Baking a landmark COVID and climate change budget in Brussels

EU invents new ways to pay for fast-tracked green deal

European parliament building in Brussels

Budget negotiations are often long, never fun, yet always important. The seven-year budget framework agreed on by EU leaders in July was unlike any budget that had come before it – and drastically different from what had been expected before the coronavirus locked down countries and economies across Europe.

EU budget negotiations take years, and much of that time is used by various European leaders to posture for their national media about “not sending any more money to Brussels.” In the end there’s nearly always a marathon summit in Brussels to hammer out the details and journalists joke about whether it was a “three-shirt” or a “four-shirt” meeting.

This year, the final negotiations of the leaders’ phase went on for five days and four nights. The end result was a landmark recovery package totalling €1.82 trillion (C$2.83 trillion) from 2021 to 2027, with the largest pot of money ever dedicated to combatting climate change. A record-breaking 30% of the budget, or approximately €550 billion (C$857 billion), must be spent directly on climate action. In principle, the remainder of the budget “should be consistent with Paris Agreement objectives” and targeted at meeting the EU’s 2030 targets for emissions cuts (we’ll come back to what those might be). What’s more, countries that do not agree to a target of “net zero” by 2050 risk losing billions from the Just Transition Fund portion of the spending.

The big caveat is the lack of clarity of what constitutes “climate action,” but this money essentially turbocharges the policy goals laid out in the EU’s Green Deal.

For German Chancellor Angela Merkel, whose country holds the rotating presidency of the Council of the European Union from July to December this year, this budget deal represents an important legacy-building moment on the EU stage as her long career comes to a close in 2021. Baking climate action into the recovery budget was the first of three major feats accomplished by the deal. The recovery package, known as Next Generation EU (NGEU), is to be funded by common European debt on an unprecedented scale. That’s the second big accomplishment. Common debt and common European taxation to pay that debt were unthinkable at the beginning of the year, but Chancellor Merkel and French President Emmanuel Macron began pushing the idea in May as a response to the coronavirus economic downturn.

Many pundits have described this as something of a “Hamiltonian moment” – after the American president who drove the U.S. federal government takeover of individual states’ debts. Taxation is a power that is jealously guarded by member states, and not even the financial crash of 2008 could convince them to give the European Commission the ability to collect taxes (aside from long-standing customs duties and sugar levies). The EU benefits from a strong AAA rating and may even be able to borrow at negative interest rates, with repayment scheduled for 2028 to 2058. It’s not hard to see the inspiration for the motto used by the German presidency of the Council of the EU: “Together for Europe’s recovery.” This historic Franco-German “meeting of minds” was instrumental in paving the way for the leaders’ political agreement in July.

The third big accomplishment is the creation of 21st-century “sin taxes” to pay for the borrowing. A tax on non-recycled plastics will be proposed next year, as will a carbon border tax. Also in the mix is a digital levy that will likely target Google, Facebook, Amazon Web Services and Apple – all of which are tech companies with a history of declaring income creatively. In theory, these taxes should simultaneously help to meet policy goals of reducing plastic waste and emissions while also raising funds to pay back the debt.

If the German presidency had ended after just three weeks, you could do worse than getting a budget deal hailed for its “wisdom and maturity” by the Dalai Lama.

However, as important as the leaders’ deal was, it is not the end of the story. The deal was a political agreement on a broad package. It still needs to be enacted through EU legislation, and here EU leaders have no formal role to play.

As a result, the overriding focus of the German presidency from now until the end of the year will be to shepherd all the various pieces of Green Deal– and NGEU-related legislation through the Council of the EU (whose 27 EU member states take collective decisions) and the European Parliament.

It’s a daunting list of initiatives, and there is no glamour or glory in “shepherding” – a cuddly euphemism that generally means constant meetings, impact assessments, consultations, negotiations and proposals, all building toward a messy compromise that most parties will be able to live with.

The Green Deal component of those priorities that will benefit from €390 billion in grants and €360 billion in loans are:

  • the European Climate Pact;
  • the Renewed Sustainable Finance Strategy;
  • the Renovation Wave initiative;
  • an offshore renewable energy strategy;
  • the 8th Environment Action Programme;
  • a chemicals strategy for sustainability;
  • the Strategy for a Sustainable and Smart Mobility;
  • the ReFuelEU Aviation initiative (sustainable aviation fuels); and
  • the FuelEU Maritime initiative for green European maritime space.

Most importantly, the EU is gearing up for the next big battle – this time over a new set of targets for emissions cuts by 2030 (from a 1990 base). The current target of 40% was set back in 2014 (pre-Paris Agreement), but as part of the budget agreement the 27 EU leaders also agreed to set new 2030 targets by the end of this year.

Because Germany holds the rotating presidency it will be up to German environment minister Svenja Schulze to first agree to a common position with the 26 other environment ministers and negotiate with the European Parliament, which will almost certainly push for a more ambitious target.

As with the five-day budget talks, there is a small group of countries that will need to be cajoled, threatened, charmed and, ultimately, promised money to get them to agree to increased ambitions.

The case for increasing the 40% target is easy. In fact, a 2019 report outlined that the EU will likely hit 50% cuts under a “business-as-usual” approach thanks largely to planned coal phase-outs in the power sector.

A more recent report laid out the economic and technical feasibility of reducing emissions by 55%. And the Green Deal, released in December, included language about increasing the 2030 ambition to “at least 50% and towards 55%.”

But also in the mix is the European Parliament, where a Swedish Member of the European Parliament (MEP) is pushing for cuts of 65% by the end of the decade. Right now, there doesn’t seem to be a majority to support such ambition, but things have been developing so quickly in the last few months it certainly isn’t outside the realm of possibility. NGOs such as Greenpeace and Climate Action Network (CAN) Europe have been vocal in supporting the 65% target and are lobbying MEPs to adopt the higher figure.

Reaching agreement on 65% will be tough. But Germany’s Schulze told Politico, “We need very, very tough negotiations … not to fulfill the Paris Agreement, not delivering, that’s a global signal the EU shouldn’t give ... It’s not an option. The Paris Agreement is clear, we need to deliver [higher ambition] in 2020 ... that’s the challenge for the German presidency.”

Peter Vis spent 30 years working at the EU Commission, including five years as Head of Cabinet for the Climate Change Commissioner, and is clear on the scale of the challenge and why 2030 is such a tight deadline. “Since 1990 the EU’s emissions have reduced by about 23%, possibly more by the end of this year in view of the effects of the coronavirus. Between 2020 and 2030 we [would] have to increase emissions cuts by another 30% in just 10 years.”

Because the EU’s legislative process takes years, it’s unlikely the bloc will see a big increase in annual reductions until mid-decade. That leaves just five years to make up the shortfall between 50% and 55% in cuts.

“The reductions needed to meet a 55% target will be unprecedented. The costs of these measures will have to be borne by businesses and households, so this doesn’t make for easy politics. There will be some opportunities and benefits too, so it’s not all negative, but it’s going to be tough. Really tough if we’re really serious,” said Vis, a senior advisor at Rud Pedersen Public Affairs in Brussels.

If the EU manages to agree on a target of 55% by the end of the year, it will have agreed perhaps to the most ambitious target for reducing CO2 levels and the most ambitious spending plan to achieve them, all within a six-month period.


Adrian Hiel is a Canadian dad, husband and writer who has spent the last 16 years in Brussels imbibing more Tintin, Gueuze and political dysfunction than he ever thought possible.


With the support of the Embassy of the Federal Republic of Germany in Canada.


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