Can robust sustainability policies and restoring competitiveness go hand in hand?

The Dutch employers' organization VNO-NCW recently advocated for greater protectionism in the EU and stronger sustainability policies as a response to Donald Trump’s plans for high import tariffs. In light of this plea by VNO-NCW chair Ingrid Thijssen, BNR economist Han de Jong raised the question: can leading the energy transition and restoring competitiveness go together, or are they inherently at odds? We discussed this with Charles Kalshoven, expert strategist at APG.

The competitiveness of the European Union lags behind that of the United States, Kalshoven observes. “But Brussels’ strong focus on the energy transition doesn’t seem to be the main factor here. After all, the success of large American companies like Alphabet, Amazon, or Netflix isn’t rooted in the low energy costs in the U.S. Their success is primarily due to America being one large internal market with abundant access to capital. Additionally, the country has a vast supply of highly skilled labor, speaks one language, and fosters a positive attitude towards risk-taking.”

Energy transition as an investment
All these factors, according to Kalshoven, make the U.S. highly attractive to European companies. “The differences between these two economic powerhouses mainly stem from the fact that the EU has never fully completed its internal market. The U.S. has its market much better organized, which attracts not only startups but also successful scientists and other workers from Europe. They expect better opportunities there to further develop themselves or a product, and that has little to do with lower energy costs.”

Energy accounts for only a small percentage of total industrial costs, Kalshoven continues. “It is true, however, that energy prices in Europe have soared due to Russia’s invasion of Ukraine. Europeans have been much more affected than Americans, who have access to cheap domestic gas. For instance, gas prices in 2022 were five times higher than the average over the previous five years, severely impacting energy-intensive industries. Gas prices are still roughly double what they were before the invasion. But this isn’t because the EU is pushing ahead with the energy transition—it’s mainly due to Russia. While energy costs play a significant role in competitiveness, the energy transition should be viewed as an investment: in the short term, it makes energy more expensive, but in the long term, it will make energy cheaper, which is crucial for Europe’s competitiveness.”

A clear target
Almost every transition involves some pain, but the sooner you start, the more gradual the process can be and the more time people have to adapt, Kalshoven notes. “We will have to move away from coal-fired power plants and fossil-fueled cars, and jobs will be lost as a result. That’s an argument to start early, with the ultimate goal of cheaper energy as a clear target. After all, the fossil fuel era is finite, no matter how you look at it. Governments can encourage the energy transition with both incentives and penalties—think of green subsidies and carbon pricing. To ensure a level playing field, there’s the so-called Carbon Border Adjustment Mechanism, which prevents countries without carbon pricing from dumping their products cheaply in the EU.”

Boosting productivity
For the past fifty years, the Netherlands has been very focused on its own competitive position and exports. “We’ve achieved significant trade surpluses, enabling us to save as a nation for things like our pensions. Ultimately, the purpose of this production—and all production—is consumption. Now that we’re dealing with an aging population, we can use the reserves we’ve built up abroad for things we need here, such as healthcare and other services that are difficult to import. I fully agree with Han de Jong that higher productivity is essential—borrowing from Nobel laureate Paul Krugman: ‘Productivity isn’t everything, but in the long run, it’s almost everything.’ However, I would broaden the focus beyond export-oriented competitiveness. In sectors less exposed to international competition, where we face labor shortages—such as education and healthcare—we could really use a productivity boost.”

Strategic autonomy
If Donald Trump’s plans for higher import tariffs materialize, it will harm global free trade. “And then what happens to your competitiveness?” Kalshoven asks rhetorically. “Still, even if borders close, it’s wise to ensure that with the limited labor we have, we can at least provide what we need. Of course, protectionism leads to a loss of welfare, so hopefully, it won’t escalate. But if you’ve become highly productive in the things you definitely need yourself, you’re less affected by Trump raising tariffs.

It’s not a given that a trade war would lead to more expensive energy, although that’s often the case with geopolitical shocks. Regardless, energy dependency is a vulnerability Europe would rather avoid. That’s why the energy transition isn’t just good for the climate but also for Europe’s strategic autonomy. And if we take the lead and stay ahead, we can monetize the knowledge and expertise gained from the energy transition in other countries—benefiting both our competitiveness and the climate.”