Meeting the EU’s climate and energy goals will mean ramping up public investment via a permanent fund.
Policy-makers need to increase public investment in the European Union to achieve its ambitious climate and energy targets. Existing fiscal rules do not provide sufficient investment scope and their coming reform will in all likelihood still not allow of enough expansion.
In a new study, we argue for a permanent EU investment fund, for additional climate and energy investments, of at least 1 per cent of EU gross domestic output per year. Such a dedicated fund is not only essential to reach the union’s climate goals but would also strengthen the community of member states, economically and politically.
Not recovered
Net public investment as a proportion of GDP fell sharply in the EU after the financial crisis and it has not fully recovered (see graph). The target of climate neutrality by 2050 requires substantial additional investment. The share of public expenditure within that must be significant because not all green investment is profitable for the private sector and, conversely, public investment can help mobilise private capital.
As we argue in our study, based on estimates in the literature public investment would have to be expanded by at least 1 per cent of EU economic output per year for the required transformations of energy, buildings and transport. It is appropriate as well as necessary to finance a significant part of climate investments through public debt: future generations will benefit substantially from these investments and should thus participate in their financing.
National governments and the European institutions largely recognise the need for additional investments but solutions remain inadequate when it comes to financing them. This is true of the recent proposals by the European Commission for reform of the EU fiscal rules, which set deficit and debt limits for the member states.
Bound to suffer
The commission’s focus on a medium-term reduction of public-debt/GDP ratios would leave no far-reaching exemption for climate investments. EU member states would hardly be able to undertake the additional public investments in energy and transport systems—and in energy-efficient buildings, solar panels and electric vehicles—to the extent required while simultaneously bearing down on the debt ratio. Fiscal-consolidation pressures are already mounting, with the reverberations of the Covid-19 and energy crises, and public investment is bound to suffer as it can be cut or postponed more easily than other government expenditure.
Under the commission proposal, public investment could be exempted from such pressure if the commission assessed the investment plan to be consistent with debt sustainability. The criteria however remain unclear and much of the required climate investment would be very unlikely to be accepted. A permanent EU Climate and Energy Investment Fund to finance public investment, amounting to at least 1 per cent of EU GDP per year, would be an important step in the green transition and relieve the burden on the budgets of member states.
The fund could draw on the positive experience of the Recovery and Resilience Facility (RRF) launched during the Covid-19 crisis to provide economic cushioning as part of NextGenerationEU. This represents the first major EU-wide investment initiative pursuing, among other things, decarbonisation goals. But at €724 billion over nearly seven years, with the green transition required to account for at least 37 per cent of expenditure in each national recovery plan, it is not large enough to address the investment demands of climate change and the energy crisis. Achieving the EU’s 2030 climate target—now declared to be a 57 per cent reduction of greenhouse-gas emissions—would require an expansion of public investment in the order of at least ten times the green investment sponsored by the RRF.
Bonds issue
To finance the new fund we propose, the commission would issue its own bonds on behalf of the EU, following the model of the RRF, to raise the funds on the financial markets. Member states would not be individually liable for the bonds issued—liability would remain with the EU. Use of the funds by the member states would however carry strict conditionality: investments supported would have to promote the climate and energy targets. While debt taken on by individual member states increases the national public-debt ratio and thus creates conflicts with EU fiscal rules, grants financed through EU bonds in this way would not have that effect.
The bonds could be serviced by a revenue stream coming from new EU ‘own resources’. On these, the commission has already mentioned revenues based on a revised EU Emissions Trading System and the carbon border-adjustment mechanism due to enter into force in October, as well as the reallocation of taxation rights for profits of large multinational companies. But there are other possibilities, for example in relation to the taxation of wealth and top incomes at the EU level.
The financing of a permanent EU investment fund could thus come from a combination of instruments. Another option is not to (fully) service EU bonds with own resources but to allow the build-up of an EU debt stock.
Added value
Investments financed by the fund could also focus on genuinely European projects to transform energy and transport and create EU added value, such as a European high-speed train system reducing carbon dioxide emissions in transport (including via diminished flying) in the long term. In energy and decarbonisation, options include the realisation of an integrated electricity grid carrying 100 per cent renewable energy, as well as basic research on complementary battery and green-hydrogen projects.
Such a fund would not only enhance the ability of member states to undertake strategic investment in climate and energy but would also stimulate private investments and promote competitiveness in industries key to the future. This would help European companies compete with their peers in the United States and elsewhere, where governments have supported their green industries with sizeable additional public spending, which in the case of the US is to be ramped up significantly.
The energy and climate crisis is a cross-border European challenge best addressed through common solutions. Co-ordinating investment efforts and securing their financing to achieve climate and energy goals can be realised more efficiently at the EU than the national level. A joint, credit-financed drive also reduces the pressure for national tax increases in the present. A permanent EU investment fund could not only strengthen the community of EU member states economically and politically but also promote its future geostrategic capacity to act in uncertain times.
This article is part of a series, ‘Beyond the cost-of-living crisis: addressing Europe’s lack of strategic autonomy’, supported by the macroeconomic institute, IMK, of the Hans Böckler Stiftung
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw) and the Institute for Comprehensive Analysis of the Economy (Johannes Kepler University Linz).
