Do European Commission ambitions signal a new, more sustainable direction of travel for the EU and globally?

By Paul Davies and Michael Green

On 27 May 2020, the European Commission (the Commission) announced a €750 billion stimulus fund aimed at helping the economies of the EU member states recover from the shock sustained as a result of the COVID-19 pandemic. Through this fund, officially titled Next Generation EU, the Commission hopes to “build back better”, through channels that contribute to a greener, more sustainable and resilient society. When combined with the proposed €1.1 trillion EU budget for the next seven years, the Commission’s wider recovery plan comes to a total of €1.85 trillion.

The plan follows the Commission’s Green Deal, which was announced in December 2019. The Green Deal was proposed as a framework of legislation from which the bloc could achieve its goal of net-zero greenhouse gas emissions by 2050. To decarbonise the economy, the Green Deal envisages government spending and public initiatives worth €100 billion per year, according to the Commission’s European Green Deal Investment Plan. Discussions surrounding the Green Deal had gained traction prior to the COVID-19 pandemic, as well as considerations on how best to tackle the social and economic issues raised by the transition to a carbon-free economy.

In light of the pandemic, certain members of the European Parliament have argued that the legislative energy consumed by climate issues would be better placed in confronting the public health crisis. With the launch of the stimulus fund, the Commission underlines its belief that economic recovery from COVID-19 and climate action are not mutually exclusive, with President Ursula von der Leyen noting, “There is no vaccine for climate change”. This statement echoes similar sentiments expressed by Mark Carney and IMF chief Kristalina Georgieva, with Georgieva affirming that “we [can] tackle both crises at the same time… If our world is to come out of this [coronavirus] crisis more resilient, we must do everything in our power to make it a green recovery”. In a similar vein, 19 EU member states have supported a statement calling for the Green Deal to be made central to the EU’s COVID-19 recovery plans.

The Recovery Fund’s Green Strings

The Green Deal

The Green Deal is at the centre of the EU recovery proposals, according to President Ursula von der Leyen, along with other EU priorities of digitisation and resilience. The recovery fund  proposes setting aside 25% of EU spending for climate-friendly expenditure, which will apply throughout the EU’s updated budget proposal and recovery programme. Spending will be regulated according to the EU sustainable finance taxonomy; this taxonomy was developed separately by the EU, with the aim of directing private investments into technology in support of at least one of six prescribed environmental objectives (including, for example, climate change mitigation). The EU sustainable finance taxonomy also includes a “do no harm” principle, whereby any contribution towards one (or more) of the six environmental objectives must do no significant harm to any of the other environmental objectives. The principles will also apply to the application of the recovery fund.

Renovation

The sustainable renovation of buildings is a key focus of the recovery fund, which envisages doubling the EU’s current renovation rate. The recovery fund is expected to initially prioritise public sector buildings, such as hospitals and schools. The renovation aspect of the recovery fund is also anticipated to support the provision of green mortgages.

Renewable Energy

The proposals concerning the recovery fund unsurprisingly devote significant resources to supporting the renewable energy industry. Although the fossil fuel sector has been worse hit by COVID-19 than renewables, the supply chains of renewable energies have nonetheless been considerably impacted; the Commission expects solar and wind markets to shrink by 20%-33% this year. The recovery fund will propose an EU tendering scheme for renewable electricity projects worth 15 GW over two years, with a total capital investment of €25 billion. Also expected is €10 billion support for national renewable schemes over two years, with co-financing from the European Investment Bank.

Clean Hydrogen

The proposals for the recovery fund place notable emphasis on clean hydrogen. The Commission is expected to propose doubling the amount of current funding for clean hydrogen research and development (which is approximately €650 million), as well as provide a further €10 billion over the next 10 years (with co-financing) to reduce the risks of complex hydrogen projects. The Commission anticipates launching a “1 million ton of clean hydrogen commitment”, which will include a carbon contracts for difference (CCfD) pilot scheme, similar to tendering systems for renewable energy. Additionally, an annual €10 billion fund is expected, to finance the development of hydrogen infrastructure.

Clean Mobility

The wider programme for the recovery fund addresses issues of clean mobility, and the Commission anticipates putting forward a Clean Automotive Investment Fund worth €40-€60 billion to accelerate investment in zero emission trains. The Commission is also expected to double the current EU investment on electric car recharging infrastructure, setting a goal of reaching 2 million public charging or alternative refuelling stations by 2025.

Supply Chains

The Commission notes that the COVID-19 crisis has highlighted the need to enhance the resilience of Europe’s supply chains, as well as reduce the dependence on external suppliers. Recovery efforts will therefore follow a model of “open strategic autonomy”, whereby the Commission aims to “[shape] the new system of global economic governance and [develop] mutually beneficial bilateral relations, while protecting [the EU] from unfair and abusive practices”.

Separately, in order to ensure that environmental and social interests are integrated into business strategies, the Commission intends to propose a new sustainable corporate governance initiative in 2021.

The recovery fund’s  green strings may even extend to its repayment obligations. The Commission has stated that the money raised on the capital markets could be repaid over 30 years, between 2028 and 2058, using means such as a new resource band on the Emissions Trading Scheme, a carbon bonds adjustment mechanism, a digital tax, or a tax on non-recycled plastics. These potential taxes could be highly contentious. In particular, regarding a carbon bonds adjustment mechanism, the Commission identifies that it will bring forward such proposals in 2021 if “differences in climate ambition levels around the world persist”.

Agreement and Oversight

In practice, the proposed recovery fund will require agreement from all 27 member states, an achievement which may be no easy feat. While the Commission has already won support from Germany and France to raise €500 billion on the financial markets as an initial step, the “frugal four” countries (Austria, Denmark, the Netherlands, and Sweden) opposed the Franco-German plan to offer grants to struggling countries, indicating a fractious road of negotiations ahead.

The Commission has indicated that there will be active oversight over how the recovery fund is spent; requests to utilise the fund must be agreed by the Commission and the European Council, as well as satisfy green criteria in supporting investments and reforms. These requirements are intended to ensure that fund is appropriately allocated to those regions and sectors most severely affected by the crisis.

Initial Reception

While the full spectrum of reactions to the recovery fund  is yet to be seen, the initial reception of the programme was mixed. Currently, member state governments are able to create their own financial bailout packages without any green conditions if funds are provided in aid of liquidity issues, as clarified by EU Transport Commissioner Adina Ioana Valean to the European Parliamentary Committee in May. The ability of national governments to provide non-green financing has prompted certain environmental campaigners to call for greater coordination between the state aid of individual member states and the EU’s green recovery ambitions.

Additionally, the WWF has called on the Commission to dedicate at least 50% of investment within the recovery plan towards environmentally sustainable activities, a target from which the current programme falls short. Greenpeace expressed particular concern about the plan’s emphasis on hydrogen, arguing that instead of using gas and renewable energy to produce large amounts of hydrogen, renewables should be mobilised to eliminate fossil fuels altogether as quickly as possible. Fatih Birol, executive director of the International Energy Agency, by contrast, points to hydrogen and batteries as areas that can now take centre stage in supporting climate action. Green hydrogen has already been attracting attention in certain markets with access to large quantities of inexpensive renewable power. Sandrine Dixson-Declève, co-president of the Club of Rome (a high-level body of scientists, professionals, and former politicians), commended the proposals, particularly the alignment of recovery spending with the Green Deal and the EU’s sustainable finance taxonomy. The climate think tank E3G similarly viewed the plan as “uphold[ing] the European vision of achieving climate neutrality and economic growth”, despite also recommending that the 25% climate investment quota be increased, given the scale of climate action required.

Green Strings Elsewhere in the World  

The Canadian federal government has attached green conditions to its offer of financial support for COVID-19 recovery. The federal government announced emergency funding for large companies (with annual revenues in excess of C$300 million) affected by the pandemic, provided that recipients commit to the publication of annual climate-related disclosure reports in line with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (known as the TCFD).

Green strings have also permeated France’s €8 billion recovery plan for the French car industry, which includes €1 billion in grants of up to €7,000 each to encourage citizens to purchase electric vehicles. President Emmanuel Macron has set a goal for France to become Europe’s top producer of clean vehicles by increasing output to more than 1 million electric and hybrid cars per year over the next five years. Likewise, the French government stated in April that it would provide a €4 billion governmental loan to Air France-KLM and Air France, combined with a direct shareholder’s loan of €3 billion, on the condition that Air France halve its overall CO2 emissions per passenger-kilometre by 2030 compared with 2005 levels, reduce carbon emissions by 50% by the end of 2024 for domestic flights, and commit to sourcing 2% of its fuel requirements from sustainable sources by 2025.

Conclusion

The impact of COVID-19 has reduced daily carbon emissions in Europe by an estimated 27%, leading many members of the public to implicitly associate economic decline with improved environmental health. The Commission’s ambitions towards a green recovery reflect a different understanding: that green investment can indeed contribute to prosperity. This approach recently received persuasive empirical evidence by way of a study from economist Joseph Stiglitz and former World Bank chief economist Lord Stern (among others at Oxford University), which found that a green recovery could give higher returns on government spending and provide more jobs in the short and long term compared with a non-green stimulus programme. After the 2008 financial crisis, much of global stimulus spending was directed at high-carbon projects. The effects of this were acutely seen in 2010, when carbon emissions rebounded by a record amount of almost 6%. Today, the Commission’s green ambitions may indicate a new, more sustainable direction of travel than the path taken after 2008.

The authors would like to thank Emilie Cornelis in the London office of Latham & Watkins for her contribution to this article.