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Two sides of the same coin
By Janez Potočnik on July 19, 2021
The author was European Commissioner for Environment from 2009 until 2014, and during his tenure initiated the European Resource Efficiency Platform, which resulted in the adoption of the first European Circular EconomyCircular EconomyA systems solution framework that tackles global challenges like climate change, biodiversity loss, waste, and pollution. It is based on three principles, driven by design: eliminate waste and pollution, circulate products and materials (at their highest value), and regenerate nature. Package. A former Minister for European Affairs of Slovenia, Potočnik is today co-chair of the International Resource Panel (IRP), and Partner at SYSTEMIQ, he serves as a special advisor on sustainability to European Commissioner for the Environment & Oceans and Fisheries Virginijus Sinkevičius.
There is almost complete consensus that we want an economy which better serves people’s needs, creates better resilience and, in so doing, secures European competitiveness. As we frame discussions and negotiations — most immediately around recovery funds — it is important to understand why the Green Deal and recovery go together. In particular, this means understanding why smarter resource management is the key to securing Europe’s competitiveness, and how we can build a globally competitive position through the decisions we make now.
This article frames my thinking on the opportunities we have in this recovery and beyond, if we are able to correctly understand the Green Deal as a new route to economic prosperity that includes future generations.
In her State of the Union address on September 16th, European Commission President Ursula von der Leyen said:
We will enhance emission trading, boost renewable energyrenewable energyEnergy derived from resources that are not depleted on timescales relevant to the economy, i.e. not geological timescales., improve energy efficiency, reform energy taxation. But the mission of the European Green Deal involves much more than cutting emissions. It is about making systemic modernisation across our economy, society and industry. It is about building a stronger world to live in. Our current levels of consumption of raw materials, energy, water, food and land use are not sustainable. We need to change how we treat nature, how we produce and consume, live and work, eat and heat, travel and transport. So we will tackle everything from hazardous chemicals to deforestation to pollution. This is a plan for a true recovery. It is an investment plan for Europe.
Fortunately, the European Commission had already adopted the European Green Deal — together with some of the important documents that operationalise it — before the Covid-19 outbreak. Had this not been the case, I do wonder if these documents would read the same and be as clear as they are. Let’s remind ourselves, the European Green Deal is described as: “A new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.”
Its implications go far beyond environmental regulation, as the deal is also framed around social justice and public health issues: “[The deal] aims to protect, conserve and enhance the EU’s natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. At the same time, this transition must be just and inclusive.”
It is an “integral part” of the strategy to implement the UN’s 2030 Agenda and the Sustainable Development Goals (SDGs), and “all EU actions and policies will have to contribute to the EGD [European Green Deal] objectives. “As such, the deal identifies a need to: “Rethink policies for clean energy supply across the economy, industry, production and consumption, large-scale infrastructure, transport, food and agriculture, construction, taxation and social benefits.”
This would be a challenging agenda, even in ‘normal’ times. However, I feel that the post-Covid-19 policy response needs to follow the same strategy proposed by the Green Deal. In fact, I believe that there is a greater opportunity to implement the Green Deal’s strategic changes now than there was before Covid-19.
Many people are saying that the world after Covid-19 will be different. It will not be different. It will be the same as it was — but we will hopefully understand it better. None of the challenges we identified a few months ago have disappeared; we just have one more. One that we could have predicted better, and for which we could have been better prepared, but the lessons from previous health crises were not well learned. Devastating outbreaks of Ebola, for example, were still considered too far removed. These previous crises did not lock half of the world within four walls, and did not seriously affect the more developed countries.
We may now realise that we are facing the emergence of a single, tightly coupled human social-ecological system that is global in its scope. We are more vulnerable and fragile, more interconnected and interdependent than ever. The severity and frequency of health-related outbreaks, and of climate-related extreme weather events, is very likely to increase in the future. We need to rethink how we manage the risks: individually and collectively, in the private and public sectors, locally and globally. We need to be better prepared and to do everything to limit these events. We need to create resilient economies and societies.
Some arguments include:
Europe depends on imports for most of its critical raw materials. Just a month ago, the European Commission published its updated analysis of 30 scarce and economically important raw materials, and found that the EU is between 75% and 100% reliant on imports for most metals. This makes the European Union extremely vulnerable.
Resource prices are increasing in the long term and volatile in the short term.
Material costs are rising as a share of the manufacturing industry’s overall input costs. Data from the German manufacturing industry for 1993–2011 shows material costs increasing from 37% to 47%, while labour costs fell from 27% to 17%.
Social considerations are among the core European values and we should value and protect them. If we need to save costs — which we are constantly told we do — we can and should save them in material inputs, freeing up budget to ensure a fairly paid, well-skilled, healthy labour force and society, in general. This is also politically favourable: natural resources will not go onto the streets and protest.
The European Commission clearly recognises how these issues are interconnected and has identified three objectives for Europe:
Setting framework conditions for fair competition in the Single Market and at international level
Accelerating the transition to a climate-neutral and circular economy
Harvesting the benefits of digitalisation
The European Commission’s Shaping Europe’s Digital Future makes regular reference to the “twin challenge of a green and digital transformation” and A New Industrial Strategy makes clear that, for the European Commission at least, the business case is as strong as the environmental and moral cases.
The Circular Economy Action Plan emphasises that the ecological transition means “embedding circularity across the economy”. Better management of natural resources is vital for maintaining and improving the European Union’s competitiveness, while implementing the Green Deal is the best way to strategically strengthen resilience. The circular economy will enable Europe to manage and lower its resource dependency, improve our competitiveness, reduce our environmental and climate impacts, and provide opportunities for new local jobs. And in the wake of the Covid-19 pandemic the circular economy emerges as more relevant than ever, as stated in a recent research published by the Ellen MacArthur Foundation.
How governments act today will shape the post Covid-19 world for generations to come. Achieving such a recovery will require the rethinking, resetting, and redesigning of the economy from one that is merely reactive in a time of crisis to one that is prosperous, inclusive, low carbon, and mitigates the risk of future crises.
Covid-19 puts the effects of globalisation in the spotlight. President Macron has already said that it “will change the nature of globalisation”, while Internal Market Commissioner Thierry Breton pointed out the need for “a radical paradigm shift in our approach”. But this question should be approached carefully. Many of globalisation’s effects have been positive; some have improved the quality of life for people in the least developed countries. Nonetheless, many political voices are talking about reducing dependency and increasing self-sufficiency.
From a European economy lens, the circular economy is already providing an important part of the answer. It is best understood as an instrument for decoupling economic growth from resource use and its environmental impacts, and as a part of the bigger picture of economic, societal and cultural transformation needed to deliver the SDGs.
In practice, this means reducing the dependency of European industry on huge material and energy imports. It also creates job opportunities which — by the very nature of a system that extends and intensifies the life of products and assets where they are used — should be more local than in the current economic model.
One of the main reasons we need the Green Deal is that we are putting future generations into debt through the depletion of natural capital: we are privatising the profits and socialising the costs. This is best explained by the Inclusive Wealth Index, published in the UN’s Inclusive Wealth Report in 2018. Between 1992 and 2014, Production Capital per person almost doubled, Human Capital per person increased slightly, while Natural Capital per person fell almost 40%. During that time, production capital more or less tracked the growth in GDP per person. This shows that the growth in GDP over the past decades has come at the expense of depleting natural capital. And that not all growth which we record by measuring GDP is actually ‘good’ growth.
The Covid-19 pandemic adds a further dimension to the question of generational debt and expectation. It is more directly affecting the older generation. To protect the more at-risk generation, younger people are showing high levels of inter-generational solidarity. But to counteract the economic effects of the crisis, countries and institutions are putting billions of euros or dollars on the table — which means further indebtedness for those younger people.
In both cases, the conclusion is clear. We cannot leave the younger generation with all the debts — financial and environmental — without giving them the promise of a better world than the one we are currently providing for them. We need an inter-generational agreement with a clear promise of a more sustainable and resilient world. Indeed, we can begin by keeping the promises we have made. In Through the COVID Looking Glass, Jeremy Oppenheim concludes:
Covid-19 has shown us that we do not have the luxury of time, nor do we have the option of going back… we need to start with a vision of the future that we want. Fortunately, in the Paris Agreement and the Sustainable Development Goals, we already have that societal software and do not need to reinvent it. But we do need to turn reflection into purposeful action.
Covid-19 and the economic consequences of the lockdown are obviously urgent issues and are being treated as such. But the Covid-19 reaction clearly reveals something else: that while accepting the need to fight against climate change, we have never treated it as really urgent. The financial support so rapidly deployed or promised to counter the pandemic is on a different scale from our efforts at greening the economy and tackling climate change.
The Green Deal aims for “a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use”. However, the financial package has been far from convincing, particularly in the context of the Multiannual Financial Framework (MFF). There is little argument around the financial efforts behind the Paris Climate Agreement being insufficient. While there is broad agreement that climate change is a problem, there is no agreement that dealing with it is urgent.
At the Petersberg Climate Dialogue in April, the European Commission’s Executive Vice-President Frans Timmermans explained the need to recover to a more resilient sustainable economic base, and why he considers the Green Deal to be a “lifeline out of the crisis”:
If we don’t use our investment capacity to create a sustainable economy… then the old economy might be more or less restored, but we will not have the means to transform that into an economy that can weather the next crises.
Paradoxically, there is suddenly an opportunity for massive changes to the economy. Jonathan Pershing and Andrew Steer have pointed out:
In the climate arena, we have been seeking trillion-dollar action for decades, and now with the Covid response, we have the right scale — and countries are prepared to move immediately. The key will be to direct those funds in the best way to both address the recovery, and to address our need for a global climate solution.
If financial support is directed in alignment with the Green Deal, it could provide some of that missing urgency in fighting not only climate change, but also biodiversity loss and pollution. The current European Commission proposal for the recovery fund is showing promising elements. However, the systemic logic of the Green Deal and recovery being two sides of the same coin must be strengthened, particularly when the money is actually disbursed in the countries.
Covid-19 has spared almost no one. It is obvious that a better coordinated approach globally, and in the European Union, could have provided more efficient answers and saved lives. Challenges of a global nature can only be efficiently addressed by joining forces and cooperating better. The same is true of the Green Deal challenges, particularly as they relate to climate change. The only way to address them is by deeper, stronger cooperation. The European Commission is well aware of this. The Green Deal states:
The EU will continue to lead international efforts and wants to build alliances with the like-minded. [But] it also recognises the need to maintain its security of supply and competitiveness even when others are unwilling to act.
We are more interconnected and interdependent than ever. More sharing of sovereignty and more cooperation is clearly possible — as we previously saw in the Paris Climate Agreement. And global coordination in the search for a Covid-19 vaccine demonstrates that we can cooperate when we see the need. In a changing and challenging world, this greater, better coordination needs to become the rule, not the exception.
The UN Environment Programme (UNEP) International Resource Panel recently released Building Resilient Societies After the Covid-19 Pandemic. Key Messages from the IRP. It explains the benefits of sustainable management of natural resources, including the smarter use of materials, such as biomass, fossil fuels, metal ores and non-metallic minerals. As the study shows, sustainable management:
reduces the rate at which natural resources are depleted
brings economic development opportunities, including reduced material supply dependencies and economic diversification towards circular economy business models and jobs
means lower levels of input, which help to reduce waste flows and emissions, and reduce costs for producers and consumers
limits the environmental impacts of resource extraction in agriculture, forestry, fishing, mining and quarrying
stimulates innovation, the creation of new industries, and furthers economic competitiveness, which allows countries with developed infrastructure to leapfrog into economic models where growth is fully decoupled from resource use
The IRP summarises its view with the words: “Many global leaders have announced stimulus packages. Biodiversity loss, climate action, and sustainable resource management should be prioritised in the recovery phase. Decisions made by global leaders on deploying these funds will shape our economies and societies for decades to come. Adopting ‘green’ stimulus packages with elements of resource efficiency can lead to cost savings and stimulate economic growth and are the cornerstones of crisis prevention and resilience.”
The health and economic effects of Covid-19 in the European Union will be asymmetrical for countries and for economic sectors. Without strong solidarity, we risk a further rise in dangerous extremism, more undermining of the core values that are the basis of the European Union… and potentially even the loss of the Union itself. The fertile ground for mistrust and extreme behaviour was neatly captured by Corrado Biroli:
The biggest impediment to action is economic and political ideology. Obama’s Treasury Secretary Tim Geithner said, ‘Mistrust those with deep convictions, and do not expect them to behave rationally.’ This opens the way to the populists, who rationally understand popular frustrations for lack of discerning government directions. ‘The whole problem with the world’, Bertrand Russell wrote, ‘is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.
Countries that are more severely affected will need better understanding and help. They need solidarity from other European member countries and European institutions. Special attention will inevitably be given to sectors such as tourism and aviation, which face the greatest economic consequences of lockdown. Other economic sectors are likely to demand significant financial support packages: agriculture, due to the importance of food security, and the car industry. Joseph Stiglitz, writing in the Oxford Review of Economic Policy (published in May 2020 using the Bloomberg Green Survey) explains:
Tourism and aviation, due to the high number of employees, are likely to get bailed out even without green conditions, even if airline bailouts were ranked lowest by survey respondents from both economic and environmental perspectives. Other policies that received little enthusiasm included income tax cuts, liquidity for large corporations, and non-green infrastructure spending.
In considering logical choices for post-Covid-19 recovery efforts that also fulfil the Green Deal criteria, Jeremy Oppenheim refers to the view of Stiglitz and others:
Recovery programmes should offer a ‘use it or lose it’ moment to jump the economy onto a low-carbon, more inclusive growth path. We already know which sectors are key: health and social care, sustainable infrastructure, social housing (both new and retrofits), mobility services, digital/tech and nature restoration all meet the test.
Nobody is denying the importance and urgency of economic help. But it must be provided with the Green Deal system thinking in mind, rather than following the traditional, siloed, sectoral logic — for example, helping the car industry without taking into consideration the investment required to shift the entire mobility system to become more sustainable. Using an established, conventional approach, based on sectors and production as an end in itself, is a trap into which one can easily fall.
While our economic ship is in turbulent waters, we must stop it from sinking — but use the Green Deal compass to steer us away from the climate iceberg.
The ‘two sides of the same coin’ approach is impossible without the clear understanding and support of those holding the coins. Increasingly, the financial sector seems to understand better than other sectors that the Green Deal direction is necessary.
“Green recovery is a bridge to a climate-resilient future”, said Kristalina Georgieva, managing director of the International Monetary Fund (IMF). “Governments must prioritise investment in green technology and climate-resilient assets for the future. When well thought-through, these investments are fantastic for the economy.”
And Larry Fink, the BlackRock chairman and CEO, was clear in his 2020 Letter to CEOs about the direction in which the financial sector should steer:
“We believe that sustainability should be our new standard for investing.”
“In the near future — and sooner than most anticipate — there will be a significant reallocation of capital. Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”
“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing scepticism from the markets and, in turn, a higher cost of capital.”
One thing is still missing. The voice of science needs to be better heard in public debates, in the media, and in future policy-making. Being the co-chair of the International Resource Panel, a science-policy interface, I am aware of the difficult task ahead of us all, both in science and in policy-making. Science needs to help us better understand the many societal challenges we face, and design the best ways to prepare for, avoid or manage them. And the policy-makers need to understand that the world is getting too complex not to base decisions on the best available scientific knowledge.
Through innovation, in particular through the enabling conditions created by digitalisation, we can provide many convincing answers, as long as knowledge and innovation are used for public needs and societal purposes. Perhaps the arguments for aligning the recovery with the Green Deal principles were best summarised by Jeremy Oppenheim:
One message is already loud and clear: it makes no sense to target reviving a high-risk, fragile economy on a dying planet. But there is every point in seizing the moment to build a future that is peace-loving, innovative, open to possibility and anchored in deeper, more caring relationships with each other and the natural world.
Even these strange Covid-19 times have provided us with some new habits and solutions that point in a Green Deal direction: low-carbon behavioural change through home-working or remote meetings, or reducing the time we spend flying. We need to focus on dietary changes, such as reducing our demand for meat, or using local suppliers, thereby shortening supply chains and reducing transport-related emissions. As Victor Galaz from the Stockholm Resilience Centre nicely pointed out:
The Corona crisis is a 100-metre race and the climate crisis is a marathon. We have to run both at the same time.
For policy-makers, there should be no doubt: the European Green Deal and post-Covid-19 are two sides of the same coin. No flipping required.
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