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The Climate Investment Challenge behind the European Prosperity Plan

18 July 2024 - Blog post - By : Dorthe NIELSEN / Ciarán HUMPHREYS

Ursula Von der Leyen’s competitiveness agenda is grabbing headlines – but the hard work of climate implementation and investment is only just beginning. In this blog, Ciaran Humphreys and Dorthe Nielsen outline the challenges this era of implementation poses, and how to align climate ambition with the President’s economic vision.  

 

Ursula Von der Leyen has been re-elected as Commission President – and by a wider margin than expected. Before the vote, she set out her political priorities for the next EU mandate. Her vision focused on themes of security, economic competitiveness, and enlargement – unsurprisingly so at a time when the EU is increasingly concerned about its place in the world. 

 

A turn away, then, from the climate ambition of Von der Leyen’s first mandate in 2019? Not quite – in her speech, the returning Commission President confirmed her commitment to stick “to the targets of the European Green Deal” and “enshrine our 90% target for 2040 in our European Climate Law”. 

 

The Green Deal gets to work – implementation and investment 

While EU policy makers are likely to put new climate legislative proposals on hold until 2026, it’s time, as Von der Leyen made clear, for Member States to get to the difficult work of implementing the Green Deal on the ground. Meeting the EU objectives of reducing greenhouse gas emissions by at least 55% by 2030 requires solid political commitment, significant institutional resources and – most importantly – public and private investment.  

 

European green investments grew by 9% to reach €407 billion in 2022 compared to the previous year. However, our analysis shows that there is still a very significant gap to close. Annual investments will need to double to bridge a climate investment deficit of €406 billion. In both France and at the EU-level, I4CE’s work has focused on providing the granular analysis of the investment gap. This is essential to better understand the progress made and the efforts ahead in terms of climate investment, not least as the new five-year mandate brings the EU right up to the 2030 goal post. 

 

Bridging the climate investment deficit will be more challenging 

Von der Leyen was explicit is stating that “Europe needs more investment”. Public finance has a significant role to play in this, in supporting both public and private investments. Yet budgets at EU and national level are set to be more constrained than ever, and the political support for investing in the green transition looks increasingly fragile.  

 

The €723 billion COVID-19 Recovery Fund (RRF) is set to expire in 2026, while the EU’s core budget (the Multiannual Financial Framework, or MFF), may become affected by the need to pay off the RRF’s interest payments. Negotiations around the next phase of the MFF are expected to begin in 2025, but the increasingly Eurosceptic and frugal stance among Member States will make negotiating a larger budget difficult. The task is made even more challenging by the competing investment priority of supporting Europe’s military autonomy and Ukraine’s continued defence.  

 

At national level, the end of the “peace dividend”, fiscal support to citizens in the pandemic and gas crisis, and higher borrowing costs have left public finances in many Member States under pressure. This is only set to be exacerbated as the EU’s revised fiscal rules come into force in 2025, imposing stricter deficit reduction plans on some Member States. 

 

Could the Clean Industrial Deal be the way forward? 

The Commission President today announced a Clean Industrial Deal, backed up by a European Competitiveness Fund under the next MFF. This is the right approach, as strengthening Europe’s green industrial base is the clearest means to align concerns of competitiveness, energy security and climate action.  While efforts at green industrial policy have so far faltered, the EU has the tools in place to do better, whether through the carbon market-funded Innovation Fund or the support offered by the European Investment Bank. By making more use of these institutions and financial instruments that crowd-in private capital, as well as delivering an ambitious Competitiveness Fund to replace the underwhelming STEP, Europe can respond to the challenge posed by Chinese and American competition.  

 

However, there is much more to climate investment than green industrial policy. Refreshing Europe’s grid infrastructure (€89bn per year) or renovating its aging building stock (€168bn per year), are tasks in which the public sector will need to take the lead, both by derisking private investment where possible and subsidising necessary transformations where it is not.  

 

Doing so will require wading into the difficult financing debates which will dominate the next mandate. Despite Von der Leyen’s optimistic vision of a bigger, better, simpler EU budget, such proposals will face vocal opposition. Therefore, assessing the effectiveness of, for example, enhanced climate earmarking, while advancing the debate on new “own resources” could make or break future support for decarbonisation. Progress will also have to be made on how Member States operate under the new fiscal regime, with a more granular understanding of investment needs, and increased budgetary flexibility for sustainability- and competitiveness-enhancing public spending.  

 

The era of implementation needs a North star 

As attention shifts towards implementation of the Green Deal rulebook on the ground, the ball is, it would seem, firmly in the court of Member States, precisely when political instability and fiscal insecurity make the future of Europe’s decarbonisation most uncertain.  

 

Still, it is the role of the new Von der Leyen Commission, and the new European Parliament, to identify the options for the way forward. The President’s vision of a “Europe that implements what it agrees should guide the next five years of policymaking and investment, as the bloc hurtles towards its 2030 decarbonisation waypoint. Therefore, it is important that the European Prosperity Plan keeps climate action front and centre – or we risk seeing Europe’s climate ambition and global leadership veer dangerously off course.  

 

I4CE Contacts
Dorthe NIELSEN
Dorthe NIELSEN
Director of Strategic Engagement Email
Ciarán HUMPHREYS
Ciarán HUMPHREYS
Research Fellow – Cleantech, Financial instruments for climate innovation Email
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