The European Green Deal (EGD), announced on December 11th, sets a 2050 target to make the continent become the first to achieve carbon neutrality. It’s a long-term plan – not yet law – to re-design all EU instruments and includes 50 specific policy initiatives. But nobody yet knows how much money is needed, who will pay (or lend) it, and who will get it. So tense discussions will now begin between the likely payers (such as Germany, the Netherlands, Austria, Italy, Sweden and Denmark) and the likely recipients (such as the Central and Eastern European region, Greece, and others). Frank Umbach at the European Centre for Climate, Energy and Resource Security runs through the EGD strategy, the estimated costs, and the arguments already being made. No agreement will be reached until all sides believe their burden – be it financial or re-skilling redundant workforces – is fair, security of energy supply is assured, and their economies keep growing.
The European Commission has announced a “European Green Deal” (EGD) on December 11, which would make Europe collectively the first carbon-neutral continent by 2050. The goal of the “man on the moon moment”-project (so President Ursula von der Leyen called it) is based on a comprehensive growth and innovation strategy for all economic sectors in Europe in support of its ambition for reducing the greenhouse gas (GHG) emissions.
The EGD is not yet a legislation, but a long-term plan and a centrepiece strategy for reconciling “the economy with our planet”. It is re-designing all EU instruments and includes 50 specific policy initiatives. In March 2020, the European Commission will propose the legal objective to achieve net-zero GHG emissions by 2050.
Later in the summer of 2020, it will also reveal a detailed plan for increasing the GHG emission reduction from previously agreed 40% up to 50-55% for 2030 (compared with 1990 levels). Germany’s influential Federation of German Industries (BDI) has already warned that the newly declared emission targets could “unsettle” businesses and consumers.
The true cost has not yet been calculated
As during the last years, declaring new ambitious targets and objectives is one thing, financing and implementing them is another one. Up to now, the European Commission itself is unable to specify the additional financial needs. But it has promised €100bn of an expanded ‘Just Transition Fund (JTF)’ for implementing the EGD and thus hoping to overcome the objections of Poland as well as other Central and East European (CEE) countries.
€260bn of additional annual investments?
According to some estimates, for meeting the existing climate and energy targets, the EU needs up to €260bn of additional annual investments, which are not yet sufficiently mobilised. President von der Leyen has also proposed a ‘Sustainable Europe Investment Plan’ of the EIB to unlock €1 trillion of private and public green investments until 2030. An “action plan on green financing” will be submitted in June 2020.
The present 2019 EU budget, however, amounts just to €166bn, of which 39% is attributed to “sustainable growth and natural resources”, but includes huge agriculture subsidies. The EU’s new budget for 2021-2027 requires up to now a national contribution of 1.07 percent of each member states’ gross national income instead of 1.11 percent originally proposed. In result, it may widen the gap between its presently proposed budget and the Commission’s newly unveiled EGD.
Who will pay and how much?
The lines of conflict between the member states have split the discussion in two camps: the net-contributors (providing more budget funds than they receive) such as Germany, the Netherlands, Austria, Italy, Sweden and Denmark and the net-recipient countries (including Greece, CEE region and others). At least the European Commission will raise its funding for climate change efforts to 25% (€320bn) of the total budget compared with 20% (€206bn) over 2014-2020 as part of its proposed ‘Multiannual Financial Framework for 2021-2027’.
Economic crosswinds are not helping
Given the newly declared targets, the financial implications will be far more challenging. This is not only due to the direct impacts of the new targets, but also due to the fact that the international conditions of the global economy have deteriorated by weakening the global and European GDP growth. Furthermore, the UK’s Brexit will decrease the annual funding of the EU’s by more than €12bn (net-contribution: £11bn in 2019). It remains to be seen how these international ramifications will impact the discussions as well as decisions on the funding sources and instruments.
The Just Transition Fund
The JTF has been created to complement the existing Cohesion Funds for the social as well as structural transition of the EU’s coal regions to phase-out their coal production. At present about 50 regions in 18 EU countries will be eligible for financial support, after the number of regions and scope has been widened beyond the coal challenge – a development Poland and others have opposed. A major component for targeting “the most vulnerable regions and sectors” is to create new jobs, provide job training and promote development of new industrial sectors in those countries and regions that still rely heavily on coal production such as Poland, Hungary and the Czech Republic or have a low GDP per capita level such as Romania, Bulgaria and Greece.
Grants or loans?
The promised figure of €100bn for the JTF is almost three times of the draft €35bn of it. But it has been criticised by Poland and other CEE countries over how much of this funding would actually be ‘fresh money’, which would be non-returnable, instead of loans or guarantees.
How much will Poland need?
McKinsey has estimated that Poland needs investments in its power generation assets alone up to €150bn until 2050. The Polish government has defined an investment list for the EIB’s JTF, which goes up to at least €578bn of energy projects by 2030. In this light, the €100bn of the JTF won’t be enough for funding the countries’ costly energy transformation – particularly if the majority of this amount will be returnable funding. It may increase the debts of the poorer countries and undermine their economic competitiveness. The European Commission itself has estimated investments amounting up to €180-290bn annually until 2050 in order to achieve the 1.5°C target of the Paris Agreement.
The return of nuclear?
In addition to the huge funding needs not just for Poland and the CEE states, these countries together with France and UK have called to include nuclear power as a clean energy source as otherwise the EU’s GHG emissions reduction by 50-55% in 2030 cannot realistically be achieved. But other countries such as Germany, Austria and Luxembourg have opposed it.
For sealing the EGD, the EIB’s JTF needs to be linked up with other banks’ lending policy, which will increase the level of co-financing available for certain member states from 50% to 75%. 10 EU member states (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia), participating at the EU’s Emission Trading System (ETS) and eligible of the Modernisation Fund, will also benefit from the higher level of co-financing.
By including the shipping and aviation sectors, the ETS will make more than €26bn available over the next decade. When discussing the adoption of the 50-55% CO2 emissions reduction target by 2030, compensation mechanisms, such as the Modernisation Fund, should be proportionately increased in the view of those countries to make sure that additional costs are fairly shared among member states.
The political discussions of the funding needs, instruments and sources have just begun and will heat up in the forthcoming months and years. Political objections won’t just come from Poland and other CEE countries. Also Germany and other EU member states will raise objections, particularly in regard to specific funding sources and instruments.
A new carbon tax for the EU has already been proposed, though it is not a popular idea in the view of most member states. Also the idea of a more active role of the European Central Bank in fighting climate change has been opposed as this is not its mandate and would overlap with the role of governments.
Thus the challenges of funding the EGD may remain the hottest issue in the debates ahead and should not be understated: the EU’s climate policies and targets risk polarising the societies of its member states and undermining security of supply and economic competitiveness if those policies and benefits are not sufficiently balanced.
Dr. Frank Umbach is Research Director of the European Centre for Climate, Energy and Resource Security (EUCERS), King’s College, London