March 4, 2020 / 10:53 AM / a month ago

Breakingviews - EU green deal is a 1 trln euro diversion

LONDON (Reuters Breakingviews) - Former Greek Finance Minister Yanis Varoufakis calls it “a colossal exercise in greenwashing”. German Member of the European Parliament Niklas Nienass has likened its “sleight of hand” to a magic trick. The European Green Deal is arguably both of these things. But with the bloc’s emissions reductions targets due on Wednesday to be enshrined in law, the exercise is probably best understood as a placeholder until Europe is ready for more robust action.

European Union flags fly outside the European Commission headquarters in Brussels, Belgium, February 19, 2020.

President Ursula von der Leyen’s European Commission says it will “mobilise” 1 trillion euros to help cut bloc-wide emissions in half by the end of the decade. That breaks down into 503 billion euros from the European Union’s budget, 114 billion euros from the 27 member states themselves, 279 billion euros in private and public investment, and over 100 billion euros in the form of a so-called “Just Transition Mechanism” to ease the impact of decarbonisation on fossil fuel-focused regions and countries, like Poland. All this would constitute a tangible sum to invest in decarbonising industry, transport and homes, were it nailed down. But it isn’t.

Start with the 503 billion euros, which is really just a rebadging exercise. Roughly a quarter of the EU’s annual budget spending over the next decade will be channelled towards green goals, including part of the Common Agricultural Policy funds, which subsidise farmers. Member states will then cough up the extra 114 billion euros for the same purpose, although this isn’t yet fixed.

It sounds a lot, but those billions won’t all go to new carbon-cutting projects, like wind farms. The commission has set itself the murkier goal of spending money on things that “contribute” to climate goals, raising the risk that it is poorly focused. Moreover, the mooted figure could yet shrink, given the next 2021-27 allocation is right now the subject of intense intergovernmental wrangling.

The other 279 billion euros is more obviously investment money. But it’s also based on a mix of leverage and presumption. The aim is to turn less than 20 billion euros of actual EU cash into 279 billion euros of green financing by deploying the European Investment Bank, a public lender controlled by member states’ finance ministers. The bootstrapping leveraged structure by which it will do so owes much to the pre-existing Juncker investment plan, a hangover from the commission headed by von der Leyen’s predecessor.

The bedrock of this structure is a guarantee extended, somewhat confusingly, by the EU budget itself. Assuming similar leverage levels envisaged in the Juncker plan, the EIB and other national-level state infrastructure banks would use about 19 billion euros’ worth of EU guarantees to lend three times that figure, or 56 billion euros, to specific riskier projects. Because these funds will rank below private sector lenders, making returns more predictable, von der Leyen reckons they will help persuade banks and other investors to cough up five times that amount, getting the overall figure up to 279 billion euros.

This layer cake of leverage is inventive. But the edifice has to tread a narrow line between two evils. If private sector banks have to leap through too many bureaucratic hoops to access cheap financing, they won’t bother supporting the projects. A bigger risk is that the money is advanced too easily, meaning the EU hands a big subsidy to private investors to enable projects that would have happened anyway. In January 2019 the bloc’s own European Court of Auditors flagged that the Juncker plan had partially fallen victim to just this problem.

Last comes the 100 billion euro so-called “Just Transition Mechanism” for polluting regions. This is an amalgam of different pots, and another leverage-fest, since it will be backed by only around 10 billion euros of EU budget money, with the rest coming from other sources like the EIB and the private sector. The lack of clarity around the fund’s financing and its goals is hardly reassuring.

It’s worth asking whether the green deal is worth all the bother. After all, the EU’s own reduction targets imply that the real investment need is closer to 300 billion euros a year, or 3 trillion euros. The stated pot is only actually a third of what’s required, and that’s if private creditors play along.

There are simpler ways of fighting climate change. In an ideal world, Brussels would gradually impose a proper carbon price of around $100 a tonne of carbon dioxide, which would make fossil fuels unviable over the medium term, forcing oil companies and the like to pour their cash today into green projects. European states could agree to relax their fiscal straitjackets and permit green investment to sit outside Brussels-imposed budgetary restraints, perhaps also pumping up the EIB’s capital base to make it lend more. With both public and private sectors incentivised to support zero-carbon projects, the 3 trillion euro figure could easily be hit.  

The reason this isn’t yet happening is the same reason as overly complex Brussels ideas like the Single Resolution Mechanism for banks have underwhelmed. EU schemes are always Byzantine and lacking in resources, because member states want to protect their own budgets or industries. Still, over the next decade, sustainability-focused investors and younger voters will increasingly give European politicians cover to be bolder. In the meantime, the EU’s green deal should be taken seriously – but not literally.


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