December 10, 2019 Reading Time: 5 minutes

The European Union is radically overhauling its economy in an attempt to combat climate change. Europe’s Green Deal appears slightly more modest than the proposed Green New Deal in the United States, but cost estimates still run as high as $13 trillion by 2050. That’s the year when the EU aims to be a net-zero carbon emitter, the flagship goal of the proposal.

This isn’t Cold War–era socialism with comprehensive and totalitarian central planning. Rather, the EU seeks to remain a union of 28 largely democratic member states with market-based economies. A complete overhaul of the way every person, household, business, and organization uses energy would be challenging enough for a totalitarian state like the former Soviet Union. Europe’s politicians have far fewer direct levers to control millions of individual decisions, not to mention the small matter of being reelected.

Opinions vary wildly about whether the EU should take such radical steps toward carbon neutrality. But economists across the ideological spectrum should pay rapt attention to what will be the most significant test case of economic planning since the end of the Cold War.

We’re All Hayekians Now

The European Union is home to 512 million people and 27 million active businesses. Carbon-emitting energy impacts virtually every decision faced by every person and business every day, from flipping on a lightswitch to commuting to work to fertilizing soil to transporting goods — the list is impossibly long to capture. 

The EU’s own website about the still-coalescing plan highlights three policies: extending the cap-and-trade system already in place in Europe’s energy and manufacturing sector to other industries, investing in new “green” technology, and fostering biodiversity to remove enough carbon from the atmosphere to offset sectors (and countries) where emissions can’t be reduced to zero.

This is where the calculation and knowledge problems raised by Austrian economists Ludwig von Mises and F.A. Hayek, originally in response to more comprehensively planned economies, still have razor-sharp teeth. By its very construction, the Green Deal will limit Europe’s economic growth at least in the short term, since it’s restricting the set of choices available to every decision-making entity in its economy. But what combination of the policies above and others will slow the economy the least? What iteration of this virtually unprecedented reallocation of resources across the Continent will be the difference between some difficult years and a destabilizing cascade of unintended consequences?

Take Europe’s construction industry, for example. Writing for news site Euractiv, Oliver Rapf, executive director of the think tank Buildings Performance Institute Europe, sees enough complicating factors in just one industry alone to keep policy makers busy through 2050:

We need to transform our buildings and cities in response to the climate emergency just declared by the European Parliament and ensure they are resilient to climate change impacts  — but we also need to ensure that the decarbonisation of the sector benefits European citizens and keeps housing affordable.

Delivering a zero-carbon buildings stock will require significant changes in the way the construction industry provides services and solutions. We also need new mechanisms to trigger investments in building upgrades. The EGD [European Green Deal] must make it clear that the built environment is a priority infrastructure for Europe.

Rapf goes on to propose a seven-point plan for the construction industry that includes investment in low-income housing, subsidies for R&D and education, and retrofitting buildings to withstand more frequent and severe weather events triggered by climate change that the EU effort won’t be able to prevent. This is one of dozens of major industries in Europe, each employing millions and each intersecting with millions of lives every day. 

How much does the EU invest in construction versus other industries? How tight do they make emissions caps? These questions alone are nearly impossible to answer ex ante — combine them with thousands of other questions of equal complexity and importance and it becomes easy to see how government officials unable to use most of society’s knowledge face an impossible task.

The problems are even dicier in transportation, an industry already on the cusp of transformative innovation, not to mention one that employs almost 14 million Europeans. Béla Galgóczi, senior researcher for the European Trade Union Institute, sees enough moving parts to be worth quoting at length:

The industry is a key employer in Europe, covering 13.8 million jobs altogether. It is undergoing three simultaneous transformations. First, regulation aimed at fulfilling climate objectives and improving environmental performance is pushing it towards powertrain electrification.

Secondly, there is a ‘mobility revolution’, whereby extensive digitisation and vehicle electrification will boost the development of new business concepts and service-provision functions, based on new connectivity and autonomous features. Such change is truly revolutionary since it has the potential for overhauling vehicle usage and ownership, along with the industry’s traditional business model.

Thirdly, digitisation across the automotive value chain promises to stretch the physical limits of flexible production further, with considerable impact on working environments. Intelligent production systems are building the interface between production machines and employees through an integrated communication network. In addition to the new automation potential opening up, this will also facilitate comprehensive control of the production process.

The paradigm change in mobility and transport will also have a disruptive effect on established patterns of globalisation in the industry. Car manufacturers in Europe will need to face these challenges, which will rewrite business models with reverberations throughout the supply chain.

Heavy regulation during periods of rapid innovation is particularly problematic. Though difficult to measure, the Green Deal may hold Europe’s transportation industry back for many decades beyond 2050.

A Virginian in Paris

The challenges further multiply when we recognize that rather than a monolithic entity figuring out how to impose its will on a complex society, the national and supranational governments of Europe are organizations woven into that complex society. Officials will have to placate firms and entire industries, and influence will inevitably run in the other direction from rent-seeking to explicit corruption.

One potential disaster scenario for EU officials chasing carbon neutrality is a full, potentially violent rejection of the policy by its citizens. Support for the Green Deal may be sizable while it remains merely the subject of articles on the internet, but things may look quite different a decade into its implementation. The specter of France’s yellow-vest protests, ignited by a gasoline tax, loom large when one considers the Green Deal’s potential to raise the cost of living as well as its potentially enormous impact on industries like transportation that employ millions.

These obstacles would be staggering, perhaps even insurmountable, for one large nation-state. But Europe itself is the largest and most comprehensive experiment in supranational governance in history. Brexit voters, German savers, and Greek spenders are merely a few of the groups that have not been impressed by the results. In fact, were you an elected official in one of the 28 national governments you would have an undeniable incentive to push back on Brussels in terms of bearing as little of the cost as possible. Early roadblocks created by coal-heavy Poland could be just the beginning.

Europe’s Green Deal lacks the doomsday clocks and progressive bells and whistles of its American cousin, perhaps part of why this experiment in economic planning is happening in the EU. This dimension of the Green Deal should not get lost beneath debates about environmental policy, important as they may be. The scale, cost, and detail of the interventions are about as close to what the newly resurgent Left on both sides of the Atlantic has been asking for. But economists from Hayek to Buchanan have given us good reason to believe that in a complex world it’s not just a matter of whether central planners should, but whether they can.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

Get notified of new articles from Max Gulker and AIER.