The EU’s coronavirus recovery fund has a new raison d’être: energy independence

Even the EU’s coronavirus recovery fund is moving on from the pandemic.

The history-making joint fund, agreed in July 2020 to help member states weather the financial fallout, is in the midst of a reinvention to cope with yet another economic shock of extraordinary magnitude: Russia’s invasion of Ukraine.

The war is threatening to inflict a new recession in Europe, as energy prices soar out of control, inflation hits double-digit heights and supply chains are wiped out under increasingly harsher sanctions. Economic forecasts have been thrown out of the window and deep uncertainty has cast a dark shadow over the continent.

However, for many, one thing is certain: the European Union needs to become fully independent from Russian fossil fuels, the Kremlin’s most profitable export and the lifeline that sustains the costly aggression against Ukraine.

The EU has long been Russia’s number one energy client, fostering a heavy degree of dependency that for years was overlooked for budgetary convenience and that has now been exposed as a geopolitical liability.

Last year, the bloc spent almost €100 billion on Russian fossil fuels, a figure that, despite sanctions, might be surpassed by the end of this year as a persistent power crunch drives prices up.

But amidst Russia’s war in Ukraine, many see this as an untenable position for the EU, which has long been an advocate of international law and human rights.

Meeting in Versailles mere weeks after Vladimir Putin launched the invasion, EU leaders agreed to phase out “dependency on Russian gas, oil and coal imports as soon as possible” and tasked the European Commission with drafting a years-long plan to make it happen.

The roadmap, called REPower EU, was released in mid-May and came with an impressive price tag: €210 billion in additional investment between now and 2027, half of which will go straight into the deployment of renewable energy systems.

That money should come on top of the nearly €650 billion in private and public investment the bloc needs on a yearly basis to advance its twin green and digital transitions.

A not-so-new recovery fund

With the EU budget already capped for the next years and member states running out of fiscal stimuli, Brussels has resorted to the financial instrument that still had enough space left to accommodate fresh expenditure: the COVID-19 recovery fund, also known as Next Generation EU.

Even if the fund was advertised as a €750-billion package (€800 billion in current prices), most member states decided to request only their allocated share of grants, leaving over €225 billion in unused loans. These loans come with a low-interest rate but, unlike grants, need to be gradually repaid over time.

In fact, only seven out of 27 EU countries took out credits – Cyprus, Greece, Italy, Poland, Portugal, Romania and Slovenia.

The Commission wants governments to think twice and tap into the untouched loans to bankroll the projects and reforms necessary to wean the bloc off Russian fossil fuels.

“It is an excellent idea to use unused loans under the recovery fund to partly finance the energy independence from Russia,” Guntram Wolff, director of Bruegel, a Brussels-based economics think tank, told Euronews.

“This is a key priority for growth and recovery, it is of great relevance for the functioning of the single market and it is a truly European endeavour.”

Using the recovery fund to cut down Russian energy offers an immediate advantage: the money is raised on the capital markets by the Commission itself, which enjoys a consistent AAA credit rating.

Contrary to other big EU plans, where the money is raised through an intricate combination of public funds and “leveraged” private investment, some of which never materialises, Next Generation EU is a direct injection of real cash.

But Brussels is aware that, despite the huge economic turmoil provoked by the war, some member states might still be reluctant to take out a loan and increase their debts. The most well-off countries might simply prefer to get a loan on their own terms, without EU intervention.

For that very reason, the executive aims to assemble an extra €72 billion in grants by transferring money from the general EU budget – up to €45 billion from cohesion funds and €7.5 billion from the common agricultural policy –, as well as €20 billion from the Emissions Trading System (ETS).

The transfers will be voluntary and decided on by each country. It’s still too early to tell how many capitals will be willing to relocate cohesion and agricultural funds, the two most sizable programmes under the EU budget.

Next Generation EU “is directly managed, therefore the central governments are the ones who administer the funds. However, in cohesion and rural development, these funds are generally managed at a regional level,”  Siegfried Mureșan, a Romanian MEP, told Euronews.

“Both farmers and regional authorities are afraid that money will be taken away from their priorities and moved to other interests of the central government.”

Mureșan, who served as rapporteur for the recovery fund legislation, called on countries to use the available loans “extensively” and invest them in clean energy systems “so that we can build an EU that is more economically competitive and crisis-proof.”

The Commission intends to re-distribute loans according to the interest shown by member states. This would allow countries that have reached the limit of their allocated loans, like Italy, to access additional credits.

“Let us not forget that borrowing costs will increase for many member states as interest rates and credits generally rise,” the lawmaker added.

Significant exemption

If all the budget transfers are agreed upon, the EU could mobilise nearly €300 billion by the end of the decade, more than enough to finance the €210 billion roadmap on energy independence.

In order to unlock the funds, member states have to add a new chapter to their recovery and resilience plans, detailing how the money will contribute to slash Russian fossil fuels. The chapters will be evaluated by the Commission and then approved by the EU Council.

The system means that, in principle, Hungary will be initially excluded from REPower EU because its national plan remains blocked over persisting rule of law concerns.

Since Russian coal and seaborne oil are already under an EU-wide embargo, the majority of new projects and investments will be devoted to renewables, energy-efficiency measures and, crucially, the diversification of gas suppliers, mainly through the augmented purchases of liquefied natural gas (LNG).

In a controversial move, the Commission has proposed to lift the “do no significant harm” rule for the actions that guarantee the “immediate security” of supply of oil and gas, a concern that became even more pressing after Moscow began retaliating against several countries who refused to pay for gas in roubles.

The “do no significant harm” principle is supposed to ensure that no activity under the recovery fund runs counter to the EU’s overarching goals of preserving the environment and mitigating climate change.

The exemption reflects the strong geopolitical dimension that energy policy has acquired. The same Commission that put forward the European Green Deal is now willing to overlook the significant harm caused by two fossil fuels for the sake of cutting the Kremlin’s ballooning revenues.

Over €10 billion have been earmarked for non-Russian LNG and pipeline gas and up to €2 billion for revamping critical oil infrastructure, a fraction of the total €210 billion. But these are estimates and countries are allowed to request extra funding for oil and gas if their national circumstances justify it.

‘A dangerous cash cow’

Another Commission proposal that has raised the alarms of environmental organisations is the auctioning of new ETS allowances to bring in €20 billion worth of fresh grants.

The EU’s Emissions Trading System is the world’s largest carbon market and covers a variety of highly polluting sectors, such as electricity generation, commercial aviation, oil refineries and steel production.

All companies that operate in these fields are obliged to buy ETS allowances to pay for the amount of carbon dioxide and other greenhouse gasses they release into the atmosphere. Companies can purchase these permits and then trade them with each other to fulfil their annual needs. The allowances that are not absorbed by the market are held in the Market Stability Reserve.

The ETS is designed in a way that gradually increases the price of each allowance. The current price exceeds €80 per ton of emitted carbon. This makes the burning of fossil fuels more expensive and encourages the adoption of renewables, which don’t require credits.

Making €20 billion out of the ETS means that a huge amount of carbon credits – between 200 and 250 million, using the current price – will have to be taken from the stability reserve and put in the market. There is a “clear risk” this will lead to higher emissions and undermine the EU’s long-term climate goals, says Klaus Röhrig, an energy expert at Climate Action Network Europe.

“It is a very dangerous precedent of using the ETS as a cash cow whenever the Commission runs out of options,” Röhrig told Euronews, calling on the co-legislators to veto the proposal.

“This political intervention clearly damages the confidence and trust in the integrity and independence of the carbon market, likely causing much more damage down the road.”

Röhrig warns that if the price of ETS credits begins to decrease after the all-time-high reached this year due to the war and the power crunch, the system will need to auction a larger chunk of permits to raise the promised €20 billion, opening the door for more paid-for carbon release.

Frans Timmermans, the European Commission’s vice-president in charge of the Green Deal, has defended the controversial plan, arguing the ETS auctions would “in no way” hamper the 2030 target, which legally compels the bloc to cut emissions by 55% below 1990 levels.

“We don’t see any disruption happening,” he said in May, while presenting REPower EU. “We believe we need as much investment as possible to make this transition happen – quickly.”