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A need for fair transition in Central Europe

The process of energy transition in Europe is accelerating and more and more countries are setting the climate policy on top of the political agenda. So did the new European Commission in December 2019 when President Ursula von der Leyen announced the European Green Deal as an overarching goal which should make the EU’s economy clean, viable, sustainable and climate-neutral by 2050. The implementation of this plan, very ambitious and very costly, will not be however distributed equally among EU Member States, as the disparities in the economic and social development still persist. It means that some countries or regions will have to do more efforts than the others to achieve the climate goal. Is the European Commission’s plan fair also for Central Europe and the Baltic States?

The energy transformation is a multi-faceted process. Structural change in the mining areas is a complex development, challenging cities, regions and governments. It encompasses many dimensions of economic activities, changes in the existing energy market, the way of energy generation but it has also social consequences: it creates structural changes in employment, especially in mining and industrial regions.

The fair transition should be a top policy priority. In that respect, the focus should be at those regions and countries that rely more heavily on the production or extraction of fossil fuels and have a lower level of economic development. Of course, for them, the transformation will take longer, will be more difficult and, importantly more costly.

There are still differences in both the level of GDP per capita and the consumption of fossil fuels across the European Union. While many Western and Northern European countries (UK, France, Netherlands) have already restructured some of their industrial regions and gradually changed their energy mixes towards low-carbon, Central Europeans are still on their way. The more, there is a crucial difference: industrial regions in this part of Europe had to go through these changes in a society in transition with a weak overall economy and less continuity. We shall bear in mind that we have started our journey to the market economy only 30 years ago and some legacies of the communist system are still not vanished.

Taking into account the level of economic development, all countries of Central and Eastern Europe are covered by the cohesion policy, meaning that the countries’ GDP per capita is below 75 per cent of the EU average. At the same time, for many of them, fossil fuels remain an important source of energy production: hard coal and lignite in Poland, Czech Republic, Bulgaria, Romania, oil shale in Estonia. This dependency automatically translates into higher costs of decarbonisation of their energy systems. In addition, national and local budgets are not significant. They cannot be left behind in the transition process.

The costs of the energy transition vary depending on the methodology, but the numbers are staggering. Different studies estimate it between 80 and 200 billion euros per year. The EU long-term climate strategy assumes that investments in low-carbon energy production and the necessary infrastructure will have to increase from 2 per cent of EU GDP per year to 2.8 per cent (520 to 575 billion euros) in order for climate neutrality to be achieved by 2050.

The ambitious climate goals, in particular the increase of the 2030 GHG emissions reduction target to 50-55 per cent, need a detailed assessment of its impact on the energy systems and economy of Central European countries. The rise of the CO2 allowances prices above 30 euros will make most conventional power plants unprofitable and may lead to their early closure and consequently provoke a sharp increase in the unemployment rate, energy prices and undermine the level of security of energy supply. Also, high CO2 prices combined with decreasing free allowances system for energy-intensive industries will make production not competitive on the global market. The jobs offshoring and carbon leakage are real problems, which have to be addressed by combining political and economic tools, including appropriate trade policy.

The regions with a high share of labour share in mining industry such as Silesia in Poland, Jiu Valley in Romania, Maritsa in Bulgaria, Ostrava region in the Czech Republic or North-East Estonia (oil shale) will have to face serious social problems. The closure of the mines and disappearance of the industry related to the mining would lead to structural unemployment, likely creating social problems and exclusion. It can be a big problem for the stability of an economy and tends to hurt some regions more than others.

The scale of the transformation requires the allocation of a significant amount of sources. The European Green Deal has been declared as the political priority of the European Commission and therefore adequate resources should be allocated to its implementation and the relevant support from the EU institutions should be put in place. Meanwhile, the Just Transition Fund, proposed by the European Commission in January, will allocate an amount up to 17.5 billion euros for the period 2021-2027 for the entire EU (including 10 billion euros from the recovery mechanism). Only around 60 per cent of this amount – approximately 9 billion euros – will be distributed among Central European countries. It is too little to make a transition in the EU success and the regions economically growing.

There is a clear need to increase spending for the transformation of the Central European energy sector from the EU budget. Also, the proper and targeted support is needed. The EU institutions should support the creation of a wide economic and restructuring plans which will encompass the variety of aspects and sectors. Only the holistic approach, combined with the relevant funds, can help these regions to move towards the cleaner and sustainable economy.

The question remains, how to properly design the Just Transition Fund and other EU funds related to energy and the environment. We should remember that the cohesion policy is about the overall economic development of the poorer regions. The funds are spent on roads, railways, schools and hospitals. It is unlikely these sources will be readdressed to climate action. If we plan to increase the climate goals, higher allocation for environmental purposes should follow. Otherwise, the transition will leave several regions behind.

We should also bear in mind that the COVID-19 pandemic is not over and we cannot still properly assess its economic consequences. Deep reception in most EU countries will lead to the lower income of central and local budgets and therefore limit their possibilities to react. And the decision which sectors need to be supported first, cannot always lead to the answers that it is climate policy.

To conclude on a more positive note, we should also look at the transformation process from a point of view of opportunities. Investments in energy transformation could stimulate economic growth and form a part of the recovery agenda. The jobs in the green and clean industry can help in the development and building the local supply chains. It is however the complicated process and those who have already invested in those sectors have an important competitive advantage. We should do much efforts to provide these opportunities also for the regions in Central Europe and Baltic states.

This article first appeared in Estonian in TööstusEST magazine.

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