Even the EU’s coronavirus recovery fund is walking away from the pandemic.

The historic common fund, agreed in July 2020 to help member states deal with the financial fallout, is being reinvented to deal with another economic shock of extraordinary magnitude: Russia’s invasion of Ukraine.

The war threatens to inflict another recession on Europe, as energy prices spiral out of control, inflation soars into double-digits and supply chains are wiped out under increasing sanctions. more severe. Economic forecasts have been thrown out the window and deep uncertainty has cast a black shadow on the continent.

However, for many, one thing is certain: the European Union must become completely independent of Russian fossil fuels, the Kremlin’s most profitable export and the lifeline that sustains the costly aggression against Ukraine.

The EU has long been Russia’s number one energy customer, fostering a high degree of dependency that for years has been overlooked for budgetary convenience and has now been exposed as a geopolitical liability.

Last year, the bloc spent nearly 100 billion euros on Russian fossil fuels, a figure which, despite sanctions, could be exceeded by the end of this year, as a lingering power crisis drives prices up.

But amid Russia’s war in Ukraine, many see this as an untenable position for the EU, which has long been a champion of international law and human rights.

Meeting in Versailles just weeks after Vladimir Putin launched the invasion, EU leaders agreed to phase out “dependency on Russian imports of gas, oil and coal as soon as possible and instructed the European Commission to draw up a one-year plan to achieve this.

The roadmap, called REPower EU, was published in mid-May and came with an impressive price tag: €210 billion in additional investment by 2027, half of which will go directly to deploying renewable energy systems.

This money should be added to the nearly 650 billion euros of private and public investments that the bloc needs each year to advance its dual green and digital transition.

A not-so-new recovery fund

With the EU budget already capped for the next few years and member states running out of fiscal stimulus, Brussels resorted to the financial instrument that still had enough room to meet new spending: the COVID-19 recovery plan, also known as Next Generation EU.

Even though the fund was advertised as a €750 billion package (€800 billion in current prices), most member states decided to apply only for their allocated share of grants, leaving over €225 billion euros of unused loans. These loans come with a low interest rate but, unlike grants, they must be repaid gradually over time.

In fact, only seven of the 27 EU countries have taken out credits – Cyprus, Greece, Italy, Poland, Portugal, Romania and Slovenia.

The Commission wants governments to think twice and dip into untouched loans to fund the projects and reforms needed to wean the bloc off Russian fossil fuels.

“It’s a great idea to use unused loans from the recovery fund to partly finance energy independence from Russia,” Guntram Wolff, director of Bruegel, a think tank, told Euronews. economy based in Brussels.

“It’s a key priority for growth and recovery, it’s of great importance for the functioning of the single market and it’s a real European business.”

Using the stimulus fund to cut Russian energy offers an immediate benefit: the money is raised in the capital markets by the Commission itself, which benefits from a consistent AAA credit rating.

Unlike other major EU plans, where money is raised through a complex combination of public funds and ‘leveraged’ private investments, some of which never materialise, Next Generation EU is a direct injection of real money.

But Brussels is aware that, despite the enormous economic turbulence caused by the war, some member states may still be reluctant to take out a loan and increase their debts. Wealthier countries might simply prefer to get a loan on their own terms, without EU intervention.

Precisely for this reason, the executive is aiming to raise an additional €72 billion in grants by transferring funds from the general EU budget – up to €45 billion from the cohesion funds and 7, 5 billion euros from the common agricultural policy – ​​as well as 20 billion euros from the emissions trading system (ETS).

Transfers will be voluntary and decided by each country. It is still too early to say how many capitals will be ready to relocate cohesion and agricultural funds, the two most important programs of the EU budget.

Next Generation EU “is directly managed, so central governments administer the funds. However, in the field of cohesion and rural development, these funds are usually managed at regional level”, said Siegfried Mureșan, a Romanian MEP , to Euronews.

“Farmers and regional authorities fear that the money will be diverted from their priorities and transferred to other central government interests.”

Mureșan, who served as rapporteur for the recovery fund legislation, called on countries to use available loans “widely” and invest them in clean energy systems “so that we can build a more competitive EU on the economically and crisis-proof”.

The Commission intends to redistribute the loans according to the interest shown by the Member States. This would allow countries that have reached the limit of their allocated loans, such as Italy, to access additional credits.

“Let us not forget that borrowing costs will increase for many Member States as interest rates and credits generally increase,” the lawmaker added.

Important exemption

If all budgetary transfers are accepted, the EU could mobilize nearly €300 billion by the end of the decade, more than enough to finance the €210 billion energy independence roadmap.

In order to release the funds, member states must add a new chapter to their recovery and resilience plans, detailing how the money will help curb Russian fossil fuels. The chapters will be evaluated by the Commission and then approved by the Council of the EU.

The system means that, in principle, Hungary will initially be excluded from REPower EU because its national plan remains blocked due to persistent rule of law problems.

Since Russian coal and oil transported by sea are already subject to an EU-wide embargo, the majority of new projects and investments will be devoted to renewable energies, energy efficiency measures and, above all , the diversification of gas suppliers, mainly by increasing purchases of liquefied natural gas (LNG).

In a controversial move, the Commission has proposed lifting the ‘do no significant harm’ rule for actions that ensure the ‘immediate security’ of oil and gas supply, a concern that has become even more pressing. after Moscow. began to fight back against several countries that refused to pay for gas in rubles.

The ‘do no significant harm’ principle is meant to ensure that no activity under the Recovery Fund runs counter to the EU’s overall objectives of preserving the environment and mitigating climate change.

The exemption reflects the strong geopolitical dimension that energy policy has acquired. The same Commission that proposed the European Green Deal is now prepared to ignore the major damage caused by two fossil fuels in order to reduce the Kremlin’s inflated revenues.

More than €10 billion has been earmarked for non-Russian LNG and gas pipeline and up to €2 billion for upgrading critical oil infrastructure, a fraction of the €210 billion total. But these are estimates and countries are allowed to request additional funding for oil and gas if their national circumstances warrant.

“A Dangerous Cash Cow”

Another Commission proposal that has sounded the alarm of environmental organizations is the auctioning of new ETS allowances to bring in 20 billion euros in new subsidies.

The EU emissions trading system is the largest carbon market in the world and covers a variety of highly polluting sectors, such as power generation, commercial aviation, oil refineries and steel production.

All companies operating in these areas are required to purchase ETS allowances to pay for the amount of carbon dioxide and other greenhouse gases they release into the atmosphere. Businesses can buy these permits and then trade them with each other to meet their annual needs. Allowances that are not absorbed by the market are held in the market stability reserve.

The ETS is designed to gradually increase the price of each allowance. The current price exceeds €80 per tonne of carbon emitted. This makes burning fossil fuels more expensive and encourages the adoption of renewable energy, which does not require credits.

Pulling 20 billion euros from the ETS means that a huge amount of carbon credits – between 200 and 250 million, using the current price – will have to be taken from the stability reserve and put on the market. There is a “clear risk” that this will lead to increased emissions and undermine the EU’s long-term climate goals, says Klaus Röhrig, energy expert at Climate Action Network Europe.

“It’s a very dangerous precedent to use the ETS as a cash cow whenever the Commission runs out of options,” Röhrig told Euronews, calling on co-legislators to veto the proposal.

“This political intervention clearly undermines trust in the integrity and independence of the carbon market, likely causing much more damage down the road.”

Röhrig warns that if the price of ETS credits starts falling after the all-time high reached this year due to the war and the power crisis, the system will have to auction more of the permits to raise the 20 billion. promised euros, opening the door to more paid carbon emissions.

Frans Timmermans, European Commission vice-president in charge of the Green Deal, defended the controversial plan, saying the ETS auctions would “in no way” hinder the 2030 target, which legally obliges the bloc to reduce its emissions. 55% below 1990 levels.

“We don’t see any disruption happening,” he said in May, when presenting REPower EU. “We believe we need as much investment as possible to make this transition happen – quickly.”