The energy transition is crucial in light of the goal for a net-zero transition to deliver the Paris Agreement goals. It implies a massive effort to convert our energy system from fossil fuels to clean energy. To meet this challenge, the EU designed its Green Deal package, consisting of an investment plan, a circular economy action plan, and a revised EU Emissions Trading System. The key to this plan's success is ensuring that European public and private sectors together finance the green transition.
Long-term goals
The energy transition is a global effort, but the EU has a leading role. Currently, the EU has already set ambitious targets for renewable energy and energy efficiency: by 2025, more than 50% of all cars sold must be electric vehicles; by 2030, at least 20% of all final energy consumption must be from renewable sources like wind, solar or biomass; and so on.
The transition is projected to require hundreds of billions of euros in investment every year to achieve each goal. Despite the efforts of the public and private sectors, the current investments are far from sufficient to meet climate goals within a reasonable timeframe and bring about effective decarbonisation of the economy. Therefore, implementing strategies to provide public and private funding for low-carbon technologies will be decisive for achieving this objective.
The European Union has set ambitious targets for public funding: 30% of the EU’s multiannual budget from 2021 to 2028, and the NextGenerationEU (NGEU) instrument to recover from the COVID-19 pandemic has been allocated for green investments. In addition, EU countries must devote at least 37% of the financing they receive under the €672.5 billion Recovery and Resilience Facility to investments and reforms that support climate objectives.
Furthermore, the EU has designed a Green Deal package, consisting of an investment plan, a circular economy action plan and a revised EU Emissions Trading System. It aspires to create jobs, boost the economy, and help the environment.The Green Deal aims to make it easier for European businesses and households to install renewable energy technologies such as solar panels on their rooftops or in their gardens.
Insufficient incentives
The package includes incentives for investors who put up money towards installing such systems; this will be paid out at low-interest rates (between 0% and 2%). In addition, there are grants available so that those who choose not to finance themselves can get some support from government coffers instead - this could include funding for training courses or equipment hire costs if necessary.
The ETS has been in place since 2005 and has helped reduce carbon emissions by 20% compared to 2005. However, it is only working at half its potential due to market failures such as oversupply and underinvestment in clean technologies by large emitters such as industry giants like Shell or ExxonMobil. These companies see no reason to invest in cleaner technologies instead of more profitable projects like shale gas extraction, where no carbon savings are associated.
Nevertheless, policy and public funding will not be enough to finance the green transition. Private funding is required to close the gap between what is needed and what the government can provide. Private capital can be used for various purposes, including financing projects like renewable energy investments and energy efficiency measures. In addition to providing capital, the private sector can also offer long-term loans to finance projects over time. These investments will help ensure that Europe aims to cut CO2 emissions by 55% by 2035 and become climate-neutral by 2050.
The role of the European Investment Bank
The European Investment Bank (EIB) is a critical capital provider of climate action, as it is committed to increasing its level of support for climate action and environmental sustainability to exceed 50% of its overall lending activity by 2025 and beyond, which means a flow of €1 trillion of investment. The EIB invested over €27.6 billion in 2021 in supporting climate action, such as renewable energies, public and private R&D projects, and low-carbon infrastructure projects such as smart grids and electric vehicles. Such efforts aim to reduce CO2 emissions from industrial processes, create jobs through clean technology innovation, supporting environmental stewardship programmes across member States – all while ensuring good governance standards are maintained throughout this process.
Despite the EIB's role as one of Europe's largest providers of loans that have been involved in green finance for decades, its efforts have not always been successful. The EIB should target its loans at projects with positive environmental effects, so it should not lend money to companies looking to develop technologies that don't contribute to improving sustainability (such as nuclear power).
Concurrently, the European Central Bank has announced that it will incorporate climate change into its policy strategy, signalling an intention to shift its monetary policy toward green finance. In addition to providing financial support for energy-related infrastructure and renewable energy generation, it can also help promote low-carbon technologies by providing refinancing for clean energies.
One of the main tools that the ECB uses to finance the transition to a low-carbon economy is the purchase of bonds issued by projects that decarbonise the energy sector. Such action is expected to accelerate the transition and be a new way of using monetary policy tools. It would also address climate change and ensure that investors can rely on their money being used responsibly.
Although financing is a challenge that will require a tremendous amount of investment, it is also essential to create the institutional framework that ensures that this happens fast enough and in an environmentally friendly way. To achieve this, financial incentives are needed to motivate investors. Then, the EU needs to create an economic framework that encourages green finance and makes it easier for institutions such as banks and insurance companies to invest in clean energy projects.
Green finance: in need for more capital
We have a significant opportunity to create the low-carbon economy we need, and the EU is responsible for leading by example. The energy transition is the most crucial challenge facing Europe today, and it requires a massive injection of capital that the public sector cannot fully cover. Also, the institutional rules and mechanisms will be crucial to allocate capital flows. Fortunately, the EU has solid institutions with the experience required to manage and accomplish these goals.
With the support of the European Commission's Representation in Italy.
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