The Draghi Report: Lessons for decarbonizing Europe

The fact that the COP is hosted in states whose primary source of income comes from fossil fuels (United Arab Emirates for COP28, Azerbaijan for COP29) or that the inaugural speech of COP29 provided a platform for the host representative to attack the French president—a country that contributed €7.2 billion in climate financing to developing nations in 2023—raises questions about whether the organization of these conferences aligns with their proclaimed objectives. 

A similar mismatch is observed between the European Union's goals in many areas and the mechanisms designed to achieve them, according to the report on Europe’s competitiveness presented by Professor Mario Draghi on September 9. 

The lack of European competitiveness—evident, for instance, in the fact that since 2000, disposable income per capita has grown almost twice as fast in the US as in the EU—poses an existential challenge, according to the former Italian Prime Minister. He argues that unless this trend is reversed, Europe will be unable to finance its social model. Reversing the situation requires to radically change three key areas to reignite growth: 

• First and foremost, closing the innovation gap with the US and China, especially in advanced technologies. 
• Second, implementing a joint plan for decarbonization and competitiveness improvement. 
• And third, enhancing security and reducing dependencies, both in supply chains and in defense capabilities. 

Decarbonization, a shared goal of the COP29 and the second point of the Draghi Report, is, in his words, a necessity for humanity and an opportunity for Europe. However, he warns that if policies are not coordinated, decarbonization could undermine Europe's competitiveness and growth. 

A malfunctioning energy market

The rules governing the European energy market, taxation, associated financial activities, and industrial strategy are areas where this radical change is most urgently needed. An energy market in which the pricing system produces a result 3 to 5 times more expensive than that of our competitors in China and the USA, as prices are set based on the most expensive generation source. This source is typically gas, which Europe does not produce and therefore does not control, and which supplied only a minority (23%) of demand in 2022 but set the price for 67% of the market. Altogether, this approach seems far from optimal. 

Yet, the reform of the internal electricity market—negotiated over two years and agreed upon by the European Parliament and Council in June—maintains this system as essential. This wholesale market, known as the spot market, operates on a marginal pricing system where the highest accepted price to satisfy the entire demand sets the rate for the rest of the market. The Draghi Report proposes replacing this system with long-term Power Purchase Agreements (PPAs) and Contracts For Difference (CFDs) that set price floors and ceilings. Floors prevent price cannibalization during periods of high renewable energy production, while ceilings ensure that excess earnings revert to consumers. This would limit the wholesale market's role to balancing and sending investment signals, in line with the Spanish proposal during negotiations¹. If these changes lower energy prices to US levels, European GDP could grow by 1% annually—half of what is needed to combat global warming. 

The report advocates for energy market regulation to limit the possibility of speculative behavior

Regarding energy taxation—which generates substantial revenue for EU member states (e.g., Spain's VAT on energy can reach 21%, and electricity excise taxes up to 5.11%)—A stark question arises: Is it wise to tax energy production costs, a key driver of growth? This blunt question, laced with irony, is reproduced by the Draghi Report regarding the practice of financial trading, which thrives on price volatility caused by the intermittency of renewable energy sources. This volatility enables trading peaks and valleys that may or may not coincide with production and consumption needs. In five years, profits declared by a handful of dominant companies have soared from €100 million to €5 billion annually. In the words of Professor Draghi, delivered at the headquarters of the International Energy Agency (IEA): a high concentration and no supervision, tell me, what does it produce? That’s the reason he advocates for regulation to curb speculative behavior, even proposing EU-level oversight of these activities.

I am pleased to see that, even modestly, at Esade Law School we are working to offer training in energy law and the electricity sector based on the conviction that energy is a complex system, in which technological and economic factors shape the social reality of the time in which the rules must be applied. It is reality, not ideological apriorisms, which must preside over the interpretation of the law.

The automotive industry crisis

Before concluding, it is worth addressing the automotive industry—a key player in decarbonization, historically Europe's top investor in R&D, and a symbol of its manufacturing strength. Today, it faces a crisis due to competition from China and the U.S. Setting ambitious goals to replace combustion vehicles with electric ones without equivalent efforts to transform the production chain exemplifies the lack of an industrial strategy. Such a strategy, as the report suggests, must integrate multiple policies: fiscal policies to incentivize domestic production, trade policies to counter anti-competitive practices, and foreign policy to secure supply chains. 

Revitalizing cooperation

Overall, it seems to me that Draghi is well aware that cooperation between states governed by international rules and trade with few barriers, which historically lifted significant portions of humanity out of poverty and provided security and stability, no longer dominate today’s headlines. Revitalizing the European project through greater policy coordination will yield positive growth outcomes and position Europe to promote cooperative approaches, break down barriers, and inspire collective hope within and beyond its borders. 

[1] To delve deeper: Bartlett Castellá, Enric R. (2024) El funcionamiento del mercado interior europeo de energía en una encrucijada: entre la competencia y la intervención pública. En Carpi Martín, Rebeca; Ginès i Fabrellas, Anna; Avogaro, Matteo (Eds.), Treinta años de la Unión Europea: una visión desde el derecho. Tirant Lo Blanch.