EU Green Deal has failed to deliver and holds damaging lessons for Britain

The EU Green Deal is failing not because decarbonisation is undesirable but because it relies on mission-oriented, technology-specific industrial policy that systematically magnifies policy failure, according to a new report from the Institute of Economic Affairs. 

The report, Green Deals in the EU: Lessons for the United Kingdom, by Magnus Henrekson, Christian Sandström and Mikael Stenkula, draws on a new collective volume of empirical case studies to identify eight recurring mechanisms through which green deals fail. Six years after its launch, the EU Green Deal has been associated with electricity prices roughly twice those in the US and China, the near-collapse of hydrogen investment, and a deepening loss of European industrial competitiveness flagged by former ECB President Mario Draghi. 

This is particularly pertinent this week as the chancellor delivered a major speech declaring her plans for an ‘active and strategic state’, which the report’s findings suggest will not end as intended. 

Eight reasons for failure 

Drawing on cases from Germany, Sweden, Italy and beyond, the authors identify the following failure mechanisms of green deals:  

• They cannot solve complex problems 

• They invite rent-seeking and clientelism 

• They distort competition by favouring specific technologies 

• They create moral hazard 

• They ignore opportunity costs 

• Politicians and agencies are not exempt from self-interest 

• Decision-makers lack sufficient information 

• ‘Green psychology’ sustains public support for ineffective measures even as evidence mounts against them. 

Case studies include: 

• Germany’s Energiewende which led to greater dependence on Russian gas, dramatically higher electricity prices, and an increase in CO₂ and other pollutants after the premature shutdown of 17 nuclear reactors.  

• Swedish battery startup Northvolt went bankrupt after securing extensive state backing.  

• The hydrogen-based steel project Stegra attracted enormous public subsidies despite cost-benefit analyses showing that the social value will be negative even if the project turns out to work technically and be privately profitable 

• Italy’s Superbonus building renovation scheme was captured by Modern Monetary Theory enthusiasts and became a fiscal disaster. 

The United Kingdom, the authors warn, has followed a similar trajectory – with comparable results in terms of declining industrial competitiveness and soaring electricity prices. UK electricity consumption has fallen by 23% since 2005, in large part because energy-intensive manufacturing has shrunk or relocated abroad. 

What should replace green deals? 

The report argues that climate policy should rest on two pillars: a uniform, comprehensive emissions trading system covering the whole economy, and strict technology neutrality – no sector targets, no industry support, no technology-specific subsidies. A properly functioning ETS eliminates the need for overlapping instruments, which are a defining and dysfunctional feature of the current system. 

On nuclear power, the authors argue that regulatory barriers are the primary obstacle. China has halved the real cost of nuclear construction through standardisation; France and the US have seen costs double and increase tenfold respectively, almost entirely due to regulatory burden. Lowering those barriers, rather than adding new subsidy schemes, is the appropriate policy response. 

The Rt Hon Lord Frost,director general of the Institute of Economic Affairs, said: “The EU Green Deal was supposed to show that governments could lead the green transition better than markets. Instead, as this report shows, it has delivered higher energy costs, weaker industrial competitiveness, and a string of expensive failures. That should prompt some serious reflection in Westminster, where the same assumptions are still largely intact, and where the government wants to link us closer once again to European energy policy-making through the EU “reset”.  If we want to remain a leading economy and a serious industrial power, we are going to need to change our approach – and fast.”

Magnus Henrekson, co-author of the report said: “Six years in, the EU Green Deal is not working — and the reasons are structural. Mission-directed government does not work to solve such complex challenges. Governments lack the information to allocate capital well, the incentives to resist organised interests, and the ability to predict which technologies will win. The result is predictable: misallocation, moral hazard, and soaring costs passed on to consumers and industry. 

“Britain is following the same model and beginning to see the same results. The answer is not to abandon climate ambition but to pursue it through market price signals rather than political direction. The evidence for that approach is considerably stronger.”