31 May 2023

Delors Centre: Do more with more - How the EU can improve funding for the European Green Deal

.. However, overly ambitious target volumes backed by only limited public financial support, and the resultant high levels of leverage, prevent InvestEU from delivering its full potential for achieving the green transition...

Funding remains the Achilles heel of the EU Green Deal. Europe needs to spend an additional €350 billion on climate action every year until the end of this decade. The bulk of sustainable investment is expected to come from the private sector and the InvestEU programme has been established to leverage private investment through the European Investment Bank (EIB) Group and other public financial institutions. However, overly ambitious target volumes backed by only limited public financial support, and the resultant high levels of leverage, prevent InvestEU from delivering its full potential for achieving the green transition. To plug the green investment gap, InvestEU needs to reduce its leverage, increase its transparency on intermediated operations and be complemented by fresh public spending at EU level to finance transformative investments that fall outside the scope of what public de-risking of private investments can achieve.

 

Funding remains the Achilles heel of the EU Green Deal. Whereas the US and China provide considerable public spending to incentivise clean technologies, the EU fails to match this support. Using temporary exemptions from EU state aid rules, individual member states have been pumping substantial amounts into climate action. However, they do not all have the same budgetary resources to fund green projects and it is an open question whether sustainable investments will win preferential treatment under the reformed EU fiscal rules. At EU level, the pandemic recovery response NextGenerationEU and the EU’s long-term budget together allocate 30% of EU funds to fighting climate change, but the total sum of €2 trillion is stretched over seven years. Later this year, an EU Sovereignty Fund could see the light of day, but its focus is narrower than boosting green investment and reaching a political agreement will not be easy. For the time being, Europe needs to spend an additional €350 billion on climate action every year this decade to reach its 55% greenhouse gas reduction target by 2030.

EU policymakers have been turning to leveraging private money to plug the green investment gap. In the absence of appropriate funding at EU level, governments’ hopes rest on private funding sources, in particular green capital markets. To mobilise as much as €1 trillion green investment over the period 2021-2027, the von der Leyen Commission in January 2020 launched the Sustainable Europe Investment Plan (SEIP). At its heart is the InvestEU Programme initially proposed in June 2018. It uses public funds and guarantees to reduce the costs and risks for private investors willing to invest in net-zero technologies. InvestEU relies on a multitude of actors with a central role for the European Investment Bank (EIB) Group to achieve its objectives. This leveraging approach could  gain more importance in the years ahead as the European Commission proposed raising overall funding for InvestEU when presenting its Green Deal Industrial Plan in early 2023.

How to fund the European Green Deal requires a rethink. In this policy brief, we show how the shortcomings of InvestEU in combatting climate change can be addressed and why it is no substitute for fresh public spending at EU level. First, policymakers need to acknowledge the limits of the leveraging approach. Several important transformative projects fall outside the scope of what public de-risking of private investments can achieve, as these are part of public infrastructure or will simply not be commercially viable. Second, you cannot green the European economy on the cheap. By defining ambitious target volumes without matching them with appropriate funding, InvestEU has a high leverage that prevents it from taking the risks necessary to provide truly additional green investment. To maximise its impact on the green transition, InvestEU should get a funding boost and concentrate on those areas where de-risking works. Third, InvestEU success depends not just on how much but also on how public money is spent. Greater transparency and accountability are needed to ensure that investments are in line with EU climate policy...

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