Environmental priorities at the heart of Europe’s Covid-19 coronavirus Recovery Plan

The Commission’s President, Ursula von der Leyen, has described the Recovery Plan as an opportunity to not only support Europe’s recovery but to invest in its future.²  Spending is to be guided by a sustainable finance taxonomy (which includes the green principle of “do no harm”) and the Commission intends to direct billions of euros into clean technology, renewable energy and circular economy initiatives. This is likely to be accompanied by a raft of new environmental and digital tax measures.  

How will Europe finance its recovery?

Central to the Recovery Plan is the creation of a new and temporary recovery instrument, titled Next Generation EU, which would be embedded within the long-term EU budget. Within this instrument, the EU would seek to raise EUR750bn in debt on international markets in order to distribute EUR500bn in grants and EUR250bn in loans over the period of the EU’s upcoming multiannual budget (2021-2027). 

In addition, the Commission has a revised EU budget proposal for 2021-2027, totalling EUR1.1 trillion. If agreed by Member States, Next Generation EU and the revised EU budget would see the deployment of EUR1.85tn to help kick-start Europe’s economy. In the short term, the Commission is also proposing to amend the current EU budget to make an additional EUR11.5bn available for the most pressing recovery initiatives. 

The additional funding is designed to be repaid over a period running to 2058 and the Commission has signalled that it would look to introduce new environmental and corporate “own resources” to support financing the debt. Current proposals include:³ 

• raising between EUR5bn and EUR14bn per year from the carbon border adjustment mechanism proposed as part of the European Green Deal;
• setting up a new digital tax on companies with a global turnover of above EUR750 million to generate up to EUR1.3bn per year; 
• extending the EU Emissions Trading Scheme to the maritime and aviation sectors to generate EUR10bn per year; and
• an own resource based on the operations of companies that draw major benefits from the EU single market, which could yield around EUR10bn (depending on its design). The details of this tax and how it would be determined are yet to be provided. 

The Commission briefly noted that these revenue mechanisms would be in addition to the Commission’s previous proposals for a simplified Value Added Tax and a non-recycled plastics levy.⁴    

Funding programmes

All of the money raised through Next Generation EU would be channelled through EU programmes in the form of: 

1. Support to Member States with investments and reforms: the bulk of the funding would be dedicated to a Recovery and Resilience Facility to provide loans and grants to Member States so they can implement national recovery and resilience plans. Although the funding would be made available to all Member States, it would in practice be concentrated in the most affected parts of the Union. 
2. Kick-starting the EU economy by incentivising private investments: central to this pillar is the Solvency Support Instrument which would channel investment to otherwise healthy companies that are now at risk because of the economic shutdown. This instrument would be operational from 2020 and have an associated budget of EUR31bn. The European Investment Bank will play a key role in this initiative. The Commission is also looking to upgrade InvestEU, Europe’s flagship investment programme, to a level of EUR15.3bn and to build a new Strategic Investment Facility into InvestEU with the aim of generating investment in strategic sectors, notably those linked to the green and digital transition.
3. Addressing the lessons of the crisis: The Commission is proposing to create a new health programme (EU4Health) designed to help equip Europe against the impacts of future health threats. 

European Green Deal and other policy fundamentals

The Commission has declared that it sees the European Green Deal as central to Europe’s growth strategy and that it is essential that Next Generation EU drives Europe’s competitive sustainability. To this end, it is intended that the EU sustainable taxonomy will guide investments to ensure that they are in line with Europe’s climate neutrality ambitions. 

In total, 25% of the EU budget is planned for climate investments. Whilst the Recovery Plan does not modify the measures announced as part of the Green Deal and the EU’s industrial strategy, it would add significant financial firepower to these initiatives. The following proposals are of particular note.  

• The Commission is proposing to strengthen the Just Transition Fund with additional funding of EUR30bn (bringing it to a total of EUR40bn). The Fund will be used to alleviate the socio-economic impacts of the transition towards climate neutrality, for instance, by supporting re-skilling, helping SMEs to create new economic activities and investing in clean energy.
• The budget for the European Agricultural Fund for Rural Development is to be strengthened by EUR15bn to support farmers and rural areas in the green transition.
• The Commission wants to channel increased funds through InvestEU and the Recovery and Resilience Facility to at least double the annual renovation rate of existing building stock.
• The Commission intends to mobilise at least EUR10bn over the next ten years for a new natural capital and circular economy initiative.   
• The new Strategic Investment Facility will invest in technologies key for the clean energy transition, such as renewable and energy storage technologies, clean hydrogen, batteries, carbon capture and storage and sustainable energy infrastructure.
• The work of the European Battery Alliance will be fast-tracked and the Clean Hydrogen Strategy and Alliance will steer and coordinate the rapid upscaling of clean hydrogen production and use in Europe. 

Beyond its environmental focus, the Commission has promoted a number of other policy fundamentals which will influence its recovery response. These include seeking to create more of a digital single market, ensuring that Europe has a fair and inclusive recovery which supports people to stay in work, and protecting the security of European supply chains.

Next steps

The European Commission still faces the challenging task of gaining unanimous Member State approval for the Recovery Plan. There are already reports of divisions emerging with certain Member States wanting to limit the use of debt and grants as part of the recovery package (in particular, the so-called “Frugal Four” consisting of Austria, the Netherlands, Denmark and Sweden). 

The Commission has indicated that it wants political agreement on the Recovery Plan by July – a tight timeframe that will no doubt place pressure on Member States to negotiate an agreement and which could see significant modifications to the current proposals. It is likely that any agreement on the Plan will also need a broader agreement on the EU’s 2021-2027 budget, which could prove to be a tougher challenge.

For further information on any aspect of this paper, please contact the authors below or your usual contact in Allen & Overy’s International Environmental Law and Regulatory Law Group.

Footnotes

1. https://ec.europa.eu/info/sites/info/files/communication-europe-moment-repair-prepare-next-generation.pdf.
2. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940. 
3. https://ec.europa.eu/info/files/financing-recovery-plan-europe_en.   
4. https://ec.europa.eu/info/sites/info/files/communication-europe-moment-repair-prepare-next-generation.pdf, see p. 4.