EU: A Trillion-Plus Euro Climate Plan

Published on January 17, 2020

The European Commission has unveiled its latest ideas for how to finance what would be a truly herculean turnaround of the European economy to first cut net CO2 emission levels in half in ten years, by 2030, and to then eliminate the CO2 emissions entirely by 2050.

** The Commission is estimating that Europe will need to spend 1.2 trillion euros a year – some 260 billion euros more, per year, than the previously estimated 940 billion euro per year over the ten-year baseline — to fund the level of energy-related, building, and transport sector investments needed to meet the climate and energy target to halve CO2 emissions by 2030. To be clear, that means 1.2 trillion annually for ten years through 2030 – the Commission does not say how much would be needed to meet the zero emissions target through 2050.

** That is the kind of money EU governments don’t have and won’t even try to raise, and so heavy private investor participation will be essential for that transformation to even remotely come close to hitting its targets (see SGH 11/27/2019; “EU: New Commission’s Carbon Tax Plan”).

** To get the ball rolling, the Commission is aiming to raise about 100 billion euros a year, for ten years, or a total of about a trillion euros. The headline 1 trillion would be a mix of public funding, European Investment Bank loans, and European Union money, in the form of EU budget guarantees, leveraged over that period in a private-public partnership.

** For those old enough to recall that far back, that structure would mirror the methodology used to stimulate the Eurozone economy under the so-called Juncker Plan (which, incidentally, SGH broke in October of 2014). Under the Juncker Plan, 21 billion euros of EU budget guarantees for the riskiest tranches of investment projects were eventually used to “crowd-in” 459 billion euros of private investment, so the leverage ratio achieved there was almost 22 times capital.

** As far as the current numbers go, from what we can gather, the next long-term EU budget, which starts in 2021, would set aside 485 billion euros over its seven-year life cycle, boosted by an additional 12 billion euros from an Emissions Trading Scheme fund, for approximately 500 billion euros. This would be money earmarked in the EU seven-year budget specifically and directly for climate and environment spending.

** Under EU rules of co-financing, national EU governments would then have to chip in with 115 billion euros of their own, and the “Just Transition Fund” intended to compensate displaced workers would provide that other 100 billion, made up of a mix of public and private cash along the same leveraging principle as the Juncker Plan. Extrapolated over the ten years, until 2030 rather than just the seven years of the budget, the Just Transition Fund is to produce 143 billion euros for the transition, the Commission has said.

** That, allowing for some glossing over of private and public money, comes out to a bit over 700 billion euros. Finally, the private sector would be expected to add another 280 billion euros thanks to leveraging of EU money along the same Juncker plan principle: the EU would provide guarantees from the InvestEU program, the EIB group, and National Promotional Banks for projects private investors would be interested in. Specifically, the InvestEU fund has 15.2 billion euros in cash that allows the EU budget to issue 38 billion euros of guarantees, which is supposed in turn to generate 650 billion euros of private investment. Of those 650 billion, 280 billion euros would be earmarked just for the Green Deal.

While a tall order, perhaps the leverage expected from the private sector may not be entirely inconceivable given growing demand in markets, and the dearth of supply, of the so-called Environmental, Social, and Governance [ESG] friendly investments, and the almost 22 times leverage achieved over the lifespan of the Juncker plan. And a willingness to pony up government funds, with first loss guarantees by public institutions, never hurts.

Indeed, on Thursday the government of Chancellor Angela Merkel announced that Germany would completely switch off all “brown-coal fueled” plans by 2038, with a price tag to the federal budget of 40 billion euros in compensation payouts.

The largest pot of compensation money from the EU has been promised to Poland, which did not subscribe to the EU’s climate neutrality goal last December, together with a handful of other countries.

Warsaw has now been promised an estimated 27 billion euros over seven years to ease the transition of its coal dependent economy to green. Still, political realities at the national level should not be entirely dismissed.

According to the Commission, coal currently provides 16% of EU energy consumption and 24% of its power generation mix. But perhaps most to the point, the EC estimates that two thirds of the coal plants currently in operation will be closed, with around 160,000 jobs lost in that sector, by 2030.

To mobilize even more money, the Commission, normally very strict about government aid to companies due to concerns over competition rules, has announced that it would use the “full flexibility” of EU state aid rules in the context of ratcheting the climate targets, and will even review its rules to make sure they do not hinder the transformation goals.

It is a clear signal for EU governments that the Commission will be ready to turn a blind eye to government financing of certain aspects of the energy and coal sector transformation that would normally be frowned upon.

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