Mats Engström is a senior policy fellow at the European Council on Foreign Relations

There are good reasons to move forward with the Green Deal — implementing ambitious environmental legislation while modernising the entire economy

China is doubling down on low-carbon steel. Companies such as Baowu and HBIS are already investing, and the next five-year plan will include reducing the climate impact of manufacturing.

History shows that when the Beijing leadership is determined to effect change, it happens. If the EU weakens its ecological ambitions, China could win another green technology race. European leaders should bear this in mind when they discuss competitiveness on February 12.

Simplifying EU legislation is a key item on the agenda at their retreat next month. However, while simplification can be useful in some cases, this is the wrong emphasis.

There are good reasons to maintain the European Green Deal’s approach, combining ambitious environmental legislation with modernisation of the entire economy.

There is no evidence that regulation in general is detrimental to innovation and productivity. An extensive European Commission study in 2016 concluded that the relationship must be assessed on a case-by-case basis. OECD analysis shows the same result. In fact, it is often the other way around.

The Commission’s Directorate-General for Research and Innovation has stated, based on several scientific studies, that regulation is important for new environmental technologies. 

Politics must encourage innovation and change while supporting workers in acquiring new skills and finding new jobs as old ones disappear

In China and elsewhere, regulation is playing a crucial role in promoting green technologies. For the EU to create lead markets for low-carbon steel and other products, legislation will also be essential.

Against this backdrop, the current strong push for simplification has become counter-productive. The “omnibus” approach to sustainability reporting and environmental legislation in general has already created uncertainty for companies. 

The cost of non-regulation must also be considered. For example, the delay in banning dangerous polychlorinated biphenyl substances has cost Europe more than €15bn. Without EU regulations, there is also a risk of the internal market becoming fragmented due to different national schemes. 

There are indeed legitimate concerns about European competitiveness, particularly in some sectors such as chemicals, steel and motor vehicles. However, it is also important to be aware of the significant, and sometimes hidden, lobbying campaigns advocating deregulation.

Often, much of the resistance to legislation comes from those who want to protect their short-term interests at the expense of long-term societal goals. Every transition creates new winners and losers, and progress can be delayed by the conflict between these different poles of influence.

EU policymakers should bear in mind what Nobel laureate Joel Mokyr writes in The Lever of Riches about technological change: “The benefits are usually heavily diffused, while the costs are concentrated. Thus the losers will find it easier to organise, and are quite likely to try to squelch technological progress altogether.” 

Instead, politics must encourage innovation and change while supporting workers in acquiring new skills and finding new jobs as old ones disappear. This is why it is important to stay the course on the green transition, providing companies with the security they need to invest in low-carbon technologies. 

A wider industrial strategy

Rather than pushing for deregulation, the European Council would be better advised to focus its attention elsewhere.

For example, on the innovation and industrial policy parts of the next multiannual financial framework, ensuring that differences in opinion over the new Competitiveness Fund are resolved and finding ways to substantially increase national spending on research and development.  

EU companies are world leaders in resource efficiency and the circular economy, but they require greater support for innovation and commercialisation, as well as ambitious eco-design regulations to establish lead markets

Following the Green Deal legislation agreed during the previous EU mandate, it was right to launch the Clean Industrial Deal in 2024. However, Commission president Ursula von der Leyen’s approach is too narrow. While supporting existing companies in “clean tech” and carbon-intensive industries is important, a broader modernisation approach is also needed.

A wider industrial strategy that goes beyond “simplification” should consider European strengths as well as challenges. EU companies are world leaders in resource efficiency and the circular economy, but they require greater support for innovation and commercialisation, as well as ambitious eco-design regulations to establish lead markets.

In emerging areas such as the intersection between digitalisation and decarbonisation, the EU can also take the lead.

One example is the use of AI in manufacturing. Other promising areas with synergies to green transitions include bioinnovation, new materials, intelligent public transport, 5G and 6G mobile networks, and power transmission.

A well-designed policy mix in such areas could encourage innovation in both large companies and start-ups alike, but this would require legislation that rewards modernisers rather than laggards. 

European leaders should be aware of the risk of policy being captured by narrow industrial interests and maintain an approach that combines green modernisation with specific, targeted support where necessary. EU policy for industrial development and competitiveness should be evidence based, not lobbying based.