How Europe plans to pay for its Green Deal

Source: By Jean Chemnick, E&E News reporter • Posted: Sunday, March 15, 2020

 Polish power station Belchatow. Photo credit: Petr Štefek/Wikimedia Commons

In its ambitious plan to combat global warming, the European Union puts its money where its mouth is.

The European Commission’s proposal to make the 27-nation alliance carbon neutral by 2050 would cost an initial €503 billion — or about $562 billion — in direct expenditures from the European Union’s budget over the next decade.

And the commission estimates that figure would roughly double to more than €1 trillion when European Investment Bank lending, national co-financing, and leveraged and private-sector expenditures are taken into account. (€1 equaled $1.12 with yesterday’s exchange rate.)

That amount may sound relatively modest. After all, Sen. Bernie Sanders (I-Vt.), in his quest for the Democratic presidential nomination, has proposed spending a whopping $16.3 trillion on his vision of the Green New Deal.

But it’s not an apples-to-apples comparison. For one, Sanders’ proposal is just that — a proposal. The money would be raised by taxing and suing the fossil fuel industry, significantly reducing defense spending, and through other measures that are either theoretical or would face uncertain odds, even with a Democratic House and Senate.

Meanwhile, the European Commission would pay for its so-called Green Deal by allocating a quarter of its overall spending — which totals only about €156 billion a year under the most recent budget — to the work of decarbonizing its economy by 2050.

A portion of the compact’s programs, from agriculture and food policy to energy to infrastructure, would be counted toward the Green Deal because those policies would be brought into alignment with that midcentury goal.

Still, some experts who follow E.U. policy say the quarter allocation for climate change is suspect. Almost half of it would come from the European Union’s support for farmers, which makes up about 30% of its overall budget. The commission is describing 40% of its agricultural funding as climate funding, because farmers would face some new requirements to be eligible — including a ban on plowing grasslands and restrictions on crop rotation.

Tobias Reichert, a policy analyst with Germanwatch, said the commission would get more bang for its buck if it incentivized farmers to raise fewer animals and use less artificial fertilizer.

Counting so much of the agricultural budget toward climate finance also lets other parts of the E.U. budget off the hook, he argued, because the commission can claim to be spending vast sums of money on climate change without achieving commensurate results.

“That would be a serious hindrance to actually putting the very good ambitions of the Green Deal into practical action,” he said.

Still, analysts agree that the Green Deal sends a powerful statement about the future of the E.U. economy.

Pieter de Pous, a senior policy adviser at E3G, a Europe-based climate think tank, compared the Green Deal to the European Union’s single market, which the bloc introduced in 1993 and which guarantees the free movement of goods, capital and labor throughout the union.

“It’s a real transformational agenda that is going to run for a long time, and that’s going to affect everything the E.U. does,” he said. “It’s a big deal. Literally.”

The Green Deal, and the E.U. seven-year budget that supports it, needs member countries to sign off — a process that’s likely to be delayed due to the novel coronavirus outbreak. But they have broad buy-in from countries across the European Union, and it’s unlikely to change dramatically.

The European Green Deal Investment Plan, which was unveiled in January as part of the broader Green Deal, calls for about half a trillion euros in direct E.U. investment between now and 2030.

The InvestEU program would mobilize an additional €279 billion, with the E.U. budget guaranteeing loans to leverage private capital. The program evolved from former commission President Jean-Claude Juncker’s response to the global recession and is designed to support comparatively risky projects — in this case, low-carbon and climate-resilient technologies.

It’s overseen by the European Investment Bank, a public development bank owned by E.U. member countries and guided by E.U. policy, which last year pledged to dedicate half of all future activities to climate and sustainability.

The Green Deal calls on national governments to put up €114 billion between now and 2030 to help fund the low-carbon transition in their own countries.

Some would receive help from a commission allocation in making those expenditures, but the Green Deal would create a pathway for national climate and energy laws to be aligned with the 2050 target. National plans also contribute to the European Union’s commitment to the Paris Agreement, which the union is expected to tighten in the coming months.

Countries are apportioned responsibility for achieving reductions under the nationally determined contribution to Paris, and that translates to responsibility for providing finance.

E.U. member countries stand to be affected to different degrees by the dual objectives of phasing down fossil fuels use and ramping up low-carbon alternatives.

Poland, which has yet to agree that the 2050 deadline for carbon neutrality applies to each individual E.U. country, has been the most vocal in its concerns for its future under the Green Deal. Miners in Katowice, Poland, where U.N. climate talks were held in 2018, staged a strike in February demanding that their government save Polish coal from extinction.

“Eastern European countries tend to see the whole climate debate as something that is being forced upon them,” noted Wendel Trio, executive director of Climate Action Network Europe.

But de Pous said that even in Poland, propping up the coal industry increasingly is seen as untenable.

“If you look into the economics of coal, then there’s been a real sea change,” he said. Most of the coal Poland is burning comes from Russia now — undermining the argument that it’s needed for national security. And renewables are becoming more affordable.

The Polish government gets more mileage with voters by providing a generous social safety net, de Pous said, than with “handouts to coal miners.”

To help cushion the blow to Europe’s remaining coal communities and places where the economy revolves around heavy industry, the European Commission plans to allocate €143 billion over 10 years for the Just Transition Mechanism to help workers and economies transition. This includes €7.5 billion for a subsidiary, the Just Transition Fund, to pay for community transition plans.

Poland stands to be the biggest beneficiary, receiving a projected €2 billion from the fund and an estimated €27 billion in overall transition assistance. Germany and Romania are projected to be distant second- and third-place recipients, with €13 billion and €10 billion in expenditures.

The most uncertain component of the Green Deal is the private capital the plan hopes the European Union’s seed money can leverage.

But here the European Union has an advantage over the United States, said Leonardo Martinez-Diaz, who directs the Sustainable Finance Center at the World Resources Institute. Where the United States has a weaker regulatory environment — with energy and climate rules revised under successive administrations — the European Union’s regulations encourage its private sector to invest, he said.

“The reason why the Europeans can get away with spending less publicly is because they are putting into place regulations that are essentially putting a higher price on carbon,” he said. “That money is real money, because it’s contributing to the transition, as well. It just happens not to be public money.”

The European Union’s Emissions Trading System — the cap-and-trade program that covers emissions from its power sector, industry and other sources — feeds into an innovation fund to support low-carbon technologies.

The United States lacks a counterpart to the European Investment Bank that would help mobilize private financing, though legislation has been introduced in Congress to stand up a U.S. Green Bank.

“That is a real challenge, because the next president — whoever that might be — is going to find it very difficult to spend on the scale that is proposed in the Bernie plan,” said Martinez-Diaz. “The fiscal condition of the country is not great, and it’s going to be left saddled with enormous deficits at a time of economic disruption and turmoil because of the coronavirus.”

Rather than relying on public spending to deliver a new green economy, he said, the next president should borrow from Europe’s playbook and build up its regulatory environment and institutions to leverage private investment.