The free movement of capital is a key long-standing objective of the European Union. It is one of the pillars of the Single Market, along with the free movement of people, goods and services. Despite the Commission’s efforts to achieve the ambitious goal of building a capital markets union (CMU), results are still to come, according to a report presented by the European Court of Auditors (ECA) today.
In the EU, businesses traditionally largely rely on banks for financing their activities. To provide an alternative funding source for start-ups and small and medium-sized enterprises (SMEs) and to mobilise private capital, the Commission has been making efforts since 2015 to supplement the Banking Union with a CMU. The CMU is also intended to remove cross-border barriers to investment within the EU more generally.
“The Capital Markets Union is an unfinished agenda, and much work remains to be done,” said Rimantas Šadžius, the Member of the European Court of Auditors responsible for the report. “The Commission’s measures to diversify the financing options of SMEs and efforts to develop local capital markets within the CMU have had no catalytic effect so far. In our opinion, increasing the role of private risk-sharing through capital markets remains an ambitious and urgent priority. This would bring about not only a more stable and crisis-resilient EU financial system, but also one which is better equipped to boost growth, especially when traditional bank funding is not easily available or when it fails.”
The auditors found that although some progress had been made, the expectations which had been raised were too high, and could not realistically have been achieved with the measures introduced in connection with the CMU. Up to now, most of the legislative acts related to the CMU have either not yet been implemented or have been implemented only recently. In particular, many of the key actions in the Commission’s CMU action plan that have not yet been initiated can only be undertaken by the Member States themselves, or with their full support. Many of the measures that the Commission was able to take within its remit were non-binding, or were narrow in scope. These measures were not successful in bringing about substantial progress in achieving the CMU.
According to the auditors, the measures to diversify financing sources for businesses were too weak to stimulate and catalyse a structural shift towards more market funding in the EU. For example, the auditors note that access to public markets for SMEs has so far not been significantly improved or become cheaper. They also note that the Commission could have done more to promote financial literacy among SMEs and would-be investors. Furthermore, securitisation legislation – which could have worked as an indirect financing instrument for SMEs – was a positive step, but has not yet had the expected impact of facilitating financing, and nor has it helped banks to increase their lending capacity.
There are clear geographical discrepancies between Member States in the capitalisation, liquidity and depth of their local capital markets. Member States in the west and the north tend to have deeper capital markets and self-reinforcing capital hubs, while Member States in the east and the south are lagging behind. The auditors found that the Commission had not developed a comprehensive and clear EU strategy for overcoming these differences. They found that the Commission had made use of its coordinating role under the European Semester process to promote the development and integration of local capital markets and provided support to some Member States. However, it did not recommend to all Member States with less-developed capital markets that they implement relevant structural reforms.
The auditors also observed that the CMU action plan had not led to a breakthrough in the main barriers impeding cross-border capital flows. These barriers often emanate from national laws, such as those in the fields of insolvency and withholding tax, or from a lack of financial education. The progress on tackling the barriers was limited, partially due to a lack of support from the Member States.
Another issue with the CMU action plan was that objectives were vaguely formulated. Priorities were only established late in the process. And where targets existed, they tended not to be measurable. The auditors also noted that progress had not been regularly and consistently followed up. They recommended that the Commission should considerably reinforce the monitoring framework.
The auditors provide a number of other recommendations to the Commission to improve the effectiveness of the CMU project; these include carrying out well-targeted actions to further facilitate SMEs’ access to capital markets, and measures to address fragmentation and key cross-border barriers to investment. The auditors also invite the Council to consider how to take further the Commission’s proposal to address the asymmetric tax treatment of equity and debt detrimental to the development of CMU.
Background information
The audit work was completed prior to the outbreak of COVID-19, and therefore this report does not take into account any policy developments or other changes that occurred in response to the pandemic.
On related matters, the ECA has published reports on the European Semester, the EU Investment Hub,  innovation in SMEs and the EU interventions for venture capital.
The purpose of this press release is to convey the main messages of the European Court of Auditors’ special reports. The full report is on eca.europa.eu.
Contact:

Claudia Spiti | claudia.spiti[at]eca.europa.eu

Compliments of the European Court of Auditors. 
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Today, the European Commission is taking the first steps towards building the European Health Union announced by President von der Leyen in her State of the Union address. The Commission is putting forward a set of proposals to strengthen the EU’s health security framework, and to reinforce the crisis preparedness and response role of key EU agencies. In order to step up the fight against the COVID-19 pandemic and future health emergencies, more coordination at EU level is needed. Drawing lessons from the current crisis, today’s proposals will ensure stronger preparedness and response during the current and future health crises.
President of the European Commission, Ursula von der Leyen stated: “Our aim is to protect the health of all European citizens. The coronavirus pandemic has highlighted the need for more coordination in the EU, more resilient health systems, and better preparation for future crises. We are changing the way we address cross-border health threats. Today, we start building a European Health Union, to protect citizens with high quality care in a crisis, and equip the Union and its Member States to prevent and manage health emergencies that affect the whole of Europe.”
Vice-President for Promoting the European Way of Life, Margaritis Schinas, said: “Today, we are taking a big, meaningful step towards a genuine EU Health Union. We are strengthening our common crisis management to prepare and respond to serious cross border threats to health. Our EU agencies need to be equipped with stronger mandates to better protect EU citizens. To fight the COVID-19 pandemic and future health emergencies, more coordination with more efficient tools at EU level is the only way forward.”
Stella Kyriakides, Commissioner for Health and Food safety said: “Health is more than ever an essential concern for our citizens. In times of crisis, citizens rightfully expect the EU to take a more active role. Today we are reinforcing the foundations for a more secure, better-prepared and more resilient EU in the area of health. This will be a significant change for the capacity to respond collectively. The European Health Union is all about preparing for and facing up to common health threats together, as a Union. We need to do this in order to meet the expectations of our citizens.”
Today’s proposals focus on revamping the existing legal framework for serious cross border threats to health, as well as reinforcing the crisis preparedness and response role of key EU agencies, namely the European Centre for Disease Prevention and Control (ECDC) and the European Medicines Agency (EMA).
A stronger EU health security framework
To create a more robust mandate for coordination by the Commission and EU agencies, the Commission is today proposing a new Regulation on serious cross-border threats to health. The new framework will:

Strengthen preparedness: EU health crisis and pandemic preparedness plan and recommendations will be developed for the adoption of plans at national levels, coupled with comprehensive and transparent frameworks for reporting and auditing. The preparation of national plans would be supported by the European Centre for Disease Prevention and Control and other EU agencies. The plans would be audited and stress tested by the Commission and EU agencies.

Reinforce surveillance: A strengthened, integrated surveillance system will be created at EU level, using artificial intelligence and other advanced technological means.

Improve data reporting: Member States will be required to step up their reporting of health systems indicators (e.g. hospital beds availability, specialised treatment and intensive care capacity, number of medically trained staff etc.).
The declaration of an EU emergency situation would trigger increased coordination and allow for the development, stockpiling and procurement of crisis relevant products.

Stronger and more operational EU Agencies
The European Centre for Disease Control and Prevention and the European Medicines Agency have been at the forefront of the EU’s work to address COVID-19 since the outbreak of the pandemic. However, COVID-19 has shown that both agencies need to be reinforced and equipped with stronger mandates to better protect EU citizens and address cross border health threats.
The ECDC’s mandate will be reinforced so that it may support the Commission and Member States in the following areas:

epidemiological surveillance via integrated systems enabling real-time surveillance
preparedness and response planning, reporting and auditing
provision of non-binding recommendations and options for risk management
capacity to mobilise and deploy EU Health Task Force to assist local response in Member States
building a network of EU reference laboratories and a network for substances of human origin

The European Medicines Agency’s mandate will be reinforced so that it can facilitate a coordinated Union-level response to health crises by:

monitoring and mitigating the risk of shortages of critical medicines and medical devices
providing scientific advice on medicines which may have the potential to treat, prevent or diagnose the diseases causing those crises
coordinating studies to monitor the effectiveness and safety of vaccines
coordinating clinical trials.

The Commission is also today setting out the main elements of the future Health Emergency Response Authority (HERA), to be proposed by the end of 2021. Such a structure would be an important new element to support a better EU level response to cross-border health threats.
Compliments of the European Commission.
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Today, the European Commission approved a fourth contract with pharmaceutical companies BioNTech and Pfizer, which provides for the initial purchase of 200 million doses on behalf of all EU Member States, plus an option to request up to a further 100 million doses, to be supplied once a vaccine has proven to be safe and effective against COVID-19. Member States can decide to donate the vaccine to lower and middle-income countries or to re-direct it to other European countries.
Today’s contract with the BioNTech-Pfizer alliance builds upon the broad portfolio of vaccines to be produced in Europe, including the already signed a contracts with AstraZeneca, Sanofi-GSK and Janssen Pharmaceutica NV, and the concluded successful exploratory talks with CureVac and Moderna. This diversified vaccines portfolio will ensure Europe is well prepared for vaccination, once the vaccines have been proven to be safe and effective.
President of the European Commission, Ursula von der Leyen, said:  “In the wake of Monday’s promising announcement by BioNTech and Pfizer on the prospects for their vaccine, I’m very happy to announce today’s agreement with the European company BioNTech and Pfizer to purchase 300 million doses of the vaccine. With this fourth contract we are now consolidating an extremely solid vaccine candidate portfolio, most of them in advanced trials phase. Once authorised, they will be quickly deployed and bring us closer to a sustainable solution of the pandemic.”
Stella Kyriakides, Commissioner for Health and Food Safety, said: “A safe and effective vaccine is the only lasting exit strategy from the pandemic, and is at the centre of our European Vaccine Strategy. Today’s agreement follows the encouraging first indications from the clinical trial results and is further evidence of our commitment to putting more Europe in the area of health. It is a very telling example of what the EU can achieve when working together, as a Union, and a case in point of what a future European Health Union will be able to deliver.”
BioNTech is a German company working with US-based Pfizer to develop a new vaccine based on messenger RNA (mRNA). mRNA plays a fundamental role in  biology, transferring instructions from DNA to cells’ protein making machinery. In an mRNA vaccine, these instructions make harmless fragments of the virus which the human body uses to build an immune response to prevent or fight disease.
The Commission has taken a decision to support this vaccine based on a sound scientific assessment, the technology used, the companies’ experience in vaccine development and their production capacity to supply the whole of the EU.
Background
The European Commission presented on 17 June a European strategy to accelerate the development, manufacturing and deployment of effective and safe vaccines against COVID-19. In return for the right to buy a specified number of vaccine doses in a given timeframe, the Commission finances part of the upfront costs faced by vaccines producers in the form of Advance Purchase Agreements. Funding provided is considered as a down-payment on the vaccines that will actually be purchased by Member States.
Since the high cost and high failure rate make investing in a COVID-19 vaccine a high-risk decision for vaccine developers, these agreements will therefore allow investments to be made that otherwise might not happen.
Once vaccines have been proven to be safe and effective and have been granted market authorisation by the European Medicines Agency, they need to be quickly distributed and deployed across Europe. On 15 October, the Commission set out the key steps that Member States need to take to be fully prepared, which includes the development of national vaccination strategies. The Commission is putting in place a common reporting framework and a platform to monitor the effectiveness of national vaccine strategies.
The European Commission is also committed to ensuring that everyone who needs a vaccine gets it, anywhere in the world and not only at home. No one will be safe until everyone is safe. This is why it has raised almost €16 billion since 4 May 2020 under the Coronavirus Global Response, the global action for universal access to tests, treatments and vaccines against coronavirus and for the global recovery and has confirmed its interest to participate in the COVAX Facility for equitable access to affordable COVID-19 vaccines everywhere. As part of a Team Europe effort, the Commission announced is contributing with €400 million in guarantees to support COVAX and its objectives in the context of the Coronavirus Global Response.
Compliments of the European Commission.
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The European Commission has informed Amazon of its preliminary view that it has breached EU antitrust rules by distorting competition in online retail markets. The Commission takes issue with Amazon systematically relying on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon’s own retail business, which directly competes with those third party sellers.
The Commission also opened a second formal antitrust investigation into the possible preferential treatment of Amazon’s own retail offers and those of marketplace sellers that use Amazon’s logistics and delivery services.
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “We must ensure that dual role platforms with market power, such as Amazon, do not distort competition.  Data on the activity of third party sellers should not be used to the benefit of Amazon when it acts as a competitor to these sellers. The conditions of competition on the Amazon platform must also be fair.  Its rules should not artificially favour Amazon’s own retail offers or advantage the offers of retailers using Amazon’s logistics and delivery services. With e-commerce booming, and Amazon being the leading e-commerce platform, a fair and undistorted access to consumers online is important for all sellers.”
Statement of Objections on Amazon’s use of marketplace seller data
Amazon has a dual role as a platform: (i) it provides a marketplace where independent sellers can sell products directly to consumers; and (ii) it sells products as a retailer on the same marketplace, in competition with those sellers.
As a marketplace service provider, Amazon has access to non-public business data of third party sellers such as the number of ordered and shipped units of products, the sellers’ revenues on the marketplace, the number of visits to sellers’ offers, data relating to shipping, to sellers’ past performance, and other consumer claims on products, including the activated guarantees.
The Commission’s preliminary findings show that very large quantities of non-public seller data are available to employees of Amazon’s retail business and flow directly into the automated systems of that business, which aggregate these data and use them to calibrate Amazon’s retail offers and strategic business decisions to the detriment of the other marketplace sellers. For example, it allows Amazon to focus its offers in the best-selling products across product categories and to adjust its offers in view of non-public data of competing sellers.
The Commission’s preliminary view, outlined in its Statement of Objections, is that the use of non-public marketplace seller data allows Amazon to avoid the normal risks of retail competition and to leverage its dominance in the market for the provision of marketplace services in France and Germany- the biggest markets for Amazon in the EU. If confirmed, this would infringe Article 102 of the Treaty on the Functioning of the European Union (TFEU) that prohibits the abuse of a dominant market position.
The sending of a Statement of Objections does not prejudge the outcome of an investigation.
Investigation into Amazon practices regarding its “Buy Box” and Prime label
In addition, the Commission opened a second antitrust investigation into Amazon’s business practices that might artificially favour its own retail offers and offers of marketplace sellers that use Amazon’s logistics and delivery services (the so-called “fulfilment by Amazon or FBA sellers”).
In particular, the Commission will investigate whether the criteria that Amazon sets to select the winner of the “Buy Box” and to enable sellers to offer products to Prime users, under Amazon’s Prime loyalty programme, lead to preferential treatment of Amazon’s retail business or of the sellers that use Amazon’s logistics and delivery services.
The “Buy Box” is displayed prominently on Amazon’s websites and allows customers to add items from a specific retailer directly into their shopping carts. Winning the “Buy Box” (i.e. being chosen as the offer that features in this box) is crucial to marketplace sellers as the Buy Box prominently shows the offer of one single seller for a chosen product on Amazon’s marketplaces, and generates the vast majority of all sales. The other aspect of the investigation focusses on the possibility for marketplace sellers to effectively reach Prime users. Reaching these consumers is important to sellers because the number of Prime users is continuously growing and because they tend to generate more sales on Amazon’s marketplaces than non-Prime users.
If proven, the practice under investigation may breach Article 102 of the Treaty on the Functioning of the European Union (TFEU) that prohibits the abuse of a dominant market position.
The Commission will now carry out its in-depth investigation as a matter of priority. The opening of a formal investigation does not prejudge its outcome.
Background and procedure
Article 102 of the TFEU prohibits the abuse of a dominant position. The implementation of these provisions is defined in the Antitrust Regulation (Council Regulation No 1/2003), which can also be applied by the national competition authorities.
The Commission opened the in-depth investigation into Amazon’s use of marketplace seller data on 17 July 2019.
A Statement of Objections is a formal step in Commission investigations into suspected violations of EU antitrust rules. The Commission informs the parties concerned in writing of the objections raised against them. The addressees can examine the documents in the Commission’s investigation file, reply in writing and request an oral hearing to present their comments on the case before representatives of the Commission and national competition authorities. Sending a Statement of Objections and opening of a formal antitrust investigation does not prejudge the outcome of the investigations.
More information on the investigation is available on the Commission’s competition website, in the public case register under case number AT.40462.
The Commission has informed Amazon and the competition authorities of the Member States that it has opened a second in-depth investigation into Amazon’s business practices.
This investigation will cover the European Economic Area, with the exception of Italy. The Italian Competition Authority started to investigate partially similar concerns last year, with a particular focus on the Italian market. The Commission will continue the close cooperation with the Italian Competition Authority throughout the investigation.
More information on the investigation will be available on the Commission’s competition website, in the public case register under case number AT.40703.
There is no legal deadlines for bringing an antitrust investigation to an end. The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertakings concerned cooperate with the Commission and the exercise of the rights of defence.
Compliments of the European Commission.
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Statement by President von der Leyen on 10 November, 2020 |
“A safe and effective vaccine is our best chance to beat coronavirus and return to our normal lives.
In the past months, the European Commission has been working tirelessly to secure doses of potential vaccines.
And tomorrow we authorise a contract for up to 300 million doses of the vaccine developed by German company BioNTech and Pfizer. This is the most promising vaccine so far.
Once this vaccine becomes available, our plan is to deploy it quickly, everywhere in Europe. This will be the fourth contract with a pharmaceutical company to buy vaccines. And more will come. Because we need to have a broad portfolio of vaccines based on different technologies.
We have already started working with Member States to prepare national vaccination campaigns.
We are almost there. In the meantime, let us be prudent, and stay safe.”
Compliments of the European Commission.
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Full discussion available as a PDF |
This discussion paper considers regulatory and supervisory issues relating to outsourcing and third-party relationships. It will facilitate a discussion on current regulatory and supervisory approaches to the management of outsourcing and third-party risks.
Financial institutions have relied on outsourcing and other third-party relationships for decades. However, in recent years, the extent and nature of interactions with a broad and diverse ecosystem of third parties has evolved, particularly in the area of technology. The financial sector’s recent response to COVID-19 highlights the benefits as well as the challenges of managing the risks of financial institutions’ interactions with third parties. The pandemic may have also accelerated the trend towards greater reliance on certain third-party technologies.
The discussion paper identifies a number of issues and challenges. For instance, financial institutions have to ensure that their contractual agreements with third parties grant to them, as well as to supervisory and resolution authorities, appropriate rights to access, audit and obtain information from third parties. These rights can be challenging to negotiate and exercise, particularly in a multi-jurisdictional context. The management of sub-contractors and supply chains is another challenge that was highlighted in the context of financial institutions’ response to COVID-19.
There is a common concern about the possibility of systemic risk arising from concentration in the provision of some outsourced and third-party services to financial institutions. These risks may become higher as the number of financial institutions receiving critical services from a given third party increases. Where there is no appropriate mitigant in place, a major disruption, outage or failure at one of these third parties could create a single point of failure with potential adverse consequences for financial stability and/or the safety and soundness of multiple financial institutions. Given the cross-border nature of this dependency, supervisory authorities and third parties could particularly benefit from enhanced dialogue on this issue.
Responses to the public consultation should be sent to fsb@fsb.org by 8 January 2021 with “Outsourcing and third-party relationships”. Consultation responses will help facilitate a discussion on current regulatory and supervisory approaches to the management of outsourcing and third-party risks. Consultation responses will be published on the FSB’s website unless respondents expressly request otherwise.
Compliments of the Financial Stability Board.
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The European Commission’s regulation increasing tariffs on U.S. exports into the EU worth $4 billion will be published in the Official Journal of the EU.
The countermeasures have been agreed by EU Member States since the U.S. has not yet provided the basis for a negotiated settlement, which would include an immediate removal of U.S. tariffs on EU exports in the Airbus WTO case. The World Trade Organization (WTO) formally authorised the EU on 26 October to take such countermeasures against illegal U.S. subsidies to aircraft maker Boeing. The measures will take effect as from tomorrow. The European Commission stands ready to work with the U.S. to settle this dispute and also to agree on long-term disciplines on aircraft subsidies.
Executive Vice-President for an Economy that Works for People and Commissioner for Trade Valdis Dombrovskis said: “We have made clear all along that we want to settle this long-running issue. Regrettably, due to lack of progress with the U.S., we had no other choice but to impose these countermeasures. The EU is consequently exercising its legal rights under the WTO’s recent decision. We call on the U.S. to agree to both sides dropping existing countermeasures with immediate effect, so we can quickly put this behind us. Removing these tariffs is a win-win for both sides, especially with the pandemic wreaking havoc on our economies. We now have an opportunity to reboot our transatlantic cooperation and work together towards our shared goals.”
The countermeasures bring the EU equal footing with the U.S., with sizeable tariffs on each side based on two WTO decisions related to aircraft subsidies. They include additional tariffs of 15% on aircraft as well as additional tariffs of 25% on a range of agricultural and industrial products imported from the U.S., thereby strictly mirroring the countermeasures imposed by the United States in the context of the WTO case on subsidies to Airbus.
Background
In March 2019, the Appellate Body, the highest WTO instance, confirmed that the U.S. had not taken appropriate action to comply with WTO rules on subsidies, despite the previous rulings. Instead, it continued its illegal support of its aircraft manufacturer Boeing to the detriment of Airbus, the European aerospace industry and its many workers. In its ruling, the Appellate Body:

confirmed the Washington State tax programme continues to be a central part of the U.S. unlawful subsidisation of Boeing;
found that a number of ongoing instruments, including certain NASA and U.S. Department of Defence procurement contracts constitute subsidies that may cause economic harm to Airbus, and;
confirmed that Boeing continues to benefit from an illegal U.S. tax concession that supports exports (the Foreign Sales Corporation and Extraterritorial Income Exclusion).

Today’s decision confirming the EU right to retaliate stems directly from that previous decision.
In a parallel case on Airbus, the WTO allowed the United States in October 2019 to take countermeasures against European exports worth up to $7.5 billion. This award was based on an Appellate Body decision of 2018 that had found that the EU and its Member States had not fully complied with the previous WTO rulings with regard to Repayable Launch Investment for the A350 and A380 programmes. The U.S. imposed these additional tariffs on 18 October 2019. The EU Member States concerned have taken in the meantime all necessary steps to ensure full compliance.
Compliments of the European Commission.
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Leaders from across the world offered their congratulations on Saturday, November 7 to U.S. President-elect Joseph R. Biden, Jr. and Vice President-elect Kamala Harris, following their projected win in the 2020 presidential election.
As partners with shared history and values, EU leaders were among the first to send well wishes to Biden and Harris. European Commission President Ursula von der Leyen said she looked forward to working with President-elect Biden, adding, “The European Union and the United States are friends and allies, our citizens share the deepest of links.” Read her full statement here, and watch her video message here.
High Representative Josep Borrell Fontelles took note of the record turnout in the election, which “expressed [the] will of the American people for change.”
Leaders of all 27 EU member states offered their own messages of congratulations, friendship, and hope for the new administration, which is expected to be sworn in on January 20, 2021.
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It has been said that the best preparation for tomorrow is doing your best for today. When the President of the French Republic confirmed France’s participation in the Paris Collaborative on Green Budgeting in December 2017, he could hardly have known that, less than three years later, green budgeting would become a central tool for developing France’s “green recovery” from a global pandemic. At the meeting of the Paris Collaborative on Green Budgeting earlier this month, French Treasury officials showcased to delegates from across the OECD how the government had used this tool to identify environment-compatible spending that helped France meet its goal of dedicating EUR 30 billion of its COVID-19 recovery plan to a green transition.
With the introduction of green budgeting, France can now identify how budget measures affect key environmental objectives. This autumn, the country tabled its first “green budget” alongside the Finance Bill for 2021. This is the world’s first budget to document both the positive and negative impact of measures on key aspects of the environment.
France is not the only country to use green budgeting to support a green response to the COVID-19 pandemic. Preliminary results of an OECD survey show that over half of OECD countries plan to use green budgeting tools to integrate green perspectives in recovery packages. In addition to green budget tagging used by France, countries will carry out environmental and climate impact assessments of individual measures or attach green conditionality to support measures. Some countries, such as Colombia, Denmark, Latvia, Portugal and Spain, plan to go further and propose an assessment of how the recovery package as a whole affects environmental and climate objectives.
In good humour, the Irish Chair of the Paris Collaborative on Green Budgeting recently suggested that France should slow down its green budgeting efforts to let other countries catch up. However, Ireland is making impressive progress of its own. In addition to introducing its own system of green budget tagging, the country has just announced an increase in carbon prices as part of its budget for 2021. Ireland recognises the central role that tax policy can play as part of an overall package of budget measures to support a green recovery from the pandemic.
Robust tax policy tools, in particular carbon pricing, can work ‘hand-in-hand’ with green stimulus to promote clean investment and spending decisions, and support a successful, long-term recovery, according to new OECD findings. Carbon pricing reinforces green stimulus measures and helps align traditional stimulus with climate objectives, even when it is not explicitly targeted towards decarbonisation. Given competing social and economic goals, it is not realistic for all public money to go directly to green projects. France’s green budgeting analysis, for example, showed that a majority of its annual expenditure is “grey”, i.e., neither environmentally harmful nor environmentally positive. Carbon taxes or emission permit trading encourage cleaner investment and consumption choices for all public and private spending, limiting CO2 emissions and local pollution. Households and businesses will embrace low carbon on their own if they know that carbon prices will rise over time, without the need for the government to identify the most promising technologies and spending choices in advance. This reduces the risk of stranded assets and stranded jobs in the future.
Reforming carbon taxes and emissions trading will be necessary to drive a green recovery. At present, 70% of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed and some of the most polluting fuels remain among the least taxed. Emissions trading systems result in significant prices for electricity and industry in some countries, but even combined with taxes, the overall carbon price signals are not in line with decarbonisation targets.
The opportunity exists for tax and spending policies to be implemented in tandem, which could make green recovery measures more acceptable from a political economy perspective. The 2021 Irish budget, presented on 13 October 2020, is a case in point. Not only did the government announce that it would spend EUR 8.5 billion on supporting people and businesses affected by COVID-19, but it will also increase the carbon tax by EUR 7.50 a tonne, from EUR 26 to EUR 33.50, while raising rates for cars taxed on CO2 emissions and extending a registration tax relief for battery-powered electric vehicles. To support the purchasing power of vulnerable groups, the government also increased a means-tested income transfer to support households during winter months. Additional spending measures to ensure a Just Transition include investments in energy efficiency, social protection and pilot environmental programmes in agriculture.
Expenditure policy can prepare the ground for a green tax shift later. For example, spending measures that support energy efficiency programmes or subsidies for R&D that unlock clean technologies can help reduce carbon emissions and make it easier in the longer term to introduce carbon pricing. Tax policy tools, such as carbon pricing, have the capacity to improve environmental outcomes, while also raising government revenues that can be used to manage the trade-offs among environmental, economic and social goals.
Doing your best today to prepare for tomorrow will involve making the most of what both green budgeting and tax policy tools have to offer. The twin challenges of COVID-19 and climate change are so great that neither green budgeting nor tax policy tools alone will be enough for a successful green recovery. By combining them, countries will be able to “build back better” from the COVID-19 crisis and provide long-term certainty to their economies.
Authors:

Elsa Pilichowski, Director of Public Governance, OECD

Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration, OECD

Compliments of the OECD.
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