Economic Policies for the Sustainability Transition: Approaches, Outcomes and Prospects in the EU and China

1. Rationale and Framework

The sustainability transition is a macro-scale process that calls for a deep transformation of the economy, society and technological system to achieve a better life in prosperity. The transition is largely triggered and accompanied by a wide range of public policies that intentionally introduce sustainability strategies, e.g., the European Union’s Green Deal, legislation and regulations, fiscal and market-based instruments, selection and conditionality criteria to drive companies (production) and people (consumption) towards sustainability. Dynamically, markets are expected to converge towards a paradigm of green economy and green growth in which sustainability can be economically self-sustained while becoming the new dominant culture.

In this dynamic process, the conventional boundaries of environmental and energy policies are weakening and broadening, as is the case with waste policies and industrial strategies jointly leading to the circular economy, or the overwhelming role of climate change policies for energy and technology policies. The process is hopefully one of convergence in which economic and social objectives are increasingly important within environmental and climate policies, while all public policies embody a sustainability dimension, to the point where sustainability is seen as the leading objective of macroeconomic and growth/development policies. However, the process can also be one of conflicts and disappointments, given the many specific and general trade-offs that can emerge in the transition pathway. This risk applies to sectors, countries, competing technologies, and to the new inequalities possibly induced by the sustainability selection process.

This Special Issue collects original research contributions on the changing landscape of sustainability policies and their economic and social impacts.

After a first paper on the ‘green growth’ and ‘de-growth’ recipes for global climate change, the other ten papers address transition policies of two major actors of the world system: the European Union (five papers) and China (five papers). These two major actors substantially differ from political, institutional, administrative, economic, social, and cultural perspectives. However, both are major leading actors in key sustainability areas like climate change, where Europe has been the historical leader in building a global governance regime for climate and China has become the critical actor for the success of that governance regime.

The different climate/energy and environmental policy approaches of China and Europe are also reflected in the papers presented here. In the case of China, the development of climate and transition policies has been based on the combination between major plans and specific large-scale initiatives at the level of regions and sectors [1]. In the case of the European Union, until the adoption of the European Green Deal in 2019, the approach has been dominated by an extensive EU-level legislative process that called for the actions by Member States and the actors of the economic system, with a large variability of outcomes. With the EGD, the EU embodied a myriad of specific sector-level policies into an overall highest-level strategy that pushes for the most ambitious sustainability transition in the world [2].

2. The Contributions

Contribution 1 addresses the recurring debate on ‘green growth’ vs. ‘de-growth’ in search for a feasible pathway to achieve the Net Zero of greenhouse gas (GHG) emissions at the global scale. The ‘green growth’ approach argues that strong policies and induced technological change can enable fast and sufficient decoupling between economic growth and emissions, while ‘de-growth’ proponents argue that global growth must be scaled down, and a socio-economic co-evolution must be pursued to accommodate for a de-growth regime. The authors provide an assessment of the gap between the historical performance in reducing emission intensity of GDP and the reduction required for the success of the green growth pathway. The results suggest that the decoupling gaps are considerable at the global scale, and there are various uncertainties and risks affecting the technological solutions for decoupling. However, welfare approaches like de-growth can hardly convince a critical mass of countries and people to embark on a de-growth pathway. This conclusion points to a critical and challenging role of governments in triggering a massive wave of investments in innovation along the green growth pathway, but also in pursuing behavioral changes that can allow us to avoid growth in excess of what is needed. However, behavioral change is still the weakest side of transition policies in the majority of countries.

The implications and perspectives of the European Green Deal are addressed by Contributions 2 and 3 with different objectives and methodologies.

In Contribution 2, different modelling tools are ‘soft-linked’ to disentangle the intrinsic complexity of the EGD and its key open questions. The system thinking (ST) approach is used to highlight the main economic feedback loops associated with the EGD strategy. Then, a dynamic computable general equilibrium (CGE) model is exploited to elaborate an ex ante assessment of policy options. The emerging suggestion is that positive outcomes can arise from carbon pricing policies in which the recycling of the fiscal revenues is used to support the diffusion of clean energy technologies. This policy approach can benefit both the European Union and non-EU countries via technology transfer.

The green transition pushed by the EGD from 2019 had to face relevant external shocks that revealed Europe’s vulnerabilities. The idea of EU strategic autonomy (SA) is becoming the new framework of the EGD process. Contribution 3 investigates whether SA supports the EGD, and vice versa, or whether the two processes may be subject to contradictions. The EGD actually embeds SA elements, especially in the most recent phase, but some trade-offs may arise. Environmental, economic, and social concerns are raised by current measures that promote self-sufficiency for energy and materials and the extension of environmental requirements to foreign products accessing the EU market. These concerns can be partly addressed through higher strategic attention to the external dimension of the EGD.

The other two contributions on the EU look at the development of the Circular Economy paradigm, which is part of the EGD through the CE Action Plan of 2020.

Contribution 4 looks at how institutional quality and trust in institutions can affect the performance in waste recycling in EU countries. The paper applies panel econometrics to measure the role of institutional variables vis à vis the role of waste policies (Waste Framework Directive (WFD) and first Circular Economy Action Plan (CEAP) of 2015) for the recycling of municipal solid waste in EU27. The results confirm that the quality of institutions can influence waste recycling results, whereas institutional trust can have adverse effects on recycling rates because of a possible ‘delegation effect’. On the policy side, both the WFD and the CEAP 2015 had a role in driving recycling performances. Therefore, local institutional quality and high-level public policies can be complementary in achieving developments of the CE.

Contribution 5 investigates how public policies can support CE-related developments in the construction sector in the Nordics (Denmark, Finland, Norway, and Sweden). From a systematic collection of evidence, the paper shows that the construction sector is extensively addressed by CE policies, and business opportunities are generated when appropriate national and local policies are put into practice. In particular, successful policies may arise from jointly implementing appropriate real estate planning, sustainability technical requirements for constructions, and public procurement.

The first two articles on China revolve around the concept of ‘Green Total factor Productivity’ and how policies can have an impact on it.

Contribution 6 applies the data envelopment analysis method to a panel of Chinese provinces in the period 2011-2019 to measure their performance in industrial green total factor productivity (GTFP). Then, it uses a generalized method of moments (GMM) model to show how environmental regulation can have positive effects on industrial GTFP. Regulation can improve productivity while reducing industrial pollution. Among policy instruments, market-based environmental regulations do not have a significant impact and can even negatively affect GTFP in economically laggard areas. Instead, innovation induced by environmental regulation can be a lever of success.

Contribution 7 uses a model of endogenous technological progress to analyze the impact of environmental regulations on industrial GTFP using a panel dataset of 30 Chinese provinces in the period 2000–2017. The results show that the direct impact of environmental regulations on GTFP has an inverted “U” shape, and the same regulations can influence manufacturers’ investments in the quality of workers. Therefore, environmental policies, also mixing different regulatory instruments, can accelerate a positive environmental and economic transition of the Chinese industrial system.

The other three contributions on China address the regional and city-level dimension of the effectiveness of transition policies, particularly their economic implications.

Contribution 8 uses a difference-in-difference (DID) model to study the relationship between regional integration and carbon emission performance and exploits the Yangtze River Economic Belt as a quasi-natural experiment. The results show that regional integration can improve carbon emissions through three transmission mechanisms: better allocation of production factors, economies of scale, and eco-innovation. In particular, regional integration can differently improve carbon emission performance in different types of cities (e.g., high-level carbon emission cities and cities not based on natural resources).

Contribution 9 uses a difference-in-difference approach applied to data of 227 cities in China from 2004 to 2019 to explore the relationship between the policies of ‘low-carbon pilot city’ (LCC) and the quality of urban development. The main conclusion is that the LCC policy has promoted high-quality economic development, and it has long-term effects at three levels: innovation, quality of life, and quality of public services. The positive effect is emerging mainly in the large cities and in the Eastern and Central regions.

Contribution 10 uses a Data Envelopment Analysis (DEA) model to measure the High-Quality Development (HQD) level of 102 resource-based Chinese cities (RBCs) with data from 2003 to 2019. The effect of environmental information disclosure (EID) on HQD in these cities is empirically measured by adopting a difference-in-difference approach with propensity score matching. The results show that EID has a significant and positive effect on the HQD of RBCs. EID is more effective for HQD in RBCs of Central China, resource-dependent RBCs, growth RBCs, and regenerative RBCs.

While keeping a regional perspective, Contribution 11 investigates the impact of environmental regulations on Taiwanese investment in mainland China, checking whether local governments are competing with one another to attract Taiwanese investment through the adoption of weaker environmental standards. The approach is based on a two-stage game model, applied to a panel data of provinces in mainland China from 2006 to 2016 through a GMM estimation method. The environmental policies adopted by the local governments have a significant inhibitory effect on the investment volume of Taiwanese enterprises, and a negative effect also arises from the interaction between environmental regulations and local tax policy.

3. Conclusion and Prospects

The papers in the Special Issue show that, in spite of the huge differences between the EU27 and China, in both cases, environmental and climate-energy policies, as well as circular economy policies, can be effective in driving a sustainability transition or some of its core processes. Furthermore, effectiveness emerges for a broad range of different policy approaches. This conclusion does not mean that policies are also efficient in the conventional meaning of delivering results at the minimum possible cost in an ex ante predictable way. Instead, they induce responses by industries and the socio-economic systems that can be initially contrasted, uncertain, unpredictably evolving, and differentiated across sectors and countries, as in the case of the EU, and across regions/provinces/cities, as in the case of China. A clear-cut conclusion emerging from the papers is that innovation, be it technological, social, or institutional, is the key lever to make policies effective.

These conclusions support the idea that, in this unique historical phase, the sustainability transition is largely policy-driven, and the transition could not take place without a strong and persistent high-level policy commitment [3]. On the one hand, climate-energy and environmental policies are able to generate new markets, innovations, and industrial dynamics that have structural and non-reversible socio-economic consequences, thus becoming a central component of the macroeconomic long-term development strategies of countries and regions [4]. On the other hand, these same transformative responses to policies can entail costs for those parts of the industrial and social system that cannot keep pace with the policy-driven transformation, and these possible side-effects are still a key open socio-economic issue of transition policies.

These economic and industrial implications are increasing—and increasingly visible—within the current evolution of the transition strategies both in Europe and in China.

In Europe, one of the first steps of the interaction between the EGD and the strategic autonomy approach (see Contribution 3) is the Green Deal Industrial Plan (GDIA) launched in 2023 through the Net Zero Industrial Act and the Critical Raw Materials Act. In response to the increasing risks of the international system, this policy aims at protecting the EGD transition by creating strong industrial interests in pursuing self-sufficiency in the Net Zero industries, together with a possible alleviation of the large EU’s import dependency for critical material inputs. The GDIA is not yet a true new green industrial policy, which requires other major changes across EU strategies [5], but it is starting to create a new industrial consensus on the transition. It can be seen in the framework of a possible new boost to the EU Single Market and the EU competitiveness that will animate the transition debate between the present EU Commission and the future EU Commission emerging from the EU 2024 elections.

Undertaking a green industrial policy within a strategic autonomy framework for a new EU competitiveness reveals that the EU fears the rising power and the competing leadership of China in the clean tech industries. Data indicate that China is the manufacturing and trading leader, and the most important deployer, of solar photovoltaic technologies, wind technologies, batteries, and electric mobility technologies (see Bruegel’s ‘European clean tech tracker’, https://www.bruegel.org/dataset/european-clean-tech-tracker, accessed 10 June 2024). This industrial leadership of China provides a sound economic justification for its own domestic transition policies and can be fed by the same global-scale sustainability transition, in particular the global pathways to Net Zero, unless the Net Zero industrial strategies of the EU and the US will be fully successful in keeping domestically the economic value generated by their huge transition investments.