From the extreme heatwaves and wildfires that plagued Europe this summer to the freakish storms and downpours that recently wreaked havoc in the Mediterranean, Europeans are experiencing some of the consequences of climate change first-hand. These events serve as a powerful reminder that mitigating global warming is the most crucial challenge for the future prosperity of European societies.
Following the Paris Agreement, the European Union (EU) has adopted new climate targets to be met by 2030. They include a 40% reduction in greenhouse gas emissions (compared to its 1990 level), a 32% share of renewable energy sources in the energy mix, and a 32.5% target for energy efficiency. The fulfilment of these objectives would represent an important step toward the transformation of the European economy.
With the launch of the negotiations on the EU's Multiannual Financial Framework (MFF) for the years 2021-2027, a crucial question is how EU funding can help to green our future. We argue that the post-2020 MFF should create incentives for member states to align their fiscal priorities with their international and European climate commitments. Several funding instruments from Cohesion to Common Agricultural Policy have a role to play.
Climate (in-)action since 2014
Since 2014, the EU has earmarked EUR 206 billion or 20% of its budget to climate action across all EU policies. The EU is broadly on track with its financial target, thanks to a rise in environmentally sustainable investments under Cohesion Policy (CP).[1] Meanwhile, several shortcomings in the EU budget cycle reveal an untapped potential when it comes to delivering decarbonisation across economic sectors.
First, there is insufficient quality control and monitoring of the 20% target. Since the climate proofing of projects is only assessed ex-post, it creates uncertainty for potential investors. Existing accounting rules also fail to distinguish between mitigation and adaptation measures, thereby artificially inflating the share of climate-related action. Some of these measures do not address the causes of climate change but merely devise ways for the EU economy to adapt to the effects of climate change.
There are also inconsistencies in the use of EU funds to promote environmental sustainability. Several EU programmes, for instance, continue to subsidise fossil fuels. In the current MFF, more resources were allocated to natural gas than to electricity interconnection projects under the Connecting Europe Facility, while Horizon 2020 supported research on shale gas even though several EU countries had forbidden such exploration because of its negative impact on the environment.
New targets for the 2021-27 funding period
In its proposal for the 2021-2027 MFF, the Commission suggests raising the climate target from 20% to 25%. Combined with a proposed overall increase in the budget, reaching this new target could provide an additional boost of circa EUR 16 billion per annum earmarked for climate action.
However, this is a small incremental step compared to the dramatic transformation required by the Paris Agreement. The latest IPCC Special Report[2] sounded the alarm bell yet again, saying the time to act is now if we are to limit the global rise in temperature to 1.5C. The report estimated that the conversion of energy systems alone requires an average annual investment of around USD 2.4 trillion between 2016 and 2035, representing about 2.5% of the world GDP.
The investment gap to meet the original Commission’s proposal for the 2030 EU climate targets[3] amounts to about EUR 180 billion per annum [4], the equivalent of the annual gross domestic product of an economy like the Czech Republic.
Linking EU funds to climate objectives
It is not up to public funding to fill the whole gap. Public resources should instead have a signalling role and a leverage effect for private investment. There are three ways the EU budget could better serve the EU’s climate objectives.
First, coherence is required across the whole budget. The EU must phase out any MFF funding that would encourage practices that contradict the objectives of the Paris agreement. Subsiding livestock production through the Common Agricultural Policy (CAP) or fossil fuel infrastructure is in a direct contradiction with the EU’s efforts to reduce greenhouse gas emissions and should be stopped. The exclusion criteria of the Cohesion Policy – which include production, processing, distribution, storage or combustion – should apply across all instruments including the Connecting Europe Facility, InvestEU, and Horizon Europe. Finally, the climate proofing methodologies adopted with the Common Provision Regulation (CPR)[5] – which defines the framework for the management of the structural and investment funds - should be used across the whole budget.
Second, a proper incentive scheme should be set up. Acting to mitigate climate change should become a pre-condition for the disbursements of EU funds. For example, the EU could condition its payments to the development of National Energy and Climate Plans (NECPs), in which member states must set out the measures towards the fulfilment of their 2030 climate and energy targets. Linking the ambition and implementation of these targets to financial incentives could also help to level off risks associated with more daring projects and boost compliance.[6]
Third, the EU must focus on the leverage effect of its budget. EU spending could pull additional public and private investments from member states to increase the funding for climate-friendly projects. With less than 1% of the Union’s gross domestic product, the EU budget may only be able to reach 5 to 7% of the total required investment level.[7] A wide array of financial conditions – such as pre-conditions to access EU funds, matched funding from national governments, or the recourse to the Union’s financial guarantee (as used in the EU Investment Plan) – can, however, help to generate considerably higher environmental benefits than the funds alone otherwise would.
As both a financing and programmatic tool for the coming decade, the MFF can and should be at the core of the EU’s climate action. It can set a direction and provide incentives. Its leverage potential should not be squandered if the EU is serious about its climate commitments and climate leadership ambitions.
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[3] The European Commission had originally proposed a RES target and an energy efficiency target of 27%, then raised to 32% and 32.5% during the negotiation with the other institutions.