06 Juni 2023

Why the EU needs a permanent climate investment fund

By Philipp Heimberger and Andreas Lichtenberger
Sunlight in a dark forest
EU fiscal rules limit the scope for national climate investments. A common fund could be the way out.

Net government investment fell sharply in the EU after the financial crisis and has not fully recovered yet. Germany has fared worse than many other EU countries in terms of investment, but Austria has significant additional investment needs, too. The figure shows the evolution of net investment in both countries compared to the EU as a whole.

The EU’s goal of becoming climate neutral by 2050 will make significant additional investment necessary. The share of public funding for climate investments must be substantial, also to mobilise the private sector, for which green investments are not always profitable.

Source: European Commission.

Transforming the energy, buildings and transport sectors would therefore require an increase in annual public investment of at least 1% of the EU’s economic output. As future generations will benefit greatly from these climate investments, they should also be involved in financing them. In terms of intergenerational equity, it is therefore necessary and appropriate to finance a significant part of this through public debt.

Consolidation pressure restricts scope for investment

But while national and European institutions largely recognise the need for investment, solutions to the financing problem are still inadequate. In April, for example, the European Commission published its legislative proposal to reform the EU’s fiscal rules. These rules set deficit and debt limits for the budgetary policies of the EU member states.

The Commission’s proposal focuses on a medium-term reduction in public debt ratios without providing any far-reaching exceptions for climate investments. This means that EU member states will not have sufficient room for manoeuvre for climate investments: If they reduce the public debt ratio as required, they will hardly be able to make additional public investments in energy and transport systems, energy-efficient buildings, solar panels and vehicles on the required scale even after the reform. Pressure to consolidate public finances is increasing in the wake of the Covid-19 and energy crises, and investment is bound to suffer because it can be cut or postponed more easily than other expenditure.

A new EU investment fund for climate and energy

In a study commissioned by the Vienna Chamber of Labour and published in the research report of the Vienna Institute for International Economic Studies (wiiw), we argue that the creation of a new permanent EU fund for climate and energy investments amounting to at least 1% of the EU’s economic output per year to finance public investments would be an important step towards a green turnaround and would relieve the national budgets of EU member states.

The establishment of the new fund could build on the positive experience of the Recovery and Resilience Facility (RRF) adopted during the Covid-19 crisis. The RRF was set up to cushion the economic impact of the Covid-19 crisis and is the first major EU-wide investment initiative  to include decarbonisation among its objectives. However, it is not large enough to adequately address the investment needs arising from climate change and the energy crisis. Achieving the EU’s 2030 climate target would require an increase in public investment ten times higher than the share of green investment in the RRF.

The Covid-19 Recovery Instrument as a model

To finance the new EU Climate and Energy Investment Fund, the European Commission would issue its own bonds on behalf of the EU, along the lines of the RRF, to raise money on the financial markets. Member states would not be individually liable for the EU bonds issued; the liability would remain with the EU. The Commission would then transfer the funds raised to the member states. The use of the funds would be subject to environmental conditionality, i.e. the investments would have to contribute to the achievement of climate and energy objectives. While borrowing by individual member states increases the national debt ratio and thus conflicts with the EU’s fiscal rules, grants financed by EU bonds would not be reflected in the national debt ratio.

The EU bonds could be serviced by a revenue stream from new EU own resources. The European Commission’s proposals for such EU own resources include revenues from a revised EU Emissions Trading Scheme and a newly introduced CO2 border adjustment mechanism, as well as a redistribution of taxing rights on the profits of large multinational companies. There are also other options, such as the taxation of wealth and top incomes at EU level. A permanent EU investment fund could be financed by a combination of different instruments. Another option is not to service EU bonds (entirely) from the EU’s own resources and to allow the build-up of an EU debt stock.

Investments from the EU Climate and Energy Investment Fund could focus more on truly European energy and transport transformation projects that create European added value. One example is investment in a European high-speed train system, which could reduce CO2 emissions from the transport sector in the long term. In the field of energy and decarbonisation, the implementation of an integrated electricity grid for the transmission of 100% renewable energy as well as research for complementary battery and green hydrogen projects could be considered.

A common solution to a cross-border problem

The Commission’s current legislative proposal to reform the EU’s fiscal rules does not provide sufficient incentives for governments to invest. In view of the foreseeable increase in pressure to consolidate budgets, national budgets should be relieved by the establishment of a permanent EU investment fund for climate and energy, which would provide annual investments of at least 1% of the EU’s economic output. Such a fund would not only promote the necessary investment in climate and environmental protection, but also contribute to the stable development of the European economic area.

The energy and climate crisis is a common, cross-border European challenge that can best be addressed through common European solutions. Coordinating investment efforts and securing their financing to achieve climate and energy goals can be done more efficiently at EU level than at national level. A joint, credit-financed effort with intergenerational cost sharing also reduces the pressure to raise national taxes in the present. A permanent EU investment fund could not only strengthen the community of EU member states economically and politically from within, but also promote its future geostrategic capacity to act in uncertain times.

This contribution is part of the thematic forum “Supranational governance between diplomacy and democracy – current debates on EU reform”, published in cooperation with the online magazine Regierungsforschung.de.

Translation: Manuel Müller.
Pictures: Forest: Daniel Sjöström [CC BY-ND 2.0], via Flickr; graph: Philipp Heimberger, Andreas Lichtenberger; portraits Philipp Heimberger, Andreas Lichtenberger: private [all rights reserved]; EU flag: Arno Mikkor (EU2017EE) [CC BY 2.0], via Flickr.

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