Olivier VARDAKOULIAS

economist at Climate Action Network Europe

To achieve its climate and environmental targets, the EU urgently needs to ramp up its investment levels: additional investments of 1.7 to 2 per cent of European GDP annually are needed to meet the decarbonisation targets until 2040, while €19 billion per year are needed to close the biodiversity funding gap. In an environment of national budgets constrained due to austerity and competing priorities – like defence expenditures – the role of the EU budget is central for closing the climate and nature investment gaps across the Union.

To simplify, the climate and nature contribution of the Multiannual Financial Framework (MFF) is a function of four key parameters: (a) the size of the EU budget; (b) the green mainstreaming target which determines the share of the budget dedicated to green objectives; (c) the green tagging methodology determining which investments are classified as green and (d) the ‘Do No Significant Harm’ screening, which aims to ensure that no climate and nature harmful investments are financed through EU budget funds. 

Decoding the real size and ambition of the EU’s next budget

The headline figure of ‘almost €2 trillion’ is designed to signal ambition and resolve in the face of multiple crises. An increase in the EU budget size is undoubtedly positive. However, a closer, more analytical look reveals a far less generous picture. 

Although the European Commission (EC) advertises its proposal for the 2028-2034 MFF as a near doubling of the EU’s long-term budget compared to the 2021-2027 period, this is a misleading claim. When comparing like-for-like using Eurostat’s GDP deflator, and subtracting the funds dedicated to the repayments of the NextGenerationEU recovery package (NGEU, roughly €120 billion), the proposed figure shrinks considerably to €1.32 trillion (in 2018 prices), which represents a real increase of 23 per cent compared to the 2021-2027 MFF, with additional resources amounting to approximately €250 billion. However, the most telling comparison is not with the 2021-2027 core MFF, but with the total financial firepower the EU has had at its disposal during the 2021-2027 period, including NGEU.

When the NGEU’s €750 billion (in 2018 prices) are added to the current MFF, the 2021-2027 total reaches €1.82 trillion. Measured against this, the proposed €1.32 trillion for 2028-2034 represents a significant decline of around €500 billion in available funding. As a share of the EU’s Gross National Income (GNI), the Union is potentially moving from spending about 1.8 per cent to just 1.15 per cent after subtracting NGEU repayments. This is the true shortfall facing policymakers – a looming cliff edge in funding after the NGEU phase-out.

Green transition ambitions

Turning to climate and nature mainstreaming, the EC announced that €700 billion (nominal) is earmarked for the green transition, backed by a raised green mainstreaming target of 35 per cent across the entire budget, up from 30 per cent in the current MFF. Yet again, the devil is in the details. When adjusted for inflation and compared to the green financing in the 2021-2027 MFF plus NGEU combination, there is a shortfall of earmarked funds for the green transition of about €100 billion. 

The gap between discourse and reality manifests when assessing the breakdown of planned expenditures in respective EU funds. For example, the proposed European Competitiveness Fund, earmarks only 15 per cent (€58.6 billion in 2025 prices) of the total funds allocated for the “clean transition and industrial decarbonisation” – compared, for instance, to 29 per cent (115.5 billion) earmarked for ‘Resilience and Security, Defence Industry and Space’.

The risk of greenwashing

Beyond the raw numbers, the integrity of the proposed climate spending approach is problematic due to the methodology used to track green investments (‘green tagging’). Indeed, the European Commission’s proposal relies on an ‘adjusted Rio Markers’ methodology for determining the contribution of investments to the green transition, despite the heavy criticism of both the European Parliament and the European Court of Auditors. 

First, the Commission’s 35 per cent target is a single, broad-brush goal for all environmental objectives, crucially lacking a distinct, legally binding target for each objective. This allows for vague accounting where a single project can be counted towards multiple goals without delivering tangible benefits for any.

Second – and more alarmingly – the proposal includes a catalogue of investments that could be classified as ‘climate-friendly’ under dubious criteria, creating a high risk of greenwashing. Indicatively, according to the proposed regulation setting a horizontal performance framework for the EU budget, investments in ‘the extraction and processing of critical raw materials’ would count as positive contributions to climate mitigation, while ‘expanding airport capacity or constructing new runways’ and ‘building new parking infrastructure on highways’ as investments contributing to climate adaptation.

This approach undermines the target itself. If (among other examples) building new runways and car parks can be counted as green investments, the 35 per cent minimum green spending target becomes a statistical exercise, not a genuine measure of the EU budget’s contribution to a transformative green transition. In short, the climate and environmental tagging methodology is designed to hit a numerical target rather than to ensure every euro spent actively decarbonises the European economy or contributes to biodiversity protection, pollution reduction and circular economy objectives. 

Similarly, although it is undoubtedly positive that the EC proposes to streamline the ‘Do no significant harm’ (DNSH) principle horizontally across the EU budget (which was not the case in the 2021-2027 MFF), including the setting of an exclusion list for harmful activities in a future DNSH guidance, the legal text proposed paves the way for exemptions concerning ‘defence and security’ investments as well as ‘investments of overriding public interest’. The loopholes in the proposed regulation could pave the way for the eligibility of climate and nature harmful investments, such as investment subsidies for fossil gas infrastructure.  

An elimination of crucial instruments

Two of the proposal’s most significant regressions are the quiet abolition of the Just Transition Fund (JTF) and the LIFE programme. Concerning the former, while the relevant regulation makes a passing reference to ‘just transition areas’, the onus is placed entirely on member states to voluntarily prioritise such spending within their national plans. Without ring-fenced funding or strong incentives, there is a grave risk that the Green Deal’s social justice and regional equity dimensions will be sidelined, breeding discontent and hampering the transition.

The latter is merged within the general ‘clean transition and industry decarbonisation’ component of the European Competitiveness Fund without, however, earmarking funds for LIFE’s specific objectives – especially concerning biodiversity finance as well as the implementation, monitoring and evaluation of environment and climate policies and programmes. 

The limitations of the EC’s proposals for the next MFF mean that, from a climate and nature perspective, significant amendments are required throughout the negotiation process. Of paramount importance are increasing the green mainstreaming target whilst ringfencing finance for respective environmental objectives, improving the climate tagging approach, ensuring that the DNSH guidance fully excludes harmful investments, and safeguarding finance currently falling under the JTF and LIFE.  

Photo credits: Shutterstock.com/Marko Aliaksandr