EU inflated climate finance figures for roads, farms, LNG, biomass: auditors

The EU inflated its climate finance spending by €72 billion (about $77 billion) while overstating the emissions benefits of funding farms, roads, LNG terminals, and biomass projects.

Because of this, the bloc did not meet its 2020 target for climate finance spending despite reporting otherwise, EU watchdog the European Court of Auditors (ECA) concluded in a 30 May report.

But even without spending enough on climate action and mitigation, the EU met both its renewable energy consumption and GHG emissions reduction goals for the same year, the ECA noted.

The EU's executive body, the European Commission (EC), said it reached its aim to spend at least 20% of the EU's combined 2014 to 2020 budget on climate action (€216 billion).

The ECA corrected the record, observing the EC spent 13% on climate-related projects.

It based this finding on the EC's own rules for spending and whether it had contributed to climate action, finding "reported spending was not always relevant to climate action."

Part of the problem lies with the way the climate-positive benefits are calculated. "We consider that the overall reporting on climate spending was unreliable. It involved significant approximation and tracked only the potential positive impact on climate without evaluating the final contribution to EU climate goals," the auditing body said.

The ECA found inconsistencies in the way the EC tallied up the climate benefits, which was based on a formula taken from legislation for European regional development funds.

"The methodology does not require quantification of the impact of spending on GHG emissions or set any specific indicators regarding adaptation," the ECA said, adding the EC's reporting didn't differentiate between adaptation and mitigation spending.

Among the improvements suggested by the ECA, it noted the EC should update guidelines and measure its potentially climate-negative spending by 2025.

The changes must happen during the next climate spending period as a leveled-up climate spending target (30 %) is in the EU's sights for 2027.

That target captures the EU's post-pandemic stimulus package for member states, NextGenerationEU. The package includes the Recovery and Resilience Facility (RRF), of which 37% must go towards member state greening.

Already, the RRF finance being handed out has certain "potential issues" such as funding milestones not linked to climate objectives, said the ECA.

The RRF is set to balloon by a further €103.5 billion ($110.8 billion) under the EU's 2023 budget, the EC said on 7 June.

EU funding grew agricultural GHGs

The report's key finding is that half of the reported EU climate spending went towards agriculture, but the EU did not successfully decrease farm emissions.

On the contrary, EU-funded studies cited by the report "suggest that without direct payments [made to farmers] EU GHG emissions from agriculture would be 2.5-4.2% lower."

Payments for "non-viable" farms disincentivize adaptation, said the ECA. It dubbed funding projects such as building roads and mechanizing agriculture as "bad practice."

On the other hand, some payments to farmers allow them to adapt to climate change, support climate-friendly cover crops, plant forests, and maintain land to prevent wildfires.

Most climate spending (80%) was allocated from the budgets of existing agricultural funding policies. About a fifth of this came from the European Agricultural Fund for Rural Development (EAFRD), which subsidizes farmers with payments and improves rural economic competitiveness.

Like several EU finance programs, the EAFRD has a target for "greening" related spending (30%), but the spending via EAFRD did not prevent emissions as much as it thought because it was spent on unhelpful compliance with public safety rules (cross-compliance) and small organic farmers.

The EC's reporting counted small organic farmers automatically towards its green spending target, but the EC did not require them to meet any related criteria.

What's more, lower crop yields from organic farms may lead to more emissions from increased production elsewhere, according to the ECA.

Within EAFRD's $5.12 billion (€4.8 billion) in funding spent on rural renewal, 10 of 17 projects claimed as climate action were for local roads that negatively impact the climate, the ECA said.

Further inflation of the EC's reported climate spending might come from other inconsistencies, for example where allocated money remained unspent, and in one instance where the EC counted member state spending as EU spending, the ECA pointed out.

The ECA said future agriculture funding choices need to show how they contribute to EU goals, for example net-zero emissions by 2050. "We also recommend obtaining scientific evidence to support the climate contribution made by the EU's agricultural policy," the ECA said.

Roads emitting rather than saving

Road transportation accounts for a quarter of all GHG emissions in the EU, according to the ECA.

The EU claimed the climate benefitted from 70% of the money spent via a program funding transportation, energy, and telecommunications projects, the Connecting Europe Facility (CEF).

But while vehicles are a major source of the EU's overall transportation emissions, only 4% of CEF transport projects by value were focused on sustainability.

The EC also overestimated the climate benefits of projects improving railways, said the ECA. It did not use conservative assumptions and was inconsistent in reporting on these projects, the ECA said of the rail projects.

For a €15.3 billion ($16.31 billion) pot of funding for railway projects, the ECA said the money had achieved a modest CO2 reduction and noted railway construction was emissions-intensive.

LNG, biomass get free pass

Less of the funding used for LNG terminals should have counted towards climate goals, the ECA found.

This is because LNG locks in future use of natural gas rather than relieving dependency, the ECA said.

Agreeing in part with the principle, on 7 June four environmental groups launched legal action against the EC over potential CEF funding for gas projects under a cross-border infrastructure program called Projects of Common Interest (PCIs).

A lawyer with environmental non-profit ClientEarth, a party to the legal action, criticized the EU's gas infrastructure funding plan. The EC "did not consider the impact of methane emissions derived from gas infrastructure projects in spite of evidence that these are substantial. That's unlawful as it directly clashes with the EU's own climate laws and its legal obligations under the Paris Agreement," said Guillermo Ramo.

The EC said the PCIs only included gas projects announced in 2019 or before. The groups said they funded 30 "major" projects: among them, the Melita Transgas pipeline, the Cyprus LNG import terminal, and a Floating Storage and Regasification Unit project in Poland, LNG Gdansk.

Another EU climate spending area hotly contested by green groups, biomass projects, received some funding through the European Regional Development Fund (ERDF) and the Cohesion Fund (CF).

For example, the CF had by 2014 financed at three "best practice" biomass heating plants for district heat networks in Austria, as well as new biomass boilers in Finland.

But a smaller amount of biomass project funding should have been counted, the ECA said.

The rubber-stamping of EU renewable energy subsidies for biomass power plants has long been questioned by environmental groups, although the EC proposed new biomass power subsidy limits.

"No one disputes that burning wood emits more carbon than coal because, at the smokestack, wood is very inefficient, and so you have to burn a lot of wood to generate a little bit of energy, and all that wood has carbon associated with it," Partnership for Policy Integrity Director Mary Booth told Net-Zero Business Daily last year.

While the Intergovernmental Panel on Climate Change has supported the use of biomass in carbon-negative practices like bioenergy with carbon-capture and storage, research finds traditional biomass power plant use worsens climate change, according to Sasha Stashwick, director of the industrial policy, climate and clean energy program for the US' Natural Resources Defense Council.

Posted 07 June 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.