The writer is a senior fellow at Brown University and global chief economist at Kroll
Europe is fully united on something: it’s hot. Records have been set everywhere I’ve travelled this summer: Madrid, Rome, Brussels, Helsinki and London (where I had the pleasure of being on the all-time hottest day recorded in UK history). Half the EU is suffering from drought. The Rhine is so low barges can’t transit. Anyone fretting about an oncoming climate crisis is missing the one Europe is already in. The good news is that there is a plan to deal with climate change. The bad news is that it’s not going to help much now, and it’s difficult to assess how well it’s going to work eventually.
The stakes are high for the European Commission and the European Central Bank. When the pandemic hit, the commission put together a landmark Recovery and Resilience Fund (RRF), comprised of grants and loans for which EU member states could apply. At least 37 per cent of the money had to be used for climate objectives.
Yet it doesn’t seem using the funds for the green transition has been a pressing priority. Payments of the funds are connected to the fulfilment of specific targets in six different pillars. A recent commission report suggests that of these pillars, payments for fulfilled green transition targets ranked only fourth.
It’s also not clear how actual absorption of the funds is going. Each national project has to be tracked to know how much is spent on what and when. Only seven countries provided an annual breakdown of planned spending in their RRF plans. With the money to be doled out during 2026, it’s too early to see if most countries are on track. And there are plenty of reasons to worry some will fall behind. EU countries on average spent just under half of the Cohesion and Development Funds from Brussels in 2020.
Italy and Greece are top candidates to fall short on RRF project spending. Italy faces an election on September 25, and still must meet 55 RRF targets by year-end to receive funds. Greece’s main opposition party, Syriza, claims only 1 per cent of RRF funds have been used, with the rest creatively transferred between government agencies.
The difficulty in tracking absorption of RRF funds also affects a new initiative to phase out dependence on Russian fossil fuels by 2027. REPowerEU relies partly on RRF leftovers for funding (currently €225bn). To meet its target, the commission estimates REPowerEU will require an additional investment of €210bn. If not used, RRF funds could help accelerate the transition. But even with more firepower REPowerEU won’t help in time for this winter; it is still making its way into legislation through the European parliament, and member states will have a month after that to request the loans.
There is a powerful source of funding for the green transition that could be deployed immediately and will mobilise private capital: the ECB’s targeted longer-term refinancing operations (TLTROs). The ECB has formally included climate change in its mandate and could adjust this tool to subsidise the green transition.
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The central bank launched the TLTROs in late 2019 and cut the rate to minus 1 per cent during the pandemic. To borrow at this concessionary rate from the ECB, banks committed to not shrinking their loan books. But with the deposit rate rising, the TLTROs have become incredibly generous. The TLTRO rate was increased to the deposit rate in June, but the actual rate on TLTROs is calculated as an average over their three-year life, which remains well below the deposit rate. According to Morgan Stanley, banks could earn up to €24bn of extra profit from this carry trade between now and the end of the scheme in December 2024.
Rather than wind the TLTROs down, the ECB should offer new ones that provide concessionary loans for banks that increase their lending to firms producing clean energy and improving energy efficiency. The biggest challenge with this is in asking banks to categorise their loan books, although under the EU taxonomy, banks will start collecting data on energy performance as early as next year.
Europe has earmarked significant funding for the green transition and to reduce its reliance on Russian energy. This summer has shown how urgent the climate crisis is, and so all tools must be mobilised. National authorities and the commission should make sure the aid already committed is being successfully absorbed by green projects. And while fiscal authorities are traditionally best placed to make decisions about which industries thrive, the ECB should be picking up a fire hose as well.