Greening the European Semester: Using an Extended Scoreboard

Greening the European Semester:

Project financed by the European Climate Foundation – europeanclimate.org

The use of an extended scoreboard 1

IF WE ARE SERIOUS ABOUT SUSTAINABLE DEVELOPMENT, WE NEED TO GET THE FINANCING RIGHT.

Sustainable Finance Think Tank

climateandcompany.org hello@climcom.org

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Outline

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What is the

Which scoreboards

Which indicators

Which concepts

purpose

are currently used

would be useful in

need clarification for

of scoreboards?

for monitoring EU

the European

these indicators to

and national

Semester to help

policy making?

deliver the EU Green Deal?

be operational?

1. What is the purpose of scoreboards?

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The benefits of monitoring through indicators Monitoring the implementation and results of a policy intervention  provide information for future policymaking Benefits of monitoring policy implementation: • Rapid information on impact of decisions • Identification of where corrective actions and support are needed • Transparency of performances to wider public • Increased accountability of policymaking bodies • Informal effects on reputation of policymakers and higher incentive to deliver better policy results Scoreboards are used to get an overall assessment of a performance.

• Data updated in cyclical manner

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2. Which scoreboards are currently used for monitoring EU and national policy making?

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Macroeconomic Imbalances Procedure (MIP) Scoreboard •

Part of the European Semester’s Macroeconomic Imbalances Procedure (MIP)2: 

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14 headline indicators used in “MIP Scoreboard”    

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Surveillance procedure aiming to oversee Member States’ economies to detect macroeconomic imbalances that could be dangerous for the economic stability of a Member State or have an effect on the whole EU Used to create the annual Alert Mechanism Report (AMR) of the European Semester Member States categorized as having “no imbalances”, “imbalances” or “excessive imbalances” Member States with “excessive imbalances” receive MIP-related recommendations from Commission and action become closely monitored by the Commission MIP Scoreboard also contains 25 auxiliary indicators providing additional information 3

Commission allowed to launch the Excessive Imbalance Procedure  

Corrective action plan which must be adopted by the concerned Member States within certain deadlines If corrective action plan not followed and deadlines not met: Member State ca be fined up to 0.1% of their GDP 7

The Macroeconomic Imbalance Procedure Scoreboard Indicator

Unit

Threshold

Current account balance

% of GDP (3 year average)

+6% and -4%

Net international investment position

% of GDP

-35%

Real effective exchange rate – 42 trading partners

3 year % change

-6%

Export market share as % of world exports

5 year % change

+9% for euro area countries +12% for non-euro area countries

Nominal unit labour cost index (2010=100)

3 year % change

+/-5% for euro area countries +/-11% for non-euro area countries

House price index 1 year % change deflated Data(2015=100) for each indicator regularly updated by Eurostat.

133% 8

The Macroeconomic Imbalance Procedure Scoreboard Indicator

Unit

Threshold

Private sector credit flow (consolidated)

% of GDP

14%

General government gross debt

% of GDP

60%

Unemployment rate

3 year average

10%

Total financial sector liabilities (non-consolidated)

1 year % change

16.5%

Activity rate (% of total population aged 15-64)

3 year change in p.p

-0.2%

Long term unemployment rate (% of active population aged 15-64)

3 year change in p.p

+0.5%

Youth unemployment rate 3 year change in p.p (% of active population Dataaged for each indicator regularly updated by Eurostat.

15-24)

+2% 9

The Social Scoreboard • In the context of the European Pillar of Social Rights 4  20 key principles to guide us towards a social European that is fair, inclusive and full of opportunity  “Social Scoreboard” created to monitor the implementation of these principles

• Commission’s Action Plan on implementation of the Social Pillar 5  Proposed new EU targets on employment, skills and poverty reduction by 2030  Proposed revised Social Scoreboard, with a view to their integration in the European Semester • • •

Derive the Joint Employment Report published at beginning of Semester cycle Country Report 2022 will contain an assessment of progress on implementation of Social Pillar Member State will report on implementation of principles in National Reform Programmes of the Semester

 Scoreboard currently under review, being updated to new set of indicators 10

The Recovery and Resilience Scoreboard • Scoreboard designed to monitor the implementation of the Recovery and Resilience Facility (RRF)6  Displays EU countries’ progress in implementing their Recovery and Resilience Plans (RRPs)  Shows common indicators to report on progress on and evaluate the RRF

• Objectives7:  Transparently display information on implementation of the RRF to European citizens  Used to prepare the Commission’s annual report on implementation of RRF to the European Parliament and the Council  Serve as basis for Recovery and Resilience Dialogue between the Parliament and the Commission

• First reporting in February 2022 and then twice a year, by the end of February and end of August8  Website on the scoreboard to be updated in April and October by the Commission 11

The Governance Regulation of the Energy Union indicators • Under the Governance Regulation of the Energy Union9, Member States had to submit National Energy and Climate Plans (NECPs) in 2019  Outline how they plan to address the different climate and energy-related dimensions of the Energy Union for the period 2021-2030

• The Governance Regulation contain a list of indicators (Annex I, Part 2) that can be used by Member States in the analytical basis of their NECP  Not mandatory  Topics covered: •

General parameters (e.g. population, GDP, number of households, etc)

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Energy balances and supply (e.g. energy supply, electricity and heat, prices, renewables, etc)

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GHG emissions and removals related indicators (e.g. GHG emissions by policy sector, etc) 12

3. Which indicators would be useful in the European Semester to help deliver the EU Green Deal?

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3A. Which indicators can track progress of the EU Green Deal from a financial perspective?

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The need for an adequate governance framework Climate and economic sustainability are interconnected

Current climate and energy targets require fundamental fundings

Delivering investment needs impacts Member States' public finances But if investment needs not considered now: climate change will highly impact public finances

Could lead to extreme macroeconomic imbalances

Need for an economic governance framework coherent with climate-related financial impacts

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Greening the European Semester In our recent analysis10 of possible options to integrate the objectives of the Green Deal with the EU economic and fiscal policy surveillance and coordination mechanism, the European Semester, we recommend : Linking investment requirements for climate and energy and the budgetary and macroeconomic imbalances surveillance and coordination mechanisms of the European Semester

Monitoring the national sustainable investment gap

Greening national budgets

Monitoring environmental ly harmful government support

Monitoring the employment policies for a just transition

Using climate stress tests to understand the exposure of the economy

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2 additional indicators for the European Semester

Monitoring the national sustainable investment gap

Monitoring environmenta lly harmful government support

Indicator highlighting the progress on closing the national sustainable investment gap

Indicator highlighting the amount of public money spent on environmentally harmful subsidies and investment support 17

Role of indicators in the European Semester • Play an informative role to the Commission and each Member States:  The Commission and all Member States receive information on each other’s economic performances  Triggers further analysis of future macroeconomic and fiscal risks for ‘not-on-track Member States’, and maybe for the whole EU

• Trigger corrective actions through two procedures of the European Semester:  Macroeconomic Imbalances Procedure (MIP): •

Serves as early-alert mechanism for the detection of risks of macroeconomic imbalances

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Commission can launch the Excessive Imbalance Procedure

 Stability and Growth Pact (SGP): as input in possible reforms of the EU fiscal rules aiming to ensure a sustainability of the debt level and the 18

3B. In which processes of the European Semester can these new indicators be useful?

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Integration of two new indicators in Semester cycle Monitoring the national sustainable investment gap

Monitoring environmental ly harmful government support

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Indicator highlighting the progress on closing the national sustainable investment gap

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Serve in the MIP as early alert mechanism for: 

Risks of macroeconomic imbalances due to lack of sustainable project pipelines Risk of not reaching Green Deal targets in due time

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Serve in Stability and Growth Pact in case of new rule exempting certain Green Deal-aligned investments

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Member States should be able to indicate the amount of public funds used in environmentally harmful subsidies and investment support.  

To be reported in their annual draft budgetary plans in October Could be also reported in MIP Scoreboard as a broader indicator on harmful government support 20

Examples of use of sustainable investment gap indicator in Stability and Growth Pact Green Golden Rule11:  The idea to allow Member States to finance certain “green” investments through deficit, as an incentive for Member States to undertake key reforms and investments needed to deliver the climate and energy targets.

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So, investments with a verified positive impact for the green transition would be exempted from the EU fiscal rules.

 The maximum amount of investment exempted per country could be based on the order of magnitude of their sustainable investment gap.  More particularly, the exact type of investment eligible for an exemption of the fiscal rules could be the ones defined in a clear and transparent investment needs and gaps assessment methodology

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Examples of use of sustainable investment gap indicator in Stability and Growth Pact Centralized EU fiscal capacity to fund Green Deal-aligned investments12:  This proposal is based on the idea that certain public investments from Member States are funded by the EU budget and common debt.  The different proposals made by experts indicate that such an instrument could work similarly to the RRF: • • •

Member States could submit “National Reform and Investment Plans” (NRIPs) Integrate Member states’ economic reform and fiscal plans (from National Reform Programmes and Stability of Convergence Programmes) These plans would serve as the basis for the allocation of EU funds.

 NRIPs could be built based on sustainable investment needs and gaps assessments 22

4. Which concepts need clarification for these indicators to be operational?

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4A. Conceptualizing the indicator on the sustainable investment gap

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Three steps to identify the Green Deal investment gaps

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CLIMATE FINANCE LANDSCAPES -

INVESTMENT NEEDS ANALYSIS

INVESTMENT GAP ANALYSIS

Tracking and mapping lifecycle of capital flows based on (historical) data

Modeling and assessing investment needs (order of magnitude)

Assessing the difference between current/planned and required investment levels

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1. Tracking and mapping climate finance flows

• How much has been invested in a specific timeframe?

• What is the split

between public and

Climate finance landscapes of capital flows passing through several dimensions of the financial value chain:

private investors?

• What types of investment/end uses are financed?

• What intermediaries and financing instruments were the most common?

1. Sources of capital (public or private) EU budget, government budget, corporate actors or households 2. Intermediaries who facilitate these flows Government actors, public financial institutions, commercial financial institutions 3. Financial instruments Grants, loans, debt or equity 4. Recipient sectors of the capital

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Tracking climate finance flows: challenges - data availability & quality Main recommendations13: Access to relevant data & harmonization of definitions and assumptions 1. Public entities: introduction of systematic tracking procedures (e.g. via climate tagging in public budgets and/or the establishment of annual evaluation procedure) • •

For domestic public climate finance that covers federal, regional, and local levels For climate programs implemented by public banks and agencies

2. Private entities: Introduction of systematic tracking of private sources •

E.g. via surveys and (mandatory) disclosures

3. Harmonization of tracking approaches in public and private setting

Challenges regarding the interpretation and thus the usability of the different studies 1. Results highly depended on/differ in scope and methodological assumptions 2. Comparing different study results complex (especially for non-experts) •

Aggregation of study results complex/ impossible

3. Wide range of reported investment gaps, instruments, and public/private split 4. Lack of data compromises usefulness of climate investment maps to calculate investment gap 27

2. Investment needs analysis Factors aff ecting the assessment of investment needs: Key question: How much (order of magnitude) is needed in which sectors to reach a certain target in a certain timeframe?

1. Modelling type (bottom-up vs top down) and underlying assumptions 2. Scenarios 3. Objectives 4. Types of costs 5. Roles of various investors 6. Temporal dimension …and many other factors

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3. Investment gap analysis Approaches to assess investment gap:

2030 Yearly investment gap to reach 2030 targets 14 – Czechia, EUR million

…or combination of the two 29

State of play of investment needs and gaps assessment in NECPS National Energy and Climate Plans • “Incomplete, inconsistent and show large disparities”15 • Framework: No common framework for MS to apply when assessing investment flows, needs and gaps, use of different definitions, display of data, etc.

• Methods: Different methods to assess investment needs and gaps (bottom-up models, least-cost investment analyses, etc.)

• Scope: baselines and targets, methods to calculate and/or highlight total versus incremental costs, different sectors, sub-sectors, actors, sources, etc.

• Display: Incomprehensible display (unclear what exactly is described or included), data sources, time frames and methods unclear and inconsistent 30

4B. Conceptualizing the indicator on environmentally harmful government support 31

Defining environmentally harmful government support • State of play:  Currently no standard definition across the EU  No institution collecting data for these kinds of subsidies/investment support for all Member States

• Coordination of definition and systematic reporting mechanism would:  Reduce administrative work for monitoring entities  Ensure all Member States are heading in same direction

• 8th Environmnetal Action Programme16:  Guide for EU environmental climate policymaking and implementation until 2030  Commission is tasked to define by 2023 a methodology to identify all environmentally harmful subsidies  No planned monitoring framework to report those harmful subsidies •

Potential role for the European Semester 32

Conclusion

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Conclusion • The current Macroeconomic Imbalances Procedure Scoreboard is already a good exercise to understand the macroeconomic state of play of Member States • However, it does not consider the macroeconomic imbalances that can be caused by inaction or insufficient action for adapting and mitigating climate change • Every year, the remaining sustainable investment gap not addressed by Member States is carried forward to the next year, which adds on to the financial burden to already high annual investment needs 

This leads to ever higher financial risks due to climate change

• Public funds to environmentally harmful activities and investment (e.g. fossil fuel subsidies, harmful tax advantages, etc) have direct deteriorating effects on the environment 

Member States have to show progress in phasing these out

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References 1. European Commission (2014), The programming period 2014-2019 – Guidance document on monitoring and evaluation.

2. European Commission (n.d.), Macroeconomic Imbalances Procedure.

3. European Commission (n.d.), Macroeconomic Imbalances Procedure – Scoreboard.

4. European Commission (2021), European Pillar of Social Rights.

5. European Commission (2021), The European Pillar of Social Rights Action Plan.

6. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility.

7. European Commission (2022), Recovery and Resilience Scoreboard.

8. European Commission (2021), Delegated Regulation (EU) 2021/2106 on supplementing Regulation (EU) 2021/241 of the European Parliame nt and of the Council establishing the Recovery and Resilience Facility by setting out the common indicators and the detailed elements of the recovery and resilience scoreboard .

9. Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action.

10. Simon, L., Herrmann, O., Juergens, I., Berendsen, S. and Kaspar, L. (2022), Make EU Economic Governance fit for climate neutrality: Time to reform the European Semester.

11. Claeys, G. (2019), The European Green Deal needs reformed fiscal framework, Bruegel. Wolff, G. (2021), Can the EU fiscal rules jump on the green bandwagon?, Bruegel. Darvas, Z., Wolff, G. (2021), A green fiscal pact: climate investment in times of budget consolidation, Bruegel. Bodin, O. (2020), Green Deal – European Semester: Green Golden Rule as a necessary link, Greentervention. Hafele, J., Bertram, L., Korinek, L., Temory, F., Dirth, E., & Barth, J. (2021).

Financing for a future-fit Europe. Feasible and impactful proposals for a reform of the EU fiscal framework, ZOE Institute for Future-fit Economies. Finance Watch (2021), Maastricht 2.0: Updating EU economic governance for the challenges ahead Finance Watch response to the E 35 uropean Commission public consultation on the review of the European economic governance

References 12. European Fiscal Board (2021), Annual Report 2021. European Central Bank (2020), The fiscal implication of the EU’s recovery package. International Monetary Fund (2018), A central fiscal stabilization capacity for the Euro area. Finance Watch (2021), Maastricht 2.0: Updating EU economic governance for the challenges ahead Finance Watch response to the Euro pean Commission public consultation on the review of the European economic governance . Hafele, J., Bertram, L., Korinek, L., Temory, F., Dirth, E., & Barth, J. (2021).

Financing for a future-fit Europe. Feasible and impactful proposals for a reform of the EU fiscal framework, ZOE Institute for Future-fit Economies.

13. Juergens, I., Amecke, H., Boyd, R., Buchner, B., Novikova, A., Rosenberg, A., Stelmakh, K. and VasaI, A. (2012), The Landscape of Climate Finance in Germany. CPI (2021), Global Landscape of Climate Finance 2021. EEA & Trinomics (2017), Assessing the state-of-play of climate finance tracking in Europe. I4CE (2021), Panorama des financements climat, 2021 Edition. IKEM (2019), Climate and energy investment map in Germany – Status report 2016.

14. Valentová, M., Dunovski, D., Knápek, J., 2021. Capital Raising Strategy for Czechia: buildings and renewable energy supply. Prague: Czech Technical University in Prague.

15. European Court of Auditors (2021), Special Report Sustainable finance: More consistent EU action needed to redirect finance towards sustainable inv estment .

16. Council of the European Union (2021), Proposal for a Decision of the European Parliament and of the Council on a General Union Environment Action Programme to 2030.

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