Financing the EU’s green transition: Who foots the bill?

The EU’s strategy to become climate neutral by 2050, the European Green Deal, has got off to a bumpy start.

Since its approval in 2020, Europe has been faced with a series of challenges – notably the war in Ukraine and the Covid pandemic.

While climate concerns have become ever-more pressing, economically-strained member states have been pulled away by more immediate crises.

The outlook, according to the EU’s top climate science advisory body, is currently bleak.

“Long-term energy infrastructure planning and development at EU level are not compatible with the EU’s climate 2030 targets for energy and climate and its 2050 climate neutrality objective,” said the European Scientific Advisory Board on Climate Change in June.

Progress is, however, currently a necessity rather than a choice.

Aside from the immediate health threats posed by the climate crisis, EU economies cannot hope to thrive on the global stage if they remain overly reliant on fossil fuels.

Such a shift is possible, European leaders claim, but effective financing has to be prioritised.

Consumer vs taxpayer financing

Integrating green technology into energy production will initially ramp up costs, but opinions are split as to who should foot the bill.

“There needs to be a debate in Europe as to who pays for the energy transition,” said Fabien Roques, Executive Vice President at the economic consulting firm Compass Lexecon.

Speaking at a Business Europe conference in Brussels this week, he added: “For instance, the US Inflation Reduction Act is great, but fundamentally this is relying on fiscal measures. So this is taxpayers money, not the electricity consumer.”

In one sense, financing the sustainability shift through taxes is logical in the sense that the climate is a public good.

Through the Inflation Reduction Act, the US has taken this approach – funding climate investments with state money.

Another option, according to experts, is to raise energy costs to place the growing pains on consumers.

Those who use more will pay more, although this approach has raised concerns for households struggling with the cost of living.

According to the International Energy Agency, around 30% of the climate funds needed globally will have to come from the public sector, with 70% sourced from the private sector.

Private funding can also come from a range of investments and financial instruments like green bonds.

Securing funds and using them effectively

Also speaking at the Business Europe conference, Member of the European Parliament for the EPP party, Christian Ehler, noted that market reform is essential to secure adequate funds for the green transition.

“We know that the European financial market is not going to deliver that [adequate funding] in its current state…banks are not able to finance the transition.”

One solution he highlighted was progress on a Capital Markets Union, which aims to create a single market for capital across the EU.

At the moment, financial systems are still fragmented across national lines, complicating cross-border investment.

Ehler continued: “If you have a fragmented capital market and you want to build up a portfolio of 100 or 200 business cases, you know, it costs us so much more in Europe than to do that in the United States.”

The MEP also highlighted that as well as boosting investment opportunities, EU countries must be supported in accessing these funds.

He specifically highlighted the shortcomings of a post-Covid support measure, the Recovery and Resilience Facility.

Many member states have been unable to access this money due to excess red tape.

Solidarity across member states

The European institutions should also focus on harmonising energy markets across the EU, said Pierre Schellekens, who leads Strategy and Coordination at the Directorate-General for Energy at the European Commission. 

If one member state offers a greater level of compensation for energy-intensive industries running on fossil fuels, this can create an uneven playing field and undermine the bloc’s climate goals.

Schellekens noted that while “conditions will not be absolutely identical” across the bloc, the EU could try and make national markets “more similar”.

He added that, given Europe’s recent energy crisis, fossil fuel subsidies were justified to “support industries and households”.

As the “situation is normalising”, he suggested there should be a different, more unified approach.