Everybody knows Henry Ford’s famous quip that his Model T, produced at the beginning of the previous century, was available in any color as long as it was black. The currently discussion in Brussels on how to recover from the economic crisis reminds Ford’s statement – but this time the only available color is green. Are exceptions to the European Green Deal allowed even if they make it harder to implement the plan? – asks Paweł Wróbel, CEO of Gate Brussels and contributor to BiznesAlert.pl. In his opinion Polish companies may benefit from green EU funding.
The EU economic recovery plan will be anchored in the next EU budget for 2021-2027 and financial instruments of the European Investment Bank. Leaders of EU institutions constantly repeat that during the COVID-19 pandemic the „green” priorities have not changed. The frequency of these assurances means that despite new circumstances everybody agrees on the course of action.
Saving jobs doesn’t have a color
A number of member states are concerned whether during a crisis when the top priority is to save existing jobs „we can afford green investments”. When considering these challenges attention should be paid to two sectors – car manufacturers and airlines. They will play a key role in pursuing climate ambitions. Investments in reducing emissions in those sectors are necessary to achieve the 2030 EU goal to reduce CO2, a target that will probably be increased from 40 to 50 or 55%. On the other hand, both sectors are among the most affect by the coronavirus pandemic. Considering the amount of jobs they provide and their role in the economy there is no doubt that they cannot be allowed to fail. They have become recipients of national rescue packages that are a „lifebelt” for the economy and make it possible to maintain employment and smooth operation. Moreover, some companies have received tailored help from individual states. The exceptional economic situation caused by the pandemic forced the European Commission to loosen the rules on public help and to use a fast track for awarding consent for such policies. At this point it depends mostly on the member states whether they will use „green” criteria when awarding grants, whose scale is often impressive. At the beginning of May the EC approved financial aid of EUR 7 bn the French government gave to Air France-KLM Group. Germany’s Lufthansa is still negotiating an aid package worth EUR 9-10 billion, but expects it will not be obliged to meet any requirements to receive the help. The airlines that are part of the Lufthansa group, i.e. Brussels Airlines, SWISS and Austrian Airlines, also need support. In those cases the decisions on awarding aid are made by governments of states that will provide the said aid. Belgium’s prime minister has already announced environment-related requirements have to be part and parcel of the aid package. The French also prepared aid for the Renault group worth EUR 5 billion, which the EC approved at the end of April. The German car industry is negotiating with the country’s government the conditions for supporting the entire industry. The details will be most probably hammered out in June. The other European car companies receive support mostly as part of aid packages designed for the entire economy. In the majority of cases these packages do not include „green” requirements, which would go along the implementation of the EU ambitious climate policy.
Tools for recovery
Apart from emergency aid, a long-term action plan to get back the EU economy on the road to recovery is also being formed. The scale of the challenge is visible in the EU GDP which, according to EC predictions from early May, will drop by 7.4% in comparison to the previous year. The economy will not simply bounce back after the crisis. We need to brace ourselves for a long recession. This means the EU needs to choose mechanisms that will define financing investments and the requirements on the basis of which the funding will be awarded. The eurozone countries have at their disposal credit lines from the European Stability Mechanism (ESM). The money from the EU budget together with instruments from the European Investment Bank (EIB), mostly in the form of loans and guarantees, may not be sufficient. This is why there is talk of emitting Eurobonds (corona bonds). This idea has emerged every now and then for over a decade now, but has always been blocked by the supporters of budget savings, mostly Germany, Austria, the Netherlands and Finland. However, recently a few countries from southern Europe, including Spain and Italy, brought it back to life and argued that the unusual situation caused by the pandemic required extraordinary actions. Unexpectedly they were backed by the EC President Ursula von der Leyen. The road to form a joint borrowing mechanism, that would be beneficial mostly to southern Europe is long. Currently those states borrow individually on terms that are much less beneficial than if they borrowed through Eurobonds. This is because of their financial and economic standing. However, if this time the plan to issue Eurobonds works out, then the European Green Deal will have another tool to support green investments – cash. So far this has been missing, which has been an issue acknowledged even by the proponents of increasing climate goals. It should be remembered that the corona bonds would only be available to eurozone states, which means Sweden, Denmark, Poland, the Czech Republic, Hungary, Bulgaria, Romania and Croatia could not participate. Apart from the Scandinavian states, this group of countries stresses that the implementation of stricter climate goals poses a huge challenge for them due to the costs. Therefore, assuming the corona bonds will facilitate the implementation of the European Green Deal, in reality they will benefit only some states of the European Union.
Criteria are the key
The decision on what mechanisms will be used to support investments are important and so are the conditions for awarding aid. They will determine whether new investments will become a driving force behind a modernization course to low emissions, or whether they will ossify the current state of affairs. This is where we need to focus on road transport, which is responsible for almost 20% of CO2 emissions in the EU (apart from LULUCF). A lot will depend on the pace with which new emission standards for the car sector are introduced. Its current reduction goals are set for 2025 and 2030. It will also be contingent on generating demand for low-emission cars through, among others, financial mechanisms to enable purchases. Without such mechanisms and with a stable low oil price, it may turn out that the expected electrification of the car industry will come to a halt. The criteria for investments in air transport will be equally important. In this case the challenges are a little smaller because this sector is responsible for about 4% of emissions in the EU. In the past few years the air travel market grew very quickly and generated not only profits, but also emissions (in 1993 on the territory of the current EU there were only 360 flight passengers, in 2008 there were 800 million and in 2018 over 1.100 million). In comparison to 1990 emissions in air transport increased by 129% in 2017 whereas in maritime transport it was only 32%, road transport 19%, while emissions in the energy generation sector dropped by 22%.
The effort at emission reductions that the two sectors – air and road transport – need to make will have a significant contribution in upping the CO2 goal for 2030 from 40 to 50 or 55%. The implementation of the European Green Deal is about introducing changes across the entire economy, it encompasses, among others, the industry, the energy sector, agriculture. However, an analysis of the aid packages and the recovery plan shows that the transformation of transport may encounter bigger obstacles than other sectors.
Increasing expectations about the European Green Deal
In the face of the impending economic crisis the EU will have to battle in the coming years, one of the main jobs of the European Green Deal, apart from implementing climate goals, will be to prove that it has the potential to become the foundation of the EU economy – create jobs and ensure economic growth. With the increasing significance of the EU climate policy, expectations about it also raise.
The first green initiative to be adopted in the coming September is the „renovation wave”, a strategy to modernize buildings including residential buildings, schools and hospitals. The European Commission believes this area has a lot of potential. On the one hand, investments in buildings support the job market as well as small and medium-sized companies from the energy efficiency and renewable energy sources sectors, which create the modern economies of all member states. Additionally, such investments may significantly contribute to achieving a number of EU goals – reducing CO2, facilitating energy efficiency and developing renewable energy sources.
An opportunity for Poland
The effect dispersed investments may have when they are coordinated as part of a cohesive program are seen in Poland in the example of the PV sector, which continues to set new records and will soon exceed 2 GW (!) of installed capacity. From our point of view the EU strategy – „renovation wave” – looks like it was tailored to Polish needs. Currently Poland offers a tax relief for insulation and a program called „Clean air”, which will soon launch in a 2.0 version. It has a similar job to the EU programs and additionally implements the goals of climate policy, which is the fight against the curse plaguing many regions in Poland, i.e. smog. Merging national programs with the EU strategy will increase their chances at co-financing from EU funds and thus improve their effectiveness. It also bolsters Polish companies that operate in the renewable energy sector, energy efficiency and low-emission heating. This is a chance to unlock potential that will shape the new energy sector.
The second area of „green” initiatives in the EU is the strategy to expand offshore wind energy. It has to be honestly admitted that the sector is at such a stage of development that it does well without state support. However, in this instance it is worth appreciating the sector’s potential for expanding the jobs market and facilitating companies that participate in the supply chain. In the face of an economic crisis, actions that will help to protect and strengthen these entities are especially important. Moreover, Europe should become more familiar with their products.
This is why Poland’s initiative, supported by other EU states, to protect EU companies that participate in the EU effort to develop renewable energy sources is so important. Poland’s May letter to the European Commission co-signed by governmental representatives from Lithuania, Austria, Estonia, Greece, Latvia, Luxemburg and Spain offers a good diagnosis on what issues shape EU decisions and where the future of the energy sector is.
Both in the case of the „renovation wave” and offshore wind energy, which we are starting to develop on the Baltic Sea, it is plain to see that we will reap what we sow. This is a chance at building Polish companies that will not only successfully modernize our economy on our journey to low-emissions, but also contribute to economic growth.