EU’s bitterly contentious green policy may kill the ‘Brussels Effect’

Europe Letter: Critics warn that proposals for climate-friendly investments may backfire

The term "The Brussels Effect" refers to the theory that the European Union is the world's regulatory superpower, setting standards and laws that the rest of the world goes on to follow due to the sheer heft of its market power.

It was coined by Finnish-American law professor Anu Bradford with her book of the same name in 2020, which was written to challenge the idea that the EU is a declining world force.

As the strictest rich regulatory power, Brussels sets a floor for global regulation, the argument goes. The author traced the ways in which EU norms have unintentionally became global standards as international companies adopted them to cater to the market of 450 million people.

In this way, GDPR data privacy rules were adopted by Facebook and Google, while food chains in the United States make their products to EU standards so they can be seamlessly shipped across the Atlantic.

Some countries save time and investment by using EU law as a template from which to adapt their own legislation, too. The concentrated workforce of Europe's policymakers and legislators that is clustered in Brussels represents a wealth of expertise and man hours, and the ready-made laws can be particularly convenient for countries in Latin America as they are written in Spanish and Portuguese. Meanwhile, the EU also intentionally exports its standards through political and trade agreements that require the other party to accept certain standards.

The concept of the Brussels Effect was embraced in the city itself. It was a flattering notion and a welcome one, arriving amid the rancour of the post-Brexit talks at a time when the credibility of the union was under attack. It was discussed by think tanks and on podcasts, and for some it articulated a hope about what the EU could be.

An echo of the Brussels Effect could be heard in the words of Ireland’s commissioner Mairead McGuinness when she set out her ambitions to establish standards for green investments in her role as financial services chief last year.

She expressed hopes of creating a “gold standard” for climate-friendly investments, through new criteria that would set out which bonds could be classed as “green”. It was to be linked to the EU’s so-called “taxonomy”: a way of categorising which economic activities can be considered green, and part of an overarching ambition to funnel private money towards the investments needed to transform Europe’s economy to meet its climate goals.

Less than a year on, this taxonomy has become the issue of bitter rancour and division.

At the insistence of some member states, the commission has included both gas and nuclear energy as “transition” fuels, deeming them green investments if they are replacing dirtier energy sources and meet certain standards.

NGOs are furious

This has outraged others. Austria, Denmark, Luxembourg and Spain, as well as the commission's own expert advisers, have accused it of going against scientific evidence. Luxembourg and Vienna have threatened a lawsuit. Climate NGOs are furious, and are calling on the European Parliament to block it.

Far from being globally authoritative, the proposal has failed to win the buy-in of even a fellow EU institution. The European Investment Bank, which aims to bankroll the climate transition, has warned it may reject the gas and nuclear parts of the taxonomy.

"If we lose the trust of the investors by selling something as a green project, which turns out to be the opposite, then we cut the feet on which we are standing when it comes to financing the activities of the bank," its president Werner Hoyer told journalists last week.

In a letter to the commission, a group of member states wrote that 15 countries outside the EU had already taken their cue from an earlier version of the taxonomy and that it was being used as “a reference” by investors decarbonising their portfolios. “Today its usefulness and credibility are at stake,” they warned.

There was scarce talk of a Brussels Effect as McGuinness stood to unveil the taxonomy at a press conference on Wednesday. If anything, she played down its influence. ”This is not mandatory, it’s voluntary,” she stressed; neither was it final. “There is a review clause in this . . . this is a living document.”

The EU’s stated ambition is to be the world leader in adapting to counter climate change. But if its embattled taxonomy does manage to set an international trend, critics now fear it will be a negative one: to embolden investors to label spending on environmentally harmful gas and nuclear projects, with the cover that the EU has deemed them green. The very “greenwashing” that the taxonomy was once intended to stop.