From wake-up call to investment action
Returning from a summer marked by soaring temperatures, wildfires and drought, the EU is entering a season of decisive negotiations. The outcomes will determine the bloc’s ability to respond to the urgent challenges of a changing climate and accelerate the decarbonisation of the economy, essential to Europe’s transition away from Russian gas.
Europe currently invests 534 billion euros annually in the energy, buildings, transport and cleantech manufacturing sectors. To reach the 878 billion euros required to meet the EU’s 2030 objectives, an additional 344 billion euros are needed each year. In addition, the European Commission estimates that about €70 billion per year is needed in climate adaptation. For an energy-independent future, a competitive Europe and to protect the population, the EU, Member States, subnational governments and the private sector must prepare to accelerate investment.
The proposed €2 trillion EU budget (2028 – 2034) will be at the center of attention. With limited fiscal space in many Member States, combined with a growing number of challenges to tackle, a lot of debate will focus on the overall size of the EU budget, new revenue stream for the EU, and the headline priorities. Although the EU budget is a significant public investment muscle, at 1.26% of the EU’s GNI it will remain limited compared to the collective spending power of Member States. Therefore, getting the wider toolbox right – also beyond the EU budget – will be essential.
The European Competitiveness Fund (ECF) is the EU’s best bet at financing its clean industrial ambitions. It will need not only a strong public budget allocation but also a data driven approach to guide strategic choices and investment decisions for Europe’s industries of the future. The ECF must also boost the mobilisation of private capital, including from commercial banks. Despite the ambition to support the cleantech sector, the scale-ups struggle to secure long-term bank loans. The barrier is less of a shortage of capital than a shortage of bankable projects. Helping more projects reach bankability faster will require targeted early-stage public derisking tools, stronger equity support, and local ecosystem clusters.
With the future of the EU’s Emission Trading System also up for debate, the coming months will see the acceleration of important design discussions – from launching contracts for difference under the Industrial Decarbonisation Bank to refocusing the Innovation Fund towards riskier, highly innovative projects. Revenues are crucial not only for supporting national investment in decarbonsing the industry, but for supporting European mechanisms developing the climate innovation needed tomorrow.
The proposal for a revised Governance of the Energy Union regulation, expected towards the end of the year, is an opportunity to reinforce clean transition implementation measures. Turning the current National Energy and Climate Plans into investment plans could actively steer economic transformation and guide public and private investment for both mitigation and adaptation measures. It would deliver on investors’ demand for clear and predictable national investment strategies in the medium term, increasing resilience in the face of future energy crises.
The EU’s Integrated Framework for Climate Resilience and Risk Assessment will also be unveiled towards the very end of the year. It should lift the Europe-wide ambition on adaptation policies. In a space of overlapping competences between local, regional, national and the EU level, proposals much offer clarity on the sticky issues of who pays for the much-needed adaptation measures across different levels of government.
The proposed introduction of a “climate resilience by design” approach in the next EU budget period can go some way in ensuring that resilience and adaptation considerations are embedded in EU-funded investments in for example infrastructure, water management, agriculture, energy, transport, buildings and civil protection. If the objective is efficiency in public spending, the challenge will be to ensure a solid application across EU funding programmes.
Finally, the recent EU Electrification Action Plan focuses on reducing the price gap between electricity and fossil fuels and sets the scene for a critical debate later in the year on the Union’s electrification target. Lowering the upfront costs for electrification for end-user, including households, will be essential to ensure buy in and public support for the clean transition. This will be the backdrop for I4CE’s forthcoming research, focussing on the affordability of electric vehicles or heat pumps for low- and middle-income households in the EU and the public policies needed to effectively deliver this.
The political agenda this autumn will provide key opportunities for policy makers to develop structural responses to the overlapping crises, which ultimately come at a high cost. Our engagement to identify the levers of the transition, informing debates and guiding decisions continue in France, Europe and internationally. More details in the newsletter below.
