Can the next EU budget point the way to an investment plan for climate transition?

Last week, Commission President von der Leyen announced a €2 trillion EU budget fit “for a new era,” set to launch for a seven-year period in 2028. As EU-watchers in Brussels and beyond scrambled to digest the reams of legislative proposals that followed this headline-grabbing announcement, much in the detail should give pause – especially from the perspective of closing the EU’s climate investment deficit.

Meeting the EU’s 2030 climate targets requires an investment of €842 billion annually across the European economy. I4CE’s flagship report, The State of Europe’s Climate Investment, finds that we are far off that pace – and these latest EU budget proposals do not demonstrate a clear commitment to targeting public money to catch up.

Not much bigger – but better?

While the €2 trillion headline figure might sound significant – and is being pitched by the Commission leadership as transformational – the reality is that it does not represent a major increase in the size of the budget compared to the current period. The new size corresponds to 1.26% of EU Gross National Income (GNI), a modest rise over the current level of 1.12%. With much of the additional funds going to pay back the loans taken to hamper the impact of the Covid crisis, the actual increase is closer to 0.02% of GNI – sure to be contested in negotiations with Member States.

So, the next budget does not look significantly larger. And with the end of the NextGenerationEU programme in 2026, the EU’s resources to support its growing number of objectives – including the climate transition – look tight. But if the next MFF cannot do more with more, can it, through changes to its structure, do better with less?

National and Regional Plans – towards long-term climate investments?

The European Commission’s proposal for the next EU budget includes merging several existing funds – including the CAP and the Cohesion Fund – into a single instrument: the National and Regional Partnership Plans (NRP plans). This consolidated fund will be divided into 27 national envelopes.

To access this funding, Member States must develop reform and investment plans, addressing also the EU climate targets. The draft regulation requires Member States to dedicate a specific percentage of their NRP envelope to climate and environmental objectives, while the Commission can set the minimum percentage, based on each country’s progress and projected trajectory.

Member States are also expected to explain how these plans align with the National Energy and Climate Plans (NECPs). A recent assessment by the European Commission indicates that full implementation of the NECPs could enable the EU to meet its 2030 targets. Still, current plans often fall short of analysing actual investment needs and lack comprehensive strategies to mobilise both public and private financing.

To ensure that part of the EU budget envelope is effectively directed toward climate investments, the NECPs should develop into robust climate investment plans. These should not only detail public budget allocations but also outline policies to stimulate private investment – through fiscal incentives, risk mitigation, and regulation. By linking the NRP plans to the NECPs, EU fund allocation could be made conditional on Member States efforts to close the investment gap.

Ensuring that these plans are sufficiently robust, and that EU funds are effectively used, will require both building capacity in Member States and strengthened bottom-up scrutiny. National think tanks and research institutions can play a key role in supporting this effort by providing technical expertise and policy guidance. In France, for example, I4CE supports public authorities estimating climate investment gaps and advising on funding options, leading to a first multiannual climate financing strategy in France in 2024. Extending this capacity in other Member States would create a common framework for analysing and governing investment plans – reducing fragmentation and offering EU policy makers a solid basis to assess how effectively budgets support EU climate goals.

The European Competitiveness Fund – limited funds demand strategic targeting

After months of anticipation, there is much to welcome in the Commission’s proposal for a Competitiveness Fund. The consolidation of several smaller EU funds promises to simplify the complex EU funding landscape. The launch of new bottom-up calls such as “EU Tech Frontrunners” (to support areas where the EU could build lasting competitive advantage) and “Single Market Value Chains Builder” (focused on onshoring strategic value chains) reflects a more strategic industrial policy approach.

The Commission also proposes a doubling of the allocation to Horizon Europe, to €175 billion – an overdue boost to the chronically oversubscribed research programme. However, integrating Horizon into the Competitiveness Fund remains contentious. The compromise – where Horizon remains a self-standing programme, but €68.2 billion in collaborative research funding will be managed by the Fund and aligned with its priorities, including €25.3 billion for the clean transition – raises questions around implementation and governance, with responsibility for the Competitiveness Fund spread between the Commission’s Research (RTD) and Industry (GROW) Directorates.

Still, beyond research and a few promising instruments, the Fund’s size remains limited relative to its ambitions. Europe’s weakening position in cleantech manufacturing and the need to accelerate industrial decarbonisation demand more. With just €26 billion dedicated to mature, capital-intensive projects – and a wide scope spanning e-fuels to nature-based business models – the resources will be stretched thin. By comparison, the Innovation Fund alone offers around €4 billion annually for a narrower scope of technologies.

Despite recent calls for a robust green industrial policy, future green industrialisation cannot rely solely on the EU budget. Leveraging national resources – through as-a-service mechanisms, state aid flexibilities, InvestEU, or carbon market revenues – will be critical.

Given scarce resources, it is striking that the Commission’s proposal says little about strategic prioritisation of sectors. The Competitiveness Coordination Tool could help align Member State and EU investments toward high-value sectors, but it is barely mentioned. The Competitiveness Coordination Tool is potentially the vehicle to implement a more ambitious governance framework of green industrial policy at EU level, with a data-driven prioritisation of sectors and closer alignment of national policies to develop a strategy that is able to compete with the largest economies globally.

The budget battle is just beginning

This proposal is only the starting point for what promises to be a long road to compromise. The Council’s political position at the end of this year will be the first indicator of how difficult the debate may become.

While Member States negotiate the details, Europe’s climate investment needs will likely continue to grow. The EU budget has an important signalling role – linking investments to NECPs and targeting funds to strategic green sectors – but the bulk of responsibility lies with national budgets and the private sector.

The MFF proposal sends a clear message: the EU wants to move beyond “business-as-usual,” but lacks the resources to do so at scale. Nevertheless, the design of the new architecture matters. If the EU budget cannot act as an investment shock in itself, it can still serve as the tip of the spear – guiding national and private investment toward sectors critical for the clean transition. Whether it lives up to this potential now depends on the Member States.