Greening the EU Budget the Battle Goes On.

Greening the EU Budget the Battle Goes On. Paweł Świeboda Author is President of demoseuropa Centre for European Strategy 1. The debate on the EU budget is in full swing with the Commission s overall proposal having now been followed by draft regulations with detailed recommendations for the specific areas of spending. In parallel, it has become clear that intervention from the EU budget will have an even more important role in the building of a lowcarbon economy in Europe. President Barroso has called this a once in a lifetime opportunity. Resource scarcity and competition are accelerating, and bearing more heavily on Europe s attempts to emerge from the current crisis. This makes it necessary for the new EU financial perspective to be part of an ambitious plan for a resource-efficient, innovative economy, which can overcome the squeeze on growth and become a key driver of future economic resilience. Given the austerity programmes implemented in the member states, EU-level intervention is irreplaceable to leverage green investments nationally, provide the private sector with the necessary incentives and accommodate the policy and technological risks of investors. It is noteworthy that the green part of the 2009 US stimulus had the greatest public/private leverage out of all sectors covered. Taking into account its high labour intensity, green investment can have positive impact on job creation. In the financial perspective 2014-2020, the Commission proposes to devote 20 percent of the overall volume of resources to decarbonisation efforts, the first time that a concrete figure is attached to green spending in Commission s planning. Inevitably, this covers a wide spectrum of interventions, from low-carbon energy research and development to improving energy efficiency of buildings. The tendency is thus followed which became clear with the composition of the recovery programme in 2008-2009 ( 3.85 billion) when unspent CAP and structural funds were devoted to energy infrastructure, including energy efficiency projects, offshore wind and carbon capture and storage. 1 Special thanks to Jesse Scott, member of the demoseuropa Advisory Team, for contributing to this paper. March 2012 1

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Funding needs The Commission has estimated total investment needs in energy infrastructures of European importance alone to amount to 200 billion to 2020 2. High voltage electricity transmission systems, onshore and offshore, storage and smart grid applications are to cost about 140 billion. High pressure gas transmission pipelines, both coming into the EU and between EU member states, storage, LNG terminals and reverse flow infrastructure are meant to cost about 70 billion. CO2 transport infrastructure is estimated at about 2.5 billion. The Commission is also of the opinion that by 2020 investments will need to increase by 30 percent for gas and up to 100 percent for electricity, compared to current levels. Significant investments are also necessary in fields such as energy-saving building components and equipment where the Commission estimates as much as 200 billion will be needed in the next decade. In the existing multiannual budget, there is only modest energy-related spending envisaged. About 550 projects, only covering gas and electricity infrastructure, are eligible for support under the current financial perspective as part of the Trans-European Energy Networks 3, out of which there are 42 projects of European interest. The total funding available in the 2007-2013 period for TEN-EU projects is 155 million. Commission s own review in April 2010 stated that the TEN-E framework lacks focus, flexibility and a top-down approach to fill identified infra- 2 Commission Staff Working Paper - Energy infrastructure investment needs and financing requirements; 11056/11, 7 June 2011 3 Decision No 1364/2006/EC structure gaps 4. Some of the available funds for energy efficiency and renewables in the current financial perspective have not been used for a variety of reasons, part of which has to do with the traditional barriers which energy efficiency instruments come across and the rest related to the co-financing requirements. EU budget is not the only source of funding at the EU level. Starting in January 2013, there will be additional resources available for the member states from the ETS auctions, half of which is meant to be spent on climate-action. Needless to say, making this a reality will be a tough struggle while the exact breakdown of funds among the climate-related activities remains to be decided. The EIB will play an important role in the EU s decarbonisation strategy. It is expected to largely increase, maybe even double, its low-carbon investment 5 by 2020, up to 60 percent of all its funding operations. Concerns are often raised about the ability of the EIB to genuinely support low-carbon transformation given its primary role as an investment bank which translates into prioritising projects which bring considerable profits, which often means coal power plants rather than renewable projects. 4 Report on the implementation of the Trans-European Energy Networks in the period 2007-2009; COM(2010)203. 5 Financing the Decarbonisation of European Infrastructure ; Ingrid Holmes, Jonathan Gaventa, Nick Mabey and Shane Tomlinson, E3G, February 2012. 3

Cohesion policy Given the scale of the EU intervention in the area, the greening of the cohesion policy is the main priority for ensuring that the EU budget becomes a relevant instrument in the EU s lowcarbon transition. Four out of eleven spending lines in the cohesion policy regulations are related to environmental protection. The Commission estimates that 17 billion from the new financial perspective will be spent on climate action, primarily through energy efficiency projects and renewables. Both early-stage funding and refinancing operations should be prioritised. At least 20 percent of the European Regional Development Fund is meant to be allocated to efficiency and renewables in the more advanced member states and 6 percent in the poorer ones. This has been criticised as not going far enough in prioritising renewable development in the new member states where the distance to be covered is the greatest. In addition, questions have been raised as to whether these earmarks are additional to the existing legal commitments of member States under the 20/20/20 package. A monitoring, reporting and verification (MRV) system is proposed to measure the climate impact of the overall cohesion spending with the objective of tracing the mainstream infrastructural development, especially road building. The system is bound to be controversial and its effectiveness in naming and shaming high carbon investment is far from certain, given that air and road transport infrastructure will play a prominent role as spending objectives from cohesion policy. This means that in a way the EU wants to have the best of both worlds invest both in high and low carbon infrastructure at the same time. The cohesion policy regulations are based on the assumption that the member states will come up with targets on energy efficiency, renewables and biodiversity which will subsequently be included in the partnership contracts to be negotiated with the Commission. A system of incentives and penalties is proposed by the Commission for missing the targets established in the contracts, hence strengthening the conditionality of assistance. The extent to which the Commission will be able to exert pressure on the member states in the formulation of the targets remains nevertheless unclear. Ex-ante conditionality is also established by the Commission s draft regulations, which define legal requirements on environmental safeguard and proofing mechanisms, which are meant to be performed through the Environmental Impact Assessments and Structural Environmental Assessments. The new cohesion policy regulations propose in addition a new set of indicators to be used by the member states in their reporting. This includes the volume of additional renewable capacity to be created, the level of emission reductions delivered or the number of households where energy efficiency improvements take place. The Commission makes for the first time a specific reference to the energy performance of buildings under the spending priority number 4. However, the effectiveness of this area of intervention will eventually depend on the amount of money designated for the purpose and the strictness with which the Commission insists on implementation at the national level. It would be useful for the Commission to stipulate specific amounts of climate-related spending, in line with its practice in the transport area. 4

Connecting Europe facility In its package of proposals for the next multiannual financial framework, the Commission put forward a new Connecting Europe facility with a 50 billion envelope to fund cross-border infrastructure, including in the fields of energy, transport and telecommunication. The entire idea of the Connecting Europe facility has been to centralise spending and avoid national and regional priorities directing the spending stream away from the priority investments. 9.1 billion is meant to be spent on energy infrastructure which is 58 times more than in the current Trans-European Energy fund. Apart from the resources spent as part of the Recovery programme, this is the first time that dedicated spending is earmarked for energy projects. Such a development is key, given that the EU decarbonisation project is integrally tied to making the transmission system capable of serving the envisaged expansion of renewable sources of energy. What is more, funds will be available for the actual construction (with the exception of CO 2 transport infrastructure), which is a welcome development given that feasibility studies have been the focal part of EU intervention in the current financial perspective. In parallel, new guidelines have been proposed on permitting procedures, limiting them to three years and thus enabling a faster take-up of funding. The advantage of the Connecting Europe facility will be the standardised cost-benefit methodology as well as a separate mechanism for regulators to allocate costs across borders. Some of the financial architecture of the Connecting Europe facility is a novelty from the point of view of the EU budget. Most of the available funding will be disbursed in the form of grants. However, a small part, 1 billion, will be devoted to innovative financial instruments, meant to leverage 20 billion in private capital. New project bonds are intended to help animate the bond markets, which will play a key role in financing infrastructure. Guarantees or loans from the EIB backed up by 1 billion from the EU budget will be crucial to make that mechanism function properly. The objectives of spending from the Connecting Europe facility will still need to be determined. There are strong arguments in favour of focusing on the strategic investments needed to equip Europe with a system for low-carbon energy infrastructure. Decisions will still need to be worked out on the presumed merits of high-voltage electricity lines versus gas infrastructure. Funding for low-carbon energy research The Commission proposes to spend as much as a third of its Horizon 2020 R&D programme on climate-related activities. The Strategic Energy Technology programme or SET Plan is the key instrument under consideration. The SET Plan is meant to build funding from both public and private sources for initiatives in six priority areas: wind, solar, bioenergy, CCS, electricity grids and nuclear fission. The financial perspective 2007-2013 is a unique opportunity to bridge the funding gap, which haunts the SET Plan since the beginning. Stakeholders grouped in the Friends of the SET Plan initiative (which includes demoseuropa) believe that 37 billion will be needed until 2020 to implement the SET Plan 6. 6 Letter of 19 September 2011 to Presidents of the European Commission, European Council, European Parliament and Heads of State and Government of the member states. 5

There are particular concerns over whether the member states will be willing to come up with a matching contribution to supplement EU-level funding. The current financial perspective is a modest starting point when it comes to climate-related R&D expenditure. According to DG Research, only 2.35 billion have been allocated to spending on energy, including renewable energy, energy saving technologies, hydrogen and carbon storage technologies in the FP7 during the period 2007-2013 whose total budget is 50.5 billion. What is more, funding for energy fell substantially over the years as a proportion of the overall budget. The Commission itself, in its Budget Review Communication stated that the EU should remedy that situation which has left Europe lagging behind in terms of developing domestic energy supplies and tackling the challenge of reduced emissions. There have been concerns ever since the publication of the Europe 2020 Strategy that the competitiveness angle would take precedence in the implementation of the Innovation Union Flagship Initiative, especially that environmental objectives had been singled out into a separate Flagship Initiative for a resource efficient Europe. A number of ideas has been floated with the objective of improving environmental parameters of research and innovation spending. They include introducing mandatory targets in key green economy sectors such as buildings, transport or industry; introducing low-carbon performance indicators in research projects or developing a framework for green public procurement. Research for secure, clean and efficient energy is planned to receive 5.78 billion from the 2014-2020 budget under the Horizon 2020 regulation, whose total budget amounts to 80 billion. These resources will fund research and innovation on energy, climate change, resource efficiency and biodiversity issues. Environmental groups and renewable industry reacted with disappointment to these figures, perceiving them as falling short of what is required to achieve the objective of the low carbon economy by 2050 in the EU. The industry has argued that it was willing to put forward substantial funds itself (figure of 3 billion has been most often quoted) but it would need to get stimulus from the Commission. In its 2009 Communication on Investing in the Development of Low Carbon Technologies, the Commission has estimated funding needs (public and private) for technologies in the demonstration and commercialisation phase at 6 billion for wind energy, 9 billion for photovoltaic energy and 7 billion for concentrated solar energy. On the basis of the currently envisaged volumes, only a fraction of funding will come from the EU budget. One idea to protect the scarce amounts of funding from further cuts is to create separate budget lines for each of the SET-Plan renewable energy technologies. Other renewable energy technologies, including geothermal electricity, marine energy and hydropower would need to be integrated into the European Industry Initiatives. Funds for energy efficiency are currently at 0.6 percent of entire FP7 funding and need to be increased as well. Similarly, the Intelligent Energy Europe programme, addressing non-technological barriers, facilitating EU policy implementation and sharing of best practices needs to be continued with at least FP7 levels for funding ( 727 million). 6

*** The above issues and other climate-related aspects of the EU budget (greening of the CAP) are now discussed by the Friends of the Presidency group created by Poland, and continued by the Danish EU presidency. The Group reports to COREPER and GAC and is seen as useful in looking at aggregate issues. The Danish Presidency is focusing on getting technical agreements on the 60 sectoral implementing legal acts and regulations as well as to define the negotiating box political document to lead the way towards the final compromise later in 2012. From the point of view of climate action, the most important issues for the on-going negotiations are: to make the mainstreaming of cohesion policy more concrete and include specific targets for climate-related expenditure, to strengthen the financial commitments for the SET-Plan which covers new and hence commercially risky technologies in their early deployment phase, to make the monitoring of high-carbon spending more stringent, to ensure synergies between pre-allocated bottom up cohesion policy spending and the centrally-run, post-allocated programmes like the SET-Plan. 7

This paper has been supported by the European Climate Foundation. Fundacja demoseuropa - Centrum Strategii Europejskiej 00-560 Warszawa, ul. Mokotowska 23 lok.8 00-560 Warszawa, t: +48 22 401 70 26 f: +48 22 401 70 29 http: www.demoseuropa.eu 8