On 19 June, EU leaders meet to discuss the European Commission’s plan to spend a whopping €750 billion to tackle the economic fallout from the COVID-19 crisis.
With its Next Generation EU plan, the Commission intends to support member states in the long-term economic recovery and restructuring. A total of €560 billion is earmarked for the European Recovery and Resilience Facility to support investments in green and digital transitions. A further €40 billion will go to the Just Transition Fund established as part of the Green Deal. In total, 25% of the proposed funding will be set aside for climate action.
“The challenge is to address the immediate economic crisis caused by the coronavirus while at the same time making sure that the EU recovery plan supports a just transition to carbon neutral Europe.”
The Commission’s announcement that its recovery plan will have green strings attached has been met with resistance – with some arguing that shoehorning in the Green Deal would jeopardize the chances of a quick return to economic growth. In fact, much of the funding that has been made available by European institutions so far – including the ECB’s Pandemic Emergency Purchase Programme – was offered with no climate or sustainability related conditionality. However, a recent survey of financial policy makers by the University of Oxford showed that fiscal support for climate-friendly investments have a stronger economic multiplier effect than many conventional stimulus measures.
The challenge is therefore to address the immediate economic crisis caused by the coronavirus while at the same time making sure that the EU recovery plan supports a just transition to carbon neutral Europe. There are four key issues that policy makers need to address:
1. The time to decarbonize our economy is now
The signals from climate science could not be clearer: we no longer have the luxury for any delay in transforming our economies towards carbon neutrality. Waiting for the COVID-19 crisis and its economic impacts to pass, investing large amounts of energy and finance into ensuring the survival of the outdated fossil-fuel based economy, and only restarting the climate transitions after we have returned to stability, is not an option.
The time to transition from short-term measures to structural changes is now. Getting people back to work is of course a legitimate imperative but doing this while keeping climate targets within reach will require clear objectives and conditions on how EU’s recovery funds can be spent so as to avoid stranded assets and wasting scarce financial resources. This also means improving protection mechanisms for those employed in economic sectors worst affected by the COVID-19 crises and industrial decarbonisation.
2. The taxonomy-based approach is not enough
Although there are many virtues of the taxonomy-based approach, the EU taxonomy of sustainable economic activities was not designed to respond to an economic crisis of this magnitude and speed. For this reason, it cannot help investors or countries prioritize certain green investments over others: it does not give guidance on where public capital can play a decisive role in transitioning sectors that are not yet able to attract private capital at scale, that are high rewards in environmental and social terms, but also high risk in financial terms.
The EU taxonomy also doesn’t consider social consequences – at least not yet. All this means that recovery funding requires both strong environmental and social conditionality, not one or the other, and that conditionality should be applied at EU and Member State level.
3. The devil is in the detail
Even if the right conditions are set at the EU level, who disburses the funds and how is key. What are the mechanisms, the vehicles, and the actors that countries are going to use within their borders to deliver the financial recovery package to the beneficiaries? Poor last mile delivery can undermine the best intentions, and make the recovery package ineffective and waste precious resources.
Efforts must be spent on defining and enforcing criteria that ensure intermediaries and delivering agents are effective in targeting the right beneficiaries at the right time with the right amount of financial resources. In particular, green SMEs, which are essential actors in accelerating the sustainable transition envisaged by the Green Deal, were already considered high risk before the COVID-19 pandemic and have been heavily affected. “Last mile” finance delivery mechanisms must be tuned to ensure that these SMEs have unhindered and rapid access to much needed financial relief.
4. Monitoring, reporting and evaluation is crucial in aligning the recovery with the Green Deal
Clear environmental and social indicators should be set during the design of economic recovery measures at the EU and Member State level. The delivery of these policies must be monitored and evaluated for the lifetime of the solutions, and progressively adjusted to adapt to the quickly changing conditions and ensure that the recovery package is used correctly, efficiently and effectively to achieve the objectives of the EU Green Deal. The monitoring, reporting and evaluation process also needs to be independent and transparent, and accessible to the public so that social accountability mechanisms—such as a green recovery scrutiny board—are in place.