The legal and institutional feasibility of an EU Climate and Energy Security Fund

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Acknowledgements

We would like to thank Ettore Dorrucci, Marien Ferdinandusse, Charlotte Grynberg, Irene Heemskerk, Nils Hernborg, Stefan Huemer, Johannes Lindner, Fatima Pires, Mila Quacquarelli, Hanni Schölermann, Fabio Tamburrini, Lucas ter Braak, Agnieszka Trzcinska, Bram van der Eem, Isabel Vansteenkiste and Chiara Zilioli for their helpful input, comments, and encouragement. We are also grateful to Jacopo Cimadomo, Nadine Leiner-Killinger, Ralph Setzer, Wolfgang Modery, Carolin Nerlich, Gilles Noblet and Christoph Zwick, who reviewed an earlier version of this paper and provided valuable suggestions.

The views expressed are those of the authors and all errors and omissions their own.

Laurent Abraham

European Central Bank, Frankfurt am Main, Germany; email: laurent.abraham@ecb.europa.eu

Marguerite O’Connell

European Central Bank, Frankfurt am Main, Germany; email: marguerite.connell@ecb.europa.eu

Inigo Arruga Oleaga

European Central Bank, Frankfurt am Main, Germany; email: inigo.arruga@ecb.europa.eu

© European Central Bank, 2023

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PDF ISBN 978-92-899-6057-1, ISSN 1725-6534, doi:10.2866/354742, QB-AQ-23-004-EN-N

[1] Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (OJ L 243, 9.7.2021, p. 1).

[2] The 2015 United Nations Climate Change Conference (COP 21) was the 21st yearly session of the

Conference of the Parties (COP) to the 1992 United Nations Framework Convention on Climate Change (UNFCCC).

[3] Council Decision (EU) 2016/1841 of 5 October 2016 on the conclusion, on behalf of the European Union, of the Paris Agreement adopted under the United Nations Framework Convention on Climate Change (OJ L 282, 19.10.2016, p. 1).

[4] These EU targets are not unanimously considered to be ambitious enough. Non-governmental organisations have suggested the EU should increase its 2030 climate target under the Paris Agreement to reductions of at least 65% in GHG emissions compared to 1990, with carbon removals being increased in addition to and separately from mitigation efforts. Moreover, the EU should also achieve climate neutrality before mid-century and by 2040 at the latest (e.g. Climate Action Network Europe, 2022). By comparison, the United States plans to reduce its GHG emissions by 50-52% from 2005 levels by 2030. It is also noted that, at a global level, the IPCC considers that to limit global warming to around +1.5°C, GHG emissions will need to peak in 2025 and be halved by 2030, with methane needing to be reduced by about a third (IPCC, 2022).

[5] Systemic climate litigation refers to climate-aligned cases against governments that challenge the overall effort of a state or its organs to mitigate or adapt to the climate crisis. See Dubash and Mitchell (2022).

[6] The Court of Justice of the European Union held in 2021 that a similar application at European level, based on the Charter of Fundamental Rights of the European Union, was inadmissible, and that it had thus not yet had the opportunity to assess whether such obligations would also flow from the EU Treaties and Charter of Fundamental Rights. See Case T-330/18 Carvahlo.

[7] Estimates in this section are in 2022 prices.

[8] Or €145 billion to €260 billion based on 2021 EU GDP.

[9] According to data from the Commission’s Recovery and Resilience Scoreboard, up to January 2022, about €500 billion of NGEU funds had been committed in grants and loans to national Recovery and Resilience Plans. Of this amount, 40% (€200 billion) is dedicated to climate expenditure.

[10] Other relevant principles include the requirement that the EU has the financial means are made available to allow the Union to fulfil its legal obligations in respect of third parties (Article 323 TFEU), and the principle of universality, also referred to as the principle of non-assignment, found in Article 20 of the Financial Regulation (Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union (OJ L 193, 30.7.2018, p. 1).

[11] Council Decision (EU, Euratom) 2020/2053 of 14 December 2020 on the system of own resources of the European Union and repealing Decision 2014/335/EU, Euratom (OJ L 424, 15.12.2020, p. 1).

[12] Council Regulation (EU) 2020/2094 of 14 December 2020 establishing a European Union Recovery Instrument to support the recovery in the aftermath of the COVID-19 crisis (OJ L 433I, 22.12.2020, p. 23).

[13] As outlined in further detail in section 3.2.1 below, Article 122(1) TFEU provides for the adoption of measures if severe difficulties arise in the supply of certain products, notably in the area of energy, while Article 122(2) TFEU provides for the granting of EU financial assistance where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control.

[14] Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

[15] A number of complainants submitted a constitutional complaint against the German law ratifying the own resources decision to the German Federal Constitutional Court (GFCC) and an application for a preliminary injunction to suspend promulgation of the law until a decision on the merits. They argued, inter alia, that the Commission does not have the right to borrow on financial markets under Article 311 TFEU in view of the no bail-out clause laid down in Article 125 TFEU. On 26 March 2021, the GFCC ordered the country's President not to sign the agreement into law until the court had decided on the application for a preliminary injunction. Subsequently, on 21 April 2021, the GFCC rejected the application for a preliminary injunction directed against the German Act ratifying the ORD. This allowed the German President to sign the Act ratifying the ORD, pending the GFCC’s substantive decision on the constitutional challenge against it. On 6 December 2022, the GFCC handed down its ruling on the case, rejecting the challenges. The GFCC held that the empowerment of the EU to borrow funds on capital markets for the purposes of NGEU did not violate the complainants’ rights under the German constitution. The GFCC reached this conclusion on the basis that the ORD including EU borrowing does not manifestly exceed the current European integration agenda and does not impair the overall budgetary responsibility of the German Parliament.

[16] Leino-Sandberg and Ruffert (2022) and de Witte (2021a) point to the fact that this unusual step was likely to have been political and strategic, aimed at providing support for national governments in debates concerning the legal implications of the envisaged scheme.

[17] The Council Legal Service (2020) also noted that a further crucial element is the fact that the ORD ensures that repayment of the EU’s debt is guaranteed within the ceilings of own resources, in a manner that constitutes an irrevocable, definitive and enforceable guarantee of payment. See also de Gregorio Merino (2021).

[18] The mid-term review of the MFF 2021-2027 in Q2 2023 will be a first opportunity to re-assess if the current EU budget continues to provide the means for common responses to common challenges and could offer a first opportunity to explore a long-term solution to the matter of climate and energy security investment needs.

[19] Leino-Sandberg and Ruffert (2022) have emphasised that Article 122 TFEU can only be a suitable legal basis for a temporary measure. They reason this on the basis that the CJEU in Case C-370/12 Pringle, para. 65 and 105, had noted that Article 122(2) TFEU would not be a suitable legal basis for a permanent stability mechanism such as the ESM.

[20] Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism (OJ L 118, 12.5.2010, p. 1).

[21] Council Regulation (EU) 2020/672 of 19 May 2020 on the establishment of a European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) following the COVID-19 outbreak (OJ L 159, 20.5.2020, p. 1).

[22] These limitations arise from the need to ensure the EU’s contingent liabilities are appropriately covered. This may be achieved where the EU still has budgetary space (also referred to as ‘headroom’, or where such liabilities are covered by Member State guarantees.

[23] For instance, by virtue of Eurostat treatment of RRF spending by Member States, spending financed by RRF grants does not increase national budget deficits, while spending financed by RRF loans does increase national budget deficits.

[24] Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources (OJ L 433I, 22.12.2020, p 28).

[25] See answer given by Commissioner Hahn to a parliamentary question on NGEU repayment, 28 September 2021.

[26] See Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices (OJ L 261I, 7.10.2022, p. 1) and Council Regulation (EU) 2022/2576 of 19 December 2022 enhancing solidarity through better coordination of gas purchases, reliable price benchmarks and exchanges of gas across borders (OJ L 335, 29.12.2022, p. 1).

Moreover, in October 2022 the European Council (2022a) called on the Commission to present proposals on the possible fast-tracking of the simplification of permitting procedures to accelerate the rollout of renewables and grids, including with emergency measures on the basis of Article 122 TFEU.

[27] Joint declaration of the European Parliament, the Council and the Commission on budgetary scrutiny of new proposals based on Article 122 TFEU with potential appreciable implications for the Union budget (OJ C 444I, 22.12.2020, p. 5).

[28] For instance, the European Climate, Environment and Infrastructure Executive Agency (CINEA), established under Commission Implementing Decision (EU) 2021/173 of 12 February 2021 establishing inter alia the European Climate, Infrastructure and Environment Executive Agency (OJ L 50, 15.2.2021, p. 9).

[29] Regulation (EU) 2021/695 of the European Parliament and of the Council of 28 April 2021 establishing Horizon Europe the Framework Programme for Research and Innovation, laying down its rules for participation and dissemination (OJ L 170, 12.5.2021, p. 1).

[30] Regulation (EU) 2021/1153 of the European Parliament and of the Council of 7 July 2021 establishing the Connecting Europe Facility (OJ L 249, 14.7.2021, p. 38).

[31] Regulation (EU) 2021/783 of the European Parliament and of the Council of 29 April 2021 establishing a Programme for the Environment and Climate Action (LIFE) (OJ L 172, 17.5.2021, p. 53).

[32] Article 33 of Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action (OJ L 328, 21.12.2018, p.

1).

[33] Commission Delegated Regulation (EU) 2019/856 of 26 February 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council with regard to the operation of the Innovation Fund (OJ L 140, 28.5.2019, p. 6).

[34] When the Treaties confer on the EU a competence shared with the Member States in a specific area, the EU and the Member States may legislate and adopt legally binding acts in that area. The Member States may exercise their competence to the extent that the EU has not exercised its competence. See Article 2(2) TFEU.

[35] Regulation of the European Parliament and of the Council of 21 February 2023 amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans (2022/0164/COD).

[36] Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

[37] These grants will be financed through the frontloaded sale of Emissions Trading System (ETS) allowances and the resources of the Innovation Fund, to be partly replenished through the Market Stability Reserve.

[38] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (OJ L 198, 22.6.2020, p. 13). See, for example, the cross-references in Articles 18(4)(d) and (e), 19(3)(d) and (e) and Annex VI RRF Regulation.

[39] Unlike the climate (37%) and digital (20%) targets for investment set out in the RRF Regulation, no quantitative targets are in place for cross-border or multi-country projects.

[40] This approach was proposed by the Commission in its original NGEU proposal. Following negotiations in the European Council, the share of Commission-administered programmes was largely reduced, with most financing being directed to the RRF, where the investment and reforms are designed by Member States.

[41] Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources (OJ L 433I , 22.12.2020, p. 28).

[42] European Parliament resolution of 23 June 2022 on the implementation of the Recovery and Resilience Facility (2021/2251(INI)) (OJ C 32, 27.1.2023, p. 42 & p. 23).

[43] See, for example, European Court of Auditors (2022).