Ref. Ares(2020)3951431 - 27/07/2020
31 October 2018
Securing and financing clean growth
for the EU
By: Nick Molho and Alex White, Aldersgate Group
Led by:
In collaboration with:
Informing a science-based agenda for
European environmental policy
beyond 2020, Think 2030 is a new
sustainability platform by IEEP that
Informing a science-based agenda for
convenes a diverse range of
European environmental policy post
stakeholders to discuss and propose
2020, Think 2030 is a new
solutions to Europe’s most pressing
sustainability platform by IEEP that
sustainability issues.
convenes a diverse range of
stakeholders to discuss and propose
Think 2030 will produce policy
solutions to Europe’s most pressing
recommendations for the next
sustainability issues.
European Commission, Parliament
and for Member States.
For more information visit
www.Think2030.eu and follow
#Think2030.
DISCLAIMER
The arguments expressed in this report are solely those of the authors, and do not reflect the opinion of any
other party.
Cover image: Shutterstock Standard License
THE REPORT SHOULD BE CITED AS FOLLOWS
Aldersate Group (October 2018)
Securing and financing clean growth for the EU
ACKNOWLEDGEMENTS
With many thanks to following for their valuable input: Markus Trilling, CAN Europe; Jonathan Gaventa, Tom
Jess, Dileimy Orozco, Pieter de Pous, Simon Skillings & Adam White, E3G; Benjamin Görlach, Ecologic Institute;
Dr Maria Carvalho, Grantham Research Institute on Climate Change and the Environment, LSE; Eero Yrjö-
Koskinen, Green Budget Europe; David Martin & Soline Whooley, Interel Group
ALDERSGATE GROUP
151 Wardour Street
London W1F 8WE
Tel: +44 (0)20 7841 8966
The Aldersgate Group is an alliance of leaders from business, politics and civil society that drives action for a
sustainable economy. Our members include some of the largest businesses in the UK with a collective global
turnover of nearly £600bn, leading NGOs, professional institutes, public sector bodies, trade bodies and
politicians from across the political spectrum.
We are politically impartial and champion the important role of the business sector in moving the UK and the
EU towards a sustainable economy.
For further information about the Aldersgate Group, see our website at
www.aldersgategroup.org.uk. Twitter:
@AldersgateGrp. For more information on Think 2030, vis
it www.Think2030.eu and follow #Think2030.
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Contents
EXECUTIVE SUMMARY ..................................................................................................... iii
1 Introduction ............................................................................................................... 1
1.1
Europe needs to move faster on clean growth........................................................................... 1
1.2
The legal and regulatory landscape ............................................................................................ 1
2 The case for ambitious environmental regulations ...................................................... 3
2.1
A major economic opportunity for the EU ................................................................................. 3
2.2
Overcoming misconceptions ....................................................................................................... 4
3 How to get there? Establishing a pipeline of affordable infrastructure ......................... 5
3.1
Setting ambitious targets ............................................................................................................ 5
3.2
Aligning fiscal policy and incentives with policy goals ................................................................ 6
3.2.1
Eliminating environmentally harmful subsidies .................................................................. 6
3.2.2
Rethinking fiscal rules ......................................................................................................... 7
3.3
Technical assistance to support innovation ................................................................................ 7
3.4
Effective market mechanisms ..................................................................................................... 8
3.4.1
Revenue guarantee ............................................................................................................. 8
3.4.2
Pricing the carbon market and supporting EIIs ................................................................... 8
3.5
Higher Standards ......................................................................................................................... 9
3.6
Sending the right macroeconomic signals .................................................................................. 9
4 How to get there? Engaging financial markets in green investment ........................... 11
4.1
Tackling short-termism of the financial markets ...................................................................... 11
4.1.1
Clarifying fiduciary duty .................................................................................................... 12
4.1.2
Adjusting capital weighting .............................................................................................. 12
4.2
Improving information available to the market ....................................................................... 12
4.2.1
Establishing better definitions........................................................................................... 13
4.2.2
Encouraging better disclosure ........................................................................................... 13
4.3
Using public funds to reduce risk .............................................................................................. 13
5 Conclusion ................................................................................................................ 15
EXECUTIVE SUMMARY
A competitive economy in 2030 is one that is resource efficient, low carbon
and resilient to the impacts from a changing climate
The transition to a low carbon economy is global and rapidly growing, with new industries and
markets emerging each year.1 Meanwhile, the impacts of climate change and environmental
degradation are increasingly tangible and immediate. There are significant clean growth
opportunities for the European Union (EU) if it maintains leadership and capitalises on this new
market. For example, increasing the resource efficiency of the European economy could generate an
additional €324bn in Gross Value Added (GVA) between 2016 and 2030, whilst also reducing
environmental impacts.2
High environmental standards in the EU can build on existing European
strenths to drive investment and innovation in the low carbon and circular technologies, expertise
and services that the world will rely on in coming decades.
Underpinning the economic benefits is
a valuable opportunity to reframe the purpose and mission
of the European Union and increase engagement in the face of declining trust in politics.3 A 2017
survey on the Future of Europe by Eurobarometer found that surveyed
citizens believe protecting
the environment is the second most important consideration for the EU when tackling global
challenges, after securing social equality and solidarity.4 Measures to mitigate and adapt to climate
change can limit inequality-exacerbating losses resulting from natural events like flooding, droughts
and heatwaves, and maximise the wellbeing benefits for European citizens through cleaner air and
water and better access to quality natural spaces. Furthermore, engaging the EU’s financial industry
in green investment opportunities can also help to better connect finance with the real economy
and rebuild trust after last decade’s financial crisis, whilst unlocking the large volumes of investment
needed in future-ready infrastructure across Europe.
However, current EU policy does not sufficiently incentivise the development of these green
infrastructure projects, whilst financial systems are not set up to invest for the long-term.
Ambitious,
well-designed and properly enforced environmental regulations will help secure this win-win and
deliver clean growth for European industry and citizens. To harness this opportunity,
the next
European Commission must integrate how it thinks about industrial strategy and environmental
and climate goals, with a view to reach net zero emissions by 2050.
To do so, this paper argues that EU policy levers in the coming decade must be used to (i) establish
long-term pipelines of green infrastructure projects, (ii) attract affordable private investment in low-
carbon technologies and new business models, and (iii) ensure this new investment translates into
EU supply chain growth. Based on the EU’s progress and policy development to date, the paper
details some of the key policy measures needed to create the necessary large scale pipeline of
projects to meet 2030 targets and deliver the large amount of private investment needed in the
coming decade.
1 International Finance Corporation (Novermber 2016)
Climate Investment Opportunities in Emerging Markets:
An IFC Analysis 2 Aldersgate Group (January 2017)
Amplifying action on resource efficiency: EU edition
3 Opinion of the European Economic and Social Committee on ‘The transition towards a more sustainable
European future — a strategy for 2050’ (own-initiative opinion) (2018/C 081/07)
4 Special Eurobarometer 467 (November 2017)
Future of Europe: Social issues
Key policy recommendations:
The next European Commission must establish, as a legislative priority, the development of a low
carbon and resource efficient economy, resilient to the impacts of climate change. This should
include, setting in particular a
target to become zero carbon by 2050 in line with the latest IPCC
Special Report on 1.5°C. Delivering on this target will require improved co-ordination between
policies on the environment, infrastructure development, finance and industrial strategy, which
could be
overseen by a new Commisioner for Clean Growth;
A
review of macroeconomic policy and fiscal incentives is required to ensure policy coherence
with a zero carbon target, including by setting a roadmap for phase out of environmentally
harmful subsidies across member states and EU institutions, and ensuring that all EU public
spending, loans and fiscal incentives are aligned with the EU’s climate and environmental
objectives;
The Commission and Member States should work together
to develop market mechanisms to
support delivery of these policy goals, including
stable revenue guarantee schemes for newer
technologies, introducing a
steadily increasing floor price in the EU Emissions Trading Scheme
(EU ETS) to level the playing field for green infrastructure from the mid-2020s onward, and
ratcheting up standards on energy and resource efficiency to drive greater investment in circular
and low carbon technologies;
The new Commission must
reconfirm its commitment to the Sustainable Finance Action Plan and
should introduce measures in the near future to
overcome short-termism in financial markets,
including requiring consideration of climate change-related risks and opportunities in financial
management and gathering evidence on relative risks between green and brown infrastructure
investments, as well as developing clear definitions and labels for green financial products to
improve accessibility of green investments;
The Commission should
target public funds and technical assistance to support wider investment
in priority sectors that are harder to decarbonise, such as energy intensive sectors, agriculture
and long-distance transport, between 2020-2025.
Securing and financing clean growth for the EU
1 Introduction
1.1 Europe needs to move faster on clean growth
Unabated climate change presents significant threats to the European Union (EU) and the global
community. Beyond the physical and social impacts from extreme weather events, such as
increasing temperatures and sea level rise, there is also an important economic dimension: extreme
weather events in Europe cost nearly €14bn in 2017 alone,5 and changes to weather patterns in the
Mediterranean have pushed up vegetable prices by up to 132% in recent years.6 A temperature
increase of 2°C is expected to generate €120bn annual losses in Europe (equivalent to 1.2% GDP)7
and wipe $4.2tn off the value of the world’s economy by 2100 (equivalent to Japan’s GDP).8
However, as well as avoiding such losses,
taking timely action to mitigate climate change also
presents considerable growth opportunities for the EU and its citizens.
An expected US$90tn will be invested in infrastructure to 2030 globally, more than is in place in our
entire current stock today,9 so the investment decisions that will be made in the coming years will
have a profound impact on the world’s ability to limit the impacts of climate change.
To remain
within 1.5°C of warming, noting the findings of the latest Intergovernmental Panel on Climate
Change (IPCC) Special Report,10 we must rapidly move away from business as usual and establish a
new European paradigm for growth. There is real urgency: the climate change-linked drought and
heatwave across Europe in 2018, responsible for numerous heat-related deaths, wildfires in Greece
and Sweden, the shutting down of nuclear power plants in France, Germany and Sweden and
significant crop yield decline demonstrate that
the impacts of climate change are neither
hypothetical, nor distant.
1.2 The legal and regulatory landscape
It is against this backdrop that the EU, which was responsible for 10% of the world’s greenhouse gas
(GHG) emissions in 2015,11 has taken action to reduce emissions and improve the resource efficiency
of its economy. The EU has agreed meaningful global commitments on climate change and
environmental degradation through the 2015 Paris Agreement and the Sustainable Development
Goals (SDGs). Domestically, the EU is on track to deliver its 2020 targets: emissions were already 23%
below 1990 levels in 201612 and the share of renewable energy in final energy consumption rose
from 9% in 2005 to 16.7% in 2015.13 The 2030 Climate and Energy Package, adopted in October 2014
and the Circular Economy Package, finalised in 2018, have the potential to extend the EU’s
international leadership on climate and environment issues, and deliver on-the-ground benefits for
European residents.
5 Munich RE NatCatSERVICE, as quoted by CAN Europe (September 2018)
Costs of Inaction on Climate Change
in Europe (infographic)
6 E3G (November 2017)
Climate risk and the EU budget: investing in resilience 7 Joint Research Centre (2014)
Climate Impacts in Europe 8 The Economist Intelligence Unit (2015)
Cost of Inaction: recognising the value at risk from climate change 9 The Global Commission on the Economy and Climate (2016)
New Climate Economy: The Sustainable
Infrastructure Imperative 10 IPCC (October 2018)
Global Warming of 1.5 °C: an IPCC special report on the impacts of global warming of
1.5 °C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of
strengthening the global response to the threat of climate change, sustainable development, and efforts to
eradicate poverty 11 European Commission website, Climate Action: https://bit.ly/2JgtLZA [accessed 7 August 2018]
12 Ibid.
13 IRENA (February 2018)
Renewable Energy Prospects for the European Union
1
Securing and financing clean growth for the EU
However
, these frameworks and ambitions are not enough. The EU is not on track to keep global
temperature increases to 1.5°C and the IPCC Special Report has demonstrated the vital importance
of doing so. Much more work must be done between now and 2030 to significantly improve the
resource efficiency of its economy, cut emissions to be compatible with the Paris Agreement and
deliver the EU’s commitments under SDGs 7 (Affordable and Clean Energy), 11 (Sustainable Cities),
12 (Responsible Consumption and Production) and 13 (Climate Action). An additional €178bn annual
investment and much more granular policy detail will be needed to deliver the EU’s 2030 climate
and energy targets14 in the construction of renewable energy facilities, significant upscaling of
energy efficiency projects in commercial, domestic and industrial premises, decarbonising transport
of all forms, tackling agricultural emissions and shifting towards resource-efficient, service-based
business models across Europe.
This paper argues that to maximize the economic and social opportunities from the global low
carbon transition, EU policymakers must embrace and recognize that ambitious, well-designed
and properly enforced environmental regulations are not only essential to meet the EU’s long-
term environmental and climate objectives but can also deliver significant economic and
competitiveness benefits to European industry.
14 IEEP & Ricardo Energy and Environment (September 2017)
Climate Mainstreaming in the EU Budget
2
Securing and financing clean growth for the EU
2 The case for ambitious environmental
regulations
A zero emission, environmentally resilient and resource efficient economy can and must be a
growing economy. Having reduced its emissions by 23% compared to 1990 levels by 2016 and
increased its GDP by 53% over the same period,15 the EU is already well placed to develop a
competitive zero carbon economy by the middle of the century. Increasing the robustness of its low
carbon offering to improve the wellbeing of its citizens is now vital to ensure that Europe remains
internationally competitive and attractive.
To safeguard the long-term sustainability of the EU,
over the next decade the Commission and
Parliament must ensure that embedding the principles of low carbon, resource efficiency,
environmental resilience and restored biodiversity into the economy is a key legislative priority for
the Union. Taking low-regrets pathways now will open up options for greater clean growth in the
longer run.
2.1 A major economic opportunity for the EU
Clean growth presents a sizeable economic opportunity for the EU beyond the imperative of
avoiding long-lasting economic and environmental damage from climate change. As the EU’s
competitor markets increasingly seek to capitalise on the low carbon transition,
higher standards in
the EU which drive innovation and investment in efficiencies are in the EU’s competitive interests,
boosting value added and profit for the bloc.
The global market for low carbon goods and services, already worth $5.5tn in 2011-1216, is rapidly
growing.17
In this burgeoning global marketplace, ambitious policy in the EU can create a first
mover advantage, building on existing European strengths to drive domestic development in the
low carbon and circular technologies, expertise and services that other countries will rely on to
deliver the SDGs and their Nationally Determined Contributions (NDCs) under the Paris Agreement.18
A recent Aldersgate Group report found that
an additional €324bn in GVA could be generated
between 2016 and 2030 across Europe from greater resource efficiency,19 delivering an addition
reduction in material demand and CO2 emissions of 184m tonnes and 154m tonnes respectively. As
China has imposed a ban on imported waste in 2018, taking a proactive approach to resource and
waste management will also become increasingly inevitable, creating commercial opportunities for
early movers. Internal investment will also help deliver growth and improved livelihoods in the real
economy: it is estimated that €10bn of energy efficiency investment could support up to 220,000
jobs, help to establish a renovation market for small businesses worth up to €120bn, and take 3.2m
European families out of energy poverty.20
15 European Commission (2018) Climate Action
: https://ec.europa.eu/clima/policies/strategies/progress_en
16 New Climate Economy (2015)
Seizing the Global Opportunity 17 Frankfurt School-UNEP Centre/BNEF (2016)
Global Trends in Renewable Energy Investment 2016 18 M. Carvalho & S. Fankhauser (April 2017)
UK export opportunities in the low-carbon economy
19 Through substantial progress in recycling and remanufacturing, and major development of reuse,
servitisation and biorefining. Findings were based on business trials undertaken as part of a LIFE+ funded
project (REBus
) www.rebus.eu.com Aldersgate Group (January 2017)
Amplifying Action on Resource Efficiency:
EU edition
20 European Commission (7 February 2018)
Smart finance for smart buildings: investing in energy efficiency in
buildings
3
Securing and financing clean growth for the EU
2.2 Overcoming misconceptions
Capitalising on these global growth opportunities will require overcoming a common perception
amongst policymakers that environmental regulation is a burden for business and a barrier to
economic growth. This misconception has often been a major hurdle to the EU and its Member
States establishing or extending ambitious environmental regulations.
A recent report published by engineering consultancy BuroHappold21 found that contrary to
common belief,
well-designed, ambitious environmental regulations can deliver economic as well
as environmental benefits. 22 The study considered the economic impacts that ambitious
environmental regulations have had in the recent past on the construction, waste and automotive
sectors. In all three cases, it concluded that the
initial costs incurred by businesses to comply with
regulations were outweighed by economic benefits in the form of increased business investment
in skills, innovation, better quality products, infrastructure and supply chains, all of which have a
positive impact on job creation and business competitiveness. For example the UK’s Landfill Tax23
has reduced the amount of waste sent to landfill in the UK by around 72% in 20 years and stimulated
the waste industry to invest in new facilities (recovery, sorting, recycling etc.) and new services
(recycling, reconditioning of goods etc.) with a net positive impact on the creation of high quality
and highly skilled jobs.
Importantly,
many of the jobs being created within the low carbon economy are in regions and
sectors that have seen decades of underinvestment. For example, in 2013 there were already
136,000 jobs in the low carbon economy within the North of England, an area in the UK that has
been most impacted by the move towards a service-based economy, with new employment
opportunities spanning from energy generation supply chains to electric vehicle manufacturing.24
Growing the low carbon and resilient economy has the potential to deliver higher quality of life to
citizens across Europe not only through jobs growth, but also improved air quality, resilience to
natural disasters, and greater physical and mental wellbeing associated with quality, green spaces.
The remainder of this paper sets out how we can ensure the EU’s successful and cost-effective
transition to secure clean growth, and is divided in two categories: the first (section 2) looks at
policies that are essential to establish the pipelines of resource efficient and low carbon projects
needed to deliver the EU’s climate and environmental ambitions; the second (section 3) looks at the
policies needed to increase the appetite and ability of financial markets to invest in these projects.
21 BuroHappold (December 2017)
Help or Hindrance? Environmental Regulations and Competitiveness 22 The analysis carried out by BuroHappold concludes that to be economically and environmentally effective,
environmental regulations need to be pitched at the right geographic scale, be consistent with other existing
policies, set a clear sense of direction and be implemented in a way that gives businesses enough time to
adjust to them. To maximise economic benefits and avoid unintended consequences, environmental
regulations also need to be complemented by other policies, such as on skills (to maximise opportunities in
terms of supply chain growth and job creation) or targeted financial support (to help industries at risk in the
early stages of the transition to a resource efficient, low carbon economy).
23 The Landfill Tax is a steadily increasing tax rate (now at nearly €100 per tonne) from 1996 onwards to
prevent waste generation and deliver the targets set by the EU’s Waste Directive
24 Aldersgate Group (September 2016)
Setting the pace: Northern England’s low carbon economy
4
Securing and financing clean growth for the EU
3 How to get there? Establishing a pipeline
of affordable infrastructure
A steady and forward-looking order book of infrastructure – the ‘pipeline’ – is the essential starting
point to delivering clean growth. A pipeline can be driven by regulatory levers and political signals
and results in investment in innovation, skills and supply chains to bring costs down. Meeting the
EU’s 2030 target cost effectively will rely on the commercial development of low carbon energy
generation, energy efficiency (domestic, commercial and industrial), zero emission vehicle
technology and environmental restoration projects.
The package of EU policies to 2030 therefore
needs to be sufficiently detailed to generate a robust private-sector led pipeline.
Before 2030, EU policy must also prepare the ground for innovation and development in the major
challenges yet to be solved, including around future mobility, innovation in Energy Intensive
Industries (EIIs), agriculture and water resource management. To meet these challenges the
Commission must ensure that
regulatory and fiscal policies work harmoniously towards delivering
the EU’s climate and energy goals. The necessary strategic coherence could be supported by the
creation of a new cross-cutting Clean Growth Commissioner to overcome siloed ways of working
and provide political momentum.
3.1 Setting ambitious targets
The EU’s ability to set long-term, ambitious targets that apply across the Single Market creates an
encouraging environment for private sector investment, offering a clear direction of travel that
businesses in all sectors can respond to, plan for and invest in, if enforced and supported by credible
policy levers. For example, the 2020 Renewable Energy Directive has driven the development of
support measures across Member States, leading to significant private sector investment in
renewable energy projects and innovation, and delivering substantial cost reductions in technologies
such as on- and offshore wind. The International Renewable Energy Agency (IRENA) estimates
that a
target to double the EU’s current share of renewable energy by 2030 would support continued
cost reductions and be delivered cost-effectively, whilst also adding 0.3% to EU GDP.25
By contrast, ‘stop start’ renewable energy policy in the UK resulted in a 56% decline in clean energy
investment in 2017, against a trend of international increases in investment.26 To work with business
time horizons,
targets must last beyond the cycle of a single Commission Presidency, as policy
uncertainty is a major barrier to business investment.27 This is particularly the case as a great deal
of low carbon infrastructure is long term: renewable energy assets can take 8 to 10 years to build
and operate for decades.
As another paper in this series argues, the EU must “Think 2050, Act 2020” to ensure long-term
policy coherence28 and encourage long-term project development. In practical terms, the incoming
Commission must strengthen and accelerate delivery of targets related to emissions reduction,
energy efficiency, agriculture, renewable energy, sustainable finance, the circular economy, SDGs
and plastics now.
Critically, neither the 2020 or 2030 targets currently put the bloc on track to
25 IRENA (12 January 2018) ‘European Union can meet ambitious renewable energy targets’
26 Bloomberg New Energy Finance (January 2018)
New Energy Outlook 2018 27 S. Fankhauser et al (January 2018)
Growth opportunities in the low-carbon economy 28 Duwe, M., Vallejo, L. (October 2018)
Think 2050, Act 2020: Bringing European ambition and policies in line
with the Paris Agreement
5
Securing and financing clean growth for the EU
meet the Paris Agreement goal of limiting temperature increase to 1.5°C, or even to 2°C29 and the
EU is not on track to meet its 2030 targets as it stands.30 The strategy for long-term EU greenhouse
gas emissions reductions will provide a pivotal opportunity for the next Commission and Parliament
to increase overall ambition in line with the Paris Agreement, and
requires setting a target for the
EU to become net zero by 2050.31 Doing so will send a strong signal to the market to invest and
change business as usual practices.
Within Member States, the mandatory 2030 National Energy and Climate Plans (NECPs) provide a
useful opportunity to identify a clear infrastructure development plan and pipeline. As such,
national governments should ensure that these are comprehensive (including adaptation and
resilience plans), delivered on time, and revised upwards if there are gaps in ambition when
aggregated to the EU level. Well-formulated NECPs could be developed to form the basis of
‘National Capital Raising Plans’ which would further identify investment opportunities and therefore
establish a clear market and strengthen investor confidence.
3.2 Aligning fiscal policy and incentives with policy goals
Fiscal policy is amongst the most effective levers to change market behavior and should be designed
to complement wider policy goals.
Currently the EU’s fiscal and environmental policies are not well
aligned: for example, companies developing circular business models may struggle to compete on
price if the upfront cost of secondary materials (or products using secondary materials) is higher
than that of primary raw materials, a concern recently experienced by the European retreaded tyre
industry competing against cheaper imported single-use tyres. Fiscal incentives and other pricing
mechanisms can help better reflect the whole lifecycle cost of a product and its environmental
benefit, and mitigate the upfront cost of resource efficient or green products.
The Commission must
therefore rethink current fiscal architecture, prioritising incentives to reduce resource use (from
energy to water and raw materials) and promoting low carbon approaches throughout the
economy, particularly through cornerstone spending packages such as the Common Agricultural
Policy (CAP).
3.2.1 Eliminating environmentally harmful subsidies
Market distorting fossil fuel subsidies within the EU and its member states undermine a level
playing field for low carbon industries. Currently €4bn of fossil fuel subsidies come from the EU
through its budget, European Investment Bank (EIB) lending and European Bank for Reconstruction
and Development (EBRD) spending, and funds such as the Connecting Europe Facility, European
Fund for Strategic Investments and cohesion funds.32 A further €112bn in subsidies per year come
from European countries, who lack clear plans or timelines for phase out.33 The EU has committed to
phase out by 2020, but
must now draw up a public roadmap for doing so immediately following
the election. Subsidies can then be rerouted into low carbon developments suffering market failures
or ‘hard to treat’ sectors such as industrial energy efficiency and new renewable technologies, to
help establish a level playing field. The Commission must also coordinate and support phase-out
29 Climate Action Tracke
r https://climateactiontracker.org/countries/eu/ [accessed 27 September 2018]
30 Duwe & Vallejo (October 2018)
Think 2050, Act 2020 31 IPCC (October 2018)
Global Warming of 1.5 °C: an IPCC special report on the impacts of global warming of
1.5 °C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of
strengthening the global response to the threat of climate change, sustainable development, and efforts to
eradicate poverty 32 E3G (December 2017)
Infrastructure for a changing energy system: The next generation of policies for the
European Union 33 ODI (September 2017)
Phase-out 2020: monitoring Europe’s fossil fuel subsidies
6
Securing and financing clean growth for the EU
efforts across Member States, by establishing an agreed definition for environmentally damaging
subsidies and sharing best practice.
3.2.2 Rethinking fiscal rules
Overall,
fiscal policy should support the EU’s stated policy aims.34 For example, the Commission can
permit Member States to reduce the rate of value added tax (VAT) on the provision of low carbon
and resource efficient goods and services to boost demand. Within the limited flexibility currently
provided by the EU VAT Directive, Sweden introduced a 50% reduction on VAT on the repair of items
like bicycles, leather goods and white goods and is also enabling citizens to reclaim up to 50% of
labour costs from their income tax for fixing home appliances. This flexibility should be extended
across the VAT regime where doing so can help to deliver the EU’s climate and energy goals, and
may require a system-wide review of VAT rules.
Similarly,
unequal application of State Aid rules must be addressed by the Commission. The rules
currently place constraints on national policy support for energy efficiency measures: only 30-50% of
eligible costs for energy efficiency can receive State Aid, compared to 100% for energy infrastructure.
Revising State Aid treatment of energy efficiency to match the treatment of wider energy
infrastructure can support greater investment in energy efficiency.35 The next
Commission should
consider reviewing where barriers arising from State Aid rules can be adjusted to support the EU’s
climate and energy goals across the board, exempting green or circular projects from State Aid
restrictions given the Europe-wide benefits of promoting such spending.
3.3 Technical assistance to support innovation
Many of the technologies and business models needed to help the EU secure a clean growth future
are relatively novel. Novel projects need technical and development assistance to commercialise and
attract private sector finance. For example, trials on adopting new circular economy business models
under the REBus project36 showed that
although there is often a clear economic rationale for
adopting resource efficient business models and developing resource efficient products, shifting
models is often challenging for many companies, especially – but not only – small and medium-
sized enterprises (SMEs).37 Businesses also need support to bridge the silos of industry and finance,
to structure their offerings in an investor-friendly way. This even impacts access to public sector
finance – an issue for many SMEs identified by REBus is how to fill in complex application forms to
access funding and present a project in a way that fits the scope of the funding being made available.
The EU must deploy its convening capabilities to bring together Union-wide expertise and ensure
increased technical assistance to accelerate clean growth and climate adaptation. The Commission’s
Innovation Deals, which aim to provide technical support to circular economy projects, have huge
potential to help here but they must be broadened over time beyond the two deals already agreed
on water reuse and electric vehicles, and the funding available significantly scaled up. The Advisory
Hub proposed under the next Multiannual Financial Framework (InvestEU Assistance) will also be
helpful in simplifying access to technical assistance for future projects, as long as it remains a key
pillar of the final budget.
Technical assistance must particularly be focussed on the regions and
sectors for whom the low carbon transition is currently highly challenging, for example in regions
highly dependent on EIIs.
34 E. Yrjö-Koskinen, M Nesbit (2018)
Aligning EU resources and expenditure with 2030 objectives, IEEP Policy
Paper
35 E3G (March 2016)
Energy efficiency as infrastructure 36 On which the Aldersgate Group was a partner. See more
: http://www.rebus.eu.com/ 37 Aldersgate Group (December 2017)
Beyond the Circular Economy Package
7
Securing and financing clean growth for the EU
3.4 Effective market mechanisms
Market mechanisms are essential to complement targets
by setting the parameters within which
businesses can invest in a project and calculate expected returns.
3.4.1 Revenue guarantee
At the national level,
long-term contracts that guarantee a fixed revenue have proven to be an
effective way of driving private sector investment and reducing the cost of new low carbon
technologies. The offshore wind industry in the UK has benefitted enormously from the
government’s graduated Contract for Difference auctions, which set price stability up to 15 years
ahead, driving progressively declining strike prices. The certainty and stability offered by the
auctions has supported a reliable pipeline of orders for the UK supply chain and increased
competition amongst developers. The strike price of offshore wind in the UK has nearly halved in
just two years as a result, and UK industry is increasing its strengths in the export of cables, blades,
foundations and towers for offshore wind, and benefitting from strong expertise in operation and
maintenance.38 Germany, the Netherland and other Member States have similar stories to tell.
Lessons from these experiences can be shared with EU states with less developed low carbon
industries, and with industries less established than low carbon energy.
3.4.2 Pricing the carbon market and supporting EIIs
At the EU level
, setting pricing signals across the Single Market can encourage investment in low
carbon technologies and energy efficiency by creating a level playing field. For example, the EU’s
Emissions Trading System (EU ETS) could support the investment case for low carbon infrastructure
if it delivered a higher price. The recent reforms39 are expected to push prices up to €25-30 per
tonne. However, analysis from Carbon Tracker suggests that prices will have to rise to €45-55 per
tonne to 2030 to limit temperature increase to below 2°C.40 A long-term pricing pathway is
particularly important given that under Phase 4, the ETS cap is set to reach zero by 2058.
Delaying
action now will likely result in a steep and sudden increase in the price of emission allowances in
the future, to the detriment of business planning.
More accurate pricing of carbon could be achieved through the introduction of a steadily increasing
floor price within the ETS, looking out to 2050. California has set an auction price reserve for its ETS,
starting at $10 per tonne in 2012 and increasing each year by 5% plus inflation. Unilateral carbon
pricing may also be in many countries’ own interests thanks to the associated non-climate benefits,
such as lower levels of air pollution.41
To ensure a just and managed transition42 for EIIs exposed to competition from markets with less
ambitious climate policies, the introduction of a European floor price would need to
be
accompanied by a continued scheme to provide proportionate financial support to those
industries and facilitate their access to long-term contracts for low-cost renewable energy.43
EIIs
should also be supported in adopting more circular business models, which can improve
competitiveness by reducing their raw material costs and/or developing new offerings suited to a
Paris-compliant global market. REINVENT, a Horizon 2020 research project considering value chains
38 Renewable UK (September 2017)
Offshore Wind Industry Investment in the UK 39 European Commission (February 2018), Revision for Phase 4 of the EU ETS (2021-2030):
https://ec.europa.eu/clima/policies/ets/revision_en 40
https://www.carbontracker.org/reports/carbon-clampdown/
41 IMF (January 2016)
After Paris: Fiscal, Macroeconomic, and Financial Implications of Climate Change 42 For more on ensuring a just transition, see E3G (October 2018)
How to Ensure a Just and Fast Transition to a
Competitive Low-Carbon Economy For The EU 43 UCL (February 2018)
UK Industrial Electricity Prices: Competitiveness in a low-carbon world
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Securing and financing clean growth for the EU
and the implications of decarbonization for emission intensive sectors, will provide an important
framework for understanding where assistance is most needed.44 Doing so can help to ensure a
smooth transition, whilst acknowledging the inherent risks for industries that remain economically
important to Europe.
3.5 Higher Standards
Stringent and well-enforced standards have a critical role to play in facilitating new products to
come to market whilst delivering environmental improvements. For example, with 80% of a
product’s environmental impact determined at the design stage,45 product standards have been
critical in improving the quality and environmental impacts of products, especially when applied
consistently across the Single Market.46 According to the Commission’s 2016 Impact Assessment, the
energy consumption of the average product will be 18% lower by 2020 than would have been the
case without the introduction of the Ecodesign Directive.47 Similarly, consistent signals sent by the
EU passenger car emission regulations have delivered significant investment in innovation, skills and
job creation, and are partly responsible for the fact that the automotive sector now ranks fifth in
R&D intensity globally48 as well as the growth of the electric vehicles market.
Looking ahead to 2030,
standards on energy and resource use should be steadily increased across
the EU to drive up investment in efficiencies, thus boosting the added value and profit for the same,
or similar inputs. Ecodesign standards could be broadened to include more products (especially
plastics, given current political support for the Plastics Strategy), and standards will have to be
introduced on future technologies like connected and autonomous vehicles in a way that
encourages rather than hampers innovation.
3.6 Sending the right macroeconomic signals
The EU and its institutions can send powerful macroeconomic policy signals to the market through
its fiscal and monetary policy. As such,
spending and loans from bodies like the European Central
Bank (ECB) and EIB, as well as the CAP and public procurement should be aligned with the Paris
Agreement. Ongoing initiatives such as greening the European Semester are therefore very welcome,
but greening efforts must be applied across the board. Research from the LSE Grantham Institute
finds a carbon-intensive skew of Quantitative Easing (QE) purchases by the ECB (62% of ECB
corporate bond purchases are in sectors contributing to 59% of the Eurozone’s GHG emissions),
undermining signals that financial regulators are making about the risks associated with high-carbon
investments. This could be addressed by QE purchasing of green bonds, for example.49
Under the new Multi-Annual Financial Framework (MFF) for 2021-2027 (InvestEU), 25% of the
Budget is ringfenced for climate or resilience-aligned spending. InvestEU also sets out four windows
for funding access: projects falling under the sustainable infrastructure window are subject to
climate, environmental and social sustainability proofing to “minimise detrimental impacts and
maximise benefits on climate, environment and social dimensions”. Whilst this is a welcome start,
all
projects receiving funds from the EU should be subject to this sustainability proofing requirement – particularly through the CAP, which could be a powerful tool to encourage better natural capital
management if payment were more conditional on doing so – and 100% of the Budget ought to be
44
https://cordis.europa.eu/project/rcn/206259_en.html
45 T. E. Graedel et al (1995)
Industrial ecology 46 Aldersgate Group (January 2017)
Amplifying Action on Resource Efficiency, EU Edition 47 The Economist (October 2016) ‘The EU is reviewing the policy that makes its appliances so energy efficient’
48 BuroHappold Engineering (December 2017)
Help or Hindrance? Environmental Regulations and
Competitiveness 49 S. Matikainen et al (May 2017)
The climate impact of quantitative easing
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Securing and financing clean growth for the EU
spent in a way that ‘minimise[s] detrimental impact’.50 How these criteria are defined and audited
will be important and must be linked to the 2050 long-term strategy on climate change. The EU
cannot justify publically funding projects that cause environmental or social harm.
Public procurement, accounting for around 14% of the EU’s GDP,51 is amongst public institutions’
most significant interventions in the economy. As such
it is essential that the procurement policies
in the EU and its Member States be centrally aligned with EU climate, adaptation and circular
economy goals and support domestic supply chains. The Commission has recognised the potential of
reformed public procurement policy in driving sustainable business models via the Circular Economy
Package handbook on public procurement and is now gradually implementing these across a range
of different products, such as furniture.52 The next step is to accelerate and extend this, with criteria
incorporating water use, energy use, transport modes, construction materials and other
environmental indicators, and to encourage the application of these criteria across different
Commission departments and Member States.
50 For a further discussion on how the EU can green the MFF and spending see E. Yrjö-Koskinen, M Nesbit
(2018)
Aligning EU resources and expenditure with 2030 objectives, IEEP Policy Paper
51 Directorate-General for the Internal Market, Industry, Entrepreneurship and SMEs (April 2016) Preventing
corruption – new public procurement rules as of April 2016:
http://bit.ly/2cGTmcn 52 European Commission, EU GPP crite
ria: http://bit.ly/1hHx4X9
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Securing and financing clean growth for the EU
4 How to get there? Engaging financial
markets in green investment
The annual investment gap to meet the current 2030 Climate & Energy Package is estimated at
€178bn, and the EIB estimates the overall investment gap in transport, energy and resource
management infrastructure at an annual €270bn.53 This gap ─ while considerable ─ is less than 3.5%
of the value of the EU’s capital markets.54
Engaging the financial markets in green infrastructure can
raise this investment and provides an opportunity to better connect finance with the real
economy, delivering benefits to people across Europe whilst also improving the stability of the
financial system over the long-term.
Many of the recommendations from section 2 will help to boost private sector investment by
increasing the supply of bankable, mature and attractive projects, and increasing investor
confidence with greater clarity on long-term direction of travel. In addition, meeting this investment
need will require creating an enabling landscape in which green finance can flourish. In the near
term, the EU can do so by reconfirming its commitment to the Commission’s Sustainable Finance
Action Plan (hereafter The Action Plan), and specifically tackling the short-termism of financial
markets, improving definitions and information available to the market and reducing private sector
risk to encourage investment.
4.1 Tackling short-termism of the financial markets
Climate change presents considerable risks for the financial system through regulatory, transition
and physical changes.55 Physical impacts of climate change may have a negative impact on the EU by
reducing economic growth potential and forcing increased fiscal spending on extreme weather
events and changing conditions.56 The EU has already increased financing for regions hit by natural
disasters in July 2017 by nearly €10bn in response to the growth in annual natural disasters.57 In
terms of transition and regulatory risk, modelling suggests that if fossil fuels assets are stranded due
to reduced demand and/or regulatory restrictions, the global economy could lose $1-4tn (for scale,
the 2008 crisis cost $0.25tn).58 With many European investments, such as pension funds, still heavily
involved in high-carbon assets, a drop in valuation in line with the internationally agreed direction of
travel could be highly destabilising. As a first step,
the Commission should assess short, medium
and long-term implications of climate change scenarios on EU debt and the financial markets to
identify areas of future risk for the finances of the EU and its citizens.
Many of these risks are inherently long-term and are therefore likely to be missed by standard
financial analysis which tends to apply short-term thinking through risk and valuation models, fed by
53 Communication from the Commission to the European Parliament, the European Council, the Council, the
European Central Bank, the European Economic And Social Committee and the Committee Of The Regions (8
March 2018)
Action Plan: Financing Sustainable Growth COM/2018/097 final
54 European Commission (18 February 2015)
Green paper: Building a Capital Markets Union COM (2015) 63
final 55 Bank of England Governor Mark Carney identified these as transitional, physical and regulatory risks in his
2015 Tragedy of the Horizon speech
56 IMF (January 2016)
After Paris: Fiscal, Macroeconomic, and Financial Implications of Climate Change
57 European Parliament Policy Department for Budgetary Affairs (April 2018)
The EU spending on fight against
climate change 58 J. Mercure at al (2018)
Macroeconomic impact of stranded fossil fuel assets, Nature Climate Change vol. 8,
pgs 588–59
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Securing and financing clean growth for the EU
the lack of adequate information to assess climate-related risks. There are a range of regulatory
changes the EU could make to encourage more long-term thinking in financial markets. Much of this
is captured in the The Action Plan and is also ocurring across the G20. To be in a position to write the
rules of this large-scale international shift in approach,
the new Commission and Parliament must
accelerate and build on the Action Plan, harnessing the current momentum.
4.1.1 Clarifying fiduciary duty
Better application of long-term thinking could be required by reforming fiduciary duties. Fiduciary
duty requires those entrusted with managing money (fiduciaries) to act prudently to protect the
interests of those whose money they are managing (e.g. savers).59 However, the scope of duties in
relation to environmental, social and governance (ESG) factors are not clearly defined in law. To
address this,
the next Commission should pursue the work announced as part of The Action Plan to
develop legislation to clarify the fiduciary duties of investors pertaining to sustainability
considerations. The legislation should be clear that investors’ fiduciary duties should include
consideration of financially material ESG factors, building on existing literature and industry
reviews.60 The duty should extend across the investment landscape, applying to asset managers and
intermediaries (including credit rating agencies) in line with the findings of the EU’s High Level Expert
Group on Sustainable Finance (HLEG).61
4.1.2 Adjusting capital weighting
Greater stability could also be encouraged by adjusting capital weighting requirements for green
infrastructure investments.
European financial markets are subject to ‘capital weighting’
requirements for financial institutions to hold money against their investments in reserve to protect
against bankruptcy. This has resulted in less investment in illiquid infrastructure compared to other
markets like Canada, where regulations allow for a lower degree of capital reserves.62
Investing in infrastructure over the long term as a means of increasing financial stability should be
supported by prudential rules.
The new Commission should build on The Action Plan and
carefully
consider the case for introducing a ‘brown penalty factor’ to increase capital weighting for ‘brown’
investments like fossil fuel projects to disincentivize investments that exacerbate a high carbon,
higher risk financial system, without lowering prudential standards or introducing additional risk to
the market. The Commission should also consider the possibility of lowering capital weighting for
green infrastructure on the grounds that it is less threatened by transition, regulatory, and/or
physical risks (known as a ‘green supporting factor’). If done with care and sufficient lead in time for
implementation, this could help level the playing field for green investment but will require the
industry to work with the Commission to collect evidence to support adjusted risk weightings.
4.2 Improving information available to the market
High quality data is vital for making sound investment decisions – it is used to measure risk,
performance and potential for new revenue. Currently, the information available on green factors,
such as revenue arising from ‘green’ activities and the impacts of climate-related risks and
opportunities is not sufficiently well captured. This obstructs green investment, as the financial
industry cannot accurately analyse whether green investments convey lower risk or are more
profitable, or to identify climate-related liabilities across portfolios. To tackle this, the Commission
needs to act on two fronts: improve definitions to set out what constitutes a “green investment” and
59 ShareAction (October 2014)
Fiduciary duty explained 60 Law Commission (July 2014)
Fiduciary Duties of Investment Intermediaries
61 EU High Level Expert Group on Sustainable Finance (January 2018)
Final report 62 FT (21 November 2017) ‘UK life insurers can help boost infrastructure’
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Securing and financing clean growth for the EU
require more comprehensive business and investor disclosure on the financial risks and
opportunities linked
to climate change.
Improved information can also be gathered and shared by
a European Observatory for Sustainable
Finance as recommended by the HLEG on Sustainable Finance, which tracks progress on green
financial flows, establishes the scale of investment required for both public and private investors,
and provides the input for evidence-based policymaking. A European Observatory would also be
well suited to perform a scenario-analysis or climate risks to EU debt and financial stability,
suggested above.
4.2.1 Establishing better definitions
To facilitate the alignment of financial markets with the EU’s environmental objectives, the next
Commission will need to press on with the work to establish a Europe-wide definition or “taxonomy”
on sustainable finance.
Providing clear, implementable definitions on what constitutes green
investment will reduce both risk and investment costs for financial markets and should form the
basis of developing green financial products like bonds and securities. In developing a system of
classification, the upcoming Commission (and Technical Expert Group) will need to strike a careful
balance between providing clarity and ensuring that new definitions and standards can
accommodate new innovative green technologies and financial products. Consistency with standards
being developed in other markets, such as the Green Financial Management Standard being
developed by the British Standards Institute, and China’s efforts to establish a common language on
green finance63 will also be important to reduce investment friction across borders.
The development of a robust green taxonomy should be fully integrated with InvestEU’s
sustainability proofing requirement, as any divergence will reduce the clarity that investors need to
create a deeper green finance market. Defining a taxonomy must not be neglected by the incoming
Commission, and it must be developed in a way that can evolve over time to suit the needs of the
market.
4.2.2 Encouraging better disclosure
Better information for the market is most usefully delivered by providing investors with relevant
data in Annual Reports, as the Non-Financial Reporting Directive (NFRD) set out to do. The Financial
Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations go
further, establishing a forward-looking framework for disclosing physical, transitional and regulatory
risks, including undertaking scenario planning for relevant potential future climate conditions.64
These should be incorporated into the NFRD guidelines, to help ensure widespread adoption of the
TCFDs.
In parallel, the Commission should work with Member States to make TCFD recommendations
mandatory at the national level in due course, sharing best practice such as Article 173 of the French
law on energy transition for green growth. It must also support a trial and error approach, as
corporate climate scenario risk analysis is very new. Companies need a safe way to trial TCFD-aligned
disclosure without the fear of raising investor concern. To help businesses get to grips with the
recommendations and ensure smooth implementation,
the upcoming Commission should establish
the European Corporate Reporting Lab as per The Action Plan without hesitation.
4.3 Using public funds to reduce risk
63 EIB & Green Finance Committee of China Society for Finance and Banking (November 2017)
The need for a
common language in Green Finance
64 Financial Stability Board Taskforce on Climate-related Financial Disclosures (2017)
: https://www.fsb-tcfd.org
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Securing and financing clean growth for the EU
Simply put, the cost of investment is linked to levels of risk of not generating an acceptable return on
investment.
EU institutions can play a significant role in reducing that risk for investors through
risk-sharing guarantees to make low carbon investments as - or more - appealing than their non-
green equivalents.
Using public funds to de-risk projects and leverage private finance is a powerful means of
increasing investment. The EU as a bloc has a greater capacity to absorb financial loss than its
Member States and the private players that make up its financial system. As such, it is well placed to
provide risk-sharing guarantees against potential financial loss through InvestEU and the European
Fund for Strategic Investment (EFSI). This is particularly suitable in the current context of historically
low interest rates, but must be set up in such a way that is resilient to future economic or financial
downturns, if it is to maximise long-term infrastructure and job creation benefits.
For example, the Commission has developed a flexible guarantee facility for energy efficiency
through the Smart Finance for Smart Buildings initiative, to be deployed at national level. This
guarantee is expected to unlock €10bn of public and private funds to 2020 for energy efficiency, and
to be instrumental in incentivising the development of financial products for energy efficiency,
thanks to reduced risk profiles for banks and other investors.
Further guarantees in priority policy
areas (e.g. industrial energy efficiency, natural capital) and regions in the short to medium term
should be a focus for the next Commission, to facilitate green investment and lending to kickstart
a wider green finance market across Europe. The Commission and EIB could further consider
sponsoring other risk-sharing instruments like emerging resilience bonds as a means of limiting the
EU’s own risk.65
National Promotional Banks (NPBs) can also play a key role, using their knowledge of local markets
to improve reach and impact of EIB funding. In November 2017, five NPBs and the EIB launched
Marguerite II, a €700m infrastructure fund which aims to act as a catalyst for investment in
renewables, energy, transport and digital infrastructure, to implement key EU policies, following the
success of the Marguerite Fund, enabled by the EFSI which guaranteed €100m of EIB funds, allowing
the bank to invest in higher risk projects.
65 Re.Bound (September 2017)
A guide for public-sector resilience bond sponsorship
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Securing and financing clean growth for the EU
5 Conclusion
There is real potential for the EU to limit costly environmental damage and take the lead in an
increasingly competitive global low carbon economy, as long as it acts decisively now. Coming
shortly after the release of the IPCC’s 1.5°C Special Report,
this paper has argued that
the EU must
establish a level playing field for green infrastructure and green investment, by fully aligning
targets, policies and spending with the Paris Agreement goal to remain within 1.5°C of global
temperature increase. In the next five years, the next European Commission and Parliament must
set the growth of a net zero, resource efficient and resilient economy as its legislative priority,
focussing on targeted measures to boost a pipeline of projects whilst creating an enabling
investment environment to fund such projects. In this way, the EU can meet its Paris Agreement and
SDG commitments cost effectively and in doing so, build a competitive low-carbon economy fit for
the 21st Century.
The building blocks to 2030
15
Securing and financing clean growth for the EU
Aldersgate Group
www.aldersgategroup.org.uk
+44 (0) 20 7841 8966
Twitte
r: @AldersgateGrp
Electronically signed on 27/07/2020 12:52 (UTC+02) in accordance with article 4.2 (Validity of electronic documents) of Commission Decision 2004/563
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