Massive investment needs to meet EU green and digital targets

Prepared by Malin Andersson, Carolin Nerlich, Carlo Pasqua and Desislava Rusinova

Published as part of the Financial Integration and Structure in the Euro Area 2024

Substantial green and digital investments will be needed in the coming years to reach the targets set for 2030 and beyond under the Green Deal and the Digital Compass.^[1] Reaching these targets would help the EU to reduce its greenhouse gas (GHG) emissions, boost potential growth, improve competitiveness, address strategic vulnerabilities and promote economic security and resilience at the EU level. However, the EU faces a large gap in funding for these investment needs which must be seen in the context of limited fiscal space, raising the question of how private capital can be best mobilised to bridge the gap. This box presents an overview of estimates of green and digital investment needs and discusses some of the challenges to be met, in particular in terms of funding needs.

The Green Deal is aimed at transition to climate neutrality by 2050 and a cut in the EU’s net GHG emissions of at least 55% by 2030 as compared with 1990 levels. To deliver on these targets, the EU has adopted a set of policy measures, the so-called Fit for 55 package, to foster the requisite transformations of the EU’s economy.^[2] One of the key elements of the package is the reform of the emission trading scheme (ETS), notably by broadening its coverage and strengthening the price signals for decarbonisation efforts. An additional ETS will be set up for the transport and building sectors and is scheduled to become fully operational in 2027. Moreover, the package establishes more ambitious emissions reduction targets for the sectors not covered by the current ETS and strengthens standards to boost sustainable mobility, increase the share of renewables in the energy mix and improve energy efficiency.

The EU needs to invest sizeable amounts until 2030 and beyond to support the green transition. Over the past decade, the EU has invested an average of €764 billion per year (equivalent to 4.8% of EU GDP in 2022) to reduce GHG emissions (Chart A, panel a).^[3] More green investment is needed, however, to bring GHG emissions in line with the 55% reduction target. The European Commission estimates the annual green investment gap for the 2030 target to be reached – that is to say, the investment needs in addition to historical spending – at €477 billion (3% of EU GDP in 2022), bringing the total annual investment needed to €1,241 billion (7.8% of EU GDP in 2022).^[4] Most of the additional investment will be required in greening the transport sector and in boosting the energy efficiency of residential real estate.^[5]

Quantifying green investment needs is fraught with uncertainty. It is therefore useful to also consider the wide range of estimates drawn up by other institutions. Compared with the European Commission estimate for total green investments, other institutions suggest a lower overall envelope. For example, Bloomberg New Energy Finance (BloombergNEF) estimates total investment needs at €1039 billion, while the Institute for Climate Economics (I4CE) expects investment needs of €813 billion by 2030 (Chart A, panel b).

Estimates of the green investment gap differ across sources. While the gaps estimated by the International Energy Agency (IEA) and the I4CE are broadly comparable with the European Commission estimate, BloombergNEF points to much higher additional needs until 2030 (Chart A, panel b).

The reasons for the discrepancies across estimates are manifold. The different historical spending levels used as a baseline may be one of the reasons, with the European Commission showing by far the highest level. Other factors include differences in the sectors covered, how the categories are defined and how the investment needs are calculated. For example, BloombergNEF and the IEA explicitly include investments in hydrogen, nuclear and carbon capture and storage technologies in the category “energy supply”. Moreover, differences arise from the assumptions underlying the mitigation policies adopted, in particular the carbon pricing path, the scenarios and the methodological approaches.

Although green investment will have to be financed largely by the private sector, the public sector is expected to play an important role as a catalyst. The EU is committed to spending 30% of its multiannual budget on green projects, amounting to around €363 billion in the period 2021-2027, and to allocating at least 37% of expenditure under the RRF to green projects, corresponding to a total of €240 billion in cumulative terms for the period 2021-2026.^[6] While national budgets will also have to contribute to the green transition, fiscal space is limited. Estimates point to around 20-25% of total green investment needs being covered by the public sector, while for the remainder private capital will need to be mobilised.^[7]

Unlocking sufficient capital for green investment may be challenging. Green investment projects differ from “traditional” investments in a number of ways and tend to entail higher risks for financial investors. In particular, green transition requires new technologies that may not yet be fully mature or are still under development; renewable energy supply is relatively capital-intensive, with high upfront capital needs and a higher depreciation rate reflecting a shorter lifecycle. Funding green investment projects may entail higher financial risks in comparison with “traditional” investment projects, in particular if start-up companies are involved. Banks may be less willing to take on higher risk or be constrained in so doing by regulatory requirements. Other sources of financing, such as venture capital, are less freely available in the EU compared with other jurisdictions, and notably the USA. Although green bond issuances have increased sharply in recent years, their overall share of total issuances is still very small.

Turning to digital investment, the Digital Compass Communication and the Digital Decade Policy Programme set targets and objectives for Europe’s digital transformation by 2030.^[8] Targets have been formulated in four areas, namely digital skills, digital infrastructures, digitalisation of business and digitalisation of public services. There are quantitative sub-targets in each of these areas. For example, by 2030 all households in the EU should be served by a Gigabit broadband network, and all populated areas should be covered by next generation high-speed wireless networks offering a performance at least equivalent to that of 5G. The Digital Decade Policy Programme 2030 sets up an annual cooperation cycle to achieve these common objectives and targets whereby the European Commission and the EU Member States will report on the progress achieved in terms of national roadmaps and on the implementation of multi-country projects. So far, progress in achieving the targets has been slow.^[9]

Substantial investment will be needed to meet the digital targets. A European Commission study on international benchmarking of digital investments found that private-sector investments by the EU ICT sector in telecommunication equipment between 2014 and 2020 amounted to €277 billion (on average €46 billion per year).^[10] On top of the existing digital investment, the European Commission estimated the additional needs to be around €125 billion per year (Chart A, panel a).^[11] A separate study by the European Commission estimates that investment of around €114 billion will be needed in digital connectivity to achieve the “one gigabyte target” and a further €33 billion to provide a “full 5G service” (including new base stations and small cells to provide additional bandwidth and ensure more reliable mobile connectivity).^[12] Including the digital investment needed in infrastructure (roads, railways and waterways) of €26 billion increases the total digital connectivity investment gap to at least €173 billion.

Funding to meet the digital targets will stem from both public and private-sector sources. The European Commission has mapped EU funding instruments to the Digital Decade targets and found that these instruments could contribute more than €165 billion, with more than 70% of the funds originating from the RRF (i.e. about €130 billion being allocated to digital transformation initiatives).^[13] EU investment efforts are directed primarily (that is to say 65% of digital funding) at the digital transformation of the public sector and the digitalisation of businesses. However, full achievement of the EU’s digital transformation target will require additional investments, notably through multi-country projects.^[14]

Lack of funding seems to be one of the most prominent obstacles to digitalisation, followed by uncertainty and the length of regulatory processes, according to the European Investment Bank.^[15] Technical capacity, disagreements among stakeholders, technological uncertainty, agreements with public authorities and access to core infrastructures also play a role. Skills and expertise are another obstacle for digitalisation. High regulatory hurdles for firm entry and weak competition tend to slow digitalisation, and other challenges to digital investment are associated with small firm size and a low level of digital advancement. The European Commission Joint Research Centre points to the key conditions for a successful European digital transformation being sufficient private investment, internal demand and awareness of the benefits of digital technologies.

Chart A

EU green and digital investments

a) EU annual green and digital investment needs by category	b) Comparison of EU annual green investment needs estimates by institution
(EUR billions)	(EUR billions)