Understanding green good specialisation in EU countries: new facts from new data
Filippo Bontadini and Francesco Vona outline their findings from constructing and analysing a new dataset identifying green production in the EU, important information for understanding how the European Green Deal can succeed in transitioning the Union to climate-neutrality by 2050.
In December 2019 the European Commission announced the European Green Deal, a policy initiative setting out the roadmap to achieving carbon-neutrality by 2050. Achieving this milestone will require a significant reduction in Europe’s carbon footprint and policies to foster specialisation in green technologies and products. Since then, of course, COVID-19 has hit. Reflecting a growing interest around green policies for a post-pandemic recovery, funding for the Green Deal will be expanded in the context of the COVID-19 plans within the Recovery Plan for Europe. Similar proposals have been made by the head of the International Monetary Fund, the International Energy Agency and the UK government.
The Green Deal’s aim is to reconcile economic, social and climate goals. It is therefore crucial to understand which countries and industries will benefit the most from Green Deal policies. New statistics are required to monitor the progress of the programme as well as its capacity to reinforce EU countries’ specialisation in key strategic sectors, such as wind and solar, batteries and transport equipment. To aid this process, we have constructed a new dataset that identifies green production in detailed manufacturing sectors across Europe – and our analysis reveals a number of structural features of green production.
A new database to improve the study of ‘green’ production
Identifying ‘environmentally friendly’ or ‘green’ products presents several challenges. For a start, product and industry classifications are not designed to distinguish economic activities based on their environmental impact. More importantly, however, there is no agreed conceptual definition of what a green product is. Two key approaches have so far emerged: the ‘process-based’ approach defines greenness as the inverse of the pollution that is directly and indirectly generated during production. In contrast, the ‘output-based’ approach identifies green products based on their potential to combat climate change and reduce the emissions intensity of production processes in other industries.
These two approaches can lead to rather different conclusions when assessing the greenness of a product. To give an example of this we can think of wind turbines. This product clearly has a strong potential for reducing the environmental impact of electricity production and the output-based approach would consider it green. From a process point of view, however, wind turbines could hardly be considered green because their manufacture requires highly pollution-intensive inputs such as steel.
In a recent paper we build what is, to the best of our knowledge, the first dataset on the production of green goods across European countries and sectors, which enables comparison of the process- and output-based approaches. We use a dataset on manufacturing production across Europe from Eurostat for the years 1995 to 2015. By carefully reviewing products’ descriptions in lists developed by international organisations, we isolate those products that are most likely to only have environmental uses to build our own list of green products. We then calculate a greenness measure for each country and industry: this is the total production of green products as a share of the industry’s total production. We complement this output-based measure with emissions intensity data to obtain measures of greenness based on the process approach from an additional data source.
Findings on green production in the EU
Using our dataset, we can highlight the following five findings.
1. Green production is highly concentrated in a few high-tech industries
Our analysis shows that green production is extremely concentrated in a few high-tech, high-value-added industries specialised in capital goods that are not directly exposed to pollution taxes or standards. Out of 119 manufacturing industries, 13 industries account for nearly 95 per cent of total green production across Europe. These include the production of machinery (such as wind turbines), computer and electronic equipment (of which solar panels are a green example), electrical equipment (including for the control and distribution of electricity) and railway stocks.
2. Only a few countries have successfully specialised in green production
There is no significant overlap between industries that produce green goods and those that are more intensive in polluting production and this is also true in terms of countries’ specialisation trajectories. The few countries that have successfully specialised in green production include Denmark, Germany, Sweden and Austria. These findings suggest that the Green Deal is likely to favour a set of countries and industries that have specialised in green production, while it will negatively impact a different set of countries and industries that have higher pollution intensity. As a consequence, the Green Deal is likely to have ‘distributional’ effects, i.e. reallocating resources away from polluting industries and countries and towards those that specialise in green production.
3. Stringent environmental policies are associated with green specialisation
Over the years in question, countries that have implemented the most stringent environmental policies are those where there has been more green specialisation. We find a strong correlation between green specialisation and a high rating in the OECD index for environmental policy stringency – but the evidence is descriptive and does not suggest any causality. It is in fact possible that policymakers may be aware that their country already has a green advantage, and that more stringent policies will strengthen this further. Also, green industries in such countries may successfully lobby policymakers in adopting environmental policies that will favour them. As a result, countries that already had green advantage may be more likely to pass more stringent environmental regulation, reversing the direction of causality.
4. This green comparative advantage is very persistent
As we have described, only a few countries have successfully specialised in green production and this is the case over the duration of the 20-year period in question. Focusing on the years 2005–2015, we find that the same pattern of green specialisation that was happening at the start of the period was present at the end (this was true also when controlling for country and sector factors). This indicates that green industrial policies may not be sufficient to create new green industries and jobs in countries that were initially lagging behind.
5. Green and non-green capabilities can be complementary and this offers a different road to green specialisation
Our analysis also reveals a correlation between green and non-green production capabilities, within the same sector. Countries that have successfully specialised in non-green production within otherwise green industries may be able to recombine their productive capabilities towards green production. For example, countries that have developed capabilities in the production of semiconductor devices have a head start over those that have not in redeploying these capabilities to produce the photosensitive semiconductors that are a cornerstone of solar energy technology.
Implications for Europe’s Green Deal
While more research is needed to identify the key drivers of green specialisation, we can highlight some implications from our analysis for policies for a green and fair transition in Europe. First, and in line with findings for the United States, countries that have already developed a critical mass of know-how in green industries stand to benefit the most from a green fiscal push. Second, countries that have specialised in polluting production will bear the brunt of the costs associated with the green transition. Hopefully, the addition of Just Transition funds to proposed Green Deals will help regions lagging behind. The US experience shows that investments in green skills are critical for those regions. Finally, policies should take into account that non-green capabilities may be recombined to facilitate the transition towards the production of green products.
Filippo Bontadini is Research Fellow at LUISS Guido Carli University, Affiliate Researcher at the French Economic Observatory of Sciences-Po and Associate Fellow at the Science Policy Research Unit – University of Sussex. Francesco Vona is a senior economist at the French Economic Observatory of Sciences-Po, Research Fellow at SKEMA Business School and the CMCC and a Visiting Fellow to the Grantham Research Institute.