What does the EU’s rightward shift mean for green policy?

Welcome back. EU lawmakers yesterday reached a deal to delay a law on deforestation in global commodity supply chains. In an ongoing saga, the law has faced opposition from businesses, farm groups, foreign governments and rightwing parties including the Alternative for Germany (AfD) — and has tested Europe’s ambitions to clean up the supply chains of major commodities.

In a statement after the deal, Christine Schneider, lead negotiator representing the European parliament in the talks, said that beyond the postponement, further changes would ensure that countries avoiding deforestation “will have the opportunity to be exempted from unnecessary red tape”.

In today’s newsletter, I report on the status of the EU’s climate policy under a more rightwing European Commission. Some hope Europe could shift from a more regulations-based to a more investment-driven approach to clean industry. And Patrick has the latest on fundraising for carbon removal company Heirloom. (Lee Harris)

European climate policy

A winding road for Europe’s green industrial policy

European Commission president Ursula von der Leyen made climate policy the centrepiece of her first administration, passing a series of green corporate regulations and financial support measures for low-carbon investment. But as she starts her second term in the role, which began on Sunday, the outlook for her green industrial agenda is contested — with implications for investors and businesses well beyond the bloc.

Since European parliament elections in June, when voters swung rightward, von der Leyen has pledged to restore manufacturing competitiveness and cut red tape that critics say is shackling Europe’s economy. Earlier this month member states called for a “simplification revolution” on regulatory burdens, and corporate sustainability reporting rules are a big target.

Members of the incoming commission insist that decarbonisation and economic dynamism can go hand in hand. But observers are torn over whether the most rightwing commission in decades will deliver the investment needed to make those compatible — rather than competing — priorities.

If Brussels reopens debates over hard-fought environmental disclosure and corporate net zero targets, a more conservative European parliament could opt to scrap some regulations altogether.

All this is driving uncertainty in compliance departments over the fate of landmark climate rules — and public support for investment in green industries.

Simplification or deregulation?

High on von der Leyen’s agenda is a plan to simplify sustainability regulations including the bloc’s green investment criteria, known as the taxonomy, and its due diligence law, which would allow plaintiffs to hold companies liable for failure to take action on environmental and social harms.

Commissioners including Valdis Dombrovskis, who will oversee efforts to improve productivity, have argued that rules can be simplified without being watered down.

But Jurei Yada, director of EU member state engagement at climate think-tank E3G, said she was “quite nervous” about reopening the debate on rules such as the due diligence directive, given “there are political dynamics we can’t predict or control” in the new parliament.

Several existing regulations faced last-mile opposition when they were originally passed — even before the rightwing gained ground. Marie Toussaint, a French Green MEP, said last month’s fight to modify Europe’s contentious deforestation law provided a warning against bringing sustainability laws back to parliament.

When the commission proposed delaying implementation by a year to give trading partners more time to prepare, a coalition of the centre-right European People’s party and some far-right groups pushed to create a category of countries with “no risk” of deforestation. That effort was blocked after critics said it would allow businesses to circumvent traceability requirements, but in a deal reached yesterday, the commission said it would “explore additional simplifications”.

“Although they say simplification will not mean deregulation, I’m really afraid that that’s exactly what’s on the table,” Toussaint said of the commission’s broader approach.

Others warned that it would be a mistake to put too much faith in the commission’s ability to cut red tape.

Jonathan Benson, a business compliance and trade lawyer at law firm Skadden Arps, expressed doubt that regulation would be untangled anytime soon, “whatever the commission might say about competitiveness”.

Guillaume Croisant, a Brussels-based lawyer with Linklaters, said he had heard “wishful thinking about the extent of the simplification process that the commission has in mind”.

Von der Leyen’s goals, he said, were likely modest. The uncertainty comes when those aims are up for discussion in parliament, which, Croisant said, “may open a Pandora’s box”.

Factoring investment into the agenda

Some new members of parliament are more focused on how to build up public investment to strengthen green growth — and, in turn, may be willing to accept simplified, and even pared-back, regulations. 

While a US-style green spending package was a long shot, it remained “politically feasible”, said French MEP Thomas Pellerin-Carlin.

“If we do less regulation and more investment, theoretically, that could work,” he told me. “But currently, we’re doing too little [green] investment. If on top of that we do less regulation, then that’s just giving up.”

Due to the bloc’s fiscal rules, an EU public investment plan could not rely on subsidies as heavily as the Inflation Reduction Act has, he said, citing the US climate spending package as inspiration.

But the EU has an arsenal of investment tools at its disposal, Pellerin-Carlin said, from equity investments in electricity grids, to loans for buildings to install energy-efficient heat pumps, to Europe’s €3bn Hydrogen Bank. Those efforts need to be co-ordinated, he said, “into an actual plan, where we can tell businesses and households, here’s the kind of support you’ll get for the next 10 years”. (Lee Harris)

CARBON REMOVAL

Heirloom’s $150mn fundraising highlights need to increase carbon removal

With atmospheric carbon dioxide levels now more than 50 per cent higher than pre-industrial levels, we need to drastically expand efforts to suck it out of the air. That’s the message from the Intergovernmental Panel on Climate Change, which has said that 100bn to 1tn tonnes of carbon dioxide must be removed this century if the world is to limit global warming to 1.5C “with limited or no overshoot”.

Right now, the fledgling carbon removal industry is a tiny piece of the wider clean technology sector. But the latest fundraising from Heirloom, one of the most prominent direct air capture companies, adds a $150mn drop to the bucket.

The series B funding round is more than double the $53mn Heirloom raised in 2022. The company, which uses limestone to absorb carbon dioxide like a sponge, will use the new funds to develop additional projects.

The funds come from venture firms such as Bill Gates’ Breakthrough Energy as well Japanese businesses Mitsubishi, Mitsui and Japan Airlines.

One of the best-known direct air capture businesses is Switzerland-based Climeworks, which raised $646mn in 2022 at a $1bn valuation and opened an expanded facility in Iceland this year. Both Climeworks and Heirloom are part of a US direct air capture hub, dubbed Project Cypress, in south-west Louisiana.

But as is the case with most sectors of the green economy, the election of Donald Trump in the US has created uncertainty for companies like Heirloom. The 2022 Inflation Reduction Act, which Trump has vowed to “terminate”, includes a tax credit for companies that capture and sequester carbon dioxide. As well as direct air capture, this covers point-source carbon capture and storage: an approach through which carbon is removed from industrial or power emissions.

Shashank Samala, Heirloom’s co-founder and chief executive, said carbon capture had enjoyed bipartisan support. “We are building a facility in Mike Johnson’s home district,” Samala told me, referring to Republican House Speaker Mike Johnson of Louisiana. Another Louisiana Republican, senator Bill Cassidy, has fought for carbon capture businesses in the state, Samala added. “We have been very fortunate from both sides of the aisle.”

There are other challenges for the direct air capture sector that do not involve politics. About 85 per cent of all carbon removal credits are bought by just 10 companies, and Microsoft hoovers up about 60 per cent of these credits, according to Jefferies. Heirloom said it had contracts to provide carbon removal to JPMorgan, Meta and other companies.

With more than 800 businesses developing some sort of carbon capture product, there will inevitably be consolidation in this market, Aniket Shah, a managing director at Jefferies, told me. A large number of these businesses were looking to the equity markets next year to raise money, and not all of them were likely to be successful, he said. (Patrick Temple-West)

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