EU’s east-west divide threatens global climate policy lead

The EU pitches itself as a key proponent of stronger action against climate change globally. However, we see a growing divide between western and eastern members states over the adoption of more stringent environmental regulations as a serious threat to this image. The split implies greater regulatory fragmentation and compliance costs for businesses operating across the EU. Additionally, it undermines the EU’s credibility to lobby the likes of China, India and the US for more climate mitigation efforts.

EU as a pioneer of environmental protections

EU member states have some of the strongest environmental regulatory frameworks in the world, with many among the highest scoring countries in our Environmental Regulatory Framework Index. Furthermore, we forecast that western EU member states such as Belgium, Portugal, Germany and the Netherlands will lead the global movement towards tighter environmental regulations.

EU's east-west environmental policy divide is clear in our Environmental Regulatory Framework Index Projection

The prospect of more stringent environmental policies in western member states will entail a greater compliance burden. However, the presence of comprehensive environmental laws and regulations also increases stability for investors in the long run as the regulatory framework becomes more transparent and predictable. Moreover, effective environmental protections can help minimise reputational and legal risks for businesses on environmental grounds. For example, the lack of clear regulations outlining the timeline of Germany’s coal phase-out has added to the deadlock between activists occupying the Hambach Forest and RWE, which operates the nearby lignite mine.

Regulatory divergence to prevent EU-wide action and drive up compliance burden

Over the coming two years, we expect to see growing regulatory divergence within the EU. Western member states will progress more quickly than their eastern counterparts as the latter will put economic priorities above environmental concerns. In eastern and central EU states, pressure for action from civil society is weaker and high emission levels make imposing more stringent emissions standards costlier to the economy.

Member states’ diverging will to introduce more ambitious policies will prevent the EU from taking collective action. To strengthen their environmental protections, we expect that western member states will adopt more ambitious policies individually. Regulatory fragmentation will thus increase across the EU, not just between the east and west, meaning businesses will face additional compliance costs as they must observe varying regulations across the EU jurisdictions they operate in.

Is global climate leadership under threat? 

The EU has sought to lead the global fight against climate change. However, the divergence between eastern and western member states on strengthening environmental protection will make it increasingly difficult for the EU to maintain this role. This growing gap will undermine the bloc’s ability to credibly advocate for greater climate mitigation globally. For example, the EU Commission’s president-elect, Ursula von der Leyen, is unlikely to win support from the Visegrad Group (Czech Republic, Hungary, Poland and Slovakia) for her ambitious plans for higher emissions reductions, including carbon neutrality in 2050.

Few countries have committed to the ambitious action needed to meet the Paris Agreement’s goal of limiting global warming to 2°C. The absence of the EU as a global leader on climate change and the lack of an obvious alternative to take on this position means that the global push for climate action is likely to lose steam. This makes more ambitious action ever more unlikely.

What is the outlook for EU states? 

Over the next two years, we expect western EU states to adopt increasingly ambitious environmental regulations, while eastern member states prioritise economic considerations over environmental protections. Businesses will thus operate in an increasingly fragmented regulatory environment in the EU which translates into higher compliance costs; and rather than EU-wide standards, they will need to observe divergent national regulations in each country of operations. In turn, the absence of the EU as a credible leader on climate action makes global progress less likely.

Franca Wolf

Senior Analyst, Markets