Filling the EU’s climate investment gap more efficiently

Europe has among the most ambitious climate and energy efficiency targets in the world, and yet we can only identify half the money to deliver them in current instruments and plans. This is the subject of our report targeting the design of the next EU Multiannual Financial Framework (2028-34), launched in the European Parliament.

The design of the next EU budget will doubtless define the success of President Von der Leyen’s second Commission, and it will frame how Europe deals with industrial competitiveness and sustainability.

At this juncture, waste is intolerable and yet tensions over EU-value add, national alignment with EU-level funding, instrument choice, fund design and a simplification agenda may yet snatch disaster from the jaws of a political compromise.

Our report looks at EU budgeting from the “bottom-up”. This requires working back from the deployment of necessary assets (like grids, PV panels, heat-pumps or rail links), via financial instruments and up into available capital sources.

Analysts think that the EU faces an additional annual climate investment gap of between €340-477 billion. Depending on the sector, the region, the year, the author’s ideology and the technology, 30 to 60% of this gap needs to come from the public purse.

We argue that part of this gap can be filled by levering more private money into the transition through better EU financial instrument design and deployment.

This is unlikely to be “enough” but it’s certainly a start.

We are convinced that there is “enough money identifiable” to deploy the climate assets Europe needs, fairly and in an orderly fashion. Enrico Letta saw that savers have over five times the cash stored in their current accounts, than is needed to finance all the extra climate assets required in the EU by 2030. Most of these assets come with savings and/or revenues, so this cash can be returned to savers in green interest and loan repayments.

So what are the problems, and their solutions?

Eliminate waste, put efficiency first

EU money is not always provided to those that need it the most, and yet we found significant inefficiencies in the delivery methods of EU funds. A financial “efficiency first” principle asks: Not to use a grant when a loan will do; not to lend public money when a guarantee can unlock private savings; and not to fund expenses when we can provide investment.

In practical terms, this means grants must not be wasted on replacement gas boilers or renovating second homes. While we can’t expect managing agencies, or local authorities, to become banks, we have to find better ways to invest in the long-term resilience and energy efficiency of people’s homes, rather than subsidize their energy costs during increasingly predictable “shocks”.

Public grants are by far the most valuable, and scarce, EU support mechanism. They are desperately needed by the energy poor, researchers, innovators and to offer technical assistance to provide confidence to people making decisions to invest in a climate asset with a loan.

There is an increasing “moral hazard” caused by providing a grant to “do the right thing by the climate”. A competitive Europe surely will invest its way to lower energy bills, climate security and greater resilience.

Resist reinventing the wheel

Instead, use EU experience and financial instruments as a service for Member States.

In the public sphere, and to deploy mature climate assets, we should re-use financial instruments which work, and replicate these templates for success. This will avoid the downtime of “instrument design” and the “learning by doing”, as members of the Union draw-down experience “off the shelf”, and learn through the mistakes of others.

The InvestEU Member State compartments are good examples of this, along with Innovation Fund auctions as a service, and a proposed EU Renovation Loan. We hope that the design of a proposed European Competitiveness Fund will reflect this approach in 2025.

Remove bottlenecks

Use private retail channels for smaller assets (eg. renovations, PV panels, EVs and heat pumps). At the retail level, banks and other private, consumer-facing channels have struggled to operate efficiently with public funds.

Blended financial instruments must be co-designed to be embedded in retail-facing IT systems that provide material transparency to public funding sources, without creating administration for its own ends, nor degrading the EU Taxonomy.

Channel grants where they are needed most

It goes without saying that across Europe, the energy poor, those who cannot afford housing and those who remain dependent upon fossil fuels need public grants to ensure a just transition.

These precious grants should focus on: 1) providing clean public goods and infrastructure; 2) supporting low-income European families participating in the benefits of the transition; and 3) boosting R&I investments in early stage technologies to sustain Europe’s future leadership in the net zero value chain.

In just one example, the EU can afford to upgrade the eight percent of EU homes, the worst performing ones which often house the energy poor, by investing just over 1% of Europe’s annual aggregate social spending each year for ten years.

Europe has been a “lead market” for clean and green products and services. European policymakers have created a globally recognised benchmark in decarbonisation through the EU Green Deal, and by ensuring that a major component of Covid-recovery funds were invested in the transition.

This is why the next EU Budget must capitalise on this and ensure that the value-chains of decarbonisation also find a permanent home here, and Europe becomes the destination of choice for innovation for the world’s largest net-zero economy.

Article originally published in Euractiv on 5th December 2024