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The unravelling of the European Green Deal and the birth of a new European Climate Policy

In December 2019 the European Commission presented the Green Deal as a sweeping programme to make the EU climate-neutral by 2050, while boosting competitiveness and social inclusion ¹ . It was probably the most comprehensive policy effort to turn the ambition of the Paris Agreement of 2015 into a policy reality and helped solidify climate policy efforts globally ² . The Green Deal was multifaceted but centered around several key elements: tighter corporate sustainability disclosures designed to help markets guide capital towards a faster transition; a ban (or near-ban) on new petrol/diesel cars by 2035; an expanded emissions-trading schemes to continue to deliver clearer price signal to accelerate abatement away from emitting activities; and a rapid scale-up of renewable energy infrastructure and capacity. To this, a set of green industrial policy initiatives were added later on ‒ from the Net-Zero Industry Act to the Clean Industrial Deal ‒ aimed at anchoring clean-tech manufacturing in Europe. The RepowerEU programme announced after the start of the war in Ukraine and the ensuing energy crisis was designed to accelerate energy transition and link it to energy resilience and Europe’s security goals. This contributed to tie Europe’s climate ambition, its industrial renewal and its geopolitical imperatives and to turn Europe’s climate policy into a critical positive geopolitical externality.

Six years later, as the last COP30 winds down, it is critical to take stock. Sadly, the entire European climate agenda and strategy might be unravelling with profound consequences not only for Europe’s economy and its climate objectives but more broadly for the world, especially after the US has clearly signalled its departure from the Paris Climate Agreement and more generally from any decarbonisation effort ³  and has become openly hostile to Europe and global efforts towards decarbonisation. Europe’s place in global climate diplomacy has always been central in part because of its ability to lead by example, but the slow, since the eruption of the US’ Inflation Reduction Act and then sudden, since the election of Donald Trump, erosion of some of the key pillars of its approach and strategy requires a new clear-eyed appraisal in order to devise a new approach.

Corporate disclosure and greening via price signals

From the start, the Green Deal emphasised that sustainable finance including reporting was foundational because it would essentially guide private capital flows away from brown activities and towards greener activities. The premise of disclosure was a firm belief in market forces and price signals to deliver the private sector incentives and impetus for the transition and achieve a least cost abatement and especially a least cost transition for the public sector. The Corporate Sustainability Reporting Directive ⁴  (CSRD), due-diligence Directive (CSDDD ⁵ ) and the Sustainable Finance Taxonomy ⁶  all aimed to guide private finance towards green finance. But in early 2025 the Commission proposed an omnibus “simplification” package which marked a profound intellectual shift and a significant watering-down of those disclosure regimes.

More concretely: The package proposes to exempt about 80 % of companies from mandatory sustainability disclosures under the CSRD. According to major investor groups who had heavily invested on the basis of this new guidance, this represents a serious risk to the integrity of the EU’s sustainable-finance architecture ⁷ . In short: a key plank of the Green Deal — the disclosure-based re-routing of investment — is being diluted under competitive pressure because of the fear that lacking sustainable reporting in the US will retain investors or divert new capital to the American market rather than to the European one. This is also compounded by pressure from the United States or fossil fuel suppliers like Qatar who don’t want money to be diverted away from fossil fuel purchase and don’t want US companies to be exposed to climate litigation risks turbo-charged by extensive disclosure schemes.

The end of the 2035 internal combustion engine ban

One of the most politically visible policies of the Green Deal was the plan to effectively ban the sale of new Internal Combustion Engines (ICE) (petrol/diesel) cars across the EU by 2035. In March 2023 the regulation ⁸ , was adopted requiring a 100 % reduction in CO₂ emissions for new passenger cars and vans from 2035. This was secured after heroic battles against the car lobby ⁹ . The automotive sector quickly submitted a draft plan calling for a 90 % rather than 100 % reduction, plus retaining long-range plug-in hybrids after 2035 and the election of Friedrich Merz in Germany installed a champion of the car industry who pledged to do everything to soften the ban ¹⁰ . Meanwhile, the European car industry was facing brutal competition from Chinese Electric Vehicles (EV) makers and exposing their inability to compete neither on price nor quality for advanced electric vehicles ¹¹ . In September 2024,  Italy and Germany joined manufacturers in calling for a review of the 2035 ban and the recognition of e-fuels (synthetic/renewable fuels) as an alternative to full electric ¹² . In October 2025 the European Parliament logged a written question on the Review of the 2035 de-facto ban on combustion engines ¹³ . The European Commission has proposed a review and an amendment by December of 2026 ¹⁴ . What is emerging is clear, exemption for e-fuels with a loose definition of what these are, exemption for long-range plug-in hybrid vehicles and possibly even some phasing in, even though optically the 2035 will remain. This step backward is a disastrous signal and more importantly it will discourage European auto-makers from making the necessary investment to accelerate their electrification precisely at a time when the EU needs to devise a new long term industrial strategy to support a sector that is critical to Europe’s industrial future. As such, Europe is self-sabotaging its transition towards clean transport and increasing the chances that China will dominate the EV market of tomorrow, which is undoubtedly dominated by a shift in demand for EV even in emerging/developing economies with limited levels of electrification. This will be presented as striking a better balance between competitiveness and transition, but it will only provide a slower transition and less competitiveness in the medium term.

Lowering emission-reduction targets

The Green Deal originally rested on interim targets in 2030 and 2040 and a pathway to net-zero by 2050 but there are growing tensions around these targets. As per the current central scenario under current policy the EU may achieve a 47 % reduction in energy-related emissions by 2030 (vs. the planned 55 % in “Fit-for-55”) and net-zero may now only be achieved by slip  to 2060 ¹⁵ . Over the same period, Chinese emissions that were supposed to peak only in 2030 have already started declining fast ¹⁶ . In effect, the coherence of the EU pathway from near-term target to net-zero is under substantial strain. Additionally, ahead of the COP30 the European Council  has essentially quietly loosened the targets, allowing EU countries to make up 5% of their emissions reductions targets through carbon credits—effectively lowering the overall target to 85% by 2040 ¹⁷ As a result, a new target for the EU is proposed to cut emissions by between 66.25% and 72.5% by 2035 ¹⁸  but the agreement needs to be agreed in trilogue negotiations by members of the European Parliament and by the Council starting December 9.   before it can come into force, which could result in yet further loosening.

The slow death of carbon pricing and taxing

The reality however is that these efforts are fundamentally tied to Europe’s cornerstone climate policy, its emission trading scheme. Pricing and taxing carbon has long been Europe’s central strategy from which derives others, like disclosure. In strict economic terms, this is undoubtedly the strategy with lower abatement cost and the most effective path to decarbonisation. In real life, it is marred with social and political challenges that are proving hard to overcome ¹⁹ . In particular, the general idea of Europe’s ETS is that it would, by way of the promising work of the COP, lead to a more generalised adoption of carbon taxing and pricing schemes globally helping the world to slowly converge towards a global carbon price. This neat intellectual economic construct is however under attack and there has been not only pressure by the US but increasingly by other emerging economies like China and India who are resisting the roll out of CBAM due early in 2026 and which is central to the industrial competitiveness of the European economy ²⁰ . The last COP is particularly worrying in this sense as the last paragraph of the agreement refer to the risks posed by « arbitrary discriminations or trade restrictions » and calls for the WTO to be more involved in future meetings suggesting a broad coalition is being forged against CBAM.

The US has no intention to adopt a carbon pricing scheme and China has one in name only. In addition, the US has been fighting tooth and nail against the EU’s Carbon Borden Adjustment Mechanism, which is critical to the survival of Europe’s ETS in the long term. As a result of these challenges, European industries –along US firms, which is rare– are lobbying for a review of the ETS mechanism and eventually and very likely for more free allocation and a lower carbon price. There is every reason to believe that the review of the ETS due in 2026 will deliver some accommodation and the roll out of CBAM will be an important test.

More importantly maybe, the ETS is designed to be expanded to new sectors in 2027 covering in particular housing, construction and transport. This is liable to create a direct shock to consumers and the climate social fund created to address the redistributional dimension of the shock seems unfit for purpose ²¹ . In July 2024, the Commission launched infringement proceedings against 26 Member States for failing to transpose the ETS2 provisions on time, but there are now pressing demands by Member States to review the directive and delay or accommodate the entry into force. On November 6, the Council agreed to delay the entry into force to 2028, which now needs approval of the other co-legislators.

But it is very likely that the Commission will have to take a very significant step back, which would mark yet another blow to its climate ambition and more significantly to the philosophical underpinning of Europe’s transition strategy. Indeed, what appears ever more clearly is that the economicist driven strategy relying on carbon pricing is reaching an impasse and that a new approach rooted in subsidies, industrial policy and energy integration and planification is yet to emerge ²² .

Green industrial policy is still looking for a framework

Almost all climate strategies depend on rapid expansion of renewables but the EU is failing on all dimensions. A report by SolarPower Europe shows that implementation of the revised Renewable Energy Directive (RED III) remains weak: in many Member States the rate of transposition is under 50 % more than a year after the deadline ²³ . Grids, interconnectors are material constraints to greater build out and the Renewable targets are being missed by several countries. Hence, although deployment continues, the pace and systemic readiness (grid, infrastructure, supply-chain) are far behind what the Green Deal initially envisioned and there is real hope for a breakthrough.

The RepowerEU plan announced at the height of the energy crisis when the war in Ukraine started has barely moved the needle in delivering faster investment on critical infrastructures. On the whole, the EU seems to continue to battle setting out a clear framework for action. The launch of the Inflation Reduction Act in 2023 in the United States has provoked an awakening but has not led to a clear plan. The EU’s green industrial policy remains marred by a lack of centralized public funding, which is usually resolved by weakening of State Aid rules to enable national support schemes along poorly harmonized principles ²⁴ . Some EU-level frameworks, like the IPCEI could provide an important venue but have been under-utlized.

In addition, the EU seems to be suffering from an enforcement crisis that is weakening the reach and breadth of its regulatory power related to the transition ²⁵ . The most illustrative case in point might be the EU’s effort to build out an indigenous battery supply chain and production capacity, which is essential for the EV industry as well as for Europe’s storage efforts more broadly. Without battery, no EV and no balanced grid dominated by renewables. What is striking here is that Europe’s efforts have been piecemeal and disjointed, ranging from high level of subsidies, low environment and local content rules for Hungary’s giga factory plan, to the most environmentally compliant one in Sweden with Northvolt, which eventually failed ²⁶ . Short-term goals of securing output and jobs often clash with longer-term ambitions of upgrading and value capture. For example, in the critical area of electricity storage and transport, Brussels has never operationalised what counts as a “European” battery industry ‒ whether loosely conditioned foreign investment suffices, or whether domestic ownership, control and supply chains are essential. After Northvolt’s collapse, many member states and firms pivoted back to Korean and Chinese FDI; yet without robust and even technology-transfer, subsidies, environmental conditions, this risks locking Europe into low value-added assembly roles and will intensify cannibalisation between European efforts without a minimal level playing field enforcement.

Domestic champions must now compete with generously subsidised foreign incumbents inside the same single market. What is striking here is that European countries have shown no coordination, consistent or coherent approach, which has clearly resulted in disastrous results that are jeopardising the entire supply chain and the whole transition.

A the transition trilemma and the dawn of a new climate policy

Europe is in effect captive of a critical policy trilemma. It cannot possibly achieve its (i) ambitious emission reduction targets, (ii) strategic autonomy and (iii) industrial competitiveness. There are fundamental trade-offs between these three announced policy objectives and no clear framework for resolving them. As a result of these tensions, the danger is that the EU is liable to compromise on all and achieve none. These tensions are amplified by the EU’s tendency to articulate broad goals without operationalising them or defining their priority ‒ a vagueness that leaves member states to default to low-road strategies.

We believe it is critical for Europe to assess thoroughly where its climate policy currently stands, where it is failing and where a new approach is required. The current combination of denial and delusion is straying Europe away from a new policy approach that appears both necessary and accessible. A new European climate policy strategy would recognize that while carbon pricing and taxing is unambiguously the least cost strategy, it is also the most socially and politically taxing and therefore it needs at minimum to be complemented with an ambitious subsidies and social support policy that has been entirely missing. The central reason why it is missing is because Europe currently lacks the centralized fiscal resources to deliver on subsidies and social support.

The EU must shift from a dying technocratic climate policy paradigm towards a new one with green industrial  and social policy at its heart, but doing so effectively requires loosening several dogmas: limits on the scope and use of industrial policy, unqualified openness to trade, the restrictions on fiscal support ‒ and as a result, recognising that more fiscal policy integration will most certainly be needed. Indeed, the green transition will not take off without large-scale public investment and generous deployment incentives, and this spending push must be paired with buy-European provisions and a clear, predictable and paneuropean industrial policy framework. With external demand drying up, Europe now has no choice but to rebalance towards domestic demand to avoid stagnation and unemployment ‒ a shift that makes demand support not just desirable but unavoidable.

At the same time, spending will not do the trick on its own. The transition is unfolding under the shadow of overwhelming Chinese dominance in net-zero technologies. Solar, wind, and batteries ‒ once imagined as engines of European green growth ‒ are now sectors in which heavily subsidised Chinese firms hold a significant competitiveness lead, raising the danger that European industrial strategies simply “leak out” into imports. The instinctive reaction is to retreat from greening altogether, but there is a better alternative: coordinating industrial rollout with strong, targeted deployment incentives. China itself has demonstrated how demand-side incentives can scale up domestic industry, and France’s “eco-bonus” scheme ‒ functioning as a de facto local-content rule for EVs ‒ offers a promising European template, with proposals emerging to extend it at the EU level. ²⁷  The challenge is to strike a careful balance: preserving the welfare benefits of trade, which matter especially for fiscally constrained poorer member states, while still nurturing infant industries in high-innovation sectors, protecting manufacturing employment, and safeguarding technological sovereignty in an era of weaponised trade. ²⁸  While there are certain areas of the green industrial supply chains that are now lost for good like the solar and perhaps parts of the wind industry. Europe must preserve the auto-sector and the nascent battery one for its role in the European industrial supply chains is too critical to be lost. Indeed, without the auto-sector, probably half of the entire European industrial sector could be at risk creating even greater vulnerabilities for the European defense industrial base. Saving autos can probably only be achieved through a systematic combination of regulatory constraints and fiscal support: Joint Ventures (JV) and technology transfer agreements and public subsidies must be harmonized to avoid the sort of cannibalisation the EU has observed in the battery ecosystem for example. This requires the EU to adopt a central planner approach that it has so far been reluctant to undertake. The European Industrial Accelerator Act to be announced in January 2026 (rather than in December 2025) could be the opportunity of a new European industrial policy and the activation of new trade protection instruments. But in order to be effective, it will certainly require new approaches to competition policy and more fiscal resources. This is central economic and climate policy challenge of the coming years.Overall, there is no reason for Europe to entirely give up on all of the three points of the trilemma but in certain areas, the EU needs to clarify how it will preserve industrial competitiveness, strategic autonomy or its emission targets, and where it will allow to give in on one to preserve the two others. This is an urgent task to save Europe’s climate ambition, to preserve its industrial competitiveness when it can and to achieve some level of strategic autonomy where it must.

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