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21 May 2020

EU’s Green stimulus takes shape ahead of next week’s announcement

The European Union will announce its economic recovery package for the bloc next week, with draft documents indicating that governments have agreed for it to center around climate change and President Ursula von Der Leyen’s Green Deal.

In a draft proposal seen by Bloomberg, the Green Deal is set to be transformed into a roadmap that will rescue the EU’s economy through a drive for private investment and jobs in sustainability across the continent. It is expected that the full plan will be unveiled on the 27th of May, with at least €500 billion allocated to combatting the long-term economic impact and recession caused by the Covid-19 pandemic, between 2021 and 2027. On a full scale, injected funds could exceed $1 trillion.

Early details have been outlined for as much as €80 billion to promote continued sales of electric vehicles and possibly providing a bloc-wide VAT exemption while also doubling investments in charging infrastructures. The EU will aim to install 2 million electric and hydrogen vehicle charging stations by 2025. €91 billion will be earmarked each year for grants and guarantees to retrofit buildings with clean and energy saving technology including rooftop solar, insulation and electrified heating.

Through the proposal, the EU will also tender an additional 15 GW of renewable energy capacity over the next two years, with investments of €25 billion. We imagine that this will be split fairly evenly between onshore wind, offshore wind and solar PV, with markets shrinking by 20% to 33% due to the virus this year, according to the Commission.

Possibly most exciting is the doubling of funds to be injected in the nascent green hydrogen market, which will inevitably focus on both production through electrolysis and adapting existing gas infrastructure to incorporate more green hydrogen. This will see a further €10 billion allocated to the technology over the next 10 years.

The European Investment bank will also offer €10 billion in loans for new green hydrogen and renewable energy projects. The most promising thing to note, is that no financing has been directly allocated to natural gas or carbon capture.

Even before the pandemic, the commission had calculated that up to €300 billion of annual investment would be needed for the EU to reach its net-zero by 2050 goal. Covid-19 has potentially provided an ideal excuse to reform its spending plans to fall in line with this.

The Commission has kept quiet about the draft document, as changes may be incurred before full publication, especially as it must be signed unanimously by all 27 EU governments and the European parliament. There will inevitably be some compromise, with additional finances going to countries who oppose the plan, as the EU tried to strike a balance restarting economies and reforming them to place more focus on climate change. It’s possible that negotiations could go on for weeks, if not months.

While several weeks ago, 17 countries had signed a letter calling for the Green Deal to be placed at the center of the bloc’s economic response to Covid-19, countries not signing are likely to provide the largest barrier to legislation passing. These include Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Poland and Romania. The Czech Republic has expressed particular objection, with Prime Minister Andrej Babis, calling for the deal to be cancelled for governments to concentrate all their resources on combating the coronavirus.

Some recent reports have also detailed that the German cabinet has agreed an economy-wide carbon price of €25 per ton of CO2 from January 2021, rising to €55 in 2025.