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The right finance crucial to success of the EU’s Green New Deal

Added 10 Dec 2019

The new European Commission is sending a clear signal by tabling a “Green New Deal” within a month of its inception. But to be a true statement of intent rather than a mere public relations manoeuvre, it must speak to the urgency for action. Equally, it must address the climate challenge in all its dimensions, not just environmental or economic, but the interconnected social and political dimensions as well. Related to this are three crucial tests to determine whether the detail will make or break the deal. 

The first test is how seriously the EU will take its responsibility to uphold the Paris agreement’s commitment to stay well below the 1.5 deg C threshold. As part of the industrial world, the EU has a specific responsibility not only to act at home but to support those countries that are disproportionately impacted despite historically being far less responsible for causing global warming.

The second test is the potential positive, or negative, impact of the Green New Deal on the rest of the world. In a globalised world, EU regulatory and other policy interventions in all spheres - taxation, trade or otherwise - have a considerable impact, not just on people within its borders, but on those beyond its borders as well.

The third test is whether the Green New Deal stands or falls as a model for a global green deal. Action at the EU level will go a long way. But at the same time, only global action based on the principles of multilateralism and equal global governance will be able to address the challenge in all its proportions.

Finance is an important part of the systemic problems that have contributed to climate change. The EU should guard against proposing solutions that would exacerbate the problematic impacts of finance, deepen inequalities and disproportionately impact the most vulnerable in society, many of whom are women.

At the same time, finance is a necessary part of the solution to achieve climate justice. To serve this function, the financial dimension of the green deal must fare exceptionally well on these three tests. There are several aspects to the finance discussion. Here we focus on tax, debt, aid and private finance.

Tax

If we are to ensure the public finance needed to fulfil the climate commitments then we cannot afford to have a broken international tax system. Globally, governments are losing an estimated US$500 billion per year due to corporate tax avoidance by multinational corporations. This problem must be solved urgently.

The EU must pioneer transparency around where multinational corporations do business and how much they pay in tax in the countries where they operate - so-called public country by country reporting. We know from experience that this can create important incentives for corporations to increase their tax payments. Furthermore, the EU must clean up its own backyard, and address the fact that some of the world's biggest tax havens are among its own member countries. At global level, the EU must send a strong signal to show that its level of ambition is not undermined by the interests of tax havens. It can do so by championing ambitious and progressive reform of the dysfunctional global tax rules, as well as backing full and equal participation of all developing countries in the process to rewrite those rules. 

Debt

High sovereign debt burdens continue to reduce fiscal space for financing the Green New Deal in many countries, especially in the so-called periphery countries of the EU. This is despite the European Central Bank-led efforts to keep interest rates in those Member States that use the Euro low. Monetary policy tools have temporarily reduced debt service costs, but will not be sustainable when there is a monetary policy reversal in the USA and other major economies. Debt relief has evidently been an effective policy tool for freeing up public resources for development spending in other regions, it should be applied in the EU too. With regard to its own financing instruments, the EU should consider debt-to-green-new-deal-swaps, with which debt that is currently due to be repaid to the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) can be transformed into investment spending for the Green New Deal. Debt or member states should remain in the lead to determine the investments to be made with freed-up resources.  More broadly, as a new round of debt crises would predictably derail any efforts to finance a green new deal, the EU should complete its patchy crisis prevention and resolution architecture with a sovereign debt workout mechanism that makes speedy and sustainable debt restructurings possible where needed.

Aid

Despite long standing commitments to spend 0.7 per cent of GNI on development cooperation, the EU and its Member States currently contribute a mere 0.47 per cent. At the same time, the EU’s contribution to climate finance to developing countries has been stagnating, and most of the money is diverted from existing development aid. If the EU is serious about tackling the global climate emergency as part of its green deal, it needs to drastically scale-up climate and environmental finance with new and additional funding without adding to unsustainable debt build-up, especially in the most climate vulnerable countries. As the largest single donor of Official Development Assistance, the EU needs to move beyond refraining from supporting fossil fuels or carbon-intensive infrastructure and mainstream climate objectives in its development cooperation and programming. While blended finance may complement the efforts of public finance for climate objectives and essential development services, these policy objectives are not necessarily the top priority for most projects and programmes financed by private investors. Specific requirements should be included to ensure that blended finance contributes to deliver on international climate commitments. 


Private Finance

The EU should ensure that the best financing option is chosen to ensure democratic ownership, transparency and fiscal sustainability of the needed reforms. However, strict European rules on fiscal deficits and debt levels, combined with the absence of ambitious plans on tax reform and new sources of financing, run the risk of an excessive reliance on private finance. Attempts to use a “private finance first” approach to deliver on climate change and development finance, either by the financialisation of public infrastructure, through blended finance instruments or public private partnerships, have failed to deliver, and have proved to be risky, with poor results on tackling climate change and inequalities, especially gender inequalities. Moreover, losing democratic ownership of public goods and services tends to eliminate human rights protections; to further marginalise those living in poverty; and has proved challenging in terms of governance and transparency. 

In conclusion, to be able to address the interlinked challenges of the climate change emergency and growing inequalities, a Green New Deal would need to be properly funded, and the EU should ensure that each euro of the EU budget, either spent within the EU or abroad, has a positive social and environmental impact, while ensuring democratic ownership, democratic scrutiny, and the highest standards of transparency.