient subsidy schemes (costing $37 billion in 2017), particularly in the energy market (Tagliapietra, 2019). Unlike in Algeria, however, the European Green Deal does not directly threaten this model. Saudi Arabia exports less than 10 percent of its oil to Europe. Its main markets, now and likely even more in the future, are in Asia to which it already exports over 70 percent22 of its oil. A European transition to renewables is not per se a major problem for Saudi Arabia. Indeed, the European Green Deal may even increase short-term demand for Saudi oil which has a lower carbon footprint than oil from Russia or the United States. Saudi Arabia could face 30 percent to 50 percent less in EU carbon tariffs than most competitors23. Overall, the Saudi approach so far has been to say little about the Green Deal, privately encourage the Europeans to develop new renewable technology, and focusing their energies on making fossil fuels cleaner. Saudi Arabia used, for example, its 2020 chairmanship of the G20 to promote the idea of a circular carbon economy, an effort to make the use of oil and gas more climate friendly. However, the broader transition away from fossil fuels, of which the Green Deal is a part, presents a serious long-term threat to the Saudi model of a rentier state. As demand and prices for hydrocarbons fall, Saudi Arabia’s ability to afford its large public-sector wage bill and domestic energy subsidies will erode, perhaps even threatening Saudi domestic stability. Already Saudi foreign exchange reserves are in decline24, in line with oil revenue declines since 2014. The Saudi regime, led by the crown prince, Mohammed Bin Salman, appears very aware of this threat and has adopted a strategy to deal with it. Most publicly, it launched in 2016 the Vision 2030 programme, a broad-ranging development plan to diversify the economy away from hydrocarbons, develop private small- and medium-enterprises, and create a non-oil export sector. The idea of global peak demand for oil being reached soon has inspired Saudi Arabia to increase its export capacity in order to produce as much oil as possible and seize market share before demand fades away25. Saudi Arabia’s relatively low-cost production means that it can sustain low prices that might drives competitors such as Russia, Venezuela and Iran out of the market. This low-cost strategy threatens the entire climate change effort embodied in the Paris Agreement, as it makes it more difficult for renewable energy resources to compete with hydrocarbons. The outcome will depend on the evolution of green technology and the ability of the European Green Deal and other efforts to get global energy consumers to internalise the cost of carbon emissions. In the context of a long-term fall in demand, increased market share, even at lower prices, offers Saudi Arabia the prospect of greater total revenues from its vast oil reserves. This logic inspired the Saudi oil price war with Russia in the middle of the COVID-19-caused price collapse in April 2020, which briefly drove US oil prices below zero26 (indicating that the cost of storage was more than the oil was worth). None of this is inherently at odds with the EU’s ability to implement the Green Deal. The EU has every incentive to encourage Saudi Arabia’s economic diversification effort, and some Saudi displacement of higher-carbon oil for other sources will ease Europe’s transition. Through its massive sovereign wealth fund, Saudi Arabia will be an eager investor and customer for renewable-energy technology that might come from European sources. However, Saudi Arabia’s Vision 2030 plan has had little success thus far in diversifying the country’s economy (Grand and Wolff, 2020). Four years in, the regime’s erratic governance and the deep rentier state give foreign investors little confidence that it will have the capacity to make the often-painful choices inherent in an economic diversification strategy. A Saudi failure to make this transition could, as the world slowly moves away from fossil fuels, threaten stability in the Persian Gulf. Europeans have an interest in assisting this transition, but Saudi Arabia’s human rights record makes cooperating with its regime difficult. Saudi Arabia’s substantial reserves and tight relationship with the United States mean that the EU lacks the leverage to force difficult changes. An effective strategy to encourage both better governance and economic diversification in Saudi Arabia will thus clearly require close cooperation with the United States, which may be possible now with a new US administration that also has greater awareness of the demands of energy transition. Global players: the United States The US has at times rivalled the EU for global climate change leadership. The Trump administration, however, pulled back from global negotiations and broadly refused to accept any responsibility for combatting climate change. Trump withdrew from the United Nations Paris Agreement, rolled back many Obama administration regulations that limited carbon emissions and called climate change a Chinese hoax devised to secure unfair trade advantage. However, roughly two-thirds of Americans believe in climate change27. They think the federal government is not doing enough to reduce its impacts and see environmental protection as a top policy priority. Many of US states are pushing forward with regulations that are as tough or tougher as those in Europe28. Fires and floods across the United States in 2020 increased concerns about climate change. Part of the reason for this disconnect is that climate change has become a highly partisan issue in the United States – perhaps the single starkest policy divide between the two parties. This means that the Democrats have become the party aiming to do something about climate change. US policy on this issue will thus change dramatically under a Biden presidency. During the election campaign, Biden proposed29 policies similar to the European Green Deal, including net-zero emissions by 2050, an electricity sector fully powered by renewables by 2035, carbon pricing and border adjustment mechanisms. It remains unclear though if more similar US and European climate policies under Biden will necessarily be more harmonious. Even for the incoming Biden administration, the European Green Deal presents some geopolitical challenges. For example, the European Green Deal implies stricter emissions standards30 for US automobiles than the US will have in place. As the US exports more than €5.5 billion (2018)31 worth of passenger cars to Europe, this could have a large impact on a politically sensitive industry. Similarly, the Green Deal may include stricter agricultural policy based around sustainable practices, which could negatively affect the 13 percent of US agricultural exports that go to the EU (CRS, 2020). It is, however, the carbon border adjustment mechanism (CBAM) proposal that generates the most concern in the United States. A carbon tariff could dramatically impact US exports of coal, natural gas and many manufactured products. The US exported32 over 1.5 million barrels of day of petroleum products to Europe in 2019, about 19 percent of its export market33. The Trump administration viewed the Green Deal threat to this important industry as an unacceptable infringement on US sovereignty and pure protectionism. Wilbur Ross, the US Secretary of Commerce, promised retaliation, noting that “depending on what form the carbon tax takes, we will react to it – but if it is in its essence protectionist, like the digital taxes, we will react.”34 A Biden administration will want to pursue its own version of a green deal and seek climate neutrality by 2050 as the US re-joins the Paris Agreement. But opposition in the US Congress means that, compared to the EU, the US effort will likely adopt less-ambitious targets and rely more on promised developments in technology than foreseen by the European Green Deal. This means that, particularly up to 2030, when the EU may be more aggressive in its climate targets, measures such as the CBAM could introduce trade tensions with the United States. Managing those tensions could prove very complex, particularly under a future Republican administration. For the next few years, however, the Biden administration will likely seek a cooperative approach to dealing those tensions. Meanwhile, the Democrats’ desire to take a global lead in climate negotiations may, as Obama occasionally did35, create conflict with the EU’s similar aspiration. As during the 2009 climate negotiations in Copenhagen, the US might decide that it can more easily reach agreement with China than with the EU, and that Europeans will simply accept whatever the US and China decide. The increased tensions in the US-China relationship make this less likely, but Biden36 sees scope for cooperation with China on climate change. The Green Deal also contains more than a hint of a new environmental justification for industrial policy. A Council of the EU paper37 on the Green Deal asserts that the EU needs “climate and resources frontrunners to develop commercial applications of breakthrough technologies” and advocates “new forms of collaboration with industry and investments in strategic value chains” in areas including battery technology and digital technologies. Any US administration will likely see such government subsidies as a protectionist European effort to use state aid to capture the green technology industries of the future. Despite these challenges, a cooperative US response to the Green Deal is possible depending on the EU’s willingness to compromise and negotiate a package deal with the US. The EU and the US will likely see that they face similar challenges in implementing their climate ambitions. Global players: China At a time when it has become increasingly difficult to define the positive, constructive elements in the Europe-China relationship, climate change has become the single most important topic for the cooperative agenda with Beijing. Almost like a mantra, when European policymakers debate the market-distorting practices of Chinese state capitalism, forced technology transfers, intellectual property theft or large-scale human rights violations in Xinjiang or Hong Kong, the conversation ends on the relatively obvious declaration “but we need China for global challenges, such as climate change” (See for example Oertel et al. 2020). And it is true. For the European Green Deal and the Paris Agreement to work, China must be part of the equation. China is the world’s second largest economy and its largest emitter of CO2, as well as a major production hub for European products. Responsibly greening the European economy thus necessarily also implies greening the supply chains of which China is an essential part. Notwithstanding the green narrative of its leaders, China continues to operate 3,000 coal plants38 – more than in the US, the EU, Japan, Russia and India combined – and has more than 2,000 in construction. Chinese emissions have not yet peaked (China is still a developing country, by climate standards) and in fact the US has massively curbed emissions despite the federal government’s unwillingness to be held accountable by global agreements. These stark facts and a new, more climate-friendly US administration starting in 2021, mean that the informal China-EU climate alliance may not last very long. Nevertheless, China also has an interest in pursuing a more sustainable and efficient path to prosperity. The effects of climate change on Chinese agriculture, water and food security are considerable and will grow. Coupled with air and soil pollution China’s environmental situation has the potential to unsettle the careful balance of acceptance of Communist Party rule. Beijing’s general willingness to serve as a constructive force in global climate negotiations and its support for the Paris Agreement were indispensable, but adherence to an agreement that does not force Beijing to reduce emissions at all is no longer enough given China’s role in global emissions. More ambitious European targets on climate change, biodiversity and sustainability are not intrinsically problematic from Beijing’s perspective. China itself claims global environmental and climate leadership. Xi Jinping has further advanced the use of the environmental catchphrase of the ‘ecological civilization’, environmental sustainability with Chinese characteristics. The Chinese government, in part to show the Europeans that is working on the broad climate agenda, said in September 2020 that it “aim[s] to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.” China undoubtedly has a national strategy to move the economy gradually towards greater sustainability. It will however do so at its own pace and always with the caveat of stability with a strong focus on retaining high levels of economic growth and curbing any rise in unemployment. A more energy-independent Europe has no major repercussions for relations with Beijing: China does not export energy to Europe. A reduction in European energy needs could in fact reduce global energy prices, which would be beneficial for China, still a net importer of energy (mainly oil and gas), and would allow China to reduce the costs if running its economy. China, however, is a major supplier of minerals such as rare earths that are of essential importance for the European Green Deal, though China’s ability to use this dependence for strategic leverage is limited. China’s previous effort to use its market dominance against Japan in 2010 inspired other nations to create stockpiles39. In the longer-term, rare earths, oddly, are not extremely rare. China had dominated this market largely because of subsidies to producers that kept prices too low for potential competitors to enter the market. This was a costly policy that caused unpopular environmental damage in those parts of China that processed these minerals. The Chinese government already seems intent on reversing it, which is encouraging the development of foreign competitors in the US and Malaysia40. The idea of a carbon border adjustment mechanism for carbon-intensive products entering the European Union poses a more fundamental challenge to Beijing. Especially at the lower end of the value chain where margins are not particularly high, Chinese manufactured products could lose their comparative price advantage (and thus their appeal), making it more attractive for European industry to source from other ‘greener’ partners. This could exert significant pressure on Beijing to adapt its own policies and serve at least temporarily as leverage in getting China to commit to an overall more ambitious climate change and sustainability agenda. Otherwise, current trends towards the greater diversification of global supply chains away from China, which started because of the US-China trade war and were accelerated by the COVID-19 crisis, could be further exacerbated. Adding this extra price tag for importers of Chinese goods could help level the playing field. European companies are already considering greater localisation of their value chains and production processes, which could entail production specifically for the Chinese market within China. This would effectively decouple Europe’s China business from other parts of the global economy. With the Green Deal, the EU will push for an ambitious global climate agenda within the UN Framework Convention on Climate Change framework. At the COP26 (Conference of the Parties) in Glasgow in 2021, China will be in the spotlight in terms of specifying how it will peak its carbon emissions before 2030 and then reduce emissions. To achieve carbon neutrality by 2060, the measures will have to be significant and start immediately. China seems to be moving closer to the European approach in terms of its commitments, while trying to buy as much time as possible to invest in its own green transition and in green or clean technology. China already leads on electric vehicles and is a major force in solar and wind energy. Clean tech is a growth market with huge potential for China-Europe cooperation, but also for crowding out of European industry and achieving Chinese tech dominance. COVID-19 meant that China experienced negative growth in the first quarter of 2020 for the first time since the end of the Cultural Revolution in the late 1970s. Emissions are down and Beijing is clearly determined to use its economic stimulus packages to jump start the Chinese economy with a specific focus on boosting its digital economy and continuing its effort to lead on renewable energy technology. But despite the green-tech push, the stimulus packages feature heavy investment in coal-fired power plants, in part for purposes of job creation. Climate change is one of the areas in which China still adheres to the developing country logic. It retains significant negotiating power through strong alliances with Brazil and Saudi Arabia (both needed to make an international agenda work) and with the G77 more broadly, which includes the majority of states most gravely affected by the effects of global warming and rising sea levels. Europe can make a sustainable development policy offer to these countries within the Green Deal framework and compete with China’s Belt and Road Initiative, which has already generated degrees of cynicism and opposition in recipient countries. Whether developing countries are receptive to the European offer will to a great extent depend on the conditions attached to loans and investments. But in the countries in Europe’s vicinity, greater European conditionality on accession financing in line with the Green Deal could effectively hamper Chinese investments in coal power plants and environmentally harmful resource extraction. A foreign policy action plan for the European Green Deal How should the EU manage the geopolitical repercussions of the European Green Deal, and the possible reactions of countries including Algeria, China, Russia, Saudi Arabia and the US? From a conceptual perspective, answering this requires looking beyond traditional geopolitics and security considerations, while considering soft power issues. That is, the EU can strengthen its position as a norm- and standard-setter for the global energy transition, promoting transparent cooperation on technical and regulatory matters in different fields. This should also be considered as part of a foreign policy action plan for the European Green Deal. From a policy perspective, a clear strategy and a foreign policy action plan are needed. We suggest dual approach: i) actions to manage the direct geopolitical repercussions of the European Green Deal; ii) actions to foster EU global leadership in the field (Figure 9).](images/u151368-244.png?crc=524441322)
Figure 9. A foreign policy action plan for the European Green Deal
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