Need for an ambition in EU Climate Finance

The success of the green transition depends on the availability of finance, along with the entire financial system transiting towards the green finances. Yet, the efforts across the countries are rater scattered right now.

The recent global Climate summit (22-23 April), organized by US President J. Biden has emphasized the role of climate finance. During the Summit, the US has revealed its international commitments listed in International Climate Finance Plan, while promising to double climate finance for developing countries to $5.7bn by 2024, to scale up, to attract private investments, and to end the support for fossil fuels. All this is an exceptional and most significant contribution to re-launch the global climate agenda.

However, what other countries, first of all, the EU, does in the area of climate finance? According to EU Council, in 2019 the climate finance support provided by the EU and its member states (the UK included) to developing countries amounted to €23.2 bn.

In 2014-2020 only around 19,7% of the central EU budget (€209 bn out of €1,066 tn) were spent on climate. In 2021-2027, this amount will almost triple, as the agreed multiannual EU budget foresees climate spending to reach at least €547 bn out of €1,08 tn, or around 30% of all expenditures.

Moreover, the most of green spending rests with EU member states. According to recent estimates, provided in the National Climate and Energy plans, to reach the 55% CO2 emissions reduction goal, in 2021-2030 member states will need to spend €350 bn more on the annual basis, in addition to about €180 bn annually over the previous decade, what makes about €530 bn per year, and more than € 5 tn over the decade, involving funds form EU budget, national budgets, private investments.

The boost of climate finance is foreseen also in post-COVID economic recovery packages around the globe, EU including. The years 2021-2023/24 will be decisive to switch from fossil fuels-related spending to climate change-related spending. According to the most recent data of Energy Policy Tracker, during post-COVID recovery, Germany is committed to spending $29 bn on clean energy, $27 bn on fossil fuels, and $13 bn on other energy. France looks better here while committing to spend $36 bn on clean energy and $ 23 bn on fossil fuels.

The countries of EU have to speed up the clean energy sending following the plans of the European Commission to increase the green spending for the post-COVID recovery, e.g. while allocating the funding from Next Generation EU with its largest program – Recovery and Resilience Facility, dedicated specifically for post-COVID recovery, both part of EU Budget 2021-2027.

The Recovery and Resilience Facility will provide €672.5 billion in loans and grants to support reforms and investments over 2021-2023/24 undertaken by the Member States, under condition these will spend no less than 37 % of funds for green recovery, and no less than 20% - for the digital transition. It follows the solidarity approach with higher allocations foreseen for most affected by COVID countries. Properly spend, they might facilitate the long-awaited jump towards the green EU while providing for the irreversible change. Italy, one of the major receivers of recovery and resilience funding, will spend half of the allocated EU funding of €191, 5 bn for green and digital transition. Germany will receive € 25,6 bn, all spent for the green and digital transition. Half of the total € 41,0 bn allocation for France will go for the green recovery.

What would be the future of global green climate finance? Certainly, given the importance of climate finance, the forthcoming US Infrastructure Investment plan of $2tn directed towards green transition, Chinese estimates to direct $21.5 tn of green investment over the next 40 years, the recent vacuum of climate finance leadership will not stay for a long.

Could the European Union, pioneer of green transition policy assume the leadership role? Climate is one of the few areas where the EU punches above its weight. EU has all in place for developing an effective climate financial system. Refusing to do so would waste a golden opportunity and undermine the EU in the one area it can credibly claim to be leading from the front.

Although, effective climate finance it’s not just the race about the numbers. Fredrik Eriksson, the well-respected European Swedish economist, the Director of ECIPE (European Centre for International Political Economy), when asked on his opinion, has emphasized that the recent top-bottom approach to defining the figures for climate finance might be wrong. “There is no good way to put a number of necessary funding for the climate transition. Much of the effort to reduce carbon emissions will be based on new technologies and innovation, and what the capital requirements will be to develop and diffuse those are impossible to measure. Furthermore, a good part of the climate investments will be an investment that would have to be taken anyway to upgrade infrastructure, buildings and production technology”, he has commented on the occasion of this article, while summing up the recent climate finance tend to follow a command-and-control approach to the economy, and the figures that come “are exactly wrong, not nearly right”.

Article draft for China Daily