Introduction

The EU has declared that climate change and environmental degradation pose an existential threat to Europe and to the world. To respond to this emergency, the European Commission has proposed, and is implementing, a suite of measures designed to reconcile Europe’s economy with the planet. The European Green Deal comprises the legislative and policy architecture necessary to transform the EU’s pledge of climate-neutrality by 2050, into reality. Every Member State of the Union has endorsed this target. The Deal sets out the EU’s objective to mainstream the 2050 climate-neutrality goal in all EU policies.

To transform the Union into a modern, resource-efficient, and competitive economy, policymakers will need to reappraise certain economic orthodoxies. Economic growth which relies on an ever-increasing use of a dwindling set of resources will no longer be a tenable model if Europe is to become the world’s first climate-neutral continent. Instead, unrivalled levels of public investment in carbon-free alternatives and significant injections of private sustainable finance will be needed to sustain the European Green Deal. This issue was the focus of a recent Environmental Resilience lecture, co-organised by the IIEA and EPA, and delivered by Professor Jos Delbeke, EIB Climate Chair at the European University Institute’s School of Transnational Governance.

The Investment Challenge of the Green Deal

In his address to the IIEA, Professor Delbeke argued that the European Green Deal could be best understood as an economic strategy which encompasses climate and sustainability concerns for all sectors of the European economy. He further argued that the Green Deal poses a considerable investment challenge.

In July 2021, the Commission published twelve policy initiatives and legislative updates in its Fit for 55 package, an element of the Green Deal which seeks to align EU policies with its climate goals, and to ensure that emissions are reduced by 55% by 2030. An additional annual investment of €350 billion will be needed from 2021-2030 to meet this target. As Professor Delbeke outlined, this figure represents an increase of almost double the current level of investment. The majority of this expenditure will be used to increase the penetration of renewable sources of energy in the energy mix. Enhanced funding will also be needed to electrify transportation; improve energy efficiency in buildings and construction; and for low-carbon technology investment such as green hydrogen and carbon capture and storage (CCS).

Professor Delbeke remarked that the scale of the challenge could be considered daunting and noted that both the public and private sector will have a crucial role to play in realising the EU’s aim of climate-neutrality by 2050.  

Sources of Finance

i.The EU’s Long-Term Budget and Next Generation EU

In December 2020, following approval from the European Parliament and Council, the EU’s Multiannual Financial Framework (MFF) for 2021-2027 was adopted. The MFF provides for the EU’s long-term budget of €1,100 billion and includes the Next Generation EU (NextGenEU) recovery instrument of  €750 billion – a stimulus package designed to boost the recovery following the effects of the COVID-19 pandemic.[1]

Professor Delbeke remarked that the MFF will incorporate a strong green dimension. A minimum of 30% of the total budget and recovery fund will be earmarked to support the Green Deal objectives. At the same time, the EU is invoking a ‘no harm’ principle to ensure that none of the remaining expenditure is used to further projects which contradict its climate objectives.

ii.Carbon Markets

The EU Emissions Trading System (EU ETS) is the world’s largest carbon market and an important tool for reducing greenhouse gas emissions.The EU ETS covers approximately 40% of the EU’s greenhouse gas emissions from around 10,000 installations in a ‘cap and trade’ scheme. A cap is set on the total amount of greenhouse gases that can be emitted by installations covered by the system and is reduced over time so that emissions fall. Within the cap, installations buy or receive emissions allowances, which they can then trade with one another. The limit on the total number of allowances ensures that they maintain value.

The Fitfor55 package proposes to strengthen the EU ETS to bring the market in line with the 2030 objective of 55% emissions reductions. This will involve increasing the scope of the EU ETS and extending it to new sectors of the economy.

Another important development arising from the Fitfor55 package is the Carbon Border Adjustment Mechanism (CBAM), which places a price on the carbon associated with imports of a targeted selection of products. The CBAM addresses the risk of ‘carbon leakage’ and seeks to ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe. It also aims to encourage international partners to take steps in the same direction.

In the EU, the carbon price currently stands at €60 per tonne of CO₂. This marks a considerable increase over the last several years. In his address to the IIEA, Professor Delbeke remarked that analysts often focus on the price impact of the EU ETS and fail to consider the important revenue impact of the carbon market. Rising carbon prices have brought about an increase in the auction revenues available to spend on climate action. In 2018-2020, revenues amounted to €14-16 billion annually. Professor Delbeke highlighted that the introduction of the CBAM for certain imports will also raise revenue for the EU.  

Greening Private Finance

Professor Delbeke argued that private streams of finance have a key role to play in delivering on the policy objectives of the European Green Deal. Channelling private investment into the transition to climate-neutral activities is particularly relevant in the context of COVID-19, which has reinforced the need to reorient capital flows towards sustainable projects to enhance the resilience of economies and health systems, in particular.

To ensure a common understanding of the terms ‘green’ and ‘sustainable investment’, the Commission has developed a common classification system for sustainable activities.

i.The Taxonomy Regulation

The EU Taxonomy is a classification system, which helps investors to bridge the gap between international sustainability goals and investment practices. The Taxonomy Regulation entered into force in July 2020. Addressing this Regulation, Professor Delbeke remarked that many economic activities are often labelled ‘green’ when in fact they are not. He argued that this classification system seeks to increase levels of sustainable investment and to limit ‘greenwashing’. 

The Taxonomy has established a list of six environmental objectives congruent with sustainable economic activity:

1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems

The Regulation also sets out 4 overarching conditions that an economic activity must meet to qualify as environmentally sustainable:

1. It must substantially contribute to at least one of the 6 environmental objectives 
2. It must do no significant harm to any other environmental objective 
3. It must comply with minimum social safeguards 
4. It must meet technical screening criteria 

Professor Delbeke highlighted that the Taxonomy does not mandate sustainable investment. Rather, it provides an obligatory framework which companies and investors must follow when engaging in ‘sustainable’ or ‘green’ economic activities.

ii.Sustainable Finance Disclosure Regulation

The Sustainable Finance Disclosure Regulation lays down sustainability disclosure obligations for manufacturers of financial products and financial advisers toward end-investors. It applies to financial market participants, including non-EU participants, and financial products active in the EU market. This Regulation seeks to enhance levels of transparency with respect to the sustainability actions of financial companies. An important element of the Disclosure Regulation, Professor Delbeke noted, is that it forces financial market participants to consider whether an investment decision will lead to negative environmental outcomes and to disclose how this is reflected at the product level. This information will then be published online in the spirit of transparency. As Professor Delbeke remarked: market participants can either comply or explain.

As the EU mainstreams sustainability objectives into its financial practices, market participants will be expected to provide additional information regarding the sustainability of their financial action. From January 2022, they will need to comply with Regulatory Technical Standards and as of 2023, market participants will be obliged to provide detailed reporting on all Taxonomy objectives. Professor Delbeke emphasised that this is a new toolkit but a very important regulation to ‘green’ the activities of financial market participants in the EU, and one which may serve as a template and standard for other jurisdictions to replicate, in particular in the US.

Conclusion

In November 2021, 30,000 delegates representing over 200 countries will meet in Glasgow for the UN Climate Conference - COP26. The topic of sustainable finance will be a critical issue at the summit. To reach the climate goals, set out in the Paris Agreement, every company, every financial firm, every bank, insurer, and investor will need to change their practices. Countries need to respond to the impacts of climate change on their citizens’ lives. This requires the largescale mobilisation of public and private finance and a recalibration of appropriate economic activity.

In his address, Professor Delbeke argued that the EU Green Deal is a comprehensive economic strategy which will continue to require a huge investment effort, but which sets Europe on a course to realise climate-neutrality. Importantly, he highlighted that the Deal moves political attention away from targets and towards policies.

Professor Delbeke concluded by noting that market-based solutions remain central in the EU’s policy approach to climate change, but that they work in tandem with a number of regulatory measures. He reflected on the success of nascent legislation which addresses sustainable finance and argued that these new instruments should be more widely discussed. It is this combination of policies, he said, which strengthens the EU’s economic approach to emissions reductions and will help to fund a climate-neutral Europe.