At the start of the next institutional cycle, the EU should hence improve regulatory certainty for green investments, which should be palatable to most parties likely to form a majority in the Parliament. In addition, the EU should adopt concrete tools that reduce cost uncertainty for companies and households in a pragmatic manner. To this end, this policy position recommends using green lead markets and proposes moves to explore two novel mechanisms that cost taxpayers little to nothing but should boost green investments.
Getting the EU Green Deal done is costly. Industry, transport and heating must be decarbonised; electricity grids reinforced, clean hydrogen produced, wind parks rolled out, charging stations erected – the list goes on. The additional investments in Europe are estimated at around €620 billion a year or about 4% of GDP.
Most of this staggering sum of money can’t be shouldered by the public purse but must come in the form of investments by companies and households. However, the private sector is not investing enough. One major impediment to more green investments is the uncertainty about their economic viability.
This uncertainty has many drivers. The price of carbon, i.e. of ETS certificates, fluctuates a lot, and it is unclear where it will be a few years from now. The availability and volume of green subsidies over the next years are added unknowns. Regulatory uncertainty is acute as well; the back-and-forth about banning the sale of combustion-engine cars after 2035 or the unclear future scope of CBAM are just two examples. And the availability of clean, cheap energy is a policy promise that many companies simply do not trust.1 For a company considering making a green investment that needs to pay off over, say, the next 10 years, this is often too much uncertainty to shoulder.
At the beginning of the next institutional cycle, the EU should therefore enhance the planning predictability of green investments for the private sector, encompassing both companies and households. To accomplish this, the EU will have to provide greater regulatory certainty (see the first part below). In addition, policy makers need to improve economic certainty, which may require leaving the trodden path, and introducing some novel tools. These tools should aim to boost green investment with little to no additional cost to the budget. In the second part of this policy position, such novel mechanisms are sketched out, as food for thought for the new legislature.
Regulatory and political certainty
Lack of regulatory and political certainty comes with high costs. In the EU, ‘uncertainty’ is cited by 78% of companies as an impediment to their investments. For instance, when energy prices increased because of the Russian war on Ukraine, the EU introduced ad-hoc “windfall taxes” in the form of a revenue cap on inframarginal electricity producers, which are often solar and wind farms. Widely differing implementation across member states “led to significant investor uncertainty”, as even the Commission concluded when the measure was not prolonged. For solar and wind farms, which are very capital intensive, uncertainty regarding the regulatory framework surrounding future revenue is a major impediment. Undersubscribed solar auctions in Germany and Spain, for instance, were attributed to the nervousness induced by the discussion around capturing ‘windfall profits’.
Political uncertainty also induces massive costs if it casts doubts about the stringency of the Emission Trading System (ETS). Research indicates that recent price increases in ETS certificates came about partly because policy makers signalled their “credible long-term commitment to climate targets”. In other words, now companies believe more than before that the ETS will be implemented as promised. Conversely, if this political commitment weakens, companies’ trust in the ETS could deteriorate, driving prices down and volatility up, thereby hampering green investments.
Both examples show the high cost of uncertainty for public budgets: under high regulatory or political uncertainty, green investments are more costly, and hence governments must subsidize more heavily for the investment to be undertaken.
The EU currently does not deliver enough political and regulatory certainty. A telling example of regulatory uncertainty is the controversy around the combustion engine. In lengthy negotiations, co-legislators agreed on phasing it out after 2035. However, after that agreement had been struck, a small number of political parties changed their position and wanted to reverse the decision, with that controversy still ongoing. Naturally, policy makers are allowed to reverse their errors (if banning the sale of new combustion engine cars after 2035 was indeed a mistake), but the uncertainty induced by such moves is substantial...
more at Delors Centre