Iain Begg
European Institute, London School of Economics and Political Science
The EU budget has been a running sore in economic governance for so long that its potential contribution to our well-being is easily dismissed. Although a review of all aspects of the budget was supposed to have taken place in 2008/9, nothing has yet emerged. There was an extensive consultation, studies were commissioned and libraries of position papers were written, but political timidity has prevailed and an observer from Mars could be forgiven for wondering quite what the EU budget is for.
Countering climate change could offer an answer. A shift to a low carbon economy is widely agreed to be necessary, and there is growing recognition that EU economic governance beyond 2010 must focus on timely action to change patterns of production and consumption towards a new, low-carbon paradigm. Comprehensive public policies and expenditure programmes will be needed, with funding from different levels of government combining with private investment, aimed at sharp reductions in the energy intensity of GDP and in the carbon intensity of energy.
Some critics portray carbon mitigation as a burden and argue that ‘green’ economy measures cannot be justified during a period of economic downturn. But research suggests that it may well offer more economic benefits than costs, especially in creating a substantial number of ‘green’ jobs and stimulating new sectors of activity. There is also a substantial self-interest for Europe in reducing dependence on energy imports, especially from politically volatile producer countries. In addition, any investment programme starting quickly (including one targeted at carbon abatement) could help the recovery from the current recession.
The magnitude of the changes required points to the need for a novel approach to governance, including re-thinking whether EU expenditure can play a pivotal or catalytic role, complementing what is done at other levels of government and by private agents. Economic arguments for assigning spending competences to the EU level include economies of scale and the expectation that if a single Member State is unable to appropriate the full benefits from relevant investments, it will invest less than is socially optimal. Such arguments are especially apposite regarding the prevention of climate change given the obvious crossborder spillovers.
Political sensitivities are bound to arise for some potential EU spending and it is inevitable that decisions on what to assign to the EU budget will reflect political expediency as well as purely analytic considerations. For example, costeffective cuts in global emissions may be attainable from EU spending outside Europe, but would face internal objections that spending should be ‘at home’. Some priorities are, nevertheless, obvious. Technological developments will loom large in any transition to a low carbon economy, but need a strategic approach. Short-term gains will, principally, stem from improving and diffusing existing technologies, but there will be a parallel need to boost investment on the known, but as yet uncommercial technologies that offer bigger cuts over a longer time horizon. Although opposed by some environmental interests, one key technology will be carbon capture and sequestration (CCS), a process which will allow for increased use of coal, an abundant and widely distributed primary source of energy that is especially suited to electricity generation, but with much lower emissions. EU funding could be used to accelerate the construction of full-scale demonstration projects and the infrastructure for subsequent implementation.
It is also important not to overlook the diverse means of achieving lower emissions and thus not to pin too many hopes on existing options, implying a need for funding now to develop the breakthrough technologies that will provide much longer term solutions. In addition, many of the more difficult options will proceed in stages. CCS, for example, can be expected to go from very costly piloting and developmental stages, through full-scale demonstration to lowercost roll-out.
Even timely emission cuts will not reduce atmospheric carbon quickly, and temperatures will rise over the next two decades, fuelling demands for public funding to underpin adaptation to effects such as rising sea levels. Rising energy prices will also have distributive effects, such as ‘fuel poverty’ among those least able to cope. EU funding for adaptation policies could therefore make sense, on much the same logic as for the Globalisation Adjustment Fund. Further political sensitivities surround the overall annual spending that could be envisaged for carbon abatement. The EU budget today is around 1% of EU gross national income (GNI). If more is spent on countering climate change, either the overall budget would have to increase or other policies would have to be squeezed. Both strategies would face political resistance. Even so, there is a margin between the present level of the budget and the ‘own resources ceiling’ (set at 1.31% of EU GNI for commitments) which gives room for an additional €35 billion annually at 2009 prices. A further impetus could come from raising at least a proportion of the EU’s revenue from some form of carbon tax, offering the prospect of a ‘double dividend’ of more resources overall (or cuts in other taxes), in tandem with incentives to curb carbon consumption.
Devising appropriate spending packages will be hard, but different configurations of spending can deliver similar results, leaving ample scope for the kind of horse-trading at which the EU excels. Elements in any package will appeal to certain Member States more than others, whether because of political preferences
or because there is the prospect (or the perception) of net economic gains. A credible portfolio has to balance the short-term and the long-term, the certain and the more speculative, internal measures and support for action elsewhere in the world, mitigation and adaptation. Another question is whether it would make sense to implement carbon abatement policies by creating new EU funds or initiatives, or whether it might be easier simply to assign new tasks within existing programmes such as cohesion policy. A possible mix, costing around a third of the EU budget, could be:
— Support for technological advances.
— Investment in new infrastructure needed to distribute alternative energy or to facilitate greatly reduced emissions of carbon.
— Initiatives to promote lower carbon use, through education, exhortation and novel approaches to regulation.
— Spending outside the EU to support low carbon strategies in countries constrained by limited fiscal capacity.
— Dealing with the consequences of climate change or carbon mitigation policies by funding projects or compensation programmes that offset the more extreme negative effects, paying attention to both potential social and regional divergences in the impact.
The political, economic and social benefits of placing sustainable development at the heart of a modernised EU budget are compelling. They would also give a new legitimacy to the EU by showing that it was acting in a domain that greatly concerns citizens. Why hesitate?