The hidden EU cash that no one’s talking about

William Todts — July 2, 2024

Europe needs fresh investment to support its green industry in the face of global competition. Unspent covid recovery funds and ETS revenues provide just that

Thanks to technological progress, halting climate change is now all about scaling up clean technologies like electric vehicles, renewables, grids and heat pumps. Climate action has become an investment challenge that is estimated to cost €620 billion per year by 2030.

Amidst all the talk in Brussels of an Industrial Deal, two big questions remain unanswered. Where’s the money? And who’s best placed to spend it?

With an EU-led squeeze on state budgets - see here why this is a problem - there are growing calls for new eurobonds to fill the investment gap. While Draghi is expected to propose this, Wilders in the Netherlands and the liberals (FDP) in Germany make it unlikely this will happen very soon.

Fortunately Europe has other options.

In 2020 the EU agreed to raise an unprecedented €640bn to fight off a Covid recession. In April 2024, only €240 billion had been spent. Even if states spend faster, it is almost certain that tens of billions of Recovery and Resilience Facility (RRF) funds will remain unspent by the 2026 deadline.

What should happen to this money?

For now, it will simply evaporate. The Recovery Fund is not an actual pot of money but a mandate for the EC to go and raise money on the bond market. So if states don’t request or spend the money, there’s no borrowing. The EU has self-imposed these rules. It can change them with majority voting.

Then there’s EU ETS revenues. In 2023 alone the EU ETS was worth €43.5 billion in revenues. As free allowances get reduced and sectors like shipping start paying revenues will grow. Most of the cash ends up in state capitals where from now on it has to be spent on climate action. Another part of the money is administered by the EU Commission. Through its €40bn Innovation Fund (IF), the EU supports things like hydrogen, batteries and marine fuels.

So there is money. But can we spend it well?

In the category of stimulus programmes the RRF is pretty good. It funds good things like building efficiency and public transport and thanks to EU restrictions it has avoided bad spending like roadbuilding. The flipside is that a lot of national projects are political and only nominally green. Most worryingly from an industrial perspective, the RRF scattergun approach does not provide a clear investment or market signal.

The US Inflation Reduction Act plays in a different league. Yes, the mechanism (federal tax credits) is different, but the biggest difference is one of philosophy. The IRA is very specific in what it seeks to promote, for example kilowatt hours of battery cells or kilograms of hydrogen. It is completely unbureaucratic, is agnostic about where money gets spent, and it gives a HUGE investment and market signal.

Biden’s marvel now has an EU equivalent: the Innovation Fund (IF). The IF works with auctions and grants, not tax credits, but has the ability to provide IRA style production aid (opex).

There has been a hydrogen ‘auction’ - with surprisingly low ‘bids”. Battery (€3bn) and maritime fuels auctions will be launched this year. Each of these will undoubtedly be massively oversubscribed, just like the hydrogen auction was.

What’s unique about the IF is that EU states can support projects that meet the “auction” criteria but that didn’t make the cut at EU level. They can do so bypassing EU state aid rules, and without counting the spending to their national debt. That’s a gamechanger.

For example, if the project meets the future EU battery fund’s auction criteria, Slovakia might be able to directly subsidise its newly announced battery factory with cohesion or ETS revenues. The same goes for maritime fuels. Last month Belgium brought together all western Atlantic EU states to discuss a plan to jointly kickstart ammonia and methanol for shipping. The Innovation Fund’s marine e-fuels call will be central to this.

The EU should also consider supporting something closer to the everyday life of voters. Most Europeans like electric cars but think they are too expensive. With battery and EV prices coming down, cheap EVs are now possible as shown by Chinese carmakers. Why couldn’t the EU innovation fund provide the spark that sets off the cheap, made in Europe electric car revolution?

If only the EU had a pot of money somewhere to invest in the bloc’s future. Oh wait…..

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