Balancing competitiveness and climate objectives: Bellona Europa’s insights on the Draghi Report   

Introduction

Competitiveness has been the dominating topic in EU political discussions in recent months and is set to be a key focus of the upcoming legislative term, as confirmed by the announcement of the Clean Industrial Deal (CID). In the long-awaited report, “The Future of European Competitiveness,” former European Central Bank President, Mario Draghi, addresses this issue, offering recommendations to be considered by the incoming Commission. While the immediate impact of the report remains unclear, the findings of the report will contribute to the work of the new Commission, especially in the design of the CID.  

Bellona Europa recently released its Roadmap for 2024-2029, highlighting key climate policy priorities for the upcoming policy cycle, many of which are also echoed in Draghi’s Report. However, Bellona expresses concern that the report places competitiveness ahead of climate ambition. Strengthening the EU’s industrial competitiveness can and should be achieved without compromising on climate goals and targets, as highlighted in Bellona’s Roadmap. 

While Draghi’s report constitutes a valuable resource for the European Commission to draw from, it is crucial for the next Commissioners to remember that emissions must be reduced at the pace and scale required to meet the EU’s climate targets. Science-based, robust climate policies are essential to ensure these targets are achieved. Reaching carbon neutrality by 2050 is a non-negotiable target and all sectors of the economy should contribute to it. 

The analysis below identifies the main solutions put forward by Draghi and assesses them in comparison with the ones outlined in the Bellona’s Roadmap 2024-2029, highlighting how competitiveness can be achieved together with the climate objectives.  

Intertwining industrial decarbonization and competitiveness   

In “The Future of European Competitiveness”, Draghi proposes a new industrial strategy for Europe, arguing that the EU has the “foundation in place” to be a competitive economy despite the slowdown in productivity growth over the past years (Part A, pp. 07-08). The report dwells on three main issues the EU should focus on to regain competitiveness: innovation, decarbonization and security. Framing decarbonization as an opportunity rather than a burden, for the development of the EU economy is an important step forward in shifting the pessimistic narrative that dominated the public space in the past months. This is aligned with Bellona Europa’s vision, outlined in its Roadmap 2024-2029. Despite this, the absence of a clear reference to the climate targets of the Green Deal is worrying, as they must be a guide for the EU economy to decarbonize and cannot be delayed. 

Draghi believes that for the EU’s industry to decarbonize while maintaining its competitiveness it must carry out a joint plan for decarbonization and competitiveness focused on reducing greenhouse gas (GHG) emissions, lowering electricity prices, and advancing clean technologies alongside a more circular economy. Although the following section will explore Draghi’s energy proposals, it is important to highlight the pivotal role that clean electricity plays in the plan. This is crucial not only because it transfers the benefit of cheaper electricity to the decarbonization objectives, as underlined by Draghi, but also because clean electricity plays a central role in decarbonizing industries. As outlined in Bellona’s Recommendations on Industrial Decarbonisation , electrification of the sectors that can be electrified must be done rapidly to maximize climate impact and cut carbon emissions. Moreover, clean electricity is vital for the development of green hydrogen which will be necessary to decarbonize non-regret sectors. 

««To preserve the competitiveness of Europe’s energy-intensive industries, it’s essential that a CO2 storage and transport network with guaranteed access and sufficient capacities for sectors with little to no alternative decarbonisation pathways is provided.»
»

Behnam Lot

Policy Assistant, Industrial Decarbonisation

Another key technology to decarbonize industries whose processes unavoidably generate CO₂ emissions and have little to no alternative decarbonization pathways is Carbon Capture and Storage (CCS). Draghi refers to CCS as one of the “critical and promising technologies” (Part B, p . 116).  Despite the spotlight given to CCS, the report refers to Carbon Capture Utilization and Storage (CCUS), putting both technological pathways on the same level. These are two different approaches; with CCS, captured CO₂ is permanently stored underground, while with CCU, the captured CO₂ is utilised in products.  In most cases, the utilization of CO₂ does not contribute to the reduction of GHG in the atmosphere since it is ultimately emitted. Despite the EU being a frontrunner in the development of CCS, Draghi rightfully identifies “the need to secure CO₂ storage sites and transport infrastructure as a barrier to its expansion” (Part B, p. 121), but concrete solutions to overcome this deployment gap are missing. Bellona has put forward various recommendations in its Roadmap 2024-2029, including regulatory and financial measures. 

Bellona’s Recommendations on Industrial Decarbonisation 

Energy Infrastructure and Electricity Grids as key enablers to EU decarbonization objectives

Draghi dedicates an entire section of his report to energy, identifying current barriers and highlighting a wide range of solutions to address them, improving the EU energy system. This aligns with Bellona’s Recommendations on Energy Systems, particularly regarding grids, electricity market and hydrogen, all key aspects highlighted in the report. 

“If there is one horizontal area in the energy sector whose importance cannot be overstated, it is the EU’s energy grids.” Grids need to adapt to a more interconnected, decentralized, digitalized and flexible electricity system” (Part A, pp. 46-47). Draghi’s report stresses the critical role that electricity grids will play in achieving the EU’s decarbonization goals. As renewable energy sources expand across Europe, they will not reach their full potential unless grid infrastructure is significantly upgraded and improved. Currently, the grid is a bottleneck limiting the integration and distribution of renewable energy. The report argues that without large-scale investment in both distribution and transmission grids, EU’s climate ambitions will be hindered. While significant financial investments are necessary to improve grids, it is of the utmost importance that grid infrastructure is planned to ensure maximum efficiency and long-term resilience. A key recommendation is shifting energy infrastructure planning to the European level, with an EU-level coordinator to oversee cross-border projects. Bellona supports this approach as it would enhance coordination, improve planning, and boost efficiency across Member States, treating cross-border grids as shared European public goods. 

««Significant investment in Europe’s electricity grids is vital to avoid large-scale renewable energy curtailment caused by grid congestion. A unified EU approach to grid expansion is crucial for achieving a resilient and sustainable energy transition. »
»

Ganni Vassallo

Policy Advisor, Electricity Grids

The report emphasizes the need to simplify and speed up permitting and administrative processes to fast-track energy projects. Additionally, it highlights the growing importance of flexibility in the energy system as electrification accelerates, with system flexibility playing a key role in future energy systems. While these are steps in the right direction, Europe will need clear, proper planning and strong governance to ensure a well-functioning and efficient energy system. “A key goal for the energy sector is to lower energy costs for end users by transferring the benefits of decarbonization” (Part A, p.46) states Draghi. He suggests building on the tools introduced in the new Electricity Market Design, particularly with well-designed Power Purchase Agreements (PPAs) and two-way Contracts for Difference (CfDs). These mechanisms will help stabilize and reduce energy prices, which is crucial for industries as they decarbonize and electrify. While additional support may be needed to assist industries in adapting to this transition, ensuring they benefit from lower energy costs while meeting climate goals is crucial. 

Finally, the report emphasizes the importance of hydrogen in decarbonizing hard-to-abate sectors where direct electrification is not feasible. In fact, it states “Hydrogen production and imports will need to play a specific role in decarbonizing hard-to-abate sectors, such as transport, chemicals and metal industries, as well as to enable industry to source hydrogen from renewable-rich regions.” (Part B, p.23). Given the significant energy demands and the lack of infrastructure for hydrogen production, hydrogen must be used strategically in these sectors, avoiding unsustainable and wasteful use of hydrogen. With hydrogen being a scarce resource, prioritizing its use where no other decarbonization alternatives exist will ensure an efficient transition. Additionally, while importing hydrogen may help meet demand, it introduces various risks and challenges that must be carefully managed. It is crucial that hydrogen imports comply with strict additionality principles to avoid compromising local electricity access and power decarbonization efforts. Strict governance to prevent a resource challenge on water is also vital, especially as the amount of water needed to cool the electrolyzers during hydrogen production will results in a large increase of water consumption.  

Bellona’s Recommendations on Energy Systems 

ETS revenues earmarked for climate action, but do not give free pass to industries to emit 

In his report, Draghi dedicates significant attention to key policy files related to greening the economy, such as the EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM). Two consequences of these policy files have particularly impacted the competitiveness in recent years for Energy-intensive industries (EIIs) and so-called “hard-to-abate” (HtA) sectors: the high carbon prices that EU industries face compared to the less stringent climate legislation in third countries; and the investment gap required to decarbonize these industries. Although Draghi acknowledges that “free allowances for the EIIs have so far limited the ETS’ impact” (Part B, p.99), he is worried that with the gradual phase-out of free allowances and the corresponding CBAM phase-in, heavy industries will be negatively affected by higher CO₂ costs. 

Two of Draghi’s recommendations are particularly relevant. The first is to reinforce “relevant funding to support the decarbonization of EIIs, starting by earmarking ETS revenues” (Part B, p.108). This aligns with what Bellona has called for in its Recommendations on Sustainable Economy, although it only tackles part of the issue. While ETS revenues must be entirely spent on climate action and are necessary to decarbonize heavy industries, it is crucial that integrity is maintained by avoiding greenwashing and inadequate solutions. While allocating this money, criteria such as climate impact, system effects, timing and scalability and the “Do No Significant Harm” (DNSH) principle must be taken into account. Three quarters of these funds are allocated by Member States, and the “earmarking” proposed by Draghi must be as traceable as possible, to ensure and evaluate their contribution to the net-zero objectives of the European Union. For these funds to be used in a strategic and effective way, it is crucial that Member States transparently report their ETS revenues and how they are spending it, with robust verification measures in place to ensure accountability if the information is unclear or inaccurate.  

Draghi’s second recommendation is to “closely monitor and improve the design of CBAM during the transition phase and evaluate whether to postpone the reduction of free ETS allowances if CBAM’s implementation is ineffective” (Part B, p.110). If the phaseout of free allowances were to be delayed, this would become an egregious example of greenwashing the EU’s own climate policy. Free allowances were introduced in the ETS in 2005 as an exceptional transitional measure to overcome risks of carbon leakage and to avoid damages for heavy industries in Europe. This transitional exemption deviates from the “Polluter Pays Principle” (PPP), at the core of the EU’s Treaties, has been implemented for almost twenty years, delaying the decarbonization of the sectors involved. The gradual introduction of the CBAM allows for the controlled phase-out of free allowances under the EU ETS, ensuring protection for EU industries and encouraging industrial decarbonization in third (non-EU) countries.

««Monitoring the design and implementation of the CBAM is one of Bellona’s priorities, but we cannot afford a delay in the phase-out of free ETS allowances.»
»

Francesco Lombardi Stocchetti

Policy Advisor, Sustainable Finance & Economy

Not only would this be an enormous step back which damages the PPP underpinning the EU ETS, but it would also weaken the carbon price signal, adding confusion and uncertainty in the market and among investors. The proposal seems to contradict Draghi’s own point that the long lead times for investments in EEIs require policy predictability, as delaying the phase-out of free allowances would create uncertainty for investors and risk locking in harmful technologies instead of low-carbon solutions. Additionally, maintaining free allowances would reduce ETS revenues, limiting funds available for industrial decarbonization, which Draghi and Bellona both emphasize as crucial.  

Recommendations on Sustainable Economy 

Lead markets for low-carbon products and public procurement as crucial drivers for the transition 

A key focus of the report is public procurement, mentioned 45 times in Part B. For energy-intensive industries, such as cement and steel, Draghi proposes stimulating demand for green products through increased transparency and standardized low-carbon criteria in public procurement. This approach would help drive the transition to a more sustainable economy in the short term, by “pulling in” low-carbon materials into the market, sending a strong signal to industry and de-risking investments in low-carbon products. 

The report also recommends harmonizing the definition of “green” products across the Single Market to prevent conflicting standards. It suggests aligning this definition with existing frameworks, such as the EU Taxonomy and the CBAM. Harmonized standards for low-carbon products are crucial to prevent market fragmentation, as called for in Bellona’s Recommendations on Embodied Carbon. However, the report fails to reflect the importance of these standards to be performance-based (i.e. standards that set requirements according to the physical behavior needed of the product), rather than recipe-based (i.e. prescriptive standards, based on the composition of the product rather than its functionality), so that low-carbon products with an equivalent performance are also able to enter the market on equal terms. 

In terms of assessing the carbon footprint of products, Draghi calls for the development of a common methodology, whether focused on production alone or the entire product lifecycle and suggests considering whether these assessments should be mandatory or voluntary. This could lead to the Product Carbon Footprint (PCF) label complementing or competing with existing eco-labels, with the Ecodesign for Sustainable Products Regulation (ESPR) serving as a basis for harmonization. To ensure proper carbon accounting, the common methodology should look at whole life carbon emissions, not only at product level but considering the whole system wherever possible. For example, the whole-life carbon of a building should be assessed, rather than just the block of concrete. Considering the current lack of sufficient environmental data, these assessments should be mandatory. 

««To ensure that we are actually reducing emissions in the full system, carbon accounting of a construction project must consider whole life carbon emissions, not only those at product level but over the full lifecycle of the final building.»
»

Irene Domínguez

Policy Manager, Embodied Carbon & Lead Markets

Additionally, Digital Product Passports (DPPs) are highlighted as a tool to improve data transparency, streamline administrative processes, and ensure supply chain compliance. The rapid development of this tool in a robust manner is essential, so that supply chain data on products and materials are publicly available to use when assessing the carbon emissions of a project, which is especially crucial to simplify and harmonize public tenders. The report also advocates for harmonizing building codes across the EU to encourage demand for green construction and to complement circular economy incentives. This, while an enormous challenge given how building codes differ even among cities of the same country, such as in Germany, would simplify the process for bidders in public tenders. 

Finally, Draghi’s report proposes integrating low-carbon criteria and minimum sustainability requirements into public procurement. By using lifecycle emissions-based adjustment factors or shadow prices when evaluating bids, Europe can leverage its existing legislative framework to push forward its sustainability agenda. However, it has been proven that voluntary criteria have failed to drive this necessary change. These requirements must be mandatory and designed to ensure that emissions are reduced at a systemic level. 

Bellona’s Recommendations on Embodied Carbon 

Strong carbon objectives and carbon accounting measures: key for an impactful transition 

Overall, “The Future of European Competitiveness” is a complete analysis of the contemporary economic and industrial landscape which puts forward high level recommendations in line with current economic paradigms. Decarbonization is presented as an opportunity for EU competitiveness, with the overall green transition and objectives left in the background albeit identifying some key levers for success. In the pursuit of strengthening Europe’s competitiveness on the global stage, the EU must also demonstrate leadership in tracking its climate progress and in being the first continent to reach climate neutrality. 

Bellona highlights that climate targets must be clearly defined by separating the targets for reducing emissions, for increasing  the restoration of natural sinks, and for permanently removing CO₂ from the atmosphere.  While carbon sinks will unavoidably play an role in reaching net-zero, we must avoid overly relying on their success in long-term climate planning.  

While Draghi’s report provides the right general direction for the EU’s future, the upcoming Commission must keep climate ambition and environmental integrity in mind while assessing this Report and designing the announced Clean Industrial Deal.

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