Impending Obligations: Is Europe Economically Prepared for Its Sustainable and Technological Tomorrow?
The European Union (EU) is aiming to bridge a significant funding gap for climate and green investments, estimated at €750 billion to €800 billion annually. Current mechanisms, such as budget subsidies and private financial intermediaries, fall short of meeting these needs. To address this issue, the EU is considering innovative approaches such as permanent EU bonds, progressive European taxation, and the creation of a permanent European investment fund.
Permanent EU bonds, or joint debt issuance, could pool member states’ financial resources and creditworthiness, potentially lowering borrowing costs compared to independent borrowing by individual states. This could unlock substantial additional funding for green transformation projects. The bonds would deepen European financial markets, create a safer and more liquid asset, enhance the euro’s global currency status, and boost investor confidence.
Progressive European taxation, such as carbon taxes or digital taxes, could provide a more sustainable and independent source of funding, reducing reliance on member states' budgets and private financial intermediaries. This has been a topic of discussion in European fiscal debates, although the specifics are yet to be fully detailed.
Establishing a dedicated and permanent investment fund focused on green projects would enable sustained financing at scale. Such a fund could leverage contributions from EU budgets, carbon market revenues, and other fiscal tools, offering more stable and long-term financing dedicated specifically to the green transition. This fund would complement the current multiannual financial framework and strategic funds like InvestEU by providing more stable and long-term financing dedicated specifically to the green transition.
Existing EU budget proposals for 2028-2034 earmark significant funds for green transitions, such as the EUR 409 billion European Competitiveness Fund and EUR 81.4 billion Connecting Europe Facility. However, these remain insufficient relative to needs and require leveraging national budgets and private investments effectively.
Besides these budgetary measures, revenues from the EU Emissions Trading System (ETS) and state aid flexibilities are additional complementary financing channels currently used but are limited in scale.
The need to reform the EU’s budgetary framework has been emphasized by studies published by the IMF. The temporary nature of the Recovery and Resilience Facility has diminished its effectiveness. To address this, the Commission has proposed an "Industrial Decarbonisation Bank" aiming for €100 billion in funding in 2026.
A permanent European investment fund could provide at least 1% of EU economic output per year. This fund could prioritize European public goods, such as continental railway infrastructure, pandemic prevention, integrated electricity grids, and an EU-wide 5G network.
Conditionalities could also be implemented to ensure that firms receiving subsidies meet certain criteria. For example, companies could be required to ensure the right to collective bargaining and decent wages, reinvest profits into R&D, worker training, or other productive activities, levy taxes on excess profits, and introduce bans on excessive shareholder remuneration.
The EU faces a green investment deficit of €406 billion by 2024. To address this, a progressive de-risking strategy for financing the green transition in Europe should be implemented. This could include conditions for firms receiving subsidies, such as granting the public sector access to intellectual property rights in exchange for subsidies.
In summary, to boost EU green transformation funding, the EU is considering permanent EU bonds, progressive European taxation, and the creation of a permanent European investment fund. These proposals aim to close current funding gaps and enable a more ambitious and coordinated European green industrial policy.
- The creation of a permanent European investment fund could provide at least 1% of EU economic output per year, focusing on European public goods such as continental railway infrastructure, integrated electricity grids, and an EU-wide 5G network.
- To improve investor confidence and deepen European financial markets, permanent EU bonds, or joint debt issuance, could be implemented, pooling member states’ financial resources and creditworthiness to fund green transformation projects.
- Progressive European taxation, like carbon taxes or digital taxes, may offer a more sustainable and independent source of funding for green projects, reducing reliance on member states' budgets and private financial intermediaries.
- A dedicated and permanent investment fund focused on green projects, complemented by budget subsidies, the EU Emissions Trading System (ETS), and state aid flexibilities, could help bridge the €406 billion green investment deficit in the EU by 2024.
