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Ian Cochran, Senior Advisor – I4CE

The idea of creating a European Climate Bank is gaining ground. After being put on the table by the Climate Finance Pact and its many supporters, it is now included in French President Emmanuel Macron’s “Letter to Europeans”. With the European elections coming up soon, it is excellent news that financing the fight against climate change is on Europe’s political agenda. However, is the best solution a new European financial institution?



To close the climate investment gap, ‘finding the money’ is not enough

The diagnosis is clear: investment flows in Europe must be increased for energy efficiency in buildings, public transport infrastructure, low-carbon vehicles, renewable energies, etc. In France, nearly 40 billion euros are invested each year contributing to climate action by households, companies and public authorities, and an additional 10 and 30 billion euros is needed annually to be on track to achieve carbon neutrality by 2050.

However before we talk financing, the first step is to ask how to help companies, households and communities develop the climate-friendly projects needed to fill this investment gap. It means assisting households to renovate their homes or buy an electric car; it means supporting companies in the adoption of technologies that consume less energy and the use of renewable energies; it means helping local governments renovate their building stock or develop public transport. These actors often need to be supported, and their projects must be economically viable. Whether through public subsidies, fiscal policy, regulation, communication and awareness-raising, support for project development, there are many tools available to create a project pipeline that will then have to be financed.

Financing the fight against climate change is therefore not limited to “finding the money” – the “project pipelines” must also be created. Given the scale of the challenge, we need to maximize the impact of public funds whether through existing or new institution to create markets, develop projects and support needed innovation.

Beware of silos

Financing for climate also means stopping funding for projects that go against the transition to a carbon-neutral and climate-resilient economy. To oversimplify slightly: financing “green” is important, stopping finance for “brown” is just as important. In France, in addition to the 40 billion euros climate investments made each year, no less than 70 billion euros are invested in equipment that consumes large amounts of fossil fuels, whether vehicles or boilers.

Increasing climate finance without reducing brown is one of the risks of creating a European Climate Bank. It would make little sense if, with the other hand, other public financial institutions continued to finance brown activities. The challenge is to “de-siloise” or mainstream climate action, thus aligning all financial flows with the objectives of the Paris Agreement. This is essential to ensure that all financial institutions contribute to financing the transition and stop funding projects that “lock in” climate change by condemning us to emit greenhouse gases for decades to come. We cannot afford for the creation of a European bank specialising in climate change to distract us from reducing brown finance from others.

Let’s put climate in existing institutions

An alternative to this specialized bank, as also mentioned in Emmanuel Macron’s Letter to Europeans, would be to ask existing public financial institutions to align their financing with the Paris Agreement. This would of course entail direct contributions to the financing of the transition; but would also ensure that institutions clearly and transparently justify any financing that is counter to the EU’s climate goals. In the words of the President, it would be a matter of putting climate at the heart of their “mandate”, whether at the European Central Bank, the European budget, InvestEU or the European Investment Bank (EIB)… In short, putting climate at the heart of the European Union’s mandate. If the EIB is now financing fossil fuels, it is because it is doing what the Commission and the Member States behind it are asking it to do. Rather than creating a new institution, let us give the right political mandate to existing institutions.

This idea is already gaining ground among financial institutions, although much remains to be done. The EIB, like all other multilateral development banks, has already adhered to the 5 Voluntary Principles for Mainstreaming Climate Action to integrate climate across all of its activities. At the 2017 One Planet Summit, the principal development banks pledged to align all their activities with the objectives of the Paris Agreement.

The high-level political mobilization in favor of a European Climate Bank is undoubtedly good news. It shows that many Member States and stakeholders from across the board want to use the upcoming European elections as an opportunity to increase the support of the EU’s institutions for climate action. This mobilization is valuable political capital. Let us invest it where it will be most useful: in the institutions that can already act today.