The economic stimulus needed to overcome the current pandemic requires significant resources. But it comes at a time when we need to accelerate the energy transition, which is currently part of the European Green Deal and will also require an increase in resources. Andrei Marcu at ERCST examines how the transition will be funded, what are the sources of funding and how they relate to and will be impacted by the current health situation. A range of funding mechanisms are being used to fund this transition and make sure that those that need funding will have access to it. To start with, will the EU funding – totalling around €125bn via the Just Transition Mechanism and the ETS (Emissions Trading System), but not including other sources up to the one trillion mentioned by the EU institutions – be sufficient to meet the transition goals? Already countries like Poland are saying the current EU budgets are an order of magnitude too small – right or wrong. The European power sector estimates they will need around €100bn/year to meet their electricity generation goals alone. This is a sobering figure. Electrification should be a priority, given its benefits quickly spill over into other sectors like buildings, industry and transport. Marcu also notes that available funding, whether originating from the EU’s Just Transition Mechanism or elsewhere, will also have to be shared with socioeconomic, environmental and infrastructural projects too. But above all, he says a synergy must be found between addressing the health situation and financing climate transition. Economic recovery, climate transition and electrification will need to come together, but not at the expense of other key economic sectors and a just social transition.
By signing the Paris Agreement, the EU committed itself to the goal of global net climate neutrality by the second half of this century which means that globally, emissions and removals will be balanced. The Paris Agreement also recognises the leadership role that developed countries must play which translates into early and deep mitigation action on their part, with the accompanying social and economic impacts that need to be addressed in the period of transition.
Europe’s Transition: just, quantified, managed, delivered
It’s increasingly clear that this transition, while inevitable, will be challenging to implement and will need to be managed. It will need to be managed as it is the right and equitable thing to do, but also because this kind of historical change can only be implemented at the required speed if it is perceived that it is just, and that the impacts are identified and quantified, and measures are put in place to manage and mitigate those impacts.
Increased ambition means higher investments
The European Green Deal provides the vision for a climate neutral Europe by 2050, and the framework to achieve that. The concept of a Just Transition is part and parcel of this package and needs to also take into account the need for EU society to finance the increased investments as the speed of decarbonisation for 2030 must also increase if we are to stay on track.
The target set up in the EU Council Conclusions in 2014 and the EU NDC put forward in 2015 before the Paris COP had outlined the 2030 targets of -40%. While the Clean Planet for All Communication in 2018 did not formally show higher targets or an acceleration of the timetable, there was a distinct expectation that this was something that was being considered.
The question now is not if we will have increased targets for 2030; that is clearly inevitable. What is unclear is how the increase in ambition and speed will be financed, i.e. where will the funds come from. This question gets more urgency given the dramatic change in economic circumstances that has developed over the last two months. The two objectives need to be considered in parallel and should try and be aligned.
Funding via the Emissions Trading System
What we know so far is that there are funding mechanisms available during Phase 4 of the EU Emissions Trading System which are meant to contribute to the transition. This will include the Modernisation and Innovation funds which are to be funded through about 1 bn allowances from the EU ETS.
If sold at (pre-pandemic) current ETS prices the amounts available through these funds could be around €25 bn.  Naturally if the target increases, EUA prices will also likely increase, and consequently this source of funding will also increase. Another question is what will be the size of these funds when the Linear Reduction Factor (LRF) is changed. How should they be strengthened in order to compensate for higher investments associated with higher target and a more rapid timetable?
It took the Paris Agreement and the process of negotiating the new Multiannual Financial Framework to mainstream the concept of the Just Transition into the EU legislators’ language. In the course of the negotiations for the Phase 4 EU ETS package the concept of a Just Transition Fund had already been put forward but did not make it into the final package.
Other funding sources
Other sources of funding will be available. Besides the new EU budget which has a proposed increased allocation for climate action from 20% in the current MFF to 25% in the new one, there is also the new Just Transition Mechanism (JTM), which seems to target specifically the transition issue.
The JTM will have three pillars of funding that should incentivise and mobilise €100 bn. At the moment the magnitude of private funding is an estimation but will be influenced and incentivised by EU spending.
How much is needed?
However, it is important to note that the Just Transition Fund provides €7.5 bn of fresh money and it is meant to leverage €100 bn. Together with the ETS funds this could make some €125 bn. Additional funding will come, as mentioned before, from the EU budget and leveraged private and public money. The total available funds available is difficult to quantify precisely. The need seems to be substantially higher. For clarity, the European Commission aims for a total of one trillion for this decade for the transition.
To put this into context, the power sector estimates €90-110 bn annually for the electricity generation alone. In that context the tangible amount is currently not aligned with what will be needed for investment
Decarbonising electricity is a priority
Decarbonising the whole economy has a founding logic that the entire electricity sector will be climate neutral way ahead of 2050. In addition, decarbonising the economy is largely based on carbon neutral electrification and this translates also into higher electricity demand.
The magnitude of the increase is not clear, even if some industry sources see a ten/eleven-fold increase in (renewable) energy demand for one sector only. Hence the burden of the transition will be on the energy sector, before being transferred to the industry and consumers, impacting the overall GDP.
…but funds are being shared with socioeconomic, environmental, infrastructural projects too
Going back to the current situation, in addition to the energy transition, the needs will be very significant given the gravity of the economic circumstances that some EU member states are currently experiencing. There will also be different transitions which require financing: the socioeconomic, environmental, infrastructural and energy sector transitions.
Funding through the Just Transition Mechanism is not in any way dedicated to the electricity industry alone, just as none of the other funding windows are, with the exception of the Modernisation Fund.
What funding guarantees will there be for electrification?
At the moment we can see that there is likely to be a big increase in the effort required, with few guarantees for electricity spending at the EU level. Poland (potentially the biggest beneficiary of the Just Transition Fund through an allocation of €2 bn in the Commission’s estimation) still argues the Fund should be at the level of €20 bn of dedicated money. Whether that amount is correct or not is not the issue: the issue is that we are looking at different orders of magnitude.
On a general note, can the EU budget and Sustainable Europe Investment Plan mobilise the substantial funds necessary to finance the just transition, taking into account the current realities? It is important to secure enough financing for the economies which have investment capacities below the EU’s average.
Who will pay?
Who will pay finally for this transition? The Green Deal and achieving climate neutrality will have different distributional aspect which should be managed. This needs to be somehow considered together with the economic needs when coming out of the current health crisis.
The Just Transition Mechanism can be one of the tools to cover costs located in the regions which have a longer way to go in decarbonising. This needs to be seen not as a negative, but the result of experiences of difficult transitions and how they impact social problems.
Andrei Marcu is the Founder and Executive Director of the European Roundtable on Climate Change and Sustainable Transition (ERCST)
- https://ercst.org/publication-implementation-of-the-funding-mechanisms-in-the-fourth-phase-of-the-eu-ets-state-of-play/ ↑
- https://cdn.eurelectric.org/media/3457/decarbonisation-pathways-h-5A25D8D1.pdf ↑