EU plans for funding energy transition to spark opposition

Good morning and welcome to Europe Express.

It’s a packed day for the European Commission, which today plans to publish proposals dubbed REPowerEU aimed at boosting investments in renewable energies and helping countries wean themselves off Russian fossil fuels. One of the proposals likely to run into controversy is the sale of €20bn worth of carbon allowances to partly fund the energy transition.

Separately, Brussels will make proposals for extra EU support for Ukraine, in the form of up to €9bn in additional macro-financial assistance to plug the country’s budget gap. The lending would be done at long maturities and concessional interest rates, as part of a wider G7 effort to address Kyiv’s $5bn a month funding shortfall. The commission is also planning to table proposals for a new reconstruction fund to rebuild Ukraine when hostilities are over. It is early days, but one way of raising the funding will be via fresh common EU debt issuance.

We’ll also look at the state of Brexit following UK Prime Minister Boris Johnson’s latest rounds of threats to change the Northern Ireland Protocol.

And in the Netherlands, we’ll examine why the ‘Dutch sandwich’ has become a thing of the past and what corporations are signing up to voluntarily in terms of tax transparency.

Carbon cash cow

Brussels is never short of ideas on how to raise extra funds and is proving quite creative with its most recent one: selling surplus carbon emissions permits to raise €20bn that could, inter alia, cover some of Hungary’s energy transition costs (and thus unblock the sixth Russia sanctions package), write Andy Bounds in Brussels and Alice Hancock in London.

Yet a less desirable side-effect of this plan is that by lowering the carbon price and making it cheaper to burn fossil fuels, it will risk thwarting the bloc’s climate policies, which aim at reducing carbon emissions by at least 55% by 2030, compared to 1990 levels.

The conundrum wasn’t lost on Luxembourg energy minister Claude Turmes: “The most important is how to keep on track on climate change in a moment where you have this huge security-of-supply issue?”

While the commission is considering a measure that would delay the application of its Fit for 55 package, the European parliament is going in the opposite direction when it comes to carbon allowances. Members of its environment committee approved — by a margin of 49 to 33 votes — to phase out free carbon emissions allowances for heavy industry by 2030. That is six years sooner than the commission proposed.

In addition, MEPs voted to accelerate the introduction of the carbon border adjustment mechanism (CBAM), a way of charging companies importing into the EU for their carbon emissions.

Eurofer, which represents European steel producers, said that the “disruptive vote” by the parliament’s environment committee put 30,000 jobs under threat and endangered €31bn in investments that would go into low carbon projects. Cepi, the paper and pulp industry body, said the proposals would make it “very challenging” for the sector to decarbonise.

CBAM and the end of free allowances under the EU’s emissions trading system are one of the most contested areas of Brussels’ efforts to decarbonise. Industrial executives also argue that plans for CBAM do not yet account for exports from the EU, making European industry wildly uncompetitive compared to global peers with lower and less expensive environmental regulations.

Industry groups may soon rejoice at the commission’s carbon-allowance selling plans, which would drive down the price of carbon and make it easier for them to adjust.

Chart du jour: Snake island

Read more here about why this rocky Black Sea islet, just 35km off the coast of Nato member Romania is as much a tool of propaganda as of military strategy for Moscow and Kyiv.

Trigger-happy PM

Boris Johnson’s choice of manufacturing facility to visit on his trip to Northern Ireland was prophetic, writes Jude Webber in Dublin. On the eve of his government’s announcement that it was prepared to blow up the Northern Ireland protocol, he toured a missile factory in Belfast.

As expected, foreign secretary Liz Truss told parliament the post-Brexit trading relations for the region needed to be “fixed” and repeatedly called on the EU to give Brexit negotiator Maroš Šefčovič a mandate to go beyond the concessions that Brussels has already put on the table and allow the deal to be reworked.

Otherwise — and she gave no timeframe — Truss said she would, within weeks, present a bill to go it alone, insisting such a move was legal.

What London wants is a green lane for goods travelling from Britain which would remain in Northern Ireland and not travel into the EU, underpinned by enhanced data sharing. The EU believes it has already bent over backwards to reduce red tape and Simon Coveney, Ireland’s foreign minister, said he believed EU proposals presented last year would fix UK concerns.

In addition, Truss said the UK wants to scrap oversight by the European Court of Justice and have an arbitration mechanism instead — previously a red line for Brussels.

Brussels is sceptical: Šefčovič is unwilling to give in to what Brussels sees as blackmail.

The UK government may also have a hard time convincing Sinn Féin, the nationalist party that won May 5 elections in Northern Ireland, that it is not pandering to the Democratic Unionist party, which believes the protocol undermines Northern Ireland’s UK status.

The DUP has demanded action, not words, from London as its price for returning to the power-sharing institutions set up under the Good Friday Agreement in 1998, that ended three decades of conflict between republicans fighting to drive out the British and loyalists battling to stay in the UK.

Truss repeatedly said the need to protect that pact, and to “ensure all communities are treated with esteem”, had made it essential to move to legislate. But just the threat of action will not resolve the prospect of months of political limbo in Northern Ireland and even fresh elections this winter.

Johnson on Monday toured the Thales factory in Belfast, posing with his thumbs up next to weapons systems as he tried to spin the upcoming legislation simply as an “insurance policy”.

But his finger is on the trigger of what could be a bitter trade battle.

Dutch transparency

The Netherlands has long faced criticism for its tax regime, which has allowed multinationals to route licensing deals and payments through the country to reduce their bills, writes Andy Bounds in Brussels.

US tech companies used a “Dutch sandwich” to pass profits through the country to tax havens and reduce their non-US tax bills.

Now 41 Dutch multinationals have signed a voluntary Tax Governance Code, drawn up by the Confederation of Netherlands Industry and Employers (VNO-NCW). This includes big names such as Heineken, Shell, Ahold and ABN Amro.

The companies have agreed to report their tax payments by country and not to use tax havens for tax avoidance among a series of measures.

Ingrid Thijssen, chair of the VNO-NCW, told Europe Express: “This tax code is unique in the world. It goes beyond any that exists.” Business accepted it had to pay its fair share to avoid erosion of trust in capitalism and the tax system itself, she said.

More businesses are expected to join as tax authorities round the world tighten regulations. The OECD club of rich countries has agreed to a minimum rate of 15 per cent.

“The Dutch system was open to abuse,” Thijssen said. “The Netherlands has taken more than 40 measures against letterbox companies. The role of the Netherlands as a transit country is really a thing of the past.”

What to watch today

1. European Commission puts forward REPowerEU proposals

2. European Commission also tables proposals on plugging gaps in defence spending, and on relief and reconstruction of Ukraine

3. Facebook whistleblower Frances Haugen discusses Digital Services Act and Digital Markets Act with members of the European parliament in Brussels

Notable, Quotable

A logical next step would amount [to] half a percentage point.

• From minus to zero: Dutch central bank chief Klaas Knot moved markets yesterday when he suggested that the first European Central Bank rate rise in a decade, likely to happen in July, might go from minus 0.5 per cent to zero.

• Eni compliance: Italian energy company Eni said it will open a rouble account with Gazprombank to comply with Russian demands for gas sales, despite the European Commission indicating that such a move would constitute a violation of EU sanctions. Eni also said it would take Gazprom to international arbitration for changing the terms of the payment obligations.

• Deutsche saga: Deutsche Bank’s new chief executive Alex Wynaendts takes over the reins of the embattled German lender tomorrow, inheriting a bank that in 2007 was the world’s largest by assets but is now only a shadow of its former self.