EU leaders agreed to slash funding for Just Transition policies at a crucial budget summit on Tuesday (21 July) and also watered down a set of green conditions that could hamper the bloc’s long-term climate efforts.
After nearly five days of negotiations, heads of state and government brokered a compromise on the EU’s next long-term €1.8 trillion mega-budget, which will include a €750 billion recovery fund to help countries worst-hit by the coronavirus pandemic.
Significant compromises had to be made in order for all 27 leaders to agree on the deal, which ranged from hefty cuts to certain EU programmes, increased rebates for net contributors and a smaller proportion of grants under the recovery fund.
Areas such as the bloc’s research scheme, Horizon Europe, a proposed solvency instrument and cash for neighbourhood and health policy, were all either stripped partially or completely of funding in the final agreement.
The European Commission’s flagship Just Transition Fund (JTF), designed to help carbon-intensive economies ditch fossil fuels, was not spared from cuts.
Its total budget fell from €40 billion to €17.5 billion after the ‘Frugal Four’ group of countries – Austria, Denmark, the Netherlands and Sweden, as well as Finland – pushed for a more balanced split between grants and loans, which meant there was less money available.
The European Commission is yet to react in any substantial way to the EUCO deal, although senior officials are reportedly unhappy with the size of some of the cuts made by leaders and their choice of which programmes to target.
President Ursula von der Leyen told a post-summit press conference that “Europe’s recovery will be green. The new budget will power the European Green Deal.”
In what she called a “difficult point”, the Commission chief also acknowledged that “in their search for compromise, leaders have made far-reaching adjustments into the new MFF and recovery fund, for example in health, migration, external action and Invest EU.”
Although the president called those downgrades “regrettable”, she did not mention changes to the JTF. Senior EU officials have since insisted that the net result of the negotiations are still positive.
According to the Commission’s initial proposal, the fund was set to be worth just €7.5 billion. After more number crunching, it was topped up with €30 billion from the proposed recovery fund and €2.5 billion of fresh cash from the MFF.
An opinion published by the European Court of Auditors on Wednesday (22 July) warned that the Commission did not conduct a prior impact assessment on its beefed-up €40 billion plan and that a better link between funding and performance is needed.
Court expert Nikolaos Milionis said that “the Commission should make sure that the new legislative proposal, together with the territorial just transition plans it will approve, have a solid performance framework to achieve the ambitious EU objectives”.
The European Parliament is set to “challenge the Council to justify the massive reduction” in certain programmes, including the JTF, as part of a resolution on the budget deal due to be voted on Thursday (23 July).
MEPs will also vote later this year on the MFF agreement as a whole. Parliament approval is needed before the deal can be finalised.
An early draft of the budget agreement stipulated that only countries that have committed to a national target of zeroing out their carbon emissions by 2050 would have access to the JTF. That was tweaked in a later draft to be just the EU’s bloc-wide neutrality target.
Poland is the only country that has not yet signed up to the EU goal, so it looked in danger of missing out on billions in cash for green projects. But in the final agreement, the criteria was diluted again, so that 50% will be available to non-subscribers.
But the deal did confirm again that the EU will update its 2030 climate goals “by the end of the year”, which was previously opposed by many in the Council. Even Germany – the current holder of the rotating EU presidency – has come on side in recent weeks.
The head of the Parliament’s environment committee, Pascal Canfin (Renew), said that it was unfortunate that the net-zero criteria fell by the wayside but insisted that the Council’s decision to ring-fence 30% of the budget for climate policies was a positive note.
Others are less optimistic about that figure. The Dutch Green party welcomed the increase from 25% to 30% but warned that “the exact details are still unclear”.
Dutch Green MEP Bas Eickhout said that “it is an improvement that the percentage has been increased, but there is no guarantee that the other 70% will not harm the climate.”
Those concerns were backed up in early July by another Court of Auditors review, which said that climate spending risks being overstated without a proper tracking method.
“We all want a genuinely greener EU budget”, said the court’s Joëlle Elvinger, who added that “progress has been made, but the risk of overestimating EU climate action remains. She warned that “we need reliable reporting on climate-related spending”.
The court’s inquest looked predominantly at agriculture policies, where the Commission has been criticised for counting subsistence payments made to farmers as part of its climate spending.
Monetising the climate
The Commission will borrow the €750 billion for the recovery fund on the capital markets – a first for the EU executive, which is already building up capacity in its budget department to pull off the feat – but the issue of how to repay the funds it is still open.
According to the initial proposal, the Commission says the full sum could be paid off without dipping into future MFFs by rolling out new sources of revenue, known as ‘own resources’.
Those include a digital tax on big tech companies, skimming off carbon market profits and charging an import tax on unsustainable products. The Council made commitments in its final budget deal to consider most of the options given to it.
Von der Leyen told reporters that she was “glad that we managed to safeguard this achievement throughout the whole negotiations” and confirmed that her services will continue to work on proposals, due for publishing next year.
The Parliament says in its resolution that it “will not give its consent to the MFF without an agreement on the reform of the EU’s own resources system, including the introduction of a basket of new own resources.”
Progress is underway. A tax on unrecycled waste will kick in next year and the Commission is now locked into reviewing the Emissions Trading System in a meaningful way and designing a carbon border tax.
Senior EU officials say that the border tax – otherwise known as the ‘carbon border adjustment mechanism’ (CBAM) – is “the most politically and fiscally interesting” and were delighted that the Council mentioned a date, 2023, for its implementation.
Like all tax plans, the matter will likely need unanimous approval, which makes some own resources more feasible than others. The CBAM already has some crucial supporters though, including French Finance Minister Bruno Le Maire.
“I am for a carbon tax at the borders as quickly as possible by a qualified majority,” he told French TV on Tuesday (21 July), adding that “it is time to abandon the rule of unanimity” for tax issues.
Environmental policy can already be dealt with by qualified majority rather than unanimous Council vote, so if there is enough support and legal basis for fast-tracking the CBAM, the mechanism could be deployed on time.
The Parliament’s insistence on formalising the role of the new revenues in the budget deal and the potential veto MEPs hold over the process may prove decisive in pushing through EU tax collection powers, which only a few months ago many analysts thought impossible.
[Edited by Benjamin Fox]