unlocking a low-carbon europe a low carbon europe.pdf · stakeholder consultation process during...

Alstom • Business for New Europe • CEE Bankwatch • CECODHAS-Housing Europe • demosEUROPA • E3G • Friends of the Earth Europe • Green Alliance • Heinrich Böll Stiftung • IEEP • National Housing Federation • Notre Europe • WWF

unlocking a low-carbon Europeperspectives on EU budget reform


Edited by Chris LittlecottISBN: 978-1-905869-28-2© Green Alliance 2010

Green Alliance’s work is licensed under a Creative Commons Attribution-Noncommercial-No derivative works 3.0 unported license. This does not replacecopyright but gives certain rights without having to ask Green Alliance for permission.

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acknowledgements

Green Alliance gratefully acknowledges the financial support of the UK Foreign andCommonwealth Office towards its work on EU budget reform.

The views expressed in this report remain those of individual authors alone, and do notnecessarily reflect the views of Green Alliance, the other contributing organisations, orHM Government.

With thanks to Corine Meier and Niki Charalampopoulou for valuable editorial support.

contents

2 introduction: unlocking Chris Littlecotta low-carbon Europe Green Alliance

section one: budget, climate, action

9 delivering EU action David Baldock and Camilla Adelleon climate change Institute for European Environmental Policy

14 a European budget for Jesse Scottthe future E3G

19 building business Arif Shahconfidence Business for New Europe

section two: spending the budget better

23 the big win within reach: David Orrenergy efficiency National Housing Federation and

CECODHAS-Housing Europe

28 climate, cohesion, and Keti Medarova-Bergstromdelivering EU value CEE Bankwatch and Friends of the Earth Europe

33 transforming technology, Giles Dicksondelivering decarbonisation Alstom

section three: connecting budget revenues to policy delivery

38 emissions trading and Sanjeev KumarEU budget WWF European Policy Office

43 connecting with carbon Eulalia Rubiotaxation Notre Europe

section four: strategies for reform

48 how to approach the Agata Hinc and Paweł Świeboda reform? demosEUROPA

53 winning the budget Jan Seifertbattles Heinrich Böll Stiftung

58 references

unlocking a low-carbon Europe 1

introduction:unlocking a low-carbon EuropeChris LittlecottGreen Alliance

Reform of the EU budget matters deeplyfor the pursuit of a low-carbon economy.For there is arguably no policy lever asimportant as the EU budget for settingthe direction of EU action.

Chris Littlecott is a senior policy adviserat Green Alliance and is the UK boardmember of the European EnvironmentalBureau. He leads the development anddelivery of Green Alliance's EU strategy,with a particular focus on the topics of

carbon capture and storage and EU budget reform.

The year 2010 presents the European Unionwith the opportunity to define a fresh focusfor the next 10 years. For by coincidence ofcalendars, the EU finds itself starting a newpolitical cycle in a revised institutionalframework.

The entry into force of the Lisbon Treatymeans that 2010 will see Herman VanRompuy begin to shape the new role ofPresident of the European Council. Similarly, afresh team of European Commissioners willtake office, while the European Parliament willtake forward enhanced powers.

But to describe the EU’s prospectus for thenew decade in these institutional terms alonewould be to remain stuck in the inward-looking traps of the recent past. This newcontext instead opens the door for a sustainedpractical focus on meeting the sharedchallenges that will shape Europe’s future.

climate challenge, budget leverage

Amongst the host of challenges that faceEurope in 2010, there are none more pressingthan the twin tasks of securing a stable climateand moving to a low-carbon economy. Nomember state can tackle these tasks alone;cooperation is the only route available.Successful action on climate change istherefore a litmus test for the EU’s ability todeliver on its core purpose as a facilitator ofshared efforts to meet common goals.

Furthermore, Europe’s existing climatepolicies also have their own timetable interfacewith the new decade. The Climate Action andRenewable Energy (CARE) package negotiatedin 2008 commits the EU to a 20 per centshare of renewables in its energy mix and aminimum 20 per cent reduction of carbonemissions by 2020. These commitments willform a central delivery challenge for the next10 years, and will remain at the top of theagenda to be defined in 2010.

introduction


While climate change is the EU’s top externalchallenge, the EU budget arguably ranks asone of its most politically significant and asyet underused policy levers for delivering onthis task. And here too 2010 will be a crucialyear with implications for the whole decade.

At the last negotiation of the multiannualfinancial perspectives in 2005, it was agreedthat a fundamental review of the EU budgetwould be carried out in 2008-09. The aim wasfor the review to guide reform plans ahead ofthe next negotiation of the budget for theperiod 2014-2020, to ensure that it is focusedon the right priorities rather than remaining‘an historical relic’.1 Yet despite an extendedstakeholder consultation process during 2007-08, the European Commission's proposals fora reformed EU budget will only finally see thelight of day during 2010. False dawns cameand went during 2009. The necessity of afuture-focused EU budget remains ever-moreurgent, yet the political momentum forreform must now be refreshed.

This delayed opportunity for reform of the EUbudget matters deeply for the pursuit of alow-carbon economy. For there is arguably nopolicy lever as important as the EU budget forsetting the direction of EU action. While thesize of the budget remains close to just oneper cent of EU’s Gross National Income, it hasthe ability to lever additional spending bymember states and the private sector. However,it is perhaps its political value that is of mostinfluence. For the way in which the EU spendsits resources is the primary indicator of itspolitical priorities and its institutional abilityto organise their pursuit.

EU budget spending thereby provides atangible demonstration of Europe's long-termpolitical commitment to its shared aims,demonstrating an assurance of purposebeyond the reach of other policy levers. Witheconomic uncertainties currently abounding, areformed EU budget would help provideincreased political certainty in addition to itsfinancial resources. Both aspects will be crucial

in fostering the new low-carbon economy andsecuring immediate investments in newtechnologies and infrastructure.

about this publication

This publication addresses the politicalchallenge of acting on these two priority areasof climate change and the reform of the EUbudget. In our view, they will be the definingtasks not just of 2010, but of the new terms inoffice of the European Commission, EuropeanParliament, and President of the EuropeanCouncil.

For successful agenda-setting action in 2010will set the EU on course for policy deliverythroughout this new decade. A concertedapproach that tackles both challenges togetherwill of course be difficult, but is far morelikely to succeed than any disconnectedattempts to deal with these challenges inisolation. Our analysis is that there exists a realopportunity to develop a positive, mutually-reinforcing dynamic between these twoagendas. Movement on the EU budget willhelp unlock a low-carbon Europe, while thecontinuing pressure for action on climatechange can create the momentum required forbudget reform.

Indeed the need for reform of the EU budgetto support the low-carbon transition is a topicof enduring interest for Green Alliance. Back in2007 we published investing in our future: aeuropean budget for climate security,2 which madethe case for the review of the EU budget toplace action on climate change at the heart ofits policy proposals. Now, this new collectionof viewpoints from diverse businesses andNGOs, social organisations and thinktanks,highlights the political importance of budgetreform as a necessary step in buildingconfidence and unlocking Europe's low-carbon transition. Furthermore, theperspectives offered here also support ourview that a focus on climate change can inturn significantly improve the prospects for

budget reform, providing political impetusand leveraging the economic resourcesrequired to kickstart a new post-crisis era ofsustainable growth and job creation.

The arguments made in this publication arethose of each individual author andorganisation alone, yet taken as a whole theypresent a coherent case for ambitious reformof the EU budget. Importantly, they point toboth the imperative of mobilising differentstakeholder interests, and the importance ofcontinuing the ‘no taboos’ budget reviewdebate throughout this direction-setting yearof 2010.

learning from 2009

For of course the opening of the new decadedoes not present a completely blank slate. Theevents of late 2009 will in particular have animportant influence on the EU’s evolvingapproach during 2010. While more detailedanalyses will surely follow over the comingmonths and years, it is already possible todraw some key learnings of immediaterelevance.

On climate change, the Copenhagennegotiations in December 2010 fell short ofachieving the EU’s aspirations. A global deal toreduce carbon emissions was not reached,while the development of the EU’s ownshared position proved to be a matter ofprolonged and delicate negotiationsthroughout the year. Both of these aspects willhave an impact on the 2010 agenda, whichwill see continued international efforts tosecure commitments to reductions in carbonemissions by the signatory countries to theCopenhagen Accord.3 The United Nationsnegotiating process will likewise continue atmeetings in Bonn and Mexico.

On the international stage, refreshed EUclimate leadership is an imperative. The EUmust build fresh momentum and create amore cohesive unity of purpose, both for its

common international stance on issues such asclimate finance, and also for its domesticefforts to stimulate the transition to a low-carbon economy. In this respect, the lack ofclarity resulting from the Copenhagennegotiations has already been felt in thedownbeat response of the carbon market.4

Additional regulatory measures and financialsupport will now undoubtedly be required tobolster the EU emissions trading scheme(ETS) through the coming years ofuncertainty.

The headline message of EU climate efforts in2009 seems clear. While the EU began the yearpositively with its agreement of the CAREpackage, it was unable to generate sufficientmomentum to turn this positive step forwardinto a domestic springboard towards a globaldeal.

A similar dynamic of positive aims faltering intheir delivery was also the story in 2009 forthe reform of the EU budget. The EuropeanCommission failed to meet its mandate toreport on the way forward from the budgetreview, as efforts to secure the entry into forceof the Lisbon Treaty and respond to theeconomic crisis took an understandable ifunfortunate precedence. As a result, themomentum previously built up during theconsultation process was lost.

What did eventually emerge in October 2009was a leaked draft version of the EuropeanCommission paper on the budget review,5

which was met with predictably negativeresponses from current budget winners andonly a muted show of support fromsupporters of reform. These responses weredoubly unfortunate, not just because the draftproposals for a low-carbon focus for the EUbudget were worthy of a positive responsefrom all sectors, but also because anopportunity to build a cohesive EU positionand wider coalition for reform had beenmissed.

unlocking a low-carbon Europe4

Both of these areas – the external threat ofclimate change and the internal challenge ofbudget reform – showed the difficulties theEU faced in 2009 as it tried to turn its aimsinto action. The big institutional achievementof the entry into force of the Lisbon Treatywill be in vain if these kinds of problems donot become more amenable to resolution.

The early months of 2010 will thereforedemonstrate whether the EU has entered thenew decade with a hangover or new resolve.The climate science imperative for furtheraction to reduce the EU’s carbon emissions by30 per cent or more by 2020 remains, as doesthe need for refreshed efforts to equip the EUfor a sustainable route out of economicrecession.

defining the EU’s 2020 vision

While many of the details of the futureinternational climate regime remain to bedetermined, the EU itself is in a position torapidly define its own priorities for thecoming decade, and within that its pursuit ofa low-carbon economy. The ‘EU 2020’strategy,6 proposed for approval in the firsthalf of 2010, offers the opportunity to anchorthe low-carbon transition firmly to the pursuitof economic competitiveness, job creation,resource efficiency and sustainable prosperity,providing a routemap for a just transition forEuropean workers and citizens. The initialproposals made are therefore to be welcomedas having placed the low-carbon economy andthe need for green growth at the centre of theEU’s recovery plans.

As the successor approach to the Lisbonstrategy for growth and jobs, the EU 2020strategy will set a course for action across thenew decade, providing a reference point for allother policy areas and influencing spendingdecisions. Its principles for action will haveenduring relevance. But, as with any strategy,it will only be as influential as the decisionsthat flow from it and the resources it provides.


The EU 2020 strategy and the reform of theEU budget must therefore be viewed as acohesive package. The priorities to be agreedfor the strategy will subsequently need to bedefined further by the EuropeanCommission’s long-awaited paper on thebudget review.

unlocking confidence

What the EU 2020 strategy offers is theprospect of a wider approach for action onclimate change that is closely integrated withthe other economic challenges facing the EU,and which will set an ambitious tone forbudget reform decisions. By making smartinvestments in infrastructure, and pursuingactive policies to support the creation of newgreen jobs, the EU can develop with the low-carbon competitiveness needed for success ina carbon-constrained world. In so doing, itcan start to build the wider political andeconomic confidence it will require for itslow-carbon transition, and which it can maketangible via the reform of the EU budget. Thispursuit of confidence in the climate effort is acentral theme taken up by our authors.

David Baldock and Camilla Adelle of IEEP setout the rationale for EU budget spending onclimate and energy, linking this to theobjectives agreed in the 2008 Climate Actionand Renewable Energy package. Policydirection has been set, they argue, but the useof budgetary policy levers are lagging behind.

Jesse Scott of E3G highlights how the EUbudget is an iconic demonstration of the EU’spolitical priorities. She makes the case for aforward-looking budget that engages with thechallenges facing Europe in a globalised worldand reconnects Europe to its citizens.

Arif Shah of Business for New Europehighlights the need to build businessconfidence that the low-carbon transition canbe achieved in ways that fostercompetitiveness and spur innovation. He

argues that political leadership on the EUbudget will help underpin the EU’s policyframeworks and market mechanisms, withtargeted spending helping to addressinvestment barriers.

Other authors also pick up on this themethroughout the publication, highlighting thesimilar need for confidence among socialactors and member states, particularly thosefrom central and eastern Europe. As PawełSwieboda and Agata Hinc of demosEUROPApoint out, these countries have already gonethrough an involuntary low-carbon transitionin the early 1990s. The EU needs a strongerpositive strategy to secure their enduringsupport going forward.

financing the low-carbon transition

Given the limited size of the EU budget, andthe multiple objectives requiring concertedshared action, it is neither possible nordesirable that the EU budget should financethe whole of the EU’s low-carbon transition.7

But the EU budget remains of paramountimportance as a means of meeting the climatechallenge. EU budget instruments are able toleverage additional spending by member statesand the private sector, fostering more coherentexpenditure policies across nationalboundaries and economic sectors.

Furthermore, EU budget spending can providespecific added value by directing its spendingon the public goods and market failures thatremain out of reach of national action.8 A keyargument set out in the chapters that follow istherefore that the challenge of spending thebudget better on low-carbon objectives mustbe of central importance to the budget review.

David Orr of CECODHAS-Housing Europemakes the case for increased EU spending onenergy efficiency: ‘the big win within reach’.The EU budget can leverage further supportfrom member states and investment banks,helping unlock the massive potential for

energy savings and spurring the retrofit of theEU’s housing stock.

Keti Medarova-Bergstrom, writing for CEEBankwatch network and Friends of the EarthEurope, develops this topic further,highlighting how the massive flows of EUbudget spending in support of cohesionpolicy present an opportunity to kickstart low-carbon investment. Yet the EU’s past record isnot good, she notes, with spending oftenresulting in increases in carbon emissionsrather than helping to decrease them.

Giles Dickson of Alstom similarlyconcentrates on the EU added-value that cancome from investment in new low-carbontechnologies. He links the need for significantincreases in Research and Development to theinvestment barriers facing technologies beforethey reach the stage of commercialdeployment. Coordinated EU spending toaddress these barriers could unlock the effortsof the private sector to provide the newtechnologies the EU requires.

connecting with revenues

Yet if much of the discussion of the reform ofthe EU budget focuses on its expenditure, theresources debate is also of great importancefor climate policy. With growing revenuescoming from the receipts of auctioningallowances from the EU’s emissions tradingscheme (ETS), and increasing interest bymember states in energy or carbon taxes,European citizens and the private sectorincreasingly want to see the fruits of theserevenues spent on the low-carbon transition.

The challenge will therefore be for memberstates to make visible their commitment tolow-carbon investment. The incorporation ofsome ETS or carbon tax revenues into the EUbudget could provide a time-limited EUresource that can be focused on shared climatechallenges.



We must remember that member statepositions on fiscal sovereignty make this adifficult area of EU politics, while theeconomic arguments against the earmarkingof revenues are similarly strongly defended. Yet although these imposing feasibilitybarriers remain, the underlying climate policyrationale and potential public acceptabilitybenefits are clearly argued in the followingchapters.

Sanjeev Kumar of WWF argues that thecreation of significant auction revenues fromthe EU emissions trading scheme creates botha legitimacy challenge and an opportunity forthe EU to direct funding on key climate andenergy targets.

Eulalia Rubio of Notre Europe discusses theprospects for new taxes on carbon emissionsor energy sources to fund part of the EUbudget, additionally providing directassistance to the pursuit of policy objectivesand creating a more positive member statedynamic in favour of investment in EU publicgoods.

strategy

A reformed, low-carbon EU budget is a keyindicator of whether the EU can put in placethe political conditions required for action onclimate change, energy security, or any of thewider suite of 21st century challenges thatwill require its attention. In all of these areas, amore positive foundation for member statecooperation on shared public goods isessential. While the new institutionalarrangements that flow from the Lisbon Treatyare meant to help make this possible, strategicspending will also be required to share effortsand unlock investment.

Reform efforts will require attention to boththe political challenges facing member statesand the process opportunities available aheadof the next multiannual budget negotiations.

Paweł Świeboda and Agata Hinc ofdemosEUROPA propose three approaches tobudget reform that could accelerate the low-carbon transition and win support from thecountries of central and eastern Europe, withHungary and Poland well-positioned to leadon this agenda in the budget review process.

Jan Seifert of Heinrich Böll Foundationargues for an approach that maximises theopportunities for budget reform via action onannual budgets as well as the next financialperspective, highlighting the role of theEuropean Parliament as a proponent ofchange.

While our focus in this publication has beenon how the reform of the EU budget canengage with the politics of Europe’s domesticdecarbonisation effort, any new proposals forreform will also need to direct targeted low-carbon support for those economic sectorsfearing change, notably including the existingrecipients of EU spending. Key to this wouldbe engagement with regional governmentsand cities to support their role as motors forlow-carbon investment.

Similarly, it is increasingly evident that EUbudget support for the agricultural sector willneed to reflect the wider climate agenda,including the testing challenge of effectiveadaptation to increasingly severe climateimpacts.9 Given their complexity and politicalimportance, these issues are worthy of furtheranalysis and discussion in their own right, andlie beyond the scope of this publication. But itis our contention here that a focus onEurope’s low-carbon transition will provide arevised EU budget with a sufficiently broadand future-focused remit to ensure theeffective engagement and support of all keystakeholders. A situation in which investmentin the low-carbon economy is limited by acontinuation of the status quo will suitnobody, particularly not those regions andsectors most at risk from a changing climate.


conclusions

The EU’s efforts to reform its budget during2010 will need to be situated within thecontext of its objectives for 2020. Both theEU’s climate change targets and the economicobjectives it will finalise in its EU 2020strategy will share this decade-long pursuit,and must be advanced together. Within thatcontext it will fall to the EuropeanCommission to publish outline proposals forbudget reform that can deliver on these twindecade-long efforts at transformationalchange. It can do so drawing from the clearmandate for reform provided by the responsesto the 2008 budget review consultation,which identified climate, energy andcompetitiveness as the top three priorities forfuture EU budget spending.10

While the European Commission has theformal lead among the Brussels institutions,the willingness of member states to engagepositively on this agenda will be crucial. Theytoo have a responsibility to their citizens toensure that budget reform proposals candeliver action on shared challenges. But theinertia inherent in budget politics means thatongoing advocacy in support of a low-carbonEU budget will undoubtedly be required fromcivil society and private sector alike to ensurethat all EU institutions and member states feelempowered to take far-reaching reformdecisions.

Yet if democratic influence from below will berequired to secure budget action, so too mustEU institutions and member states seize thistangible opportunity for positive engagementwith Europe’s citizens. A budget fit for thefuture would be a more direct demonstrationof the EU’s added value than any of theinstitutional reform efforts of recent years.This is an opening where the EuropeanParliament can work closely with new CouncilPresident Herman Van Rompuy to activelyshape the agenda, ensuring that the need for alow-carbon budget is firmly embedded into

the priorities of both the EuropeanCommission and Council alike.

For as European Commission PresidentBarroso underlined at the start of the budgetreview process, this is a “once in a generationopportunity to make a reform of the budget”,adding that “This is about much more thanmoney. This is about a vision for Europe.”11

That is indeed the challenge of 2010 and thecoming decade. The message is positive fromthe viewpoints published here: bold budgetreforms will unlock clear low-carbon results.

delivering EUaction on climatechangeDavid Baldock and Camilla AdelleInstitute for EuropeanEnvironmental Policy

The EU budget needs to support theoverall vision of building a low-carboneconomy, providing positive impetus forinvestments and actions where individualmember states are unlikely to move fastenough or far enough on their own.

section onebudget, climate, action

There is a sharp contrast between thesignificance of climate and energy issues forthe European agenda and the resourcesdevoted to them in the EU budget. Climatechange commitments have grown at EU levelin response to scientific concern and risingpolitical awareness but the use of the EUbudget to catalyse action has remained verylimited. Setting aside the question of itsinternational responsibilities, does the EUhave the means to deliver its owndecarbonisation?

Thus far, the challenge of financing a dynamicclimate and energy policy has not beenaddressed squarely. This chapter discusses whyand how the EU budget should contribute. Itdiscusses the need for financing of bothadaptation and mitigation activities withinEurope, considering in particular the 2008Climate Action and Renewable Energy (CARE)package of European legislation.

headline cost estimates

We are still in the early stages of estimatingthe costs of tackling climate change and thereis much work to be done in a range of areas.1

In 2006, the Stern Review2 concluded thatwhilst the short-to-medium term costs ofinvesting in mitigation are likely to be high(as much as one per cent of global GDP perannum), the longer-term costs of inactioncould be as high as 20 per cent of GDP.

More concretely at EU level, the EuropeanCommission estimated the direct economiccosts of compliance with the CARE package3

as ranging between 0.25 and 0.71 per cent ofEU GDP in 2020, depending on the extent ofuse of policy instruments such as renewableenergy trading and the use of credits from theClean Development Mechanism (CDM).4

Additional national commitments will add tothis cost.

The European Commission’s attempts toestimate more precise costs for climate

9

David Baldock is the Executive Director ofthe Institute for European EnvironmentalPolicy (IEEP). An authority on Europeanagricultural policy and the environment,he has an active interest in sustainabledevelopment and the external dimension

of European policy. Current external commitments includemembership of the European Commission's high-levelgroup on the competitiveness of the car industry inEurope.

Camilla Adelle is a Policy Analyst at IEEPin the environmental governance team.She is a specialist in EU sustainabledevelopment and policy integration with aparticular interest in the EU budget.


adaptation remain in their infancy. Neither its2007 Green Paper5 nor the 2009 White Paperand accompanying Impact Assessment6 7 madeany serious attempt to estimate potential costs.This is despite the European Parliament8

calling for a study of the economics ofadaptation. Major advances are needed toaddress the topic not least due to the limits onquantification and valuation.9

Nonetheless, a number of recent studies arestarting to shed light on the issue. In general,they show that while the net impacts onEurope may be modest there will besignificant differences in regional impacts. TheEuropean Commission’s Regions 202010

report concludes that a total of 170 millionpeople live in regions most affected byclimate change in parts of the south and eastof Europe. Additionally, the impacts of climatechange will be felt disproportionately inregions with low GDP per capita, which havea lower capacity for adaptation. What is clearat this stage is that the costs of bothmitigation and adaptation in Europe will besignificant and sustained.

why the EU budget?

There has been an increasing recognition ofthe need for action via the EU budget bygovernments and other stakeholders acrossEurope. Climate change and energy securitywere the top two priorities for futurespending identified in the consultation on thebudget review in 2007-2008.11

Alongside this growing political interest, thereare strong theoretical arguments for using theEU budget in the fight against climate change:

• The transboundary nature of climatechange means that there is added-value fromEU action. The principle of subsidiaritysuggests that the EU should act only if theobjectives cannot be achieved effectively byindividual member states alone and can bebetter achieved by the community as a whole.

There is a clear case for EU action given thepublic good nature of a stable climate, whichwould otherwise result in an undersupply ofmitigation action by individual memberstates.

• The principle of common pooling ofresources for research and development islogical on grounds of resource efficiency.Research efforts need to be targeted, reach acritical level of investment, and avoidunnecessary duplication or wastage. This is aparticularly powerful argument for EUfunding of high cost energy technologies,such as carbon capture and storage (CCS).

• The principle of cohesion, employed toaddress economic and social imbalancesbetween member states, is also relevant. Suchan approach could help smooth the unequalcosts experienced by different member statesin pursuit of shared community objectives. Inthis respect, EU funding could provide extraleverage and incentives to complement aprimary regulatory approach,12 as well assharing the costs of adaptation in the worstaffected, and poorer, member states.

• Similarly, the EU principle of solidaritybetween member states can also be invoked.The provision of emergency relief toindividual regions or member states in theevent of major natural disasters is a distincttype of EU action, which could haveconsiderable implications in the context ofmember states’ adaptation to climate change.

Public expenditure is of course only one of arange of potential policy instruments tosecure action on climate and energy goals.Others include regulation, market-basedinstruments, and voluntary agreements. Insome cases, policy objectives may be securedeffectively and efficiently without the use ofpublic spending, which is subject to manycompeting demands. However, there arenumerous circumstances where neither hardregulation nor soft law is enough andfinancial incentives are required to induce or

support the necessary policy responses. Insome cases member states may need to beincentivised to adjust their policies to EUpriorities.

Here there is a role for the EU budget andassociated mechanisms, such as soft loansfrom the European Investment Bank (EIB).These will need to be well targeted. The EUbudget is small relative to the scale ofinvestment required to complete the transitionto a low-carbon economy, an endeavour akinto a new industrial revolution. The types ofinvestment and expenditure that it can supportare also subject to limitations due to theregulations that control it and the need toavoid projects that confer undue competitiveadvantage on individual enterprises andmember states. Nonetheless the EU budget issubject to a level of political direction andtuning that makes it a useful instrument tosupport other policy measures.

EU budget and the CARE package

The 2008 CARE package of legislation,including the revision of the EU EmissionsTrading Scheme (ETS), is a step forward inmoving the EU towards the current targets of20 per cent of renewable energy in the energymix and a minimum 20 per cent reduction incarbon emissions by 2020. However, theseregulatory mechanisms alone cannot be reliedon to be effective.

A clearer link between EU spending and theachievement of the EU’s domestic climatetargets would be beneficial. Smart investmentsin the low-carbon transition could play amajor catalytic role in the delivery of EUtargets and the negotiation of any furthermeasures that are needed, such as an increasein the carbon emissions reduction target to 30per cent in the event of a global climate deal.For we can see in the CARE package a numberof elements that reflect the need to matchpolicy obligations with the economic capacityof different member states:

• In the Renewable Energy Directive13

national targets have been allocated accordingto the GDP and national circumstances of eachmember state. In addition, countries meetingthese targets are allowed to sell tradablerenewable certificates to those falling behindon their targets.

• The revision of the ETS14 aims to strengthenthe EU carbon market for the third phase from2013 and increase the auctioning ofallowances. Here, 10 per cent of the emissionquotas are to be reallocated for the purposesof solidarity and growth, particularly to helppoorer member states in central and easternEurope in their transition to a low-carboneconomy. Similarly, an additional two per centis to be redistributed among nine countriesthat had experienced large reductions incarbon emissions as a result of their economictransition from the communist era. The ETSwas also used as a source of funding for theEU’s CCS programme, with 300 millionallowances set aside for allocation to thedemonstration of CCS and innovativerenewable energy technologies.

• Finally, the Effort Sharing Directive15 setsindividual greenhouse gas reduction targetsfor member states, with targets allocated onthe basis of GDP. Newer, poorer member stateshave in general been allowed to increase theiremissions while older, wealthier memberstates are required to make more significantcuts.

By means of these approaches, the EU hasattempted to share the efforts and costs ofmeeting its climate objectives withoutrecourse to the EU budget. This has proved tobe a viable approach to date, albeit a rathertortuous one, but it suffers from the lack ofvisibility associated with more directeconomic support measures.

Indeed, in all of these areas there was strongpush back from those industry lobbies andmember states that felt that they were toocostly for their present circumstances. This will



be repeated if targets are to increase as part ofinternational efforts. Whilst this tension is tosome degree unavoidable, a more explicitpolitical understanding about the scope forassistance under the EU budget would help toensure that these measures are implementedand can be built on further.

By early 2009 it was already clear thatovercoming policy stagnation on climate andenergy policy issues is a challenge for somemember states.16 Yet across Europe the targetsare repeatedly highlighted as stretching,especially as a consequence of the economicdownturn. Public expenditure will be neededon a larger scale than anticipated in order toaccelerate the pace of new investment.

While there is an understandable reluctance tocommit public funds until marketmechanisms have been fully explored, thetime constraints for action on climate aresevere. It will therefore be critical to deployEuropean funding to catalyse action inmember states, especially in those countriesand regions that are most reluctant or less ableto pay the costs of implementing climatechange mitigation measures.

Europe faces a new economic reality: whilecitizens are anticipated to remain concernedabout climate change, they will want toprioritise action that helps to delivereconomic stability and jobs into the future. Inaddition, many of the most cost-effectivemitigation opportunities are in the newmember states where climate is not necessarilya key objective. Targeted transitional assistanceto accelerate energy conservation initiatives,improved infrastructure and assistance tosectors facing severe and rapid dislocationswill help to reduce impediments to furtheraction.

Indeed, a clear signal that there is greaterwillingness at EU level to reinforce a primarilyregulatory approach with supportiveinvestment would balance the overall strategyto addressing climate change mitigation. At

the same time it could form a central plank ofa green recovery, helping regional economiesin their transition to a low-carbon futurewhile stimulating greater social and economiccohesion.

addressing the adaptation challenge

Adaptation requirements will be highlyuneven within the EU and there are solidarityand cohesion considerations pointing to asharing of this burden. There is already scopefor addressing adaptation within a number ofdifferent EU funding instruments, includingthe European Regional Development Fund, theCohesion Fund, and the Common AgriculturalPolicy (CAP). As with mitigation measures, thepossibility has also been raised of at least partof the revenues from the auctioning ofemission allowances being targeted atadaptation within member states. What isabsent is a broader strategy about howexisting or new funds can contribute tocommunity-level adaptation priorities.Adaptation issues need to be taken intoaccount in regional development strategies,infrastructure planning, agriculturalproduction, the management of habitats forvulnerable wildlife species, and many otherways.

There is also a potential need for moreinnovative adaptation measures. One of thesecould be a revision to the existing instrumentof the solidarity fund set up in 2002. Thisfund is mobilised “when a natural disasterwith serious repercussions on livingconditions, the natural environment, or theeconomy in one or more regions or one ormore countries occurs”.17

It is currently unclear whether this fund couldbe used to address some of the more localisedand acute but longer-term consequences ofclimate change. In 2006 the EuropeanParliament pressed for the definition of‘natural disaster’ to be extended to includemore protracted threats such as droughts,

desertification, or the development of urbanhot spots where the elderly and the veryyoung are particularly vulnerable.18 While itwould be necessary to define fairly tightly thekind of events that qualified for aid, it wouldcertainly be helpful to have an instrument thatis more flexible and attuned to shorter-termproblems.

conclusions

The costs of meeting the EU’s presentmitigation commitments and of adapting tocoming climate impacts will be considerable.Much of the finance required will come fromenergy consumers, the private sector, revenuesextracted via the emissions trading mechanismand national governments. However, with aclear European framework and objectives forclimate policy already in existence, there is acorresponding need for financial mechanismsat the community level to provide a morebalanced set of policy instruments.

Only in a few instances, such as the spring2009 European Economic Recovery Plan, hasthere been significant funding offered fromthe EU budget, in this instance for investmentby member states in energy infrastructure,renewables and CCS. The result is that thebudget fails to support in any substantiveongoing way the delivery of targets that willbe demanding for many governments to meet.This is both a policy failure and a politicalrisk.

The EU budget needs to support the overallvision of building a low-carbon economy byensuring that expenditure is consistent withand enabling of the achievement of climatepolicy goals. It needs to provide positiveimpetus for investments and actions whereindividual member states are unlikely to movefast enough or far enough on their own. Thisis particularly the case at a time of restrictednational government expenditure, limits onthe availability of credit to the private sector,and relatively low carbon prices.

At a basic level this is a question of aligningexisting EU funding mechanisms to newrequirements, with corresponding changes inobjectives, guidelines and rules. At the veryleast, the EU budget must not undermineclimate change objectives.19 Therefore there isa need to invest in climate-proofing the EUbudget in relation to the CAP and structuralfunds, the two largest items of EUexpenditure.

Beyond this, there is need for increasedtargeted climate funding. EU interventionscan pump prime critical initiatives, maintainmomentum when the investment climatefalters, help to offset the burden on the leastprosperous regions of the EU, and leverinvestment from national governments.

There is a growing recognition that the EUbudget has a role to play in all of these areas,but no clear European approach to financingthe transition to a low-carbon economy. Astrategy which maps the role of the EUbudget, the EIB, and revenues generated fromemissions trading must now be developed toprovide confidence in the EU’s domesticdecarbonisation.

13unlocking a low-carbon Europe

a Europeanbudget for the futureJesse ScottE3G

The manner in which an organisationraises and spends its financial resourcesis a key test of its priorities, and, atpresent, the EU fails miserably. Europewill be unable to ensure its security andprosperity unless it better aligns itsresources with the challenges it faces.

The problems that will dominate the 21stcentury, from terrorism to climate change, theregulation of financial markets to massmigrations and organised crime, cannot besolved by nations acting alone. They require apooling of sovereignty. The European Union isthe world’s most sustained and far-reachingexperiment in the practical and politicalrealities of sharing sovereignty and itscontinued success matters to everyone, notjust to Europeans.

Yet, over recent years, the EU agenda has beendominated by an inward focus on institutionalmatters, coupled with a lack of confidence inits own ability to shape affairs on the worldstage. The success story of the extension ofsecurity and prosperity across the continenthas become the limit of our politicalimagination, rather than the starting point. Tosucceed in the next 50 years, Europe mustnow look to its future, not its past. It has toembrace an outward-looking agenda, and beprepared to use its hard-won soft power onthe international stage.

Back in 2006, in our pamphlet Europe in theWorld,1 E3G examined the key political choicesfacing the EU. We argued that these keychallenges for the 21st century would be metonly if the EU could redefine success; buildintergenerational cooperation; achieve energysecurity and climate security; and invest in asuccessful China.

Alongside these external challenges, weidentified a key area for action under the EU’sown control: the EU budget, one of the mostpowerful tools in Europe’s policy armoury.The manner in which an organisation raisesand spends its financial resources is a key testof its priorities, and, at present, the EU failsmiserably. Europe will be unable to ensure itssecurity and prosperity unless it better alignsits resources with the challenges it faces.


Jesse Scott leads work on ‘Europe in theWorld’ and engagement with EUinstitutions in Brussels for environmentalNGO E3G (Third GenerationEnvironmentalism). Her work currentlyfocuses on financing for low-carbon

innovation and infrastructure in the context of the EUbudget reform debate.


a real budget review required

European Commission President José ManuelBarroso has called the EU budget review a“once in a generation opportunity”.2 But thiswill only be the case if debate and reformsbegin with a fundamental examination of thepolicy objectives.

Some commentators have suggested that thebudget review must start with a debate on alimit on overall resources. However, the EUbudget represents close to just one per cent ofEuropean GDP, and this proportion hasconsistently fallen over the last 20 years. Thedanger of the budget review is not that it willresult in an unsustainably expanded budgetbut that it will fail to set clear priorities.Focusing on spending limits is to declare anartificial taboo and invites a return to theinertia of disputes around net-balancesbetween payments and receipts for individualmember states.

The budget review and upcoming financialperspective negotiations will set the outlinesof European spending until 2020. They musttherefore reflect the profound changes thathave taken place in Europe and the world inthe years since the historical lines of thecurrent framework were decided in the 1980s.

shaping the debate: delivering EU publicgoods

At €120bn a year, the EU budget is relativelysmall and needs to be a targeted mechanism,intended primarily to deliver European publicgoods. It should support projects thatproactively shape change and that provideclear additional benefits compared to actionby individual member states. It must createmaximum added value for the commonEuropean interest.

An intelligently focused EU budget can set thestandard for member state public spending topursue. It should integrate public

interventions and investments by Europeanindustry and other stakeholders. It should bedesigned to open up new businessopportunities and leverage private investmentfrom around the world. This has to happen inparticular in the fields of clean energy,resource efficiency, intelligent infrastructureand climate proofing in the poorer memberstates. The budget should also invest throughthe Neighbourhood Policy in managingclimate impacts and other risks to stability onEuropean borders.

Early investment will pay the greatestdividends. The EU can and should achievemajor shifts in structural and cohesionfunding, research and development andadaptation, all prior to 2014. Early decisionson common objectives and means shouldresult in better outcomes than those availableunder the national wish lists and politicalpressures of eleventh-hour negotiations. Thisargues for a budget reform process that isdriven by an open discussion of Europeanpriorities, and one that rigorously focuses onareas where European action adds value.

Following the positive result of the secondIrish referendum, an EU budget for 2020must reflect the evolved institutional shapeand missions of the EU under the LisbonTreaty. The treaty confirms energy and climatechange as fundamental challenges, prioritisesresearch and development, and strengthensEurope’s global role with new capacities forexternal action. No European country wouldhave realistically committed to such anambitious agenda for global influence andchange if they had not been part of the EU.Without a matching budget process there is adanger that the burden of delivery will fall onthe larger countries, and will constantly betraded off against national priorities andshort-term interests: Europe has willed theends; now it must will the means to deliverthem.

This will be undoubtedly the central challengeof the second term in office for President


climate proofing in the poorer member states,and on managing the risks to stability onEuropean borders through theNeighbourhood Policy. The CommonAgricultural Policy (CAP) must likewise focuson combining climate adaptation measureswith the protection of European public goods.

low-carbon investmentMoving to a low-carbon economy willrequire shifting trillions of Euros in the EUfrom high-carbon to low-carboninvestment. Europe will build 500-800GW of new power stations by 2030 as itreplaces its aging capacity; this will costover €1.6 trillion. Most of this will beprivate investment shaped by regulationand national policy decisions, but thereremains a clear and critical Europeaninvestment component.

The European electric grid needs to bestrengthened, modernised and extended tobring in renewable energy from the NorthSea, North Africa and Eastern Europe intomajor areas of population. A network ofcarbon dioxide transport and storage willbe needed to enable fossil power stationsto become carbon-neutral. Major newtechnologies such as bulk power storageand concentrated solar thermal power willneed to be demonstrated at a scale wellbeyond the means of any one Europeancountry.

Europe is already failing to invest in itslow-carbon plans. The ambitious StrategicEnergy Technology plan agreed in 2008remains unfunded; so do the proposedBaltic Energy Market Interconnection Plan,the Mediterranean Energy ring and theNorth Sea Offshore Wind Network. Plansagreed at Head of Government level in2007 for 12 CCS demonstration plants willonly go ahead through an independentinitiative of the European Parliament.

Barroso. In his manifesto for re-election3 herecognises the paramount importance ofreforming the EU budget to focus on genuineEuropean added value and on resolvingmarket failures. Success on reforming thebudget will be the key issue against which hewill be judged.

sustainability, energy and climatechange

Climate change is challenging the foundationsof European peace and prosperity at home andinternationally. Europe has rightly taken aglobal leadership role in tackling climatechange, and an ambitious approach candeliver multiple benefits, making Europe aworld-leader in the transition to a stableclimate and in the technologies that willachieve this. Sustainability, in Europe andglobally, with its economic, environmentaland social dimensions, must be theoverarching and fundamental goal of the newEU budget.

This entails a step change in commitments:there is little funding, and no clear place in thecurrent budget, for this century’s urgentglobal priority of low-carbon technologies.Effective connections need to be madebetween climate change and other Europeanpolicies, in particular the Lisboncompetitiveness agenda. In recognition of thescale of the climate and energy challenge, weshould move from the current model ofsupporting projects that are proposed bottom-up, towards EU-scale programmesspecifically targeted to achieve concrete andtransformational results.

The current EU budget will also need to bereformed. Today it increases rather thanreduces EU emissions, due to investments inhigh-carbon transport and energyinfrastructure, and the impact of intensivefarming practices. European structuralprogrammes should instead focus onpromoting intelligent infrastructure and

opportunity in the economic downturn

The €5 billion European Economic RecoveryPlan agreed in December 2008 by heads ofgovernment linked the urgent problem ofeconomic recovery to EU level publicinvestment in low-carbon energy.4 Similarly,President Obama’s stimulus package aims todouble US production of renewable energy inthree years, and to carry out energy efficientretrofits for 75 per cent of government officebuildings and the weatherproofing of sometwo million homes, with the creation ofnearly half a million new ‘green collar’ jobs.

In both the US and Europe, the economicdownturn has given new focus to concernsthat public and private energy researchbudgets have declined substantially since the1980s. And while many countries are nowstarting to look for exit strategies from thepublic investments made to shore up failingeconomies, there is a risk that we fail to seethe ongoing need to develop new routes outof the economic crisis. A return to high-carbon growth is not a recovery strategy but arecipe for further economic pain.

making the transition

At a time of financial crisis, revisiting how weuse the EU budget may be less difficult thanseeking political consensus for new spendingat the national level. If the reform option isnot taken, member states will effectively haveto pay twice: for climate and energyinvestments at home, plus their contributionto an ineffective EU budget.

One option would be to establish a new (adhoc and time-limited) European fund forenergy and climate security, co-financed withmember states, for the industrial scaledemonstration and market replication ofadvanced low-carbon technologies. Therevenue generated by auctioning EU emissionpermits could be one source of reliablerevenue for such a fund.


Europe in the worldEurope faces formidable challenges ofmigration, instability and poverty in itsimmediate neighbourhood: the arcrunning from Russia and the Ukraine,through the Balkans, southeast Europe, theMiddle East and the Maghreb, to Morocco.Events in these regions are likely to haveimmediate and profound consequences forEurope, and climate change willexacerbate all these problems.

Engaging and promoting stability in theseregions cannot be achieved solely withmoney, but does require adequate funds tomake a difference. These should beavailable to support the actions of the newHigh Representative and the ExternalAction Service established by the LisbonTreaty. If Europe’s policies are not seen towork on its doorstep, they will not becredible anywhere else.

Beyond its immediate neighbourhood,European action is critical in promotingstability, peace and development in Africaand other developing regions. Thecommon budget can also promote aEuropean model of human rights anddemocracy, developing the EU’sdiplomatic, peace building and militarycapacity for peacekeeping andinterventions to uphold the UN’s principleof “responsibility to protect”.

Large scale financing is also needed outsideEurope to cement a global deal to controlclimate change. Europeans will not haveclimate security unless large developingcountries such as China and India begin toreduce their greenhouse gas emissions. Thesecountries are still poor, have low per capitaemissions and have contributed far less toclimate change than Europe. Withouttransitional funding to help their move to alow-carbon economy they will not join anyglobal effort to tackle climate change.


Estimates are that Europe could have to spendaround €30 billion of a likely globalrequirement of €100 billion every year tohelp these countries decarbonise, as part of ashared responsibility with other developedcountries.5 The EU budget is a logical vehiclethrough which to fairly share these costsbetween countries.

building public support

Budget reform should be a constant process aspriorities evolve: the European Parliament hasa key role in driving this and in addressing thedeteriorating relationship between the EU andits citizens, whose increasing remoteness andhostility to common institutions reflects afailure to communicate the benefits of sharedEuropean action.

In the past, EU budget setting has been anexercise in the defence of historical politicaltrade-offs between the different vestedinterests of member states; rather than adivision of resources according to thechallenges facing Europe. The reform of thebudget must now provide a realdemonstration that European institutions areaccountable to the views of citizens. Thecurrent budget review should thereforeincorporate a Europe-wide participativebudgeting process.

In its simplest form this could involve theEuropean Parliament organising a deliberativepolling process for a representative sample ofEuropean citizens to discuss the balance ofbudget choices. This well-tested, robust andsophisticated process, which was successfullypiloted at a European scale in 2007,6 wouldallow a sample group of European citizens toengage in debates with experts beforeexpressing their preferences over the future ofthe European budget. MEPs should then takeresponsibility for engaging their constituentswith the subsequent discussions in the EUinstitutions. Member state officials and

political leaders should also have to justifytheir negotiating positions in the light of theseassessments of citizen preference.

The entry into force of the Lisbon Treatymarks the end of a divisive era of institutionalreform, achieved at the cost of a deepeneddemocratic deficit. During 2010 the EUinstitutions and member states will definetheir priorities for the next decade via the newEU 2020 strategy. In this they must rememberthat the task of reconnecting the EU to itscitizens remains urgent: for the immensechallenges facing Europe today will only betackled successfully with their support. Arefreshed EU budget that addresses citizens’concerns and involves them in shaping EUpriorities would be a direct and visible meansof earning a renewed democratic consent.

buildingbusinessconfidenceArif ShahBusiness for New Europe

In this time of great economicuncertainty, there exists an enormousopportunity to embark upon a new eraof economic growth, one that is basedon the transition to a low-carboneconomy. The EU is the world’s largestmarket, and it must have confidence inits own ability to make this transitionhappen.

As we inch our way out of the worsteconomic crisis since the great depression, theworld is presented with numerous challenges.At the top of this list is the issue of climatechange.

The EU has recognised the scale of this threat,and has been at the forefront of global effortsto establish the political frameworks andpolicy instruments necessary to tackle climatechange. It has displayed the seriousness itattaches to this issue by agreeing to theambitious 20-20-20 targets of the ClimateAction and Renewable Energy (CARE)package, and has promised to go furtherprovided that other countries take on similarcommitments. In addition, a report publishedby The Climate Institute and E3G1 revealed thatEuropean countries such as France, UK andGermany are already leading the transitiontowards a low-carbon economy: andbenefiting economically in the process.

However, far more needs to be done across theEU to secure a low-carbon transition thatwould give confidence to governments andbusiness, and play a significant role inimproving the EU’s competitiveness.Unfortunately, those facing difficult decisionsin the context of the economic crisis all toooften overlook this imperative. As such, acrucial test of the EU’s commitment will behow it uses the coming opportunity forbudget reform to demonstrate its willingnessto incentivise the low-carbon transition.

delivering on the budget review

Over four years ago, the European Counciltook the much needed but long overduedecision to launch a review of the EU budget.2

This decision was taken against a backdrop ofgrowing cynicism over the procedures, size,and allocations of the budget, as well as agenuine desire to meet the new globalchallenges posed by globalisation, climatechange, energy security and migration.

19


Arif Shah is Public Affairs Manager atBusiness for New Europe: a business-ledadvocacy think tank that supports theUK’s active engagement in Europe. Priorto this, he worked at Westminster for aMember of Parliament and a member of

the House of Lords.


As part of the same effort, the EuropeanCommission launched its consultation processon the budget in September 2007,3 whichlasted until April 2008. This wide-rangingreview promised “no taboos” and covered allaspects of the EU budget including itsrevenue-raising and expenditure plans. Its aimwas to identify how the budget can be shapedto best serve EU policies and meet thechallenges of the decades ahead.

The stakeholder inputs to the budget reviewhighlighted the deep desire for the EU budgetto focus on the challenges of climate change,energy, and competitiveness.4 But at a timewhen the EU needs to help chart the coursefrom economic difficulties to a new low-carbon economy, there has since been anunwelcome and lengthy delay in the release ofthe European Commission’s response to thebudget consultation. In doing so, theCommission has missed an opportunity tobuild the confidence of European citizens andcompanies.

positive sum negotiations?

Given the number of member states involved,developing a consensus on the EU budget is apolitically fraught and contentious process.This was highlighted by the eleventh-hournegotiations required to endorse the €862bnseven-year package for 2007-2013. Althoughnegotiations had commenced in 2003, a dealon the budget was only obtained in December2005. As a result, despite the EuropeanCommission’s attempts to rebrand thedifferent areas of the EU budget, it remainsdominated by historical areas of focus such asthe Common Agricultural Policy (CAP)(providing subsidies for farmers and ruraldevelopment) and cohesion funding (aimed athelping the new member states anddisadvantaged regions catch up economically).

While targets linked to the EU’s LisbonStrategy modernisation agenda have beenincluded, the budget fails to adequately

address the diverse domestic challengesbrought by globalisation and demographictrends, or the EU’s role in the world as apromoter of peace and security. Therefore, it isessential that the EU budget of the futureplaces investment in research anddevelopment, innovation and technologicalprogress at its core. As a recent publicationfrom the Swedish Chamber of Commercemakes clear, we have to move “from CAP tocompetitiveness”.5 The areas of environmentalprotection, climate change, and energysecurity are obvious targets for thisinvestment. All are crucial public goods thatneed to be addressed at EU level, and allprovide opportunities for a new greenrevolution.

In the political context, a focus on climate andenergy also provides a potential means ofunlocking the budget negotiations. It does soby providing a coherent area of added valuefor the budget going forward. Discussionsregarding potential areas to spend on, andthose to draw back from, can be approachedfar more positively within such a framework.

investing in European business

In this time of great economic uncertainty,there exists an enormous opportunity toembark upon a new era of economic growth,one that is based on the transition to a lowcarbon economy. The EU is the world’s largestmarket, and must have confidence in its ownability to make this transition occur.

The business community have alreadyrecognised the benefits of this, and companiesfrom a diverse range of sectors are investing ina more sustainable future. For instance,Centrica has recently built the world’s largestoffshore wind farm and will invest more than£1 billion between 2008 and 2011 to improvethe energy efficiency of its customers’ homes,while Eurostar has pledged to cut carbonemissions by 35 per cent per passenger by2012. We highlighted these and other success


stories in July 2009 in a collection ofviewpoints from leading UK business leadersentitled A Climate Mission for Europe: Leadership &Opportunity.6

But business cannot ensure the low-carbontransition by itself. A coherent EU policyframework and targeted financial support willare needed. Therefore, we want to see urgentprogress made on the budget review. Theviews of UK business on this matter were setout in our report A Budget for Business.7 Amongstother factors, the report highlighted the factthat business provides the tax revenues that gotowards funding the EU, and delivers theeconomic growth that underscores the bloc’slong-term success. As such, business has alegitimate interest in seeing the EU budgetspent wisely. The report helped develop a clearconsensus, with a call for the followingthemes to be part of any reform of the EUbudget:

1. Greater expenditure on policy priorities isneeded to tackle the challenges ofglobalisation, in particular climate change andworld poverty, thereby cementing the EU’sleadership in these areas;

2. A focus on the EU's competitiveness vis-à-vis emerging economies, with a specialemphasis on the need to invest in skills, aswell as research and development (investing inmeasures that help complete the Lisboncompetitiveness agenda, especially in financialservices, telecoms and energy);

3. The CAP should represent a much smallerpercentage of the overall budget in bothabsolute and relative terms. More than a thirdof the current budget is spent on a sector thatmakes up just two per cent of economicactivity and five per cent of employment inthe EU. The CAP is expensive and wasteful.Moreover it has a damaging effect on themarkets of the poorest regions of the world;

4. The budget should be capped at its currentlevel; and

5. There should be no major changes in thecurrent revenue-raising arrangements.

Such an approach would, in our view, help theEU engage with the business community inpursuit of our shared goals for the future,delivering an ongoing framework for agreener, low-carbon economic recovery.

economic recovery, from Europe to theworld

At the global level, world leaders gathered atthe G20 meeting in London in April 2009pledged to “make the best possible use ofinvestment funded by fiscal stimulusprogrammes towards the goal of building aresilient, sustainable, and green recovery. Wewill make the transition towards clean,innovative, resource efficient, low carbontechnologies and infrastructure.”8

The EU has been a clear leader in thistransition with its €200 billion stimuluspackage, announced in November 2008,dedicating a significant proportion ofresources to green programmes. This includedmeasures such as the re-programming ofstructural funds to devote a greater share toenergy-efficiency investments, reduced VAT forgreen products, national funds for the autoindustry to speed the development of greenervehicles, and increased investment in energyinfrastructure, renewables and carbon captureand storage technologies.

While this symbolised that the low-carboneconomy has become a priority for Europe,progress within the EU budget will play a vitalrole in the continent’s long-term response tothe test posed by climate change.

making the spending transition

In the EU budget of 2009, 45 per cent (€60billion) of the €134 billion expenditure wasdedicated to research, innovation,


employment and regional development. Thisamount included €12 billion in funds forresearch, and €0.5 billion (an increase of 22per cent from the previous year) for the EU'sCompetitiveness and Innovation programmeto finance sustainable technologies, in order toenhance competitiveness and aid the transitionto a low-carbon economy. These trends willcontinue during 2010, with Trans-Europeantransport and energy networks seeing theirfunds increase by 10 per cent.

Yet, in late 2009 the European Commissionoutlined the need for a threefold increase infunding for energy research over the nextdecade.9 The plan would allocate €6 billionfor wind energy, €16 billion for solar energyand €9 billion for bio energy research.Furthermore, €2 billion would be earmarkedfor a smart grid system while €13 billionwould go towards Carbon Capture and Storagefor 12 pilot projects.

While the EU budget cannot be expected tobear the burden of this expenditure on itsown, it would represent a far more effectiveuse of resources when compared withspending on the priorities of yesteryear, suchas the CAP. There is widespreaddisillusionment, particularly within thebusiness community, about the enormousamounts poured into this area, which deliversvery little in return.

conclusions

With a decision on future budgets around thecorner, the EU must decide on a potential shiftin resources. The stakeholder responses to theEuropean Commission’s consultation on thebudget review were clear: the top priorities foraction must be climate, energy andcompetitiveness. It was recognised thatspending on cohesion policy needs to be re-examined and concentrated on the mostdeprived areas, instead of serving as aredistribution mechanism within richermember states. Similarly, CAP spending was

clearly identified as an area where spendingcuts should take place.10

A ceiling has already been implemented onfinancial resources for the CAP in the currentbudget framework, and we believe the nextmulti-annual EU budget must set a clearcourse for a transition from agriculturalsubsidies to increased funding in support ofEU goals on climate mitigation and adaptationthat impact rural and agriculturalcommunities. The savings made can be moreefficiently reallocated towards funding energy,climate, research and other initiatives whichwould see Europe move more quickly alongthe path to a green economy, catalysinginvestment from the private sector andbuilding confidence across the continent.

While climate change is often called thegreatest challenge, the transition to a low-carbon economy presents the greatest ofopportunities for our generation. We cannotafford to ignore either, particularly within thecontext of the EU budget.

23

the big win withinreach: energyefficiencyDavid OrrNational Housing Federation and CECODHAS-Housing Europe

Investments in improving the energyefficiency of the EU’s existing housingstock make economic, social andenvironmental sense. All we need now isfor the EU to turn policy logic into Eurosand ensure the right financial andlegislative incentives are in place tosupport the big retrofitting drive ahead.

The climate agenda during 2009 wasdominated by the preparations for the UNnegotiations in Copenhagen. The EU aimed toplay a leading role using its commitment to aminimum reduction of carbon emissions by20 per cent by 2020 as an indication of itsown ambition.

Yet the EU’s headline commitments require onthe ground delivery to provide a truly credibleexample of its international leadership. Andthere is no more pressing area for action thanenergy efficiency; an area that has seengrowing EU legislation but limited EUspending.

That’s why we at CECODHAS-Housing Europepublished our own ‘CopenhagenCommitment1’, setting out how we can helpdeliver a step change in EU action on energyefficiency in the housing sector. Contrary toother carbon intensive sectors, the technicaland institutional solutions have beenidentified, and all that is needed to trigger thistransformation are the right financialincentives.

The housing boom of the last two decadesresulted in urban sprawl and house priceincreases while locking in inefficient energypractices. Now the EU needs to see aretrofitting boom that will deliver sustainableeconomic growth and job creation, fightclimate change, improve living conditions andincrease the affordability of housing.

But such an approach will requireconsiderable up-front financing. Coming upwith this ready cash will call for creativethinking that may take EU budget planners,financial institutions and energy utilitiesoutside their traditional comfort zones.Without financing, EU action on energyefficiency will remain stuck at the level ofaspiration, with no prospect for delivery.

This chapter therefore looks at how thepolitical vision of the EU must be backed upby a sufficiently radical mobilisation of

section twospending the budget better

David Orr is Chief Executive of theNational Housing Federation in England,and President of CECODHAS-HousingEurope, the European Liaison Committeefor Social Housing. He also sits on theboard of The Housing Finance

Corporation. He is a member of the Social InvestmentTask Force, which supports the development of socialinvestment in the UK.


resources from the EU budget to leverageequivalent budget shifts at national and locallevels throughout the EU.

The delayed budget review is the primeopportunity for EU leaders to ensure that EUfunding serves as a catalyst in the low-carbonenergy transformation, and that their policyleadership on climate change has a positiveimpact on the ground in the short term.

investment in housing and energyefficiency is a win-win-win option

Investments in improving the energyefficiency of the EU’s existing housing stockmake economic, social and environmentalsense. It is also the best way of engaging andempowering citizens in the still too abstractissue of climate change.

Although housing policy is a local issue andnot strictly speaking an EU competence,energy security and climate change mitigationare key EU public goods, with growing EUresponsibilities. The residential sector andcommercial buildings account for 40 per centof the EU’s total final energy use and carbonemissions,2 with 67 per cent of energyconsumed in buildings in the residentialsector. The sector also has significant untappedpotential for cost-effective energy savingswhich, if realised, could mean that in 2020the EU will consume 11 per cent less energy.Additionally, this does not take into accountthe potential of housing as an energy producerthrough the installation of renewable energygeneration.

Radically reducing the energy consumption ofEurope’s social and cooperative housingsector, which accounts for 25 million units or12 per cent of the residential stock in the EU,is the logical step to take to trigger an energytransformation across the entire residentialsector. In our Copenhagen Commitmentmanifesto, we detail how in the period 2010-2020 we can increase the annual eco-efficient

refurbishment rate to four per cent (theequivalent of 800,000 units) in Europe’ssocial and cooperative housing stock alone.

In addition to the energy savings andreductions in carbon emissions that wouldcome from such an investment, there wouldalso be profound social benefits. Energyefficiency projects can be deployed rapidly,creating labour-intensive sources ofemployment and local economic spin offs. Wecalculate that this would create 200,000 jobsper year directly, with an additional 140,000jobs indirectly created at local level.

Additionally, the inhabitants of newlyretrofitted energy efficient properties thenbenefit from the resulting reduction in energypoverty, a key cause of bad health and socialexclusion. National treasuries likewise benefitfrom a corresponding fall in the need forenergy poverty relief payments and directenergy subsidies.

All of these positive outcomes makeinvestment in energy efficiency a logicalpolicy choice, but the reality of the up-frontfinancing barriers means it is yet todemonstrate its potential at mass scale. Theestimated total annual investment requirementfor the retrofitting and renovation boomoutlined above is €16 billion,3 with publicfinancing required to kickstart the largerprivate investments that will deliver thischange.

turning policy logic into Euros

To date, the most visible outcome of EUenergy efficiency policy is increasedlegislation: one element of the 2008 ClimateAction and Renewable Energy (CARE) packagewas an effort-sharing agreement for carbonemission reductions in sectors includinghousing that are not covered by the emissionstrading scheme (ETS). Energy efficiency inbuildings was also a priority identified in the2006 Energy Action Plan with the largest cost


effective savings occurring in the residentialsector; a number of implementing measuressuch as the Energy Performance of BuildingsDirective (EPBD) then followed. We also havethe End-use Energy Services Directive, theRenewable Energy Directive, and theEcodesign of energy-using products directive.However, without the addition of an over-arching and binding target for energyefficiency and the right financial instruments,legislation alone will have a slow and limitedimpact. The EU has therefore also introduced anumber of financing opportunities, whichaim to help deliver these objectives.

In parallel to the EPBD, increased funding hasbeen made available for know-how and best-practice exchange initiatives, research inconstruction and refurbishment methods andmaterials and, more recently, eco-efficientrefurbishment works and the incorporation ofrenewable energy in existing buildings. This

financial support is channelled through arange of funding programmes managed atEuropean level such as the Intelligent EnergyEurope programme, the European ResearchFramework and through nationally managedfunds such as the European structural funds(primarily the European RegionalDevelopment Fund (ERDF) and the EuropeanSocial Fund (ESF)). In addition Europe’sfinancial institutions, active in all memberstates, in particular the Council of EuropeDevelopment Bank (CEB) and the EuropeanInvestment Bank (EIB), have also beenadapting their products and services to theenergy efficiency ‘market’.

Although in need of development, thecontribution of carbon-trading and efficiency-based market mechanisms promoted throughEU law also stands to have an impact at locallevel. Following the revision of the ETS in the2008 CARE package, auction revenues from2013 onwards can be used for efficiencymeasures, while ‘white certificate’ systems canbe implemented (whereby certificates whichprove energy reducing refurbishment has beencarried out can be auctioned or sold as amarketable good). But these policyinstruments remain optional under EU law.There is significant room to increase pressureon member states to turn these options intosubstantial future funding streams to supportthe energy transition on the ground.

EU structural funds

But in the short term, structural funds have akey role to play in greening national andregional spending programmes and serve as alever for the release of additional public andprivate funds. All three of the structural fundshave the potential to contribute to sustainableenergy actions although energy efficiency isonly one of their priorities and, until recently,housing retrofit projects were not eligible forERDF in the EU15 member states.

EU project funding The Intelligent Energy Europe (IEE)programme is managed by the EuropeanAgency for Competitiveness andInnovation (EACI), an executive arm of theEuropean Commission. Between 2007 and2013, the IEE programme budgetamounted to €730 million, increasingfrom €88.3m in 2009 to €150m in 2013.In 2009 approximately 25 per cent of thebudget has been allocated to the buildingsector.

The aim of these IEE projects is to unlockthe potential for energy efficiency inbuildings, appliances, industry, transportand cities, with over 400 projects fundedto date. CECODHAS-Housing Europe hasreceived an IEE grant to ensure that theresults of the completed projects areactively shared with its 20,000 affiliatedlocal social housing organisations in aninitiative entitled POWER HOUSE EUROPE.


As part of the European Economic RecoveryPlan agreed in April 2009, an amendment tothe regulation on the ERDF was adoptedstating that energy efficient refurbishmentsand the use of renewable energy in existinghomes can now benefit from up to four percent of each member state’s ERDF allocation,while new member states are allowed toallocate up to six per cent to these projects.4

The ERDF can consequently co-financenational, regional and local schemes related tothe insulation of walls, roofing and windows,solar panels, and replacement of old boilers.Existing data reveals that currently only 0.23per cent of the funds are being used forenergy efficiency measures, with only 0.77per cent being used in the EU12.5

The proposal aims to contribute to socialcohesion by supporting in particularvulnerable groups at risk of energy poverty, asdefined by member states. There is noadditional funding, however, which meansthat this new measure requires a shift in thepriorities set at regional level. It is now up tomember states and their national and regionalauthorities to decide whether to make use ofit or not.

There is, however, much more that can bedone via structural funds. In its opinion on theEPBD, the European Parliament called for asignificant increase in the maximum amountof European regional development allocationthat may be used to support energy efficiencyincluding district heating and cooling andrenewable energy in housing.6 In addition, theParliament also proposed that by 2014 at thelatest there should be established a dedicatedEnergy Efficiency Fund based on contributionsfrom the Community Budget, the EIB andmember states for energy efficiency andrenewables in buildings.

financial institutions adapt to theefficiency agenda

The reinforcement of energy and climatechange objectives and the ongoingstrengthening of the EPBD have led Europe’sfinancial institutions to adapt their productsand services to changing political priorities.They have recognized the considerable lendingopportunities in the required improvement ofthe energy performance of housing and socialhousing and this area has become a prioritytarget.

In collaboration with the EuropeanCommission, the EIB has recently launchedthe ‘ELENA’ facility, with €15 million ofEuropean Commission funds for localauthorities for financing their costs associatedwith the development of municipalinvestment projects or programmescontributing to the overall EU energy targets.ELENA is also funded by the Intelligent EnergyEurope (IEE) programme and will contributeto technical assistance costs related to eligibleinvestment projects, such as retrofitting ofpublic and private buildings, sustainablebuilding, energy-efficient district heating andcooling networks, or environmentally-friendlytransport.

linking structural funds with Europeanloans – the Estonian example One leverage option for structural funds isto combine ERDF funding with loans fromDevelopment Banks. This system has beenactivated in Estonia where a centralrevolving fund consisting of funds fromthe ERDF and loans from the Council ofEurope Development Bank has beencombined with assistance from thenational housing fund to provide aguarantee and funding source providinglong term low interest loans tohouseholders through local commercialbanks. The guarantee means that nocollateral is needed.

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next steps: increasing ambition

As we consider the intertwined future of theEU’s climate policy and its budget, two thingsare clear. The first is that current fundingapproaches, although substantial, will notcover the up-front costs required to meet theEU’s energy efficiency potential. Targetedfunding at a different scale will be required toleverage investments across the EU.

The second is that there is no longer room fora pale-green EU budget. Every Euro ofEuropean taxpayers’ money must be used tocontribute to a further greening of theeconomy and not as a life-support machinefor outdated and environmentally and sociallydamaging sectors. The next EU budget mustpropose innovative and groundbreakingapproaches to facilitate this eco-efficientrefurbishment boom and complement andimprove existing funding and financingfacilities.

While in the longer term the energy efficiencytransition can be financed in part via the ETSand the development of other marketmechanisms such as white certificates, in theimmediate term action via the EU budget isrequired to catalyse action in support of the2020 targets.

Alongside a range of policy and regulatoryinterventions required to provide a coherentframework for energy efficiency investment,the EU needs to:

• Set a clear framework for energy efficiencyinvestments via the revised Energy EfficiencyAction Plan, Post-Lisbon Strategy, and the EUbudget, detailing how funding will bedelivered from member states;

• Encourage EU member states to revise theirERDF operational programmes and ensure thatfull use is made of the allocation of up to 4per cent of funds for energy efficiency andrenewables measures in social housing;

• Use the budget review and negotiation ofthe next financial perspectives to substantiallyincrease this allocation to energy savingprojects, including renovation, district heatingand cooling, and renewables. As a means ofmobilising private funding, renovations thatdo not increase energy efficiency should notreceive EU funds.

By addressing the existing EU budget andpreparing for the next one, the EU can putitself into position to truly deliver on itsenergy efficiency goals. In doing so it canactivate its cities and citizens to grasp this bigwin within reach.

climate, cohesion,and delivering EU value Keti Medarova-BergstromCEE Bankwatch Network andFriends of the Earth Europe

The current economic crisis, soaringunemployment and the threat of climatechange are all challenges for whichEurope needs new answers: high carbongrowth is no longer an option. Cohesionpolicy needs an urgent reform to lead the transition towards the low-carbondevelopment of the EU into the longer term.

European Union cohesion policy and itsstructural instruments – so called structuraland cohesion funds – account for around onethird of the current EU budget. At €347billion over the period of the current 2007-2013 financial perspective,1 they are nowroughly equal in size to spending on theCommon Agricultural Policy (CAP),historically the largest spending line in the EUbudget.

The financial support they provide is aimed ataddressing regional disparities across the EU,providing a majority of public financing incohesion countries.2 Importantly, EU fundshave a strong leverage effect via national co-financing and additional loans frominternational financial institutions (IFIs) suchas the European Investment Bank (EIB). Theyalso help attract private investments byunlocking business opportunities, givingcredibility to projects and fosteringinnovation. In other words, the way EU fundsare used in these countries largely determinestheir economic development path.

Much as it did 20 years ago, cohesion policystill focuses mainly on economic andinfrastructural investments to address regionaldisparities and deliver economic growth. Butthis traditional formula is increasingly beingquestioned. The current economic crisis,soaring unemployment and the threat ofclimate change are all challenges for whichEurope needs new answers: high carbongrowth is no longer an option.

Importantly, the use of EU funds has recentlyassumed a new role as a favoured anti-crisisstimulus measure and progressive proposalshave been made to ensure that these funds notonly deliver economic recovery in Europeanregions but also facilitate the transitiontowards an eco-efficient and low-carboneconomy.3 It is imperative that such a shift inemphasis does indeed take place. This chapterconsiders how such an approach can be takenforward.


Keti Medarova-Bergstrom was coordinatorof the EU funds campaign at CEEBankwatch Network and Friends of theEarth Europe, advocating for greenerspending in cohesion policy and theprevention of environmentally harmful

projects supported by EU public funding. She joined theBrussels office of IEEP at the close of November 2009.


the changing climate for cohesion policy

The European Commission’s fourth progressreport on cohesion in 2006 identified climatechange as one of the key challenges forEuropean regions. Moreover, the 2008 report‘Regions2020’4 stated that climate change willhave acute territorial impacts. Certain regionsand territories, such as mountains and coasts,will bear severe negative impacts not only fortheir economic development but also on theirnatural ecosystems and the quality of life oftheir citizens.

Investments will obviously be required tomitigate carbon emissions but must alsoaddress adaptation measures related todrought, heatwaves, forest fires, coastal erosionand flooding. Indeed, the 2009 independentBarca report on the future of cohesion policygoes further, highlighting that the cost of theseimpacts will be mostly borne by alreadydisadvantaged regions, leading to furtherexacerbations of existing economic disparities.5

While the territorial aspects of climate changeare now being recognized, EU spending is stilllagging far behind in addressing thesechallenges.

In 2008, the EU adopted the Climate Actionand Renewable Energy (CARE) Package, whichsets targets for emission reductions andincreases in the share of renewable energysources. Significant financial investment will berequired, especially in new member states. Inthis respect, EU funds could play a crucial rolein ensuring effective delivery of EU climatepolicy at national and regional levels.

state of play

When the overarching priorities for cohesionspending were finalised in 2006, it was agreedthat it should deliver more than just economicdevelopment: “the objectives of the Funds shallbe pursued in the framework of sustainabledevelopment and the Community promotionof the goal of protecting and improving the

environment.”6 Similarly, the regulations forthe European Regional Development Fund(ERDF)7 and Cohesion Fund8 include specificprovisions that make possible the financing ofclimate mitigation measures such as energyefficiency, renewables and clean transport. TheCommunity Strategic Guidelines on CohesionPolicy9 further underlined the possible synergyeffects of pursuing economic growth togetherwith environmental protection.

However, cohesion policy does not have adedicated category of expenditure on climatechange, nor a comprehensive integratedapproach to mainstreaming it in othercohesion policy interventions. Furthermore,climate adaptation measures are entirelymissing from the regulations guiding the useof EU funds.

Analysis of the 2007-2013 EU fundsallocations10 show that measures such asenergy efficiency and renewable energy receivea meagre 2.6 per cent of all funds, despite thefact that these two measures are listed amongthe 12 Lisbon Strategy priorities.11 Meanwhile,nearly 12 per cent of EU funds subsidisemotorway and other road investments that aremore likely to intensify climate change andlock countries into carbon intensive paths ofdevelopment.

Indeed, between 2000 and 2006 EU fundscontributed to the growing emissions of thethen biggest recipients of the cohesion policy:Spain, Portugal, Greece and Ireland.12 Thesimilar ‘business as usual’ spending takingplace in new member states between 2007 and2013 is therefore likely to perpetuate the samerising trend in carbon emissions instead ofreversing it.

Furthermore, experience in new member statesshows that many of the major projectssupported with EU funds are often based onlocal political preferences or archaic plansrather than on a rigorous assessment of costeffectiveness, available alternatives andenvironmental impacts13. In the 2007-2013


The most acute example is Estonia. Here,railways and public transport investmentswere prioritised in the 2007 allocations, butEU funds have since been shifted to fund anincrease of up to 64 per cent for roadconstruction measures. If similar actionsfollow in other countries, high-carboninfrastructure developments pursued as anti-crisis measures will easily wipe out theemissions benefits from investments in cleanenergy and energy efficiency measureselsewhere.

improving the existing budget

When the current operational programmeswere proposed by member states and adoptedby the European Commission, climatemitigation and adaptation did not feature as apriority. But the economic crisis has openednew opportunities to take the low-carbonpathway. Given the current economicuncertainty, the European Commission mustdemonstrate its leadership role by addressingspending already within the current 2007-2013 budget ensuring that member statesupdate their operational programmes toreallocate funding for energy efficiency andrenewable energy.

Additionally, the European Commissionshould require that member states developroadmaps for low carbon development,identifying opportunities for low-carbonpathways that can catalyse wider regionaltransformations. Member states should usefunding from the technical assistance budgetlines to develop these plans at regional ornational levels. These should assess the specificimpacts of climate change on a given territoryand identify investment needs for mitigationand adaptation as well as opportunities forgreen businesses, technological innovationand green jobs. Ultimately, these roadmapsshould serve as the basis for targetingspending over the next few years and informthe planning of EU budget support for thenext budget period post-2013.

financial perspective the transport projectssupported by the Trans-European TransportNetwork (TEN-T) give priority to road (€40billion) and aviation (€1.9 billion). It isimportant to note that the transport sectorremains the only sector in the EU for whichcarbon emissions are still on the rise, havingincreased by 32 per cent between 1994 and2004.14 Meanwhile the rehabilitation andupgrade of the EU’s rail infrastructure and thedevelopment of clean urban transport remainunderfinanced.

It is therefore clear that the objectives of EUcohesion policy and the principles on whichthe structural and cohesion funds are allocatedmust be dramatically reformed. There is anurgent need for EU spending to stimulate thede-carbonisation of the economy and unlockprivate-sector investments that work inharmony with, rather than at the expense of,the natural environment.

The economic crisis has opened a window ofopportunity to change the role of EU funds.Following President Barroso’s rhetoric on“smart spending” for low-carbon recovery, DGRegional policy has put forward a series ofprogressive proposals for changes in the EUFunds regulations. These would allow memberstates to channel EU funding into energyefficiency and renewable energy projects inhousing. But no additional EU funding hasbeen made available for these measures. Thechanges in the regulations simply allow forshifts within and across existing operationalprogrammes. This means that member stateswill have to take from another spendingcategory in order to reallocate the funds.

Already, the signs are not promising. In early2009, as part of its response to the economiccrisis, the EU adopted changes to simplifyspending procedures, and speed up, and front-load investments in major infrastructureprojects.15 There is evidence that new memberstates in particular are tempted to channel EUfunds into such developments, butunfortunately still focus on high-carbon ones.

the urgency of forward reform

The next multi-year framework for the EUbudget is scheduled to run from 2014 to2020, drawing it directly into line with theestablished timeline for the targets of the EUCARE package. The future EU budget will alsobe in line with the new EU 2020 strategyproposed by President Barroso as the successorto the Lisbon Strategy for growth and jobs.Based on Barroso’s proposed politicalguidelines for the new Commission, the newstrategy will seek to enhance the creation of a‘competitive, connected and greenereconomy’16. It is imperative EU funds helpunlock the EU’s urgent transition towards alow-carbon economy, requiring momentumfor change throughout the upcomingnegotiations on the EU budget and cohesionpolicy.

We propose five key approaches that shouldinform such a strategy:

1. from redistribution and economicgrowth to low-carbon developmentStructural and cohesion funds havetraditionally had a redistributive function,providing financial resources to overcomedisparities between the poor and the richregions of the EU. Currently, EU funds are alsomeant to deliver growth and stimulatecompetitiveness in European regions byearmarking 60-75 per cent of all funding tothe Lisbon Strategy objectives.

Cohesion policy needs a new overarching goalthat ensures a focus on improving thewellbeing of Europe’s citizens and stimulatinglow-carbon development within ecologicallimits. The allocation criteria for cohesionfunding need to be expanded to includeenvironmental and social needs and spursynergetic solutions. Furthermore, low-carboninvestments will not only contribute toemissions reductions but also reap otherancillary benefits: a double dividend for socialcohesion and economic development. Suchbenefits include reducing energy bills,


creating new employment and businessopportunities, and spawning innovation inlow-carbon technologies. In many regions, EU funds will play a crucial role in unlockingthese opportunities and attracting additionalprivate investments for a smooth transitiontowards a low-carbon economy.

2. make climate mitigation andadaptation priority spending areas infuture cohesion policyThe next wave of EU funds will need toearmark spending that will assist cohesioncountries in reaching the targets of the CAREpackage, and eligibility for funding should bemade conditional on tackling them. Dedicatedinvestments in climate adaptation at regionaland local levels will likewise need to besecured to ensure resilience of entireeconomic sectors, communities andecosystems.

EU funds should also be made available forcapacity-building measures such as training,education, awareness-raising and skilldevelopment for environmental sustainability,climate change and ecosystem services. Theestablishment of best practice networks inlocal and regional administrations should bealso supported. Such measures will improvethe absorption capacity for climate projectsand foster innovation.

3. climate-proof other cohesion policyinterventionsClimate mitigation and adaptation measuresneed to be mainstreamed across cohesionpolicy programmes and in projects at eachstage of planning, design, implementation andmonitoring. EU funds can require this throughapproaches like eco-conditionality and eco-compatibility. Measures that fuel climatechange instead of tackling it should beabolished from the cohesion policy portfolio.

Similarly, new indicators should be integratedin the overall monitoring systems of EUfunded programmes and projects. Bestpractices such the French NECATER carbon


evaluation tool17 should be shared and appliedin other countries where possible. Existingapproaches such as Strategic EnvironmentalAssessment (SEA), Environmental ImpactAssessment (EIA), and cost-benefit analysisshould integrate climate mitigation andadaptation needs to provide rigorousassessment of alternative solutions and ensureadequate measures are taken. An explicit rolein providing ‘climate proofing’ technicalassistance to JASPERS18 should be granted.

4. carry out regular and rigoroussustainability evaluationsA recent European Environment Agency (EEA)study found that many evaluations of EUcohesion policy focus on the level of spendingor the distribution of investments betweensectors within a country, but provide noevaluation of the actual effectiveness andimpacts of the measures themselves. Overall,the study argues that evaluations fail to informdecision-making and they are not properlyembedded into the spending cycle.19

Sustainability evaluations are an integral partof a ‘sustainability management system’,which delivers support for and legitimizationof decision-making while being a vehicle forsocial learning.20 Their deployment incohesion policy needs to be strengthened toimprove the link between public spending andclimate change action.

5. ensure better transparency and theparticipation of environmental actorsTransparency and participation in decision-making, implementation and evaluation areessential elements of healthy democracy andgovernance for sustainable development. Dueto the complex multi-level system of sharedmanagement of EU funds programmes andthe volume of supported interventions, theresponsibility for publicity and transparency isassumed to lie in member states. The EuropeanCommission, however, has co-decision powerover major projects and therefore must accepta much stronger responsibility in ensuring thepublication of a project’s content, feasibility,and environmental and climate impacts before

a decision is reached. In this respect, EUfunded projects are lagging far behind thetransparency standards of IFIs like theEuropean Investment Bank, which have beencriticised heavily for years for their secretivedevelopment project loans.

conclusions

There is a clear and urgent need for climatechange mitigation and adaptation imperativesto be addressed across European regions. TheEU has already committed to concrete targetsfor emission reductions and renewable energywithin the EU CARE package. EU heads of stateand government in their December 2009Council conclusions gave a fresh mandate tothe European Commission to seek a ‘newapproach’ to the long term development of theUnion and called for a shift towards a ‘safe andsustainable low-carbon and low-inputeconomy’. At the heart of this effort will be theEU’s actions on budget reform. It is imperativethat the EU commits significant spending tomake sure that these aims are met and resultsare delivered.21

The economic crisis has created momentumfor progressive proposals that EU funds canfacilitate a greener recovery. There is anopportunity to go further, with EU fundshelping to lead the transition towards low-carbon development in the longer term forthose countries and regions which will moststruggle to reduce carbon emissions or adaptto climate impacts. This would be a positivealternative to the continuation of existingcohesion spending.

Decisions taken now will determine howEuropean taxpayers’ money will be spent up to2020. A continuation of high-carbon spendingwould be indefensible. The low-carbonopportunity must be grasped with both hands.

transformingtechnology,deliveringdecarbonisationGiles DicksonAlstom

If the EU is going to meet its climatechange and energy security goals, it isessential that power generation inEurope is decarbonised: transformed todeliver only low-carbon forms ofelectricity.

Over half of Europe’s electricity is generatedby fossil fuels, and the power sector accountsfor around one-third of the EU’s carbonemissions. If the EU is going to meet itsclimate change and energy security goals, it isessential that power generation in Europe bedecarbonised: transformed to deliver only low-carbon forms of electricity.

Action to do this must proceed quickly. Notonly does the power sector account for farmore carbon emissions than any otherindustrial sector, it is also relatively easier for itto reduce them. There are a number of ways ofgenerating low-carbon electricity, but relativelyfewer low-carbon options for the productionof, for example, steel, cement or chemicals.Furthermore, the demand for low-carbon forms of electricity is set to increase as a means of reducing Europe’s dependence on fossil fuelimports and increasing its energy security.

But the timeline for this decarbonisation isshort. In the UK, the independent Committeeon Climate Change has recommended that thepower sector should be almost entirelydecarbonised by the year 2030.1

new investments needed

Decarbonising the power sector will requirehuge investments in new technologies, plantand infrastructure.

in new technologiesMany low-carbon energy technologies (wind,solar, biomass and carbon capture and storage(CCS)) have already been developed, withsome already available to the market. But all ofthese require further research and development(R&D) to optimise their performance anddrive down costs. Other technologies, such asgeothermal, tidal and wave, are less developedand require further significant R&Dinvestment. All of these technologies, oncedeveloped, then need to be demonstrated atpre-commercial or commercial scale, ahead oftheir wider deployment.

33


Giles Dickson is Vice President forGovernment Relations in Europe in AlstomPower. He leads Alstom's advocacy onenergy and environment policy in Europe.Previously for 16 years he was a UKGovernment official where he worked

mostly on EU business.


in new plant Low-carbon technologies, once developed anddemonstrated, then need to be deployed on amassive scale across Europe in industrial-sizeinstallations. This will require both theconstruction of new plant and the retrofittingof clean technologies. Much of this investmentwill have to happen anyway as a large part ofEurope’s existing power generation capacity isnearing the end of its working life and needsto be replaced.

in new infrastructure But new clean plant on its own will notdecarbonise power generation. Low-carbongeneration capacity will need to be physicallyconnected to the grid. And the grid itself willneed to accommodate their potentially morevariable electricity production alongside othermore traditional forms of generation. This willrequire major investment in networks, and thedevelopment and deployment of newtechnologies to store electricity and adjustinputs to the grid from different sources.

how much required?

The total cost of these investments is hard togauge. The European Commission’s recentCommunication on Financing Low-CarbonTechnologies2 estimates that Europe needs toinvest an additional €50 billion by 2020 inthe R&D, demonstration and early markettake-up of clean energy technologies. But thatalone is not sufficient: the same paperestimates the total combined investment needsfor wind, solar, energy networks, bio-energy,CCS, nuclear fission and smart cities are €75 billion.

Beyond that, there will remain the challengeof rapidly deploying these technologies at thescale required to impact soon enough onemissions while ensuring security of supply.This will require huge further levels ofinvestment, mostly in the private sector butwith public action driving and incentivisingthose investments.

The European Commission estimated in itsstaff working document3 accompanying theCommunication on the Second StrategicEnergy Review4 that the total energyinvestments required in the EU by 2020 wereexpected to cost around €400-435 billion.Independent research by Cambridge EnergyResearch Associates (CERA) draws a similarconclusion. CERA have estimated that theaverage annual cost of investment in cleanenergy technologies in Europe between 2009and 2020 will be €35 billion (in nominalcapital expenditure (capex) terms).

who will fund these investments?

the role of the public sectorMost of these investments will be expected todraw a commercial return and the privatesector will bear the burden of funding most ofthem. But the public sector will need to makesizeable investments itself, in each of the areasof R&D, technology demonstration, and earlymarket take-up and commercialisation.

R&D in low-carbon technologies entails a levelof technology and commercial risk that meansit cannot be delivered by private investmenton its own, certainly not in the timeframerequired. Public support for R&D is a well-established principle long recognised by boththe EU and national governments in Europethrough their significant investment of publicfunds in the EU Framework Programmes andnational R&D activities.

The demonstration of clean technologies atindustrial scale will in most instances not be acommercially viable proposition for theprivate sector. The costs of the technology willbe higher than the currently available high-carbon alternatives; although costs should fallonce clean technology is being deployed on awider scale. But even at this stage oftechnology development there will continueto be a technological risk that industry will beunwilling to bear on its own. Both the EU andsome national governments have recognised

this through the funding they have committedto the large-scale demonstration of CCS, forexample.

The third stage of early market take-up andcommercialisation of the relevant technologiesmay also require additional public financialsupport. The existence of feed-in tariffs inmost member states to support thedeployment of renewables is testament to this.In such cases, support is required during theinitial period in which costs are still falling,prior to a point where they can be covered bythe return on a purely commercial investment,including income generated from the carbonprice.

the role of the EUThe decisions on how this burden of publicinvestment will be shared between EU andnational authorities will in part be driven bythe political interests that inevitablyaccompany budget discussions. We take theview that the EU will need to bear asignificant part of the financing responsibility,for the following reasons.

Europe’s collective R&D and demonstrationefforts are more effective if they arecoordinated at EU level, avoiding theduplication of national efforts. This impliesboth coordination of EU input in the R&D anddemonstration of low-carbon technologies,plus sizeable support from the EU budget.

Additionally, the fruits of both R&D anddemonstration in low-carbon technologiesneed to be shared as appropriate acrossEurope. The EU has a key role to play indisseminating the resulting knowledge so that all member states benefit from it. In this,the EU needs to take further what it hasalready started in efforts like the EU CCSdemonstration programme. Such knowledge-pooling and sharing activity requires EUinvestment.

In the same vein, the early commercialisationand market take-up of some of the keytechnologies may require a small number ofselected large-scale investments in plants that,to begin with at least, are not commerciallyviable. Such investments should becoordinated at EU level, to avoid duplication,and ensure the right geographical andtechnology spread. The EU will be betterplaced than member states to provide thenecessary financial support for these strategicinterventions.

Finally, many of the public investments in theinfrastructure required to support adecarbonised power sector will by definitionbe cross-border. Again, the EU is better placedthan member states to support investmentssuch as interconnections linking electricitynetworks across Europe. The existing TEN-Eprojects and the funding from the EuropeanEconomic Recovery Plan are a step in thisdirection, but concerted action at a larger scalewill be required over the coming decades.

how far will the ETS support theseinvestments?

The carbon price delivered by the EUEmissions Trading Scheme (ETS) will help toincentivise much of the private investmentrequired in new plant and infrastructure.However, it is not yet enough on its own todrive the huge scale of investments neededover the next ten years. Current evidence bearsthis out. Worryingly, the amounts invested in new plant in the power sector across Europe in 2008 fell significantly shortof the €35 billion annual investments assessedas necessary by CERA.

But the value of the ETS will not solely bedelivered via its price signal. The significantincrease in the auctioning of allowances inPhase III of the ETS from 2013 will deliverrevenues that could in principle support someof the public investment that has beenidentified as necessary. But these revenues will



be national not European, and are thereforeunlikely to support the European investmentsidentified above.

Indeed, given the current fiscal climate it isunclear how far auction revenues will even beable to support the public investments in cleantechnology that are required at national level.

what support does the EU budgetcurrently provide?

The EU budget already provides significantsupport for the development of clean energytechnologies. In the current FinancialPerspective (2007-13):

• Framework Programme 7 (FP7) is investing€2.3 billion in clean energy R&D;

• the Competitiveness and InnovationProgramme (CIP) is investing €730million in“intelligent energy” projects;

• the Entrepreneurship and InnovationProgramme (EIP) is investing €430million ineco-innovation; and

• significant funds are available under thestructural and cohesion funds (SCF) tosupport specific energy projects, notably in thenew member states.

In addition, the European energy plan forrecovery is investing €4 billion in 2009 and2010 in strategic energy technologies (CCS,offshore wind and interconnections5); while300 million emission allowances from theNew Entrant Reserve of the ETS will beallocated by 2015 to the demonstration of CCSand innovative renewables technologies.

what support should the EU budgetprovide?

But these levels of funding fall short of what isrequired to deliver the EU support to drive the

huge investments in low-carbon energyrequired over the next ten years. The EuropeanCommission has implicitly recognised this inits September 2009 Communication onInvesting in the Development of Low-Carbontechnologies, stating:

“Given the need to establish a rapidimplementation of focused, integratedprogrammes on technologies that havewidespread deployment potentials across theEU, an increase in the proportion of the publicinvestment at Community level will need to beone of the options explored in the budgetreview.”6

A significant increase is required in theinvestments made from the EU budget insupport of low-carbon energy technologies.More specifically, and drawing on theEuropean Commission’s own analysis in itsrecent paper, we would propose that the EUbudget should:

• increase its total spend on clean energy by€1 billion each year compared to currentlevels;

• allocate a specific amount of funding fromboth the R&D Framework (FP) andCompetitiveness and Innovation Programmes(CIP) to fund the European IndustrialInitiatives that lie at the heart of the StrategicEnergy Technologies (SET) plan;

• reinforce the European Investment Bank’s(EIB) Risk-Sharing Finance Facility to allow itto support the SET Plan, this should include anEU budget contribution to the energyobjectives of the EIB’s 2020 European Fundfor Energy, Climate Change and Infrastructure(the Marguerite Fund);

• increase EU support for venture capitalmarkets to encourage increased investment inclean energy, particularly in small andmedium enterprises (SME) through the CIP’sHigh Growth and Innovative SME Facility(GIF);

• create a single budgetary framework for aone-off transition to low-carbon energygeneration. Such a framework would includethose funds being allocated to clean energyprojects across the full range of CommunityProgrammes (FP7 and 8, CIP, EIP) and thestructural and cohesion funds. This budgetframework would serve to ensure effective co-ordination of the investments made acrossEU instruments; and

• create a new budget instrument to financelarge commercial-size demonstration / marketreplication projects in order to support theearly market take-up of key technologies. Suchan instrument would enable the EU to allocatefunding upfront to projects and assume thetechnology risk. Perhaps in return a share ofany substantial benefits that may result couldbe invested back into the fund.

conclusions

The decarbonisation of energy generation isonly one part of the wider transition to a low-carbon economy that is required if the EU isto meet its ambitious long-term climate goals.Other sectors need to undergo similartransformations, and can and should besupported in this by the EU budget.

Transport stands out as a sector that alreadyreceives substantial funding from the EUbudget, notably through the Structural andCohesion Funds and TEN-T programme. Thosefunds should be used to encourage a modalshift to low-carbon forms of transport,including via the completion of the TEN-Tnetwork. The EIB and public-privatepartnerships should also be fully mobilised tosupport low-carbon transport projects.

It is encouraging in this context that EuropeanCommission President José Manuel Barrosohas identified for rapid decarbonisation boththe transport sector and power sector in hismanifesto for re-election ‘political guidelinesfor the next Commission’. It is vital that these

guidelines are translated into clear politicalpriorities for the new five-year EUinstitutional cycle, and that those are thenfully reflected in the way the EU uses the maintool in its policy kit: the budget.

The budget review and subsequent agreementof the Financial Perspective for 2014-20 offersa huge opportunity to achieve this. It will beone of the defining issues for the new termsin office of the European Parliament andEuropean Commission: now is the time tomake this happen.


emissions tradingand EU budgetSanjeev KumarWWF European Policy Office

We must ensure that the new wealthgenerated from ETS auction revenues areused to build a cleaner, safer andprosperous Europe. Failure to maximisethis opportunity is simply unacceptable.

Climate change, unlike any other threat inhuman history, compels us to implement themost comprehensive, profound and disruptivechange ever witnessed in a very limitedtimescale. The clean, safe, sustainable and low-carbon Europe that we have to build will befounded upon four interdependent pillars:decisive political leadership, transparent policyplanning, democratic inclusivity, and last butnot least, adequate financing.

It is within this context that we must considerhow Europe will invest in its low-carbontransition. The review of the EU budgetprovides an opportunity to think through howspending decisions at EU level will intersectwith other policy levers.

Central to this discussion will be considerationof the future of the EU emissions tradingscheme (ETS), the EU’s flagship policyapproach to tackling climate change. Thischapter looks at the political dynamicsinfluencing the recent revisions to the ETS andthe review of the EU budget, and considershow these two different approaches can addvalue to each other in ensuring publicacceptance and political confidence in theEU’s low-carbon transition.

development of the ETS

The ETS can be viewed as the EU’s mosttransformative political achievement of recenttimes. In comparison to the Euro currency,which after 10 years includes only 16 of the27 EU member states, the ETS provides asingle shared economic instrument, designedto enable Europe’s transition to a low-carboneconomy. The ETS has real compliance andenforcement criteria applicable directly toparticipating emitters, collectively responsiblefor almost half the EU’s carbon emissions.

The underlying logic of emissions trading isthat it should enable the economically efficientpursuit of reductions in carbon emissions atlowest cost. Over time, the ETS will incentivise

section threeconnecting budget revenues to policy delivery

Sanjeev Kumar joined the WWF EuropeanPolicy Office in 2007 to coordinate theiractivities on the European EmissionsTrading Scheme (ETS). He previouslyworked for the Energy Institute and forthe Crown Estate, which manages land

for HM the Queen.

investments in low-carbon technologies andpenalise high-carbon options, bringing intoreach further reductions in carbon emissionsvia an increasing carbon price.

To date, however, the impact of the ETS hasbeen far less than had been hoped. Acombination of grossly inflated emissions capscoupled with the global economic recessionhave led to insufficient pressure for genuineEU emissions reductions and resulted involatile carbon prices.

As a consequence, the ETS has not yet beenable to undertake the real heavy liftingrequired to radically reshape investmentpatterns. This must be addressed through animmediate revision of the ETS cap to correctfor the instability caused by the economicrecession and bring emissions reductions intoline with the levels required by the latestclimate science.

But alongside this tightening of the emissionscap, it will be important for the EU to use theETS more creatively to build public andinvestor confidence in the low-carbontransition and ensure that least-cost optionsare taken up. What needs to be pursued is astrategy of ‘cap and invest’1 rather than simply‘cap and trade’.2 Targeted investments ofauction revenues, combined with smartregulatory frameworks, can enable significantfurther reductions in carbon emissions overand above those that would be achieved viathe carbon price alone.3 This visibleinvestment would support Europe’s economiccompetitiveness, reduce the social impacts ofthe low-carbon transition, and provide asustainable political platform for deeperemissions reductions over the comingdecades.

recent revisions to the ETS

The revisions undertaken in the ClimateAction and Renewable Energy (CARE) packagein 2008 sought to address many of the initial

design flaws in the ETS, and were importantsteps forward in building its credibility. Theintroduction of significantly increasedauctioning of emissions allowances is animportant step forward in tackling publicconcern about windfall profits,4 and providesthe basis for a more far-reaching discussion asto how these new revenues will be used. Forallowance auctions are already creating a newand significant source of income for memberstates, one that will increase further in Phase IIIof the ETS from 2013.

Yet at present ETS auction revenues are notdedicated to climate and energy goals, norchannelled towards shared EU climateoutcomes via EU mechanisms. This is a massivemissed opportunity and a recipe for a futurecrisis of legitimacy. For the political andeconomic tensions that will continue tosurround the EU’s transition to a low-carboneconomy need to be tackled positively. The EUhas tried to address this to date through thedesign of the ETS system itself, but this will notbe sufficient.

intra-EU redistribution is already an issue

The negotiation of the CARE package sawagreement that 88 per cent of the emissionsallowances for the period 2013-2020 will bedistributed to member states on the basis oftheir relative shares of past emissions. A furtherten per cent of the total number of emissionallowances will be reallocated betweenmember states as a means of supporting intra-EU solidarity and growth.5 Additionally, ninemember states6 from central and easternEurope will share an additional two per cent ofemissions allowances, in recognition of thehistorical reductions in carbon emissions thatcame about at the end of the communist era.

Jointly, these two approaches demonstrate howthe EU has sought to sweeten the pill forreluctant member states by providing a transferof resources via the ETS. Importantly, theadditional income delivered via both



approaches stems from EU legislation. It is anEU-generated resource, aimed at securing theshared public good of a stable climate.

We at WWF believe that it is vital that thismoney is actually spent on delivering theCARE package so that the benefits of ahealthier low-carbon economy are achieved tothe advantage of all European citizens. Ifmember states fail to deliver this spending it islikely that the European Parliament will seekto more closely direct this expenditure whenthe ETS is next reviewed after a newinternational agreement on climate change isreached. The EU budget offers one option fordirecting auction revenues to unlock Europe’slow-carbon economy.

delivering spending?

In the 2008 negotiations, the EuropeanParliament was the only EU institution to acton the political significance of the ETS inproviding predictable financial assistance forthe low-carbon transition for both the EU andalso for developing countries.

The European Commission had originallyproposed that 20 per cent of revenues shouldbe used for climate change objectives,7 whilethe European Parliament8 agreed withcampaigners such as WWF9 in calling for 100per cent dedication of auction revenues; withhalf each to be spent on the EU’s internationalobligations and its domestic decarbonisation.

Thanks to the support of the EuropeanParliament, it was finally agreed that 50 percent of the income from the ETS or itsequivalent be spent on a broad list ofmeasures including the EU’s internationalcommitments; renewable energy technologies;reducing tropical deforestation; energyefficiency; and research and development.10

Interestingly, the press release from theCouncil upon the final agreement of the CAREpackage noted that this spending should alsobe used “to alleviate the social consequences

of moving towards a low-carbon economy”.11

Member states thereby recognised theimportant role that the visible expenditure ofauction revenues has to play in building publicconfidence, yet ironically this potentially morepositive political strategy was squeezed outduring the negotiations.

For the final agreement reached represented abroader defeat for the European Parliament,which bowed to member states’ insistence ongreater flexibility to spend the income fromthe ETS as they wish. This political fight restedon the battle between the ultimately agreedword “should” and the proposed word “shall”in Article 10 of the ETS directive. Furthermore,it is worth highlighting that the final positionagreed was that 50 per cent of auctionrevenues “or the equivalent in financial value”should be used. 12

Member states will no doubt be able to reportways in which they have leveraged spendingvia regulatory policies or fiscal changes. Butwhat won’t happen as a result is a directdiscussion of how ETS auction revenues will bechanneled to unlock the low-carbon transitionin member states and at EU level. Theopportunity for a visible public demonstrationof the EU’s added value in the climate battlewill have been missed.

Indeed, the lack of visible benefits from thesenew resource flows present a politicallegitimacy problem, even for richer memberstates, particularly when they are underpressure from vocal industry lobbies. Citizenswant to see that higher energy prices areresulting in tangible improvements in areassuch as energy efficiency or transport that havedirect impacts on their quality of life.

tackling the hypothecation debate

At the heart of member state opposition to astronger position on the use of auctionrevenues is the issue of hypothecation (theearmarking of expenditure related to specific

revenues), and it has to be recognised thatthere are important legal issues involvedhere.13

Yet vocal member state opposition to theearmarking of auction revenues has led BenitoMuller of the Oxford Institute for EnergyStudies to argue that finance ministrypositions based on the grounds of “fiscalpurity” should in fact be read as “fiscalpossessiveness”.14 Such possessiveness is ofcourse to be expected in times of economicdifficulty, but the bigger picture of an effectiveresponse to climate change is at risk of beinglost.

As Muller points out, earmarking can actuallylead to both increased revenues and increasedexpenditure on public goods as a result of theimproved visibility and legitimacy given to thepolicy aim.15 As a consequence, a greaterstability of spending can result. Earmarkingdoes therefore take place for topics as diverseas social security payments, national lotteryreceipts, or environmental taxes and energycharges.

Indeed, Germany has already announced thatit will dedicate 50 per cent of its ETS auctionrevenue to climate action, with around €120million to be channelled via its internationalclimate initiative.16 Similarly, some memberstates from central and eastern Europe havecommitted to spend revenues from the sale oftheir Kyoto Protocol permits (AssignedAmount Units (AAUs)) via Green InvestmentSchemes.17

the ETS and the EU budget

The likely flow of revenues from ETSauctioning has attracted interest fromproponents of EU budget reform. Indeed, ETSauction revenues have significant positivefeatures for budget discussions as they providea resource linked to the achievement of policyoutcomes and the broader stimulation of theEU’s low-carbon competitiveness.18 Similarly,

the intra-EU resource transfers within the ETSprovides parallels with the current system ofcontributions to and receipts from the EUbudget.

A logical connection is therefore easily madebetween the two aspects of the discussion ofEU budget reform: increased spending isrequired on climate change and energy, whileat the same time new resources are becomingavailable from EU action on the same climateand energy agenda.

implications for auction revenues

n their major study for the EuropeanCommission’s budget review, Iain Begg et alidentified ETS auction revenues as an optionfor part-funding the EU budget.19 They notedthe added value that flows from emissionstrading at EU level and the potential logic of acentrally administered system, but alsowarned of the explicit member stateopposition to hypothecation and the potentialconflict over EU competencies that mightresult.

More particularly, they refer to a number ofstudies that suggest that ETS auction revenuescould fund between 27 and 62 per cent of theEU budget during 2012-2020 (based on 2008spending levels, and reflecting differentestimates for the carbon price).20

WWF has consistently argued that all suchrevenues should be devoted to climate changemeasures both internationally anddomestically.21 Given that ETS auction revenuesare a resource created by the EU, we wouldfurther argue that a proportion of themshould be applied to addressing climate andenergy policies that deliver significant pan-EUadded value, for example in the areas ofenergy interconnections or research anddevelopment. Such support could be deliveredeither via the EU budget or via new andinnovative financial vehicles that leverageprivate sector investment.



Unfortunately, the opportunity to secure thisprinciple in the CARE package negotiations of2008 was lost. Future revisions of the ETSfollowing any agreement on a new UNframework will therefore take on additionalsignificance, particularly for the EuropeanParliament. For ratification of the Lisbon Treatyhas changed the power balance with theEuropean Council and European Commission.With this comes an opportunity for theEuropean Parliament to again resonate directlywith European citizens by building a strongpolitical coalition for change.

One option that might gain widespreadsupport could be for a dedicated ETS auctionrevenue resource stream to be incorporatedinto the EU budget. This could be time-limitedif needed (as auction revenues themselves willbe as we head towards a low-carboneconomy). This funding could be dedicated tosupporting both the EU’s own domestic low-carbon transition (including assisting anypotential losers from the transition as per thecurrent globalisation adjustment fund) and asa means of channelling funding for the EU’sinternational commitments.

conclusions

The inclusion of a significant flow of ETSauction revenues into the EU budget dedicatedfor spending on the low-carbon transitionwould be a bold political move, providingboth much-needed policy transparency andthe resources required to deliver on shared EUambitions. Furthermore, it would form avisible signal to the EU’s citizens that thesocial impacts of the low-carbon transitionwill be addressed and the EU budget reformedfor the 21st Century.

Furthermore, the dedicated use of ETS auctionrevenues would provide the political visibilityrequired for their ongoing legitimacy,particularly as carbon prices rise. The all-too-common assumption that high carbon prices

are politically sustainable without ademonstrable investment of the proceeds isdangerous for both the pursuit of a stableclimate and the EU itself.

The way forward will undoubtedly rest withmember states. If they are hesitant at makingvisible their own use of ETS auction revenuesfor climate goals, and under-invest in sharedEU actions, then they will surely come underincreasing pressure for ETS receipts to beincorporated into the EU budget at source. Fortoo long the EU budget has been criticised forits continued spending on the wrongpriorities. It would be a serious error ifmember states did the same thing with ETSauction revenues.

connecting withcarbon taxationEulalia RubioNotre Europe

The establishment of a common EUregime for carbon taxation would notonly help the EU reduce carbonemissions but it would also provide thebasis for the creation of a new EU ownresource as a means of financing the EU budget.

An idea that pervades much of the discussionof EU budget reform is that the problemsessentially fall on the expenditure side. The EUbudget, it is argued, is a ‘relic of the past’. It isheavily tilted towards agriculture and cohesionand does not provide adequate finance toaddress today’s most acute EU challenges:global competitiveness, energy security orclimate change. Budget reform is urgentlyneeded, it is claimed, to “focus EU spendingon the right areas”.

The European Commission itself has adoptedthis way of thinking all too quickly. Onesimply has to look at the way it organised the2007-2008 budget review. While the mandatefrom the European Council was for a“comprehensive assessment of bothexpenditures and revenues”,1 inCommissioner speeches and formaldocuments the review has been frequentlyportrayed as an historic opportunity “todiscuss future EU priorities and spendingneeds”.2

No one can neglect the importance of revisingthe EU’s spending priorities. Yet a narrowfocus on expenditures alone is a recipe forfailure. History reminds us that previousattempts to undertake an ambitious reform ofEU finances have only succeeded whentackling simultaneously all the elements of thebudgetary system: expenditures, revenues andprocedures.3We can endlessly debate EUspending priorities, but this will serve to noavail if we do not address simultaneously thestructural factors explaining the path-dependency of EU budgetary negotiations.

One of these factors is the structure of therevenues. The EU is currently financed by threerevenue sources: i) custom and agriculturallevies (the so-called TOR, or ‘Traditional OwnResources’); ii) a levy on national Value AddedTax (VAT) receipts and iii) member states’contributions paid according to levels of GrossNational Income (GNI). While initiallyconceived to play a residual role, over the lastdecade this GNI resource has come to

section threeconnecting budget revenues to policy delivery

Researcher at Notre Europe (Paris),Eulalia Rubio holds a degree in Law fromPompeu Fabra University (Barcelona), adegree in Political Science from theAutonomous University of Barcelona and aPhD degree in Political Science from the

European University Institute (Florence). Before joiningNotre Europe, she had been research assistant at theDepartment of Social and Political Science at PompeuFabra University.

43


represent three-quarters of total revenues, asdetailed in Table 1.

table 1 - structure of EU finances(in percentage share of revenues)

1992 1996 2000 2005

TOR 23.6 19.1 174 13.9

VAT 61.8 51.4 40 15.9

GNP/GNI 14.5 29.6 42.7 70.3

Source: European Commission

three clear weaknesses

This system of financing has proved to be astable basis for multi-year planning, andensures that the EU does have sufficientresources to balance its budget. But there arethree clear negative implications for the EUbudget that flow from this revenue structure.

Firstly, the overwhelming dependency of theEU budget on national contributions has aninfluence on the way EU spending decisionsare taken. The overt character of nationalcontributions, which have a clear link tonational treasuries, accentuates member states’tendency to calculate their net budgetaryreturn (that is, the difference between whatthey pay and what they receive from the EU).4

The result is a decision-making processconducive to the status quo, as member statestend to adopt a conservative stance and focuson defending a ‘juste retour’ from theirbudgetary positions.

Secondly, the strong EU dependency onnational contributions has resulted in agrowing reluctance to increase the size of theEU budget, despite increasing demands placedon it. The logic of net returns places particularpressure on those policy areas providingdiffuse benefits for the whole of the EU. It isnot entirely coincidental that calls frommember states for a capping of the budget

started in the early 2000s, just at the timewhen national contributions had come torepresent almost 50 per cent of total EUrevenue.5

Thirdly, the current approach to financing theEU is one that neither contributes to norsupports the delivery of EU policy outcomes.In this respect, one should take into accountthat taxes or levies are not only means ofyielding revenues, but are also direct policyinstruments in their own right. They can serveto alter patterns of consumption (ie reducingconsumption of tobacco or levels of CO2emissions) or induce other actors to adopt theright decisions (ie raising R&D investment).

All EU member states use tax policy as amatter of course in the pursuit of their policyoutcomes, and a strong case can be made forthe EU to do so too. Given that the EU hasboth a low budget and practically no directimplementation capacity, tax instrumentscould play an influential role in supportingthe achievement of shared EU policyobjectives. Besides, there is a strong economiclogic in undertaking or aligning taxation atthe supra-national level to address cross-border spillover effects.6 Such an approachcould help avoid a race to the bottom ofmember state tax competition as well asproviding a visible means of reconnecting theEU to its citizens.

taxation is needed to combat climatechange

During recent years, the EU has shown strongcommitment to the fight against climatechange. The EU’s effort to curb greenhousegas (GHG) emissions has principally consistedin the establishment of a carbon emissionstrading scheme (ETS). The ETS is the largestsuch scheme in the world, covering more than10,000 energy generation and industrial sitesacross the 27 member states, and the EUshould be praised for establishing it. Yet, it stillpresents some weaknesses, particularly in

To reduce transport emissions, existingpolicies will need to be complemented withpricing measures able to influence consumerbehaviour and therefore demand. The same istrue for other non-ETS sectors. In the field ofhousing, for instance, the EU regulation onenergy labelling has shifted consumer buyingbehaviour towards the purchase of moreenergy and water-efficient home appliances.Yet, energy consumption has grown by anaverage of one per cent a year between 1990and 2005.8

It is therefore time to recognise that taxation isessential to curb carbon emissions in non-ETSsectors. But in order to move in this direction,a coordinated EU approach will be needed.The recent French debate on national carbontaxation shows it is difficult to convincenational public opinions to accept higher taxesif the rest of the EU does not follow the samedirection. This is not least because themaintenance of different levels of taxation onenergy sources creates distortions in the EUinternal market, a problem that is particularlyacute in the field of transport.

Most importantly, an EU approach will berequired because there is little interest orpolitical will to introduce carbon taxation atnational level. Over the past decade, only a fewmember states have introduced nationalcarbon taxes (Denmark, Sweden and the UK),while the levels of energy taxation in theEU25 have decreased, passing from 2.1 percent in 1993 to 1.8 per cent in 2007. Hence,if carbon tax policy is left to nationalgovernments to decide on their own, the mostlikely scenario will be a continuousdowngrading of energy or carbon taxation innational fiscal regimes, undercutting attemptsto reduce carbon emissions.

designing an EU regime of carbontaxation: different options

There are a number of alternatives toestablishing an EU regime of carbon taxation.

respect to emissions caps and the auctioningof allowances, which have not been fullyresolved by recent reforms.

More worryingly, the ETS is only a partialanswer to the problem. The system covers lessthan half of the greenhouse emissions inEurope. In particular, it does not include directemissions from households; the service sector;transport (the second largest source ofemissions in Europe); nor emissions fromwaste and agriculture. All together, the non-traded sectors represent about 60 per cent oftotal GHG emissions in Europe.

The non-inclusion of transport in the ETS isparticularly worrying. Transport sectorgreenhouse gas emissions – of which morethan 90 per cent are due to road transport –increased by 26 per cent from 1990 to 2007.This compares with a reduction of emissionsin all other main sectors. In fact, among themain polluting sectors, transport is the onlyone that has increased in volume of emissionsover the past twenty years.

So far, the EU strategy to address transportemissions has consisted of the promotion ofbiofuels and increased fuel-efficiency forvehicles. However, as pointed out by theEuropean Environment Agency, an exclusivefocus on transport supply-side measures willnot suffice to reverse the trend.7 The increasein transport GHG emissions has occurred eventhough vehicles have generally improved theirenergy efficiency. Thus, whereas averageemissions from new cars have decreased by12.4 per cent from 1996 to 2006, over thesame period car ownership has increased by26 per cent and passenger car use – calculatedin terms of km per passenger – has increasedby 18 per cent. Similarly for freight transport,road- and air-freight volumes have grownconsiderably (45 per cent and 43 per centrespectively), reflecting a shift away frommore environmentally efficient rail andmaritime transport.



In a recent study for Notre Europe,9 EloiLaurent and Jacques Le Cacheux sketch outthree possible scenarios.

The first is the climatic conversion of existingenergy taxes through a reform of the EUDirective on Energy Taxation.10 Adopted in1997 and modified in 2003, this Directive setsthe minimum rates for the taxation of allsources of energy (mineral oils, coal, gas andelectricity). However, at present theseminimum levels do not reflect theenvironmental impacts of different fuels and,in most cases, they are too low to have animpact on consumer demand.

A way to resolve this problem would be todivide the current minimum level of taxationinto two components that refer respectively tothe energy content and environmental impactof each energy source. In this way, memberstates would then introduce a tax on all fuelsources according to their energy content, butalso by reference to the carbon emissionsattributable to them.

This option, which is built on a proposal bythe European Commission in 2007,11 wouldbe relatively easy to implement. Yet, as notedby Laurent and Le Cacheux, it would stillconsist in the establishment of minimum ratesalone, and would therefore not resolve theproblem of distortions within the singlemarket due to different national tax rates.

A second possible scenario is the creation of anew EU harmonised energy or carbon tax onthe use of fuels in the main non-ETS sectors(transport and housing). This approach couldtake inspiration from a proposal for an EUcarbon tax presented by the EuropeanCommission in 199212 in the context of thepreparations for the Rio Earth Summit. Thisconsisted in the establishment of aharmonised tax of hybrid type, taxing fossilfuels according to both their energy contentand the carbon emissions emitted in their use.The proposed tax was intended to cover allsectors but it envisaged the possibility of

exempting the most energy-intensive sectors(such as the steel and cement industries),which are now covered by the ETS. It wasintended to be introduced in stages, starting ata level equivalent to $3 per barrel of oil in1993 until reaching a level of $10 per barrelin the year 2000.

There is no doubt that such a proposal wouldencounter strong political resistance. Thereluctance of certain EU member states to anytype of fiscal harmonisation is well known.Besides, fiscal matters are subjected tounanimity vote by the EU treaty, meaning thatthe opposition of any single member statewould suffice to block an initiative of this typefor the introduction of a new EU tax. On thepositive side, this proposal would be superiorto the first in that it would establish acommon carbon price in Europe for non-ETSsectors.

Finally, the third scenario would be thecreation of an EU carbon added tax. Based onthe same principles as the existing VAT, this taxwould be levied on all goods according totheir carbon footprint. Such a tax wouldprovide financial incentives to both producersand consumers, as those goods with lowercarbon footprints would be financiallyadvantaged. Besides, unlike other options, itwould also tax imports, hence eliminating theproblems of carbon leakage and loss ofcompetitiveness. On the other side, it wouldbe very difficult to put into action, not onlydue to political resistance but also because oftechnical obstacles in assessment andimplementation. In particular, the creation ofsuch a tax would require all EU firms to beable to calculate their carbon footprint,something that is difficult to envisage in theshort term.

the double dividend of an EU carbon tax

The establishment of a common EU regimefor carbon taxation would have an additionaladvantage: it would not only help the EU

reduce carbon emissions but it would alsoprovide the basis for the creation of a new EUown resource as a means of financing the EUbudget.

There are various reasons why an energy orcarbon tax can be a good EU tax candidate as asource of EU revenue. At present, nationalenergy taxes raise an amount equivalent toabout twice the level of EU expenditure,which converts them into a potentiallybuoyant source of revenue for the EU.13

Although the levels of energy taxation arerather diverse across Europe – and thereforeany attempt to introduce an EU energy orcarbon tax would require a previous effort ofharmonisation – the differences in tax rateshave diminished over the last decade. Last butnot least, an EU carbon tax would offer animportant advantage with respect to otheroptions: it would be popular, and clearlylinked to EU policy priorities.14

The easiest means of implementation wouldbe the establishment of an EU surcharge onexisting energy taxes, or on a specific nationaltax (ie the excise duty on motor fuels). Thiscould be combined with a reform of the EUenergy tax directive as proposed above, so thatthe EU surcharge could consist in the revenuesyielded by the environmental component ofthe tax. Another, more ambitious optionwould be the establishment of an EUharmonised tax (scenarios 2 and 3 above) andthe use of the revenues yielded by this tax (orpart of them) to finance the EU budget.15

Finally, it should be taken into account that theintroduction of an EU carbon tax would leadto a heavily unbalanced distribution offinancial burdens among member states. Inparticular, the poorest countries would be themajor losers of its introduction, as the ratio offuel consumption relative to GNI decreaseswith increasing national wealth.Yet thisshould not be a categorical impediment to thecreation of the tax. As noted in the 2008budget review study for the EuropeanCommission by Begg et al,16 one might

imagine different alternatives to offset thedistributional consequences of the carbon tax,such as the creation of another EU tax or theestablishment of an automatic equalisationscheme. Besides, if the revenues provided bythis tax are earmarked for action on climatechange – ie support for low-carbon energysystems and climate adaptation measures –poorer member states countries would beparticularly advantaged.

conclusions

The introduction of an EU carbon tax wouldhave direct benefits for both the achievementof EU policy outcomes and the politicalstanding of the budget as a whole.

On policy delivery, a carbon tax could helpdrive emissions reductions from the sectorsnot covered by the ETS, particularly in thetransport sector. By being introduced at EUlevel it would avoid many of the economicpitfalls that make national introduction ofcarbon taxation so difficult.

For the EU budget itself, the introduction of acarbon tax as a new own resource could helpbreak the dominance of the GNI resource,creating a new political dynamic in favour ofthe delivery of European public goods andaway from the current logic of net balances.

On both topics, ambitious action is required tobreakthrough on delivering EU added value.Without attention to the revenues side of theEU budget, any efforts at reform in the comingyears are liable to fail.


how to approachthe reform? Agata Hinc and Paweł ŚwiebodademosEUROPA

The way the EU budget is recalibratedwill be an important lever in the processof making the EU a world leader in thefinancing of innovation, greentechnologies and new low carbonmarkets.

The EU has been a global leader in pushingfor ambitious targets in climate policy. It playsan important role in the ongoing negotiationof a global agreement on the reduction ofemissions of greenhouse gases (GHGs), and ithas made low-carbon investment a central partof its economic recovery package.1

One clear EU achievement in this effort hasbeen agreement on a common politicalplatform despite differences in the economicpotential among its member states. But toensure delivery into the future, Europeanclimate policy must do more to take intoaccount the different levels of development inthe EU and its variable impact on economiccompetitiveness.

For while the EU continues to make the casefor global action, its less developed memberstates cannot endlessly assume newresponsibilities without securing thesupportive conditions that will enable them tocontinue their economic development. Theconcerns of Poland and other member statesabout their potential financial commitmentsunder a new global agreement are a symptomof wider fears around the potential costs ofthe transition to a low-carbon economy.

While a handful of EU member states havelaunched ambitious industrial strategies toassist in the emergence of the low-carboneconomy, it is clear that much more actionneeds to be taken in this field at the EU level,including by means of the EU budget. Thepotential form of the budget for the period2014-2020 is slowly becoming an issue ofpolitical discussion. The way the EU budget isrecalibrated will be an important lever in theprocess of making the EU a world leader inthe financing of innovation, greentechnologies and new low carbon markets.

from recovery to prosperity

The headline analysis of the Stern Review onthe Economics of Climate Change2 was that

section fourstrategies for reform

Agata Hinc is leader of the project ‘LowEmission Economy’ at demosEUROPA –Centre for European Strategy, focusing onissues such as Carbon Capture andStorage technology (CCS) and the EUemissions trading scheme (ETS). She is

an author of articles, commentaries, reports and studieson energy and climate change, development policy andEU external relations.

Paweł Świeboda is President ofdemosEUROPA – Centre for EuropeanStrategy. He was EU Advisor to thePresident of Poland prior to serving asDirector of the Department of theEuropean Union in the Ministry of Foreign

Affairs. There he was responsible for negotiations on EUaccession, institutional reform and the financialperspective. He is a member of the advisory groupassisting the Polish government in its preparations forthe EU presidency in 2011.


action now to avoid dangerous climate changeis far less expensive than dealing with itsconsequences. This is an important message,but one that has yet to truly be taken on boardacross the EU; particularly in areas where theimmediate costs of transition are most likelyto be experienced by powerful economicinterests.

A clear EU climate strategy is thereforerequired, one that can engage with theeconomic concerns of its citizens. It isfortunate that investment in low-carbontechnologies are likely to have a positiveimpact on the economy and job creation ifthey are based on sound business principles.The EU has the potential to maintain its roleof an exporter of green technologies todeveloping nations, provided it picks the righttechnologies and gets their financing in place.

Yet the EU budget has so far played a relativelyminor role in meeting climate and energypolicy objectives. Indeed, the way it isstructured and operated very often contributesto increases in carbon emissions. Nine percent of EU GHGs come from agriculture, butthere has been little effort made to date toaddress that problem, despite the sectorcontinuing to receive the largest portion of EUfunding.

It is true that spending on research anddevelopment in the area of green technologyhas increased within the Seventh FrameworkProgramme, but it is still less than funding onnuclear research as part of the Euratom Multi-Annual Framework Programme for NuclearResearch and Training. It cannot be right thathistorical priorities continue to receivesignificant budget resources at the expense ofthe pressing challenges that will define thesecurity and prosperity of today’s half a billionEuropeans.

political realities, political priorities

The European transition to the low-carboneconomy is complicated by the political andeconomic realities of a union of 27 memberstates. Given the public good nature of a stableclimate and the cross-boundary implicationsfor the European continent, it is right thatshared actions are required. But although allEU member states face some commonchallenges in adapting to climate change andreducing carbon emissions, each nation,region and locality also has a particular set ofchallenges and capabilities of its own. For thisreason, it will be increasingly important goingforward to examine and address the impactthe low-carbon economy will have in differentmember states of the EU.

Not withstanding these existing differencesbetween member states, the EU has createdthe basis for a common energy and climatepolicy. This means that the EU budget shouldbe an important instrument in ensuring thatthe EU remains ahead of its competitors andthat the transition to the low-carbon economytakes place across the EU, regardless of thelevel of development of the individualmember states. These two objectives shouldguide future thinking about the way the EUbudget should be revised in the context of theconstruction of the low-carbon economy.

Naturally, there have to be clear guidelines fordeciding what to spend at the EU level. Theprinciple of European added value shouldtherefore be of primary importance, meaningthat EU spending should be focused onprojects which require the scale of EU-levelengagement. In addition, effective financialmanagement should lead to expendituresbeing concentrated in areas which offergreatest returns on the investment, asmeasured in terms of the potential reductionsof carbon emissions. The energy-intensiveeconomies of central and eastern Europe(CEE) in particular are prime candidates for amore rapid transition to a low-carboneconomy. But, having experienced the pain of


transition in the 1990s, they will requirepolitical and economic support to make thispossible.

three approaches to reform

Given this context, there are three possibleapproaches to consider in respect to thereform of the EU budget. These arecomplementary rather than mutuallyexclusive, and in combination could provide acoherent strategy leading to a significant shiftin resources toward the low-carbon transition.

low-carbon criterionIn the first approach, which would be most inline with the tradition of adapting existinginstruments to the political priorities of theday, the low-carbon criterion would beapplied to the main categories of spending,including the Common Agricultural Policy,cohesion policy and competitiveness forgrowth and employment. The manner ofapplication will have to be tailor-made andadjusted to the specific parameters of thegiven policy.

This could mean that rural developmentpolicy would be focused on an additionaltheme on top of the existing three thematicaxes of improving the competitiveness of theagricultural and forestry sector; improving theenvironment and the countryside; andimproving the quality of life in rural areas andencouraging diversification of the ruraleconomy.3 The additional theme would bespecifically devoted to promoting the low-carbon economy.

Similarly, in the competitiveness for growthand employment heading of the budget, moreresources should be devoted to research anddevelopment on green technologies withinthe scope of the next Framework Programme.The recent announcements4 of overall levels offinancing required to support the StrategicEnergy Technologies (SET) plan5 are a step inthis direction. But the absence of specific

indications of levels of support from the EUbudget is a classic example of where the EUneeds to move its political ambitions into thearea of real world delivery.

reorientation of cohesion policyIn the second approach, cohesion policy itselfshould be reoriented to help the lessdeveloped member states tackle the challengesof the low-carbon economy. This priorityshould be integrated into the existingconvergence objective addressed to the regionswhose per capita GDP is less than 75 per centof the EU average.

The general regulation establishing commonrules in programming, managing, controllingand evaluating the new cohesion policyshould be complemented by a new low-carbon emphasis. This would mean thatspending should be screened for their value-added in terms of enhancing the low-carboneconomy. Funding should be concentrated onsupporting member states in meeting theobjectives of EU policy, including in the fieldof energy efficiency. In addition, EU fundsshould be focused on creating low-carboninfrastructure, especially in the field of energyand transport.

Such an approach would be in line with theresults of the stakeholder consultation on thebudget review. The top priorities identified foraction were climate, energy, andcompetitiveness, with a clear desire to seecohesion funds focused on regions most inneed of support.6

a new strategic fundThe third approach would be a new additionto the existing budget structure, via theestablishment of a new instrument, theStrategic Fund for Low Emission Technologies(SFLET). In spite of the fact that some EUmember states have created their own fundsaimed at developing low carbon technologies,there is a strong need for a European fund thatwould address the financing gap which occursbefore new technologies reach the


marketplace,. Such an approach could be putinto operation via a hybrid fund of the EUbudget and the European Investment Bank(EIB). The SFLET would address investmentneeds in areas where financial pooling isnecessary in order to secure sufficient fundingand where the EU is engaged in competitionwith other international actors for first-moveradvantage.

The SFLET would be spent on technology-based businesses with high growth potentialthat require equity finance. Additionally, itwould focus on investing in growingbusinesses, start-ups and spin-offs in thesectors of the future, such as advanced greenmanufacturing, renewable constructionmaterials and chemicals, and low-carbonvehicles.

Special attention also has to be attached toclean coal technologies, which have not beenadequately supported in the framework of theEU Climate Action and Renewable Energy(CARE) package. The CO2 storage directive7

passed as part of the CARE package sets thelegal framework for Carbon Capture andStorage (CCS), but it does not address issues offunding. Support was instead granted in theform of 300 million allowances from theEmissions Trading Scheme for CCS andrenewables as an ad hoc measure, reaching outin an innovative fashion to the carbon marketsas the source of funding. Further funds havealso been designated as part of the EUrecovery package for CCS demonstrationplants, but at just €180 million per projectthey will cover only part of the total costs.

There is therefore a need for a more strategicvision of the role that CCS technology shouldplay in addressing the decarbonisation of theEU power sector.8 If CCS is to be made arequirement, then the rapid proving of itscommercial and technical viability is anecessary focus for EU support.

engaging CEE member states

Industry actors throughout CEE areincreasingly engaged in the creation anddevelopment of new low-carbon technologiesbut they all to often face the same hugechallenge of bridging the pre-commercialfunding gap. There is therefore a growingneed for innovation-friendly regulatoryframeworks and increased public fundingacross CEE. Unfortunately, many nationalbudgets in the region are less future-orientedthan in the EU15, meaning that currentlyavailable financial support is in many casesprimarily obtained from Europeanmechanisms. The creation of a SFLET couldtherefore leverage further public funding andgreatly stimulate the green technologies sectorin CEE. This would foster the development ofsolutions crucial for both the decarbonisationand energy security of this region: particularlywind, clean coal technologies, and biomass.

Furthermore, in any political strategy toreform the budget, the concerns of CEEmember states must also be treated seriously.The difficult discussions during 2009 as to theEU’s internal division of contributions tointernational climate finance shows that theissue of the costs of climate change is here tostay.

In the international context, a formula foreconomic contributions based onresponsibility for emissions rather thaneconomic wealth makes sense for the EU as awhole. But the same approach would be badnews for the new member states that have ahigher share of emissions than income(Poland, for example, has an eight per centshare of emissions and a three per cent shareof EU income).

The difficulty with asking the CEE memberstates to contribute to international climatefinance is four-fold:


1. they have just started paying large amountsof money in Overseas Development Aid;

2. they need to foot the bill for meetingclimate objectives in their own economies;

3. they are mostly (with the exception ofPoland) going through a particularly viciouseconomic crisis with enormous slashes ofpublic expenditure in the Baltic states; and

4. they are not that well-off and some of them(Bulgaria, Romania) could end up payingricher countries, such as Brazil. This would beverging on the absurd.

Yet with the final decisions on contributionsto be decided after any global agreement, anopportunity exists to address this issue furtherupstream.

A reform of the EU budget in support ofEurope’s domestic low-carbon transition, asoutlined above, would channel significantfinancial flows to CEE member states. Thiswould provide greater confidence that theireconomic recovery and ongoingcompetitiveness will be aided by action onclimate change rather than hindered by it.Such a move would create the opportunity fora more positive dynamic about how Europecan meet its international responsibilities andunlock the political confidence required forEurope’s own domestic climate action.

conclusions

The EU has a pivotal role to play in the globaleffort to reduce carbon emissions bypursuing a balanced, sustainable growthmodel and becoming a leader in eco-technologies. Given the scale of financingrequired, the EU budget can seem tiny, at justone per cent of EU GDP. But its ability toleverage additional resources from memberstates and the private sector make it a keypiece of the financing puzzle.

It is worrying that EU budget negotiationstraditionally lead to intensive infightingbetween member states over their individualattachments to the different categories ofspending and their respective net financialpositions. Any significant increase in spendingvia the EU budget to enable the low-carbontransition will undoubtedly be burdened bythe same political preoccupations. It istherefore important to integrate the low-carbon objective as thoroughly as possible intothe EU budget, as a means of ensuring that thelow-carbon imperative does not become ahostage to the political machinations ofbudget negotiations.

While the proposals made here have beenfocused on the next multi-year framework,there are opportunities to start theimplementation of these approaches withinthe current financial perspective, refocusingspending via the negotiations of annualbudgets. Similarly, the creation of a low-carbon technologies fund could also be madepossible via the use of unused budget outlayscombined with contributions from memberstates.

During 2011, Hungary and Poland will holdthe presidency of the EU Council. A centralissue on their agendas will be the negotiationof the post-2013 EU financial perspective andits relationship to the new EU 2020 strategy.The timing appears right for these twomember states to take the lead in securing anEU strategy for the transition to a low-carboneconomy.

winning thebudget battlesJan SeifertHeinrich Böll Foundation

The shift to an EU budget that supportsEurope’s transition to a low-carboneconomy is possible. Much can beaddressed via implementation issues anda more focused approach to the €130billion annual EU budget, building thecase for serious reform year on yearahead of the negotiation of the nextmultiannual framework.

It is important for the budget reform debate tobe focused on objectives. However, change isdifficult and presents a serious politicalchallenge in an ever more complex EU.Indeed, there is often an impression given thatbudgetary transformation in the EU is simplytoo difficult, while in fact structural change ofany budget is tough. Back in 1964 AaronWildavsky wrote a famous analysis on budgetpolitics in the US Congress,1 coining thenotion of ‘incrementalism’ to describe howslowly and evolutionary budgets change.

As much as a radical overhaul of the EUbudget is desirable, past experience teaches usthat we may be better off to prepare for aseries of more ambitious incremental changes.A healthy realism about the dynamics ofincrementalism means that our strategies needto take this into account. Persistence in pursuitof a low-carbon budget will undoubtedly berequired.

This chapter therefore focuses on the politicsof budgetary reform in the EU; on the meansand methods to achieve many of the changesproposed throughout this publication. It drawsrecommendations from the experience duringPresident Barroso’s first term of office and thenegotiations over the current financialperspectives from 2007-2013. This sameperiod also saw new approaches taken in boththe agreement of the EU’s annual budgets andthe three recent revisions of the financialperspectives to finance the Galileo project, thefood facility for developing countries and theEuropean Economic Recovery Plan.

improving the next financialperspectives

The most obvious step to bring the EU budgetinto line with the low-carbon transition and amore sustainable model of developmentwould be the overhaul of the next financialperspectives, currently slated for the period2014-2020. However, this exercise could alsobe the most difficult one as long as the

53

section fourstrategies for reform

Jan Seifert currently works in the team forenvironmental policy and sustainability atthe Heinrich Böll Foundation in Berlin andis a freelance contributor tofollowthemoney.eu, a blog about the EUbudget. Previously he worked for three

years as an assistant to a senior member of the EuropeanParliament’s Budget Committee. He was President of TheYoung European Federalists from 2005 to 2007.


unanimity principle continues to apply fortheir adoption.

There are, however, three clear approaches thatany strategy for change will need to deploy:

Firstly, when approaching the negotiation ofthe next multiannual framework, advocates forchange must keep in mind that theprioritisation and distribution of moniesbetween the different spending areas havedeveloped over many years and cannot be cutoff instantly. Therefore, it is very important toexercise continuing pressure to decreasespending on what are considered ‘bad’programmes and build up support for ‘good’ones.

Unfortunately, most spending areas are stillunder-researched, but the increasingtransparency over the beneficiaries of EUfunds presents an opportunity to identify thereal European value added. Ongoing scrutinyby CEE Bankwatch and others on the use ofstructural funds in central and eastern Europehas been complemented by new campaignerssuch as farmsubsidy.org and fishsubsidy.org. Inthe context of the current budget review,independent studies and analyses fromcampaign groups helps to build the case forreformers within the EU institutions. Areliance on studies by the EuropeanCommission or European Parliament willhardly alter the status quo.

Secondly, a strategy for change needs to arguefor the provision of margins within thedifferent headings or spending areas of themultiannual frameworks. Recent practice hasseen the headings fully programmed with thevarious spending programmes. This leaves noroom for new challenges; which are mostoften social and ecological challengesrequiring concerted pan-EU engagement.

Moreover, non-programmed margins wouldalso leave room for a more meaningful annualbudget process, in which a fruitfulcompetition should evolve between the

European Commission, MEPs and memberstates over the most effective use of suchfunds.

The third and so far most underdeveloped areaof influence is the own resources side. Eventhough the revenue decision is formallydetached from the financial perspectives, anddespite requiring unanimity in Council, it canstill offer valuable steering instruments.

Former European commissioner for budget,the German Green Michaele Schreyer, hassuggested that ecological taxes could be partlycollected via EU mechanisms. More recentlythe European Commission has discussed ideasto directly charge CO2 emitters via the EUEmission Trading Scheme (ETS) and use themoney raised to fund global efforts indeveloping countries as part of a globalclimate deal.2 We have likewise witnessed arenaissance of the idea of ecological taxes inFrance, with similar interest also expressed bythe European Commission and SwedishPresidency. More such initiatives will need tobe launched as the EU seeks the resourcesrequired for it to fulfil its internationalresponsibilities on financing climatemitigation and adaptation activities indeveloping countries while also decarbonisingits own energy system over the comingdecades.

In this vein, alternative approaches to fundingthe EU budget that take into account carbonemissions or other ecological concerns mustbe considered. As discussed in thecontribution to this publication by EulaliaRubio of Notre Europe, such a change wouldhelp shift the politics of the EU budgetbeyond the current restrictions that flow fromthe combination of VAT and GNI contributionsfrom member states.

continue revising the current financialperspectives

Given the lack of ambition when the current

for such revisions. One such occasion maycome soon, with the likely need for animproved offer from the EU of fast-startinternational climate finance as part of thenegotiation of a new global climate deal.

The most obvious way to provide newinternational financial support would be totop-up the financial perspectives and channelthe necessary funds through the EU budget.This would be a logical means of delivering ashared EU financing offer, with advantagesover the alternative of agreeing nationalcontributions subject to difficult domesticpolitics for a number of member states. Additionally, it would also allow some scrutinyover the funding process by both memberstates (via the European Council) and theEuropean Parliament.

make better use of the annual budget

Up until now the annual budget process hasrightly received the limited attention itdeserved. With practically all spending itemsprogrammed for the seven years of thefinancial perspective, annual expenditureswere pretty much fixed predictably for eachyear. The Council of Ministers and theEuropean Parliament performed their annualgame of cutting and raising the lines,predictably finishing up close to where theCommission started the exercise.

All this can change now the Lisbon Treaty hasentered into force. The European Parliamenthas finally gained co-decision power overcrucial expenditure items like agriculture,which still represents almost 40 per cent ofEU expenditure and has multiplerepercussions on the EU’s environmentalagenda.

New coalitions of green groups, the ruralcommunity and MEPs will have opportunitiesto develop a new form of cooperation toreform the disastrous agricultural and fisheriespolicies we face today. It seems likely that

financial perspectives were negotiated in2005, it is positive to see how the EuropeanCommission has managed to includeadditional funding priorities in the EU budgetvia annual revisions of the financialperspectives over recent years.

While there had not been any mid-cyclerevision of the perspectives since around1995, they have been revised every year since2007 to fund projects as diverse as the Galileosatellite system, the food facility fordeveloping countries and, most recently,energy infrastructure projects as part of theEuropean Economic Recovery Plan. All of theserevisions can be traced back to externalchanges or events such as the unforeseenincrease of costs for the agreed Galileo project,or global events like the 2008 food hikes andlater the financial crisis. In each case theEuropean Commission was ambitious andclever in using these events as a justificationfor significant budget increases. These rancounter to member states’ perceived narrownational interests but went throughnevertheless.

The European Commission and particularlyPresident Barroso has quite openly used thisinstrument of revision to put a personal noteon the EU budget. But this was achievedagainst the background of possibly the tightestfinancial perspectives ever. The logic arisingfrom this is that precisely because the financialperspectives are so tight, member states faceproblems of justification when external eventsarise that put a strong moral or economicpressure on the EU to react.

Now that revisions of the overarchingfinancial perspectives have almost become partof the annual budget process, there is anopportunity to build momentum in keymember states and across civil society insupport of low-carbon objectives. PresidentBarroso has referred to the need to improvethe budget framework in his ‘politicalguidelines for the next Commission’,3 but willclearly need external support if he is to strive



issue-linkages will need to be created in whichreformist MEPs tie their demands for areformed CAP to those issues in whichnational governments have particular interestand MEPs less to lose. These are typicallyforeign policy matters, but could also concernstructural funds or the opportunities forefficiency savings in many areas.

improve how the EU spends its money

While the overall distribution of EU money isfixed with the financial perspectives, the actualbeneficiaries and projects are mostly definedby the programming guidelines. Even thoughthere could and should be a major shift offunds towards environmental and energy-friendly programmes, streamlining theexisting major programmes probably has amuch higher effect in the short run. Both theCAP and cohesion policy guidelines but alsothe fisheries policy can be much more focusedalong sustainability concerns.

Such a revision of the operational programmescan only be proposed by the EuropeanCommission. The upcoming mid-term reviewsof these policy areas offer real alternatives tomove ahead as a small first step. The secondstep will be the new programming guidelinescoming up with the new spending envelopesfor the post-2013 financial perspective.

Both of these targets provide an opportunityfor proposals for more sustainable guidelinesfor the structural fund that can continue tosupport growth in lesser-developed regions.Moreover, large parts of the real farmingcommunity – particularly those from smallernon-industrial units – can probably be wonover with a much more targeted approach toagricultural support based on environmentalobjectives and job creation.

work towards institutional change

Much of the EU budgetary process is still

based on a functioning logic devised for thesix EU founding members. The idea that eachmember state has an implicit veto whenmatters of great national concern are at stakepersists even today. This view needs to beovercome if the transition to a low-carboneconomy is to be catalysed through theeffective use of EU funds.

Only a breakaway from unanimity might makethe budget more responsive to the challengesof the day. With the national veto in place,many old programmes continue to fundregions and policies that have long lost theirjustification; or indeed those that have avoidedthe necessary structural changes.

In addition to overcoming the national vetoover the financial frameworks (theexpenditure side), a change to the need formember state unanimity on the revenue sidecould present a more radical opportunity. Thiswould pave the way for much more ambitiousbudgetary instruments that would supportpolicy delivery such as ecological or carbontaxes. Unfortunately, the Lisbon Treaty has notaddressed the issue of unanimity on the ownresources decision.

Another often forgotten issue is the explicitdefinition of certain policy objectives like theCAP inside the treaties. This and otherobjectives defined in the treaties limit the EU’sability to respond to future challenges. Thissurely is a field for action for future treatychange, whenever member states again feelbrave enough to consider tackling institutionalmatters.

influence the new budgetary process

Now that the Lisbon Treaty has entered intoforce, a number of important technicaladaptations need to be agreed on. Up untilnow, the three institutions have not shownmuch willingness to include new politicalpriorities in this process, but some civilsociety advocacy could help here.

Two changes stand out as most promising. Thefirst touches on the legal nature of thefinancial perspectives. Until now they had thestatus of contracts between the EuropeanParliament, European Commission andEuropean Council. The Lisbon Treaty upgradesthis inter-institutional agreement (IIA) to thestatus of a regulation. This might makerevisions much harder because only theCommission can propose them and not any ofthe institutions, as is currently the case. Thereis a strong democratic rationale for civilsociety groups and MEPs to keep this optionopen inside a new regulation as a means ofstrengthening the European Parliament’s hand.

Moreover, the mere transition to a new legalinstrument would also open the door forfunding shifts or general upgrades of specificfields like climate change. The proposedclimate transformation funds or otherinstruments mobilising further money tocombat climate change are suitableinstruments to be included in the newregulation before 2013 to give them fullfooting within the institutional system.

The second opportunity for change is theduration of the multiannual budget. Whilecurrent practice is for seven-year frameworks,there is both a democratic argument and areforming tactic in favour of five-year periods.The democratic argument proposes that theframeworks should run parallel to the terms ofthe European Commission and the EuropeanParliament. This would allow candidates andpolitical parties to make the debate overbudgetary promises an essential part of theirEU election campaigns.

The reforming tactic approach builds on theassumption of incrementalism: every newframework builds at least in part on theprevious and significant budgetary shifts aredifficult to achieve. With a shorter intervalbetween multiannual budgets, incrementalchange is more likely to be realised over ashorter timeframe, even if in smaller steps.

As it currently stands, the European Council isvery keen on keeping longer periods, whilethe European Parliament and EuropeanCommission could still be convinced. If thiswere achieved, a second issue would be howto align the next full five-year period with theelection cycle. Some sort of transition periodwould be needed for the short period from2014-2015. Should the current frameworksimply be extended or major change alreadybe aimed at in the transition period? Theformer might result in a dissipation ofmomentum for reform now, while the lattercould enable a more visible shift in the budgetduring the next decade. The ambitions ofleading member states will be key indetermining the way forward.

conclusions

This quick tour of the budget process andinstitutions has argued that change is possiblein a number of fields. Advocates of reform,whether member states, European institutions,or civil society actors, will now need to alignthemselves around a coherent strategy.Pressure for change will need to be supportedby rigorous policy analysis.

The shift to an EU budget that supportsEurope’s transition to a low-carbon economyis possible. Much can be addressed viaimplementation issues and a more focusedapproach to the €130 billion annual EUbudget, building the case for serious reformyear on year ahead of the negotiation of thenext multiannual framework. Taking the EUbudget a little more seriously on an ongoingbasis can yield great results.



references

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the big win within reach: energy efficiency1.http://www.cecodhas.org/images/stories/campaigns/Energy/copenhagen_offer_web.pdf2. 36% of the EU’s total CO2 emissions and 40% energyconsumption, European Commission Research – Industrialtechnologies -http://ec.europa.eu/research/industrial_technologies/lists/energy-efficient-buildings_en.html3. This has been calculated as an average of data available fromCECODHAS-Housing Europe members. Further details available fromwww.cecodhas.org4. Regulation (EC) No 397/2009 of the European Parliament and ofthe Council of 6 May 2009 amending Regulation (EC) No1080/2006 on the European Regional Development Fund as regardsthe eligibility of energy efficiency and renewable energy investmentsin housing, p. 1.5. Ibid, p. 8.6. European Parliament legislative resolution of 23 April 2009 on theproposal for a directive of the European Parliament and of theCouncil on the energy performance of buildings (recast)

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16. European Commission, Consultation on the future EU 2020Strategy, COM(2009)64717. The NECATER carbon impact evaluation tool has been developedfor French EU funds programmes. It serves as a decision-makingsupport tool but also ensures the continuous carbon performance ofEU funds programmes.18. JASPERS (Joint Assistance in Supporting Projects in EuropeanRegions) is a technical assistance instrument of cohesion policy2007-2013 aimed at assisting member states in the preparation ofmajor project applying for EU funds.19. EEA. 2009. Territorial cohesion – analysis of environmentalaspects of the EU cohesion policy in selected countries. Technicalreport 10/2009.20. Schubert, U. and Stormer. E. 2007. Sustainable Development inEurope – Concept, Evaluation and Application. Edward Elgar”Cheltenham.21. Council of the European Union, 10-11 December 2009,Conclusions, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/111877.pdf

transforming technology, delivering decarbonisation1. Committee on Climate Change, 2008, ‘Building a low carboneconomy - the UK's contribution to tackling climate change’2. European Commission, 2009, ‘Investing in the Development ofLow Carbon Technologies (SET-Plan)’ COM(2009) 519 final3. European Commission, 2008, ‘Europe's current and future energyposition. Demand – resources – investments’ {COM(2008) 781final}4. European Commission, 2008, ‘Second Strategic Energy Review: anEU energy security and solidarity action plan’ COM(2008) 781 final5. European Commission, 2008, ‘A European Economic RecoveryPlan’ COM(2008) 800 final6. European Commission, 2009, ‘Investing in the Development ofLow Carbon Technologies (SET-Plan)’ COM(2009) 519 final, Page 10

emissions trading and EU budget1. See for example NRDC, 2009, Why Cap and Invest is better than aCarbon Tax, available fromhttp://www.nrdc.org/globalWarming/cap2.0/files/why.pdf2. The European Commission’s own advice to the US congress isalong those same lines, with Peter Zapfel of DG Environment stating“Recycling of auction revenue, if done in an efficient and smart way,has a positive impact on the overall economy: GDP growth, privateconsumption and employment all come out better with auctioningin comparison to free allocation. These positive effects have beenfound with alternative economic modelling tools both in case theauction revenue was recycled to households and where it was usedfor promoting research and development of low-carbon technology.”http://globalwarming.house.gov/tools/assets/files/0327.pdf3. Cowart, R., 2008, ‘Carbon caps and efficiency resources: howclimate legislation can mobilize efficiency and lower the cost ofgreenhouse gas emissions reduction’ Vermont Law Review 4. Neuhoff K. et al (2008), The role of auctions for emissionstrading, Climate Strategies, available fromhttp://www.climatestrategies.org/reportfiles/role_of_auctions_09_oct_08final.pdf5. This resource flow will come from allowances that wouldotherwise have gone to Austria, Denmark, Finland, France, Germany,Ireland, the Netherlands and the UK. Directive 2009/29/EC of theEuropean Parliament and of the Council amending Directive2003/87/EC so as to improve and extend the greenhouse gasemission allowance trading scheme of the Community 6. Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania,Poland, Romania and Slovakia 7. European Commission, 2008, Communication: 20 20 by 2020 -Europe's climate change opportunity COM/2008/0030 final8. http://www.europarl.europa.eu/sides/getDoc.do?type=IM-


PRESS&reference=20081006IPR38798&language=EN 9. See for example WWF position paper on the ETS, April 2008,available fromhttp://assets.panda.org/downloads/wwf_ets_position_paper_april_2008.pdf10. Article 10 3 of the Directive 2009/29/EC of the EuropeanParliament and of the Council of 23 April 2009 amending Directive2003/87/EC so as to improve and extend the greenhouse gasemission allowance trading scheme of the Community11. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/107136.pdf12. Article 10 3 of the Directive 2009/29/EC states “Member statesshall be deemed to have fulfilled the provisions of this paragraph ifthey have in place and implement fiscal or financial support policies,including in particular in developing countries, or domesticregulatory policies, which leverage financial support,… and whichhave a value equivalent to at least 50 per cent of the revenuesgenerated from the auctioning of allowances … including allrevenues from the auctioning of [the 10 per cent and two per centintra-EU transfers]. Member states shall inform the Commission as tothe use of revenues and the actions taken …. 13. For example, the UK has asserted that the revision of the ETSdirective ”contained significant provisions on fiscal policy” andshould therefore have been adopted with reference to Treaty articlesdealing with fiscal issues. See Statement 8033/09 ADD 1 REV 1 ofCouncil of the European Union, 31 March 200914. Muller, Benito, ‘Are Treasuries killing the climate deal?’ OxfordEnergy and Environment Comment, June 2009 available fromhttp://www.oxfordenergy.org/pdfs/comment_06_01_09.pdf15. Muller, Benito, ‘To earmark or not to earmark?’ A far-reachingdebate on the use of auction revenues from (EU) emissions trading,Oxford Institute for Energy Studies, November 2008, available fromhttp://www.oxfordenergy.org/pdfs/EV43.pdf16. http://www.odi.org.uk/ccef/resources/reports/s0198_oecd_adaptation.pdf and / 17. See for example ENDS Europe daily 09/06/2009 “Hungary tofinance efficiency through AAU sales”18. WWF, 2008, ‘The EU Emissions Trading Scheme andcompetitiveness concerns: myth and reality’,http://www.wwf.fi/www/uploads/pdf/ilmastonmuutos_energy_intensive_industry.pdf19. Begg, I., et al, 2008, ‘Financing of the European Union Budget’,20. ibid, page 8921. See for example WWF and Oxfam, November 2008, “Cash totackle climate change – the role of revenues from EU EmissionsTrading Scheme auctions”

connecting with carbon taxation1. European Council, 2006, Presidency Conclusions 15/16December 2005 15914/1/05 REV 12. European Commission, 2007, ‘Reforming The Budget, ChangingEurope’. SEC(2007)1188 final3. Laffan, Brigid (2000) The Big budgetary Bargains: FromNegotiation to Authority Journal of European Public Policy, 7:5;Lindner, Johannes (2006) Conflict and Change in EU BudgetaryPolitics, London/New York: Routledge4. Some people question the extent to which the problem of ‘netreturns’ can be related to the dominance of national contributions inthe EU financing system, stressing the fact that national governmentsalso include the receipts from EU customs and agricultural leviescollected in their territory into their calculus of budgetary returns. Ifind the response by Begg et al (2008) to this objection quiteconvincing. According to these authors, “national administrationswould still be able to calculate net contributions under alternativeschemes relying on own resources, but the debates would likely bemore in terms of the distribution of effective tax burdens oncategories of taxpayers, which is more appropriate from a political

accountability point of view, than in terms of distribution acrossnational budgets” (p. 57)5. National governments’ first formal request to cap the EU budgetwas the famous “letter of six”. Signed by six Heads of State (all net-contributors) after the 2003 December Council, this letter made astrong statement for limiting the total size of the EU budget at 1.0%of GNI 6. Begg, Iain,2009, Fiscal Federalism, Subsidiarity and the EU BudgetReview, Stockholm : SIEPS7. European Environment Agency, 2009, Transport at a crossroads,EEA report, n 3/2009, Copenhagen: EEA 8. European Environment Agency, 2009, Energy and EnvironmentReport 2008, EEA report n 6/2008, Copenhagen: EEA9. Laurent, Eloi; Le Cacheux, Jacques, 2010, Une Union sans cessemoins carbonée ? Vers une meilleure fiscalité européenne contre lechangement climatique, Paris: Notre Europe10. Directive 2003/96/EC of 27 October 2003 11. See EU Green Paper on market-based instruments forenvironment and related policy purposes (COM (2007) 140 final)12. (COM (92) 226).13. Cattoir, Phillipe,2009, Options for an EU financing Reform, Paris:Notre Europe (forthcoming) 14. The popularity of an EU carbon tax was tested in a study on EUtax preferences among Members of the European Parliament. Thestudy revealed that, among those MEPs favourable to the introductionof an EU tax, a “EU green tax” was its most preferred option(Heinemann, Mohl and Osterloch (2007) Who’s afraid of an EU taxand why? Determinants of tax preferences in the EuropeanParliament, ZEW Mannheim)15. One should notice in this respect that the Commission’s 1992proposal envisaged revenues to be entirely for member states. Yet, atthat moment, the question of creating a new “EU own resource” wasnot at debate as the EU budget was mostly financed by ownresources (see table 1).16. Begg, I. ; Enderlein, H., Le Cacheux, J. and Mrak, M.,2008,Financing of the European Union Budget. Study for the EuropeanCommission, DG Budget

how to approach the reform?1. European Commission, 2008, A European Economic RecoveryPlan. Brussels, 26.11.2008 COM(2008) 800 final. 26 November20082. Stern, N. 2006, ‘The Stern Review on the Economics of ClimateChange’, HM Treasury, London3. As set out in the Council Regulation (EC) No. 1698/2005.4. European Commission, 2009, ‘Investing in the Development ofLow Carbon Technologies (SET-Plan)’ COM(2009) 519 final5. European Commission, 2007, A European strategic energytechnology plan (SET-plan) - 'Towards a low carbon future'COM/2007/0723 final6.http://ec.europa.eu/commission_barroso/grybauskaite/pdf/presentation_2008nov12.pdf7. Directive 2009/31/EC on the geological storage of carbon dioxide8. As recognised by Jose Manuel Barroso in his ‘Political guidelinesfor the next Commission’

winning the budget battles1. Wildavsky, A., 1964, Politics of the Budgetary Process2. European Commission, 2009, Stepping up international climatefinance: A European blueprint for the Copenhagen Deal. COM(2009)475/33. Barroso, J.M., 2009‚ ‘Political guidelines for the nextCommisssion’

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Reform of the EU budget matters deeply for the pursuit of the low-carbon economy. For there isarguably no policy lever as important as the EU budget for setting the direction of EU action.While the size of the budget remains close to just one per cent of EU’s Gross National Income, it has the ability to lever additional spending by member states and the private sector. However,it is perhaps its political value that is of most influence. For the way in which the EU spends itsresources is the primary indicator of its political priorities and its institutional ability to organisetheir pursuit.

This collection of viewpoints from diverse businesses and NGOs, social organisations andthinktanks, addresses the political challenge of acting on these two priority areas of climatechange and the reform of the EU budget. These will be the defining tasks not just of 2010, but ofthe new terms in office of the European Commission, European Parliament, and President of theEuropean Council. Successful agenda-setting action in 2010 will set the EU on course for policydelivery throughout this new decade. Movement on the EU budget will help unlock a low-carbonEurope, while the continuing pressure for action on climate change can create the momentumrequired for budget reform.

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