A major and sustained increase in investment is needed if the EU is to move towards a low carbon economy. With limited additional financing expected from the public purse, attention is turning to ways to unlock the investment potential of the private sector, in particular through the use of new financial instruments such as project bonds, revolving funds and blending mechanisms.

In on-going discussions on the future EU budget, new financial instruments are being promoted as a means of attracting additional public and private financing at a time of fiscal constraint. If well designed and targeted, these instruments could offer significant opportunities for bridging the climate financing gap. However, expectations should be realistic. The use of such instruments for leveraging financing for climate change is still a niche area in the EU. While efforts are needed to increase the scale of spending on climate change, there is also a need to ensure that overall spending does not undermine EU climate change objectives. Thus, it is important to flank efforts with clear policy and regulatory signals to ensure that financial instruments do not lock in carbon-intensive technologies and infrastructures. Financial instruments as such are policy neutral. The direction of their deployment is however highly policy dependent. 

This report by IEEP aims to contribute to discussions on the use of new financial instruments in the EU. It examines practical experiences in the use of some new financial instruments, the Commission’s proposals for new financial instruments in the post-2013 EU budget, and potential opportunities and caveats of using such instruments. Discussing these issues should provide useful information for policy-makers and stakeholders involved in on-going negotiations on the future design of EU funds and their instruments as well as for representatives of the financial and banking sector.