‘Less Money More Problems’: Just Transition Mechanism and CEE Energy Transition
Riding high on the momentum of the COP 24 Silesia Declaration in Katowice heralding a socially inclusive just energy transition from the heart of Poland’s coal-mining region, it was inevitable that early enthusiasm was due for a reality check and the Commission’s Just Transition Mechanism (JTM) proposal released in January did not fail to disappoint.
As part of the 10-year EUR one trillion 10 European Green Deal Investment Plan, JTM is envisaged to reach EUR 100 billion of investments over 7 years. For some context, one trillion over the next decade would only cover the power sector based on its own estimates, and with the expected increase in 2030 targets later this year more investments will be needed faster.
Setting aside Poland’s popular assertion that the JTM is an order of magnitude too small, this article will attempt to present the JTF as a case study for CEE efforts to accelerate its energy transition.
The JTM starts with a paltry EUR 7.5 billion of fresh money which in itself is technically dubious under the MFF framework. What the Commission classifies as financial leveraging to reach the heights of this EUR 100 billion critics in Strasbourg deem as misleading creative accounting. Both have a point. But Eastern recipients have the most to gain and lose when it comes to the Commission’s grandiose figures since they would be obligated to contribute matching euros to receive them in return.
At the core of JTM is the Just Transition Fund (JTF), functioning primarily to provide grants for Eastern member states that not only face a greater degree of socioeconomic difficulty in transitioning from carbon-intensive economies but suffer from chronically underdeveloped financial markets and investment frameworks. I would emphasize that fixing the latter is a precondition for achieving the former.
JTF is envisaged to reach EUR 50 billion – half of the JTM – with a reallocation of ‘matching’ beneficiary funds through a combination of the European Regional Development Fund (ERDF) and European Social Fund (ESF) and national budget provisions that topping up the EUR 7.5 billion seed money. This is a large enough gap, but not to say that these funds wouldn’t or shouldn’t be put this use anyway. The Cohesion Policy governing the last budgetary period set out climate action and environmental sustainability growth objectives for Cohesion, ERDF and ESF that will be further emphasized in the next budget. Thus there is already a firm basis for the scope and application of JTM/JTF to complement and reinforce these objectives.
If the EU is introducing a new policy initiative that requires increased spending- like the Climate law’s 2050 carbon neutrality in this case -Eastern member states rightly expect more money on top of existing budgetary provisions, not the recycling of them. ERDF and ESF are within the Cohesion Policy which is a sacred cow fiercely defended from any Commission imposition. But stepping back, CEE has grown all too comfortable and dependent on the grant system over the years. On top of being free, and the moral hazard that comes with it, external evaluation is superficial and virtually unenforceable. This is not to question the rationale or purpose behind the Cohesion Policy – in a word getting used more frequently in time of crisis ‘solidarity’ - but to advocate the need for more transparency and accountability that improves value for money. In the end it is the governments that need to take the initiative on performance criteria through EU advisory tools that are available.
And while governments finagle over headline MFF budget numbers, the fact remains that public finances and no less EU grants will not be sufficient to achieve the scale of investment necessary. They must do the heavy lifting to crowd-in private investment, which is why the Commission’s plan to leverage JTM with EIB and InvestEU programmes is the correct and only way forward.
Private equity and commercial loans are by nature more transparent and accountable because people or banks are rigorous about project evaluation and expect their money back with a return, which is why blended financial instruments structured around public funds is ideal not only as a multiplier but for quality control. As such, instruments using EU funds should not be subject to the same extensive application procedures as EU grants, yet in many cases they are.
JTF is a tool for the Commission to gain political buy-in from Eastern member states for the Climate Law and 2050 carbon neutrality. As such, being light on funds, vague in scope and somewhat redundant is not exactly a winning formula. Eastern member states have a right to call out the Commission’s for a degree of mischaracterization and under-delivery, but at the same time should recognize that Cohesion, Emission Trading Scheme (ETS) or Green Deal budgets will together not be enough. Above all, rather than distracting from the JTF should contribute to improving national financial frameworks and ensuring value for money, which requires a radical departure from business as usual. Is reallocating ERDF/ESF resources in support of the social dimension of the low carbon transition, already enshrined in the Cohesion Policy, so consequential? Are we talking about the principle or the result? In the end, it is a green DEAL after all.
This year was already set to be pivotal for the EU with the intensification of Green Deal and MFF negotiations that will fund the bloc’s sustainable growth model for the next decade, but now adding to this monumental undertaking is the urgent need to set economies on the proper long-term trajectory from the depths of the COVID-19 shutdown. Actions and decisions in the coming months will go a long way in determining the future competitiveness of the CEE region and for that matter the EU as a whole - whether strategic clean technology project pipelines will emerge to capitalize on available EU resources and catalyze the region’s low carbon economy transition or whether the region continues to be muddled in business-as-usual, making hay in the short and medium-term while failing to reinvent the foreign direct investment infused industrial model of the past 30 years and falling further behind the West. It is cliché, but solidarity must prevail to make the grand deal on Europe’s climate future.
The views expressed in this opinion are those of the author and do not necessarily reflect the position of GLOBSEC or CEEP.
This reflection was published on 23 April 2020 in the CEEP REPORT for Q1 2020 entitled Just Transition Mechanism (JTM) and its importance for Central Europe energy transition.
This is the first CEEP Report in 2020 and it focuses on the Just Transition Mechanism (JTM) and Fund (JTF) which are tools of support for the regions and sectors most affected by the transition. The edition features a variety of voices from Brussels and the Central European region, presenting opinions on how the JTM and JTF should be structured and designed.