A green tinge to the EU's latest bailout

Investment in efficiency and to a lesser extent clean energy are no-brainers for stimulus spending, making the EU's latest growth package, agreed on Friday, a useful addition to national efforts to shore up green programs.

The €125 billion ($155 billion) package was a sideshow in an EU summit deal which allowed Spain and Italy to recapitalise their banks using EU bailout funds and so shore up the eurozone. Nevertheless, the package is a useful program: about half the funds will go towards infrastructure, including efficiency, clean energy, power grids, transport and broadband networks, and the rest to supporting small- and medium-sized enterprises (SMEs) and technology research.

The combined package comes from €60 billion of European Investment Bank loans, plus €60 billion of unspent EU development funds and up to €5 billion of "project bonds".

EU officials hope the EIB loans will drive additional investment from the private sector, raising up to €180 billion in total.

The presidents of the European Commission and the EIB, Jose Manuel Barroso and Werner Hoyer, sketched out target sectors in a letter to finance ministers last week, as follows: 

Investment timeframe: 3-4 years.

Resource efficiency refers to "water and waste-management ... climate change and renewable energies, especially innovative wind power, as well as the infrastructure and equipment required to connect new generation capacities," the letter says.

Strategic infrastructure means broadband, transport and cross-border energy grids. "These and other international links are all critical for the long-term improvement of the growth potential and competitiveness of Europe," it says. That strategic infrastructure is an identical focus for the project bond initiative, which the European Commission, member states and parliament approved last month.

The unspent development funds, meanwhile, will be invested alongside EIB loans in SMEs and infrastructure, especially in debt-stricken EU countries including Portugal and Greece which couldn't meet a condition to provide matching capital.

Why green stimulus?

The aim is to address a pullback in public and private finance following a new austerity imperative across Europe. The green sector may be more suited than most to such stimulus spending. That's partly because clean energy and other low-carbon initiatives need public funding anyway, to overcome various market failures and other hurdles, and so spending is less likely to "crowd out" (compete with or displace) private capital.

Green projects face market failures, where some of their benefits (such as clean air and water) don't have a market price, reducing investor interest. Such projects face additional private sector hurdles: many projects are small (building efficiency a typical example), raising transaction costs, while finance is biased towards up-front capital vulnerable in a credit squeeze.

Roadmap

An efficiency focus, alongside renewable energy, especially makes sense given investments have short pay-backs, generate jobs and cut fossil fuel imports.

In 2010 the bloc's oil and gas imports bill stood at 2.6 per cent of GDP from 1.5 per cent in 2001, according to HSBC. A study last week by the Paris-based "Institut du developpement durable et des relations internationales" (IDDRI) calculated the kinds of net savings generated. It estimated the EU's proposed "2050 roadmap" of investment in low-carbon energy and efficiency would deliver a net, average benefit of €56 billion annually over the next 40 years, calculated by subtracting fuel savings from investment costs.

Meanwhile, investment in power grids is a competitive alternative to building new power plants by managing electricity supply and demand more intelligently. To be cost-effective, the funds should catalyse the private sector. The project bonds initiative is an example of that, aiming to draw pension funds by taking the riskiest portion of project debt, making the balance a safer bet.

This article was originally published by Reuters. Republished with permision.