What a Climate-Focused Policy Shift Means for the EU’s Long-Term Budget Planning

The budget planning of the European Union (EU) has been a central topic of the organization’s internal discussions in recent months. After concluding talks on the budget and expenditures for 2020, EU policymakers are now continuing negotiations regarding the Multiannual Financial Framework (MFF) for 2021-2027. In order to take a decisive stance on climate protection, the EU has decided to increase climate-related funds in the 2020 budget and intends to make climate protection a priority in the 2021-2027 MFF. This policy direction may bring the EU closer to keeping the global temperature increase below a maximum of 2 degrees Celsius as established by the Paris Climate Agreement. At the same time, it also marks a shift in the distribution of funds for the EU’s agricultural sector, cohesion policy, research, and innovation.

Making climate protection a priority on the EU agenda reflects the emergence of green politics in Europe. Approximately 20% of the total 2020 budget (590 million Euro) will go to the LIFE Programme for the Environment and Climate Change. This is the largest amount that the European Parliament has ever designated for climate protection. Climate research and carbon-free energy projects will receive most of these funds. To further strengthen this policy trend, the European Commission also proposed an increase in climate-related funds in the 2021-2027 MFF budget. The Commission proposed that 25% of the total 2021-2027 MFF budget will flow into climate protection, which would amount to approximately 320 billion Euro. During the upcoming European Council meeting in Brussels on December 12 and 13, 2019, European heads of state will discuss the overall level of the 2021-2027 budget, key policy areas, and financing issues, providing a clearer image of the EU’s climate-related budget plans.

There are two factors that must be considered regarding MFF budget discussions. The first is the total expenditures of net contributors, i.e. the EU member states. Secondly, the diverging policy priorities of EU member states should also be taken into account. After Brexit, the UK will no longer contribute to the EU’s funds. This will create a large budget deficiency since the UK is one of the EU’s largest net contributors alongside Germany and France. Therefore, member states are debating whether the total 2021-2027 MFF budget should be decreased or not. Some countries like Germany, which contribute large sums of money to EU funds, argue in favor of a budget reduction to 1% of the combined gross national income (GNI) of all EU member states. Meanwhile, others – including the European Parliament – advocate an increase to 1.3%. The European Commission has suggested a moderate MFF budget of 1.1%, which would amount to the spending of 1.1 trillion Euro over the course of seven years.

The distribution of funds in the two key areas of agricultural policy and cohesion policy will become a focal point of MFF negotiations. So far, almost 40% of the total MFF budget was spent on agricultural policies and about 30% on the cohesion policy. The EU cohesion policy is based on the 1986 Single European Act, which defines economic and social cohesion as “reducing disparities between the various regions and the backwardness of the least-favoured regions.” A central goal of the cohesion policy is to raise the development of all EU member states to a similar level, thereby creating prosperity across the EU. The cohesion policy for 2021-2027 will encompass the following five issue areas:

  1. decarbonization and green energy
  2. digitalization and innovation
  3. improved connection through transport and digital networks
  4. improved social rights, e.g. education, employment, healthcare, and social inclusion
  5. improved local and urban outreach and development strategies

Diverging policy preferences are likely to lead to a tug of war between EU member states. The cohesion policy significantly encourages the development of Eastern European states, which is why these countries are resisting a reduction of the total cohesion policy funds. Considering that climate protection will be a central component of the cohesion policy, it appears unlikely that the cohesion policy funds will be cut significantly. Yet industries that produce large amounts of greenhouse gas emissions like the aerospace industry may face increased limitations as the EU reduces fossil fuel-based infrastructure in the cohesion policy fund.

Meanwhile, top agricultural producers in the EU like Spain, France, and Ireland have contested the reduction of agricultural policy funds. This could be a substantiated concern since climate funds could be increased at the expense of agricultural funds. This could become a problem for countries like Latvia, for example, because a third of the income of Latvia’s farmers is funded by the EU. A reduction in agricultural funding could therefore negatively impact the stability of the farming sector in countries that are strongly reliant on EU support.

To conclude, the policy shift towards a green Europe could entail a restructuring of budget distributions. Increased funds for climate projects may go hand in hand with decreased funds for the agricultural sector, which can pose risks to the farming industry. At the same time, businesses that adopt climate-supportive projects are likely to receive better funding. Previously strong focus on agricultural policies could potentially shift towards more sustainable rural development, emission-free energy initiatives, climate research projects, and digitalization. Forthcoming EU summits on the MFF will indicate how the EU will weight its budget priorities.

About the Author

Yasemin Zeisl

Yasemin Zeisl is a Risk Analyst at Global Risk Intelligence. She earned her MSc in International Relations and Affairs from the London School of Economics and Political Science (LSE). She is currently based in Austria. Yasemin is fluent in German and English and possesses advanced Japanese language skills.

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