The European Commission has published its much-anticipated proposal for the next EU budget. Set to the tune of sustained crises and uphill domestic politics, the proposal attempts to walk a fine line between agility and fiscal conservatism. Climate maintains a foothold, but the overall size fails to rise to the multiple challenges faced by the EU and widens the clean transition funding gap.
As EU Member States roll up their sleeves for lengthy negotiations ahead, this baseline will heighten the importance of the budget’s design and governance fine print. Against this backdrop, five elements of the proposal stand out as particularly significant for the EU’s climate ambition and investment trajectory.
1. The size of the MFF falls short of investment needs due to political constraints
The newly proposed budget represents only a modest increase in spending (from €1.25tn to €1.61tn, or 1.13% to 1.15% of EU GNI) in 2025 prices and adjusting for the repayment of Next Generation EU (NGEU), the COVID-era debt instrument. Factoring in the end of NGEU disbursements in 2026, the EU’s overall funding capacity will fall, resulting in a widening of the clean transition investment gap. Given the compounding crises faced by the bloc and Mario Draghi’s unequivocal call for an increase in fiscal firepower, these figures represent a slump in ambition at a time when it is most needed. They also reflect the Commission’s measured understanding of the EU’s political landscape, where a continued focus on simplification and deregulation has eclipsed clear openings for action. Despite some hints of loosening fiscal orthodoxy among ‘frugal’ Member States, immediate reactions to the new proposal indicate that even a nominal increase in funding will face a difficult political road ahead. This adds weight to the details of how a limited pot of money will be mobilised towards a set of competing priorities.
2. The devil is in the details regarding the 35% climate target
The proposal’s headline figure states that 35% of the budget will be spent on climate mitigation, adaptation and environmental protection. While it is difficult to compare this to the existing 30% earmarking (37% in NGEU) as the methodology differs, in the current political context it is encouraging that climate earmarking retains a foothold. In the new proposal, the climate target will be tracked across the entire MFF using a list of eligible activities set out in the new Performance Framework. This system is not immune to greenwashing: to give just one example, 40% of spending on new airport terminal capacity is eligible for the climate adaptation target. The other major development is the application of the Do No Significant Harm (DNSH) principle to the entire budget, in theory preventing any EU funded activities from harming the climate or environment and requiring them to consider adaptation requirements. As highlighted by the European Court of Auditors, the implementation of the DNSH principle will hinge on the guidance prepared by the Commission.
3. The National & Regional Partnership Plan (NRPPs) create new opportunities for climate and energy – but also new challenges
The new NRPPs formed from the merger of Cohesion Policy and Common Agricultural Policy funds (around 2/3rds of the budget) will follow the “cash-for-reforms” logic of the post-COVID Recovery and Resilience Plans. Under this proposal, Member States would negotiate an investment and reform plan with the Commission. The plan would then be approved by the Council, and EU funding disbursed upon completion of the agreed milestones and targets. As advocated by E3G, NRPPs would have to deliver on existing climate and energy targets, with the Commission empowered to request more funding to be allocated to these objectives if countries fall behind.
However, the centralisation of NRPPs creates challenges for local and regional authorities (LRAs) traditionally responsible for implementing EU Cohesion Policy programmes and designing projects, threatening the existing place-based approach to regional development. National governments will have a lot more control over the geographical distribution of EU funding, which, combined with the disappearance of the Just Transition Fund targeted at fossil-fuel dependent regions, risks leading to some areas falling through the cracks.
4. In search of “EU added value”: energy infrastructure gets a boost, the new Competitiveness Fund gets a decarbonisation pillar
The MFF proposals are framed by an aspiration to deliver “EU added value”, with a cross-border dimension and economies of scale. To this end, the Connecting Europe Facility received a fivefold increase in its budget for energy infrastructure, including cross-border interconnectors. The European Competitiveness Fund, the new flagship instrument intended to answer the Draghi report, leverage private finance and provide support throughout a company’s development, contains a dedicated window for clean transition and decarbonisation. While the clean transition window accounts for just 4.5% of the Fund – compared to 22.5% for the defence and resilience window – 43% of the overall Competitiveness Fund will have to contribute to the climate and environment spending target. Designed to move governments, the private sector, the research community and the EU in sync, the Competitiveness Fund will have to demonstrate its effectiveness where previous EU investment vehicles, such as the Strategic Technologies for Europe Platform (STEP), were not given the means to succeed.
5. Europe attempts to reaffirm itself on the global stage
In a context of shrinking overseas development aid worldwide, the proposed €190bn external action budget – a 37.9% increase – indicates the Commission’s ambition for the EU to play a larger role in the world, including on climate and development as part of its Global Gateway strategy. At the same time, the removal of thematic spending targets in exchange for greater agility raises serious risks that the EU’s shifting political prerogatives – such as migration concerns and transactional economic objectives – will overshadow longer-term development and climate finance needs.
