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Next Generation EU and National Recovery Plans

On 27 May 2020, the European Commission proposed a temporary recovery instrument called Next Generation EU (NGEU), meant to address the unprecedented crisis caused by COVID-19. Currently, Member States are rapidly formulating National Recovery and Resilience Plans on the basis of the European Commission’s recommendations before the deadline of 30 April 2021.

Next Generation EU: The basics

The Next Generation EU is an envelope of €750 billion representing the largest stimulus package ever financed by the EU and is designed to boost the recovery of EU economy on the basis of two clear targets:

  • 37% for green investments and reforms. Each Member State will have to include a minimum of 37% of expenditure related to climate and other environmental objectives.
  • 20% for digital investments and reforms. Each Member State will have to include a minimum of 20% of expenditure to foster the digital transition.

To achieve the targets outlined above, the Member States have until 30 April 2021 to advance a National Recovery and Resilience Plan. All Member States are now at work to set up their national recovery and resilience plans, with a constant activity following the guidance provided by the European Commission (I and II). The Member States will also integrate their recovery and resilience plans with the annual national reform programmes in line with the European Semester objectives.

The following weeks and months are a crucial period, and Dr2 Consultants strongly advises businesses to engage with their national governments and make sure that the draft national plans effectively address their specific digital and sustainability needs. Two concrete case examples in Belgium and Italy which are in the process of formulating their plans provide a vivid example of current and future opportunities for businesses to intervene in the sustainability sector.

Dr2 Consultants is expertly placed to assist your company in identifying the opportunities in the National Recovery and Resilience Plans. Our expertise in sustainability and digital topics neatly overlaps with proposed activities at national and European level.

National Recovery and Resilience Plans

Belgium

Regarding Next Generation EU in Belgium, the different governments have only recently (11 January 2021) found an agreement on the distribution of the allocated €5.9 billion from the Recovery and Resilience Facility between the federal and federated entities.

National Recovery Plan: Distribution of the allocated €5.9 billion from the Recovery and Resilience Facility between the federal and federated entities in Belgium

Distribution of the allocated €5.9 billion from the Recovery and Resilience Facility between the federal and federated entities in Belgium

Owing to its complex state structure, Belgium has not yet officially presented its National Recovery and Resilience Plan at the time of writing, which has to be agreed between the six different governments. However, it is clear that the plan will centre around five key themes:

  1. Sustainability;
  2. Digital transformation;
  3. Mobility;
  4. Social issues;
  5. Productivity.

Within the sustainability pillar, the plan will have a major focus on energy renovation of buildings, renewable energy sources, biodiversity and circular economy activities. The Belgian government(s) are expected to present their shortlist of projects shortly which will provide (industrial) stakeholders with the opportunity to elaborate on their potential involvement in concrete projects. Belgian companies which are active in the above mentioned sectors are thus highly encouraged to seek close contact with the cabinet of Minister for Recovery, Thomas Dermine.

Italy

On 12 January 2021, the Italian Government has approved the Piano Nazionale di Ripresa e Resilienza (PNRR) which has a budget of €224 billion and outlines the trajectory that the country will follow to achieve the goals of Next Generation EU.

Based on 6 missions spanning from digitalization to green transition and mobility, the PNRR covers various projects to make Italy a more modern, more digital, more sustainable and more inclusive country. The mission 2 called “Green Revolution and Ecological Transition” is at the core of the plan, envisaging to earmark €68.9 billion to four components:

  1. Green enterprise and circular economy;
  2. Energy transition and sustainable local mobility;
  3. Energy efficiency and building requalification;
  4. Protection and enhancement of land and water resources.

Mission 2 is predominantly oriented towards the pursuit of environmental sustainability, but it also has considerable digitization content. The investment actions will be accompanied by specific reforms aimed at promoting the energy transition and the use of renewable sources, providing the necessary infrastructure for their integration into the national electricity system.

The interventions will be consistent with the European Circular Economy Action Plan, with the aim of reducing the net production of waste and the landfill of all processed waste, and will ultimately contribute to the achievement of the EU objectives, made even more challenging by the review of existing legislation at European level (“Fit for 55 package”, which aims to reduce emissions by at least 55% by 2030).

The PNRR is currently under revision of the Italian Parliament and will undergo a final check with the local institutions and the social partners. The Government will also publish a governance model that identifies responsibilities for its implementation, ensures coordination with relevant ministers and monitors progress on spending.

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Summer recess – what’s next?

As EU leaders agreed on a new proposal for the new Multiannual Financial Framework and the Recovery Plan on 21 July, the European Parliament was given good food for thought over its summer recess. However, the new long-term budget is not the only priority on the EU agenda. The Commission is already chewing on a series of proposals to be expected later this year and in 2021. In fact, now is the moment to deliver input on some key, planned legislative proposals, as the Commission launched a series of public consultations that are open until after summer. Let’s have a look what is next after the 2020 summer recess.

Transport: smarter and greener

The green and digital transition as the twin priorities of the Von der Leyen Commission are also reflected in the upcoming transport initiatives. To deliver the ambitious European Green Deal climate neutrality objective, the mobility sector needs a 90% emission reduction by 2050. The Strategy for Sustainable and Smart Mobility, expected towards the end of the year, will be the overarching strategy for the delivery of the twin transitions in this area. Stakeholders can contribute to the public consultation until 23 September.

Expectedly, the strategy will include the integration of alternative fuels, in line with the recently published hydrogen strategy that already outlines a pathway for the deployment until 2050 in all modes. The strategy is also complemented by the upcoming FuelEU initiatives for the maritime and aviation sector. The FuelEU Maritime initiative, aimed at boosing alternative fuels in shipping specifically, is open for feedback until 10 September. The public consultation on ReFuelEU Aviation, initially planned for the first quarter of 2020, is still to be expected ahead of the Commission proposal this year.

Sustainability: a bigger role for tax

Taxation will become a more important instrument for the Commission to align consumer choices and business investments with its climate targets. On 23 July, public consultations on both the revision of the Energy Taxation Directive and the creation of a Carbon Border Adjustment Mechanism were launched. Having been unchanged since its adoption in 2003, the Energy Taxation Directive will be subject to a thorough review. The exact changes are yet to be determined based on the consultation outcome, however, what is clear is that it will include a correction of the minimum taxation rates for electricity, gas, and coal, as well as a tax exemption reduction for fossil fuels. The proposal, which is part of the European Green Deal, is scheduled for June 2021. The consultation is open for feedback until 14 October.

In addition, the Commission proposes a Carbon Border Adjustment Mechanism to prevent ‘carbon leakage’. This ‘CO2-tax’ internalizes emissions in the price of a product, so production does not shift to countries with lower climate ambitions. The exact instrument is still to be determined, and could take the form of an EU-wide import tax or an extension of the Emmission Trading System (ETS). The latter has already seen critical responses, as this may not be in line with WTO rules. The Commission plans to scrutinize the issue and present a proposal later this year. The revenues would directly contribute to the ‘own resources’ of the EU budget for the next seven years that would help finance the new €750 billion recovery plan. Stakeholders can deliver their contribution to the plan until 28 October.

Digital: fit for the COVID-19 reality

Following its pledge to make Europe ‘fit for the digital age’, the Digital Education Action Plan and the Digital Services Act are also high on the Commission’s agenda. The Digital Education Action Plan, due to be published in September this year, will be part of the Next Generation EU program. The COVID-19 crisis has seen schools and universities close their doors and increasingly turn to remote, digital teaching. The Action Plan aims to promote high-quality and inclusive education and training in the post-COVID digital reality. Feedback on the proposal can be delivered until 4 September.

Part of the Next Generation EU financing is the digital tax element of the Digital Services Act, to be presented by the end of 2020. The Digital Services Act is an attempt to regulate online platforms when it comes to illegal goods, product safety, political advertising and offensive content. The initiative may face intense debates before its approval, as previous attempts to implement an EU-wide Digital Taxation mechanism have so far been unsuccessful. The consultation remains open until 8 September.

Next steps

The Commission’s proposals on the above initiatives are expected before the end of 2020, except for the Energy Taxation Directive which is due in June next year. From the above-mentioned public consultations, it is evident that the European Commission is gearing up for a busy end-of-year period. Early (proactive) action is desirable for stakeholders that aim to represent their interests on these files, which will also be closely examined by the European Parliament and Council of the EU in 2021 (and later).

Want to know more about the upcoming initiatives, COVID-19, or other files that might affect your business? Please contact Dr2 Consultants to see what we can do for you.

From Green Deal to Green Recovery

While the COVID-19 crisis has seen unprecedented challenges for the European transport sector, it also demonstrated the crucial role transport plays to ensure an uninterrupted supply of goods and services across Europe. Although the recovery of the sector is of vital importance of Europe’s economy, the recovery from the crisis also provides a momentum for the industry to act on the ambition of decarbonization and reaching climate neutrality by 2050. As put forward in the Commission’s EU Recovery Plan, the COVID-19 recovery phase should be used to pave the way towards not only a resilient and reliable transport sector, but also a sustainable one that is at the heart of the European Green Deal.

Following the publication of the Commission’s plan for recovery – dubbed as ‘Next Generation EU’ – as well as its updated Work Program for 2020, we have a clearer picture how the greening of the sector will unfold in the coming years. Dr2 Consultants’ transport team presents four take-aways for sustainable transport that will dominate the EU’s policy agenda in the years to come.

1. Alternative fuels, sustainable vehicles

Alternative fuels are a key priority for the Commission to cut emissions and create jobs. The EU’s executive arm aims to accelerate the production of low-emission fuels and the deployment of sustainable vehicles and vessels. In order to finance this, public investment should come with a commitment from the industry to invest in cleaner and more sustainable mobility.

The roadmaps for the further deployment of different fuel types are expected to be part of the highly-anticipated FuelEU proposals – to be published later this year – that will aim at increasing the use of alternative fuels in the maritime and aviation sector. Furthermore, in early 2021, the Commission will put forward the revision of the Alternative Fuels Infrastructure Directive, which will ensure the development of the necessary infrastructure across Member States to stimulate the uptake of sustainable fuels for all transport modes. 

2. The convergence of the energy and mobility systems

In order to decarbonize the transport sector, no stone is currently left unturned. Although electrification seems to be the most viable option on the short term, hydrogen is dubbed as the energy source for the future. The Commission’s flagship instrument for research and innovation, Horizon Europe, will be instrumental to kick-start the clean hydrogen revolution. The Commission has increased its budget in the new Multiannual Financial Framework (MFF) with €13.5 billion, bringing Horizon Europe’s new budget to a total of €94.4 billion.

Later this month, the Commission will launch the Clean Hydrogen Alliance to stimulate the upscaling of clean hydrogen production in Europe. Also, the work of the European Battery Alliance will be accelerated. On 24 June, the Hydrogen Strategy is expected to be published.

3. Cities at the heart of sustainable mobility

With over 70% of EU citizens currently living in urban areas, achieving sustainability in cities across Europe is one of the main challenges of the recovery period. As a direct result of the COVID-19 crisis, noise pollution and air quality figures have dropped to an unprecedented level. Moreover, cities reinvented the way citizens move around, e.g. by giving priorities to pedestrians, introducing speed limits for vehicles and implementing new cycling lanes. The shift towards smart and more livable cities, therefore, places a big responsibility on the transport sector.

The Commission aims to increase the support for zero and low-emission mobility in cities by investing significantly in clean urban mobility. Funding calls in the Connecting Europe Facility (CEF) and InvestEU programs will focus on clean fleet renewals by cities, the deployment of charging points and mobility-as-a-service solutions.

4. Taxation, anyone?

In the Next Generation EU, the Commission proposes to generate additional own resources by new taxes. Although the Commission still must draw up the specifics, it floated the option of extending the EU’s Emissions Trading System (ETS) to the maritime sector, thereby raising up to €10 billion annually that will feed into the EU’s budget. In addition, the so-called carbon border adjustment mechanism is likely to be introduced, putting a carbon levy on non-EU imports.

Raising these kinds of ‘European’ taxes is unprecedented. As Member States have diverging views on this matter, it remains to be seen whether we can expect a breakthrough on these new own resources any time soon.

Next steps

The Commission aims to have the new MFF and recovery fund operational by 1 January 2021. EU leaders are expected to start the negotiations on the budget proposal during the European Council Summit on 19 June and will have multiple rounds of very difficult talks until a compromise is made. This ultimately means that the budget as proposed now for transport-related funding instruments can still change. The budget negotiations are expected to accelerate when Germany takes over the rotating six-months Presidency of the Council of the EU on 1 July 2020.

Europe’s green recovery from the COVID-19 pandemic

On 27 May 2020, the European Commission’s published its historic proposal for the ‘Next Generation EU’ recovery fund worth €750 billion, topping the renewed proposal for a €1.1 trillion Multiannual Financial Framework (MFF) 2021-2027. After the approval by the Council of the EU and the European Parliament (16 and 17 December 2020 respectively) of the EU’s Multiannual Financial Framework 2021-2027, it is now clear how Green Deal initiatives are incorporated into the Commission’s recovery plans.

Main takeaways                

  • The European Green Deal will be central in Next Generation EU, public recovery investments should follow EU energy and climate priorities;
  • Funding of €10 billion for the Just Transition Fund;
  • The Commission will increase its own resources via an extension of the Emission Trading System (ETS)to the maritime and aviation sectors and a carbon border adjustment mechanism.

Accelerated investments in the green transition

To kick-start the green transition in times of crisis, the European Commission published a Renovation Wave Communication on 14 October 2020. This massive renovation wave of buildings will improve energy efficiency and promote the circular economy, whilst creating local jobs in the coming years.

On top of the renovation wave, the Commission will focus on rolling out renewable energy projects, especially wind and solar. To this end, the Commission published an Offshore Renewable Energy Strategy on 19 November 2020. Moreover, the EU will reinforce its efforts to develop a clean hydrogen economy in Europe, something that is currently mainly promoted by Germany and the Netherlands.

When it comes to clean transport and logistics, the Commission aims to accelerate the production and deployment of sustainable vehicles and vessels as well as alternative fuels. This ambition includes the installation of one million charging points for electric vehicles and a boost for rail travel and clean mobility in European cities and regions, as set out in its Strategy for Smart and Sustainable Mobility published on 9 December 2020.

EU ‘green’ levies to finance recovery

How will this sustainable recovery be financed? The Next Generation EU will raise money by temporarily lifting the own resources ceiling to 2.00% of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets. To repay these loans in a fair and shared way, the Commission proposes a number of new own resources. The Commission will for example increase its own resources via an extension of the Emission Trading System (ETS) to the maritime and aviation sectors and a carbon border adjustment mechanism.

Next steps

For the Commission to start borrowing under NextGenerationEU, thus making the instrument operational, the ratification of the new Own Resources Decision by all Member States in line with their constitutional requirements is still needed.

This blog post has been updated with new information on 5 February 2021.

The EU Budget proposal and its impact on the digital sector

On 27 May, the European Commission put forward its proposal for a major recovery plan. The plan includes not only a proposal for the EU’s Multiannual Financial Framework for 2021-2027 – The EU budget powering the recovery plan for Europe, but the European Commission also proposes to create a new recovery instrument, Next Generation EU.

Next Generation EU, with a budget of €750 billion, together with targeted reinforcements to the 2021-2027 EU budget with a proposed budget of €1.1 trillion, will bring the total financial firepower of the EU budget to €1.85 trillion. Including other schemes such as Support to mitigate Unemployment Risks in an Emergency (Commission’s safety net for workers), the European Stability Mechanism Pandemic Crisis Support (Eurozone’s enhanced credit line) and the European Investment Bank Guarantee Fund for Workers and Businesses (focused primarily on small and medium-sized companies), with a combined budget of €540 billion, significant funds will be available for European recovery.

Next Generation EU will raise money by temporarily lifting the European Commission’s own resources ceiling to 2.00% of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets. To help do this in a fair and shared way, the Commission proposes a number of new own resources among which extension of the EU Emission Trading System (ETS) to include maritime and aviation sectors, a carbon border adjustment mechanism, a digital tax and a tax on large enterprises.

Finally, the Commission has published an update of its 2020 Work Program, which will prioritize the actions needed to propel Europe’s recovery and resilience.

The future is digital

The outbreak of COVID-19 has highlighted the importance of digitization across all areas of the economy and society. New technologies have helped businesses and public services to keep functioning and have made sure that international trade could continue. It is expected that, in the long run, the pandemic will have triggered permanent social and economic changes: more remote working, e-learning, e-commerce, e-government. It has, therefore, become imperative for businesses and governments to invest in digitalization.

The twin transitions to a green and digital Europe remain the defining challenges of this generation. This is reflected throughout the Commission’s proposals, which stress that investing in digital infrastructure and skills will help boost competitiveness and technological sovereignty.

Implications for the digital sector

A new instrument, the Solvency Support instrument would be primarily aimed at countries hit hardest by the crisis and unable to provide state aid to their most vulnerable sectors. The distribution of this ‘immediate and temporary’[1] tool will also aim to prioritize green investment according to the Commission. While welcomed by poorer countries the instrument might not have the desired effect unless agreed upon and deployed quickly by the Member States.

The Strategic Investment Facility will be used to promote the green and digital transitions by investing in 5G, artificial intelligence, the industrial internet of things, low CO2 emission industry and cybersecurity. Since such investments might become significantly riskier in the aftermath of the pandemic, the Commission stands behind a common European approach to provide the crucial long-term investments for companies implementing projects of strategic importance. The Strategic Investment Facility will take a more forward-looking approach by focusing on ‘projects relevant for achieving strategic autonomy in key value chains in the single market.

The Digital Europe Programme will be used for the development of EU-wide electronic identities and for the building of strategic data capabilities, such as artificial intelligence, cybersecurity, secured communication, data and cloud infrastructure, 5G and 6G networks, supercomputers, quantum and blockchain. The Commission has managed to withstand the significant pressure from Member States to reduce the funding of the Programme and the digital transition remains one of its key priorities.

In terms of financial inputs, the digital sector would be affected by two of the newly proposed taxes, aimed at funding the Commission’s so called ‘own resources’ used to repay the recovery package. The new digital tax would come into play at EU level if no global solution could be reached at OECD level. If the tax is applied to companies with an annual turnover higher than €750 million, it could generate up to €1.3 billion per year for the EU budget. The other relevant provision is the new corporate revenue tax, which if applied according to the same principle as the digital tax at a rate of 0.1 percent could generate up to €10 billion annually.

The Commission tried to introduce a European digital tax last year but its proposal was blocked by several Member States. The chance of such a proposal being accepted at this date appear slim as unanimity is required and Ireland, amongst others, has been adamantly against it. However, with the departure of the UK who had previously provided strong backing for Ireland’s opposition, some form of digital taxation being accepted remains a possibility. The new corporate tax was also previously unsuccessfully introduced by the Commission in 2016 and would be aimed at ‘companies that draw huge benefits from the EU single market and will survive the crisis.’[2] The chances of the proposal being accepted are also relatively low with countries such as Ireland, Denmark, Luxembourg and the Netherlands strongly opposing it. The proposal might also provoke a ‘race to the bottom’ phenomenon where companies relocate to countries willing to provide them with the most favorable business conditions. While both taxes are facing strong opposition from some Member States, the alternative of increased national contributions might convince leaders that accepting a form of these levies would be the more politically savvy option.

In conclusion, the new EU budget proposal creates new opportunities and challenges for the digital sector with the potential application of new pan-European taxes but also with additional funding devoted to digitalization, increased connectivity and sustainable value chains. The Coronavirus pandemic has demonstrated the increasing importance of digitalisation for the daily functioning of the economy and the Commission’s proposal reflects that through a series of digital political priorities. Increased connectivity, investment in strategic digital capacities (artificial intelligence, cybersecurity, data and cloud infrastructure, 5G and 6G networks, blockchain and more) building a real data economy and legislative efforts on data sharing (a EU-wide Data Act), as well as a thorough reform of the single market for digital services (Digital Services Act expected in late 2020). The combination of budgetary provisions and policy priorities makes the moment beneficial for a transition to online business models, a trend which has appeared during the pandemic but is expected to remain for the next few years.

[1] Annex to the Commission Budget Communication, p 6.

[2] Commission Budget Communication, p 15.