European Challenges: Will Budgets Cover Sustainable Tech and Digital Transformation?
European Union Boosts Green Transformation Funding with Multiple Strategies
The European Union (EU) is taking significant steps to increase funding for its green transformation, moving beyond traditional subsidies for private financial intermediaries. This multi-pronged approach aims to close the estimated €100 billion annual investment gap [5].
One key strategy is doubling down on public research and innovation funding. The EU plans to double the Horizon Europe research budget to approximately €175 billion by 2030, dedicating a significant portion to clean transition technologies. This investment is crucial for fostering breakthroughs and scaling up green technologies that private investors find too risky or nascent [3].
Another approach is mobilizing fiscal capacity at the national level. Several member states with healthy public finances can unlock fiscal space, potentially providing up to €60 billion annually, optimized by budgetary flexibility rules. This means public budgets could directly fund green investments rather than relying solely on intermediated private finance [5].
Utilizing climate-related EU revenue streams is another strategy. Revenues from the EU Emissions Trading System (ETS) are earmarked for green projects and can be expanded or better coordinated among member states to increase the financing pool dedicated to climate action [5].
The EU is also expanding dedicated EU strategic funds. The European Strategic Autonomy Funds, under acts like the Net-Zero Industry Act, are channeling tens of billions to support green startups and ramp up deployment of critical green technologies, with an expectation of exceeding €60 billion by 2030 when including private co-financing [2].
Promoting public-private co-investment mechanisms is another crucial aspect. By sharing investment risk with private actors, these mechanisms can attract more private capital into innovative but high-risk sectors, such as hydrogen, energy storage, and digital green technologies [2].
Fostering bottom-up and multi-stakeholder initiatives is also essential. Empowering local authorities, cities, and private-sector alliances to innovate and invest in green solutions can unleash additional resources and improve climate finance effectiveness [4].
The EU is also leveraging national resources and integrating EU tools. Combining the EU budget with national state aid flexibilities, InvestEU guarantees, and carbon market revenues can scale up available funding and align incentives across governance levels [3].
A significant step forward in this endeavour is the Recovery and Resilience Facility, a crucial component of the NextGenerationEU program (2021-2026), which raised €723.8 billion through EU bonds [6].
The EU is also considering the establishment of a permanent European investment fund to provide at least 1% of EU economic output per year for long-term financing of the green and digital transformations [1]. This could improve the EU's fiscal space amid the Stability and Growth Pact and counteract regional imbalances within the Union [7].
In addition, there are increasing calls for common European taxation, including common taxes on wealth, financial transactions, capital gains, carbon emissions, and an EU corporate tax [8]. These taxes could raise resources equivalent to between four and eight percent of the Union's GDP per annum [9].
However, it's important to note that the Commission's proposed "Industrial Decarbonisation Bank" aims for €100 billion in funding in 2026, though its final structure remains to be seen [1].
The European Union is facing a significant green investment deficit estimated to be €406 billion in 2024 [4]. The need to reform the EU's budgetary framework has been emphasized by studies published by the IMF [4]. The temporary nature of the Recovery and Resilience Facility has diminished the effectiveness of some of its resources [10].
European development banks, including the European Investment Bank, have been major green financiers in Europe, funding 40% of Europe's offshore wind capacity as of 2020 [11]. Multilateral development banks account for over one-third of climate finance to developing countries and 10% of global investments annually [12].
Lastly, conditionalities should be included in a progressive de-risking strategy for firms that receive subsidies. This could require them to reinvest profits, ensure decent wages, agree to profit-sharing schemes, grant public sector access to intellectual property rights, levy taxes on excess profits, and introduce bans on excessive shareholder remuneration [13]. The former ECB Vice President, Vítor Constâncio, stated that the 60 percent benchmark for public debt was chosen arbitrarily at a time when climate and digitalisation investments were considered less pressing [14].
This comprehensive approach addresses current investment shortfalls and balances ensuring sufficient public funding with catalyzing private participation, positioning Europe to meet its ambitious climate targets by 2030 and beyond.
Investing in the digital transition is crucial for the green transformational efforts of the European Union, as the EU plans to allocate resources toward digital green technologies through public-private co-investment mechanisms. Collective bargaining, such as profit-sharing schemes and decent wages, can be integral to attracting private capital in these high-risk sectors.
To finance the green transition at the national level, the EU is considering establishing a permanent European investment fund, which could potentially provide at least 1% of EU economic output per year for long-term funding. This fund could leverage EU tools, like the InvestEU guarantees, to increase available funding and align incentives across governance levels.
