European Union: How to finance the Next Generation EU funds and the transition to a decarbonized economy?

In the last days of 2021, the European Commission proposed new sources of revenue for the European Union (EU) budget, to finance the Next Generation EU funds and the transition to a decarbonized economy in the coming years. The Commission expects these new sources to generate (“at cruising speed”) up to €17 billion annually in the years 2026-2030 for the EU budget. Together with this, it published proposals for implementation of the Pillar 2 of the OECD/G20 historic tax agreement.

• Three new sources of revenue for the EU budget 

‑ EU emissions trading system (ETS). The Commission proposes that in the future 25% of the revenues from the auctioning of EU allowances for emissions goes into the EU budget, what is estimated in around €12 billion per year on average over 2026-2030 (€9 billion on average between 2023-2030).

‑ Carbon border adjustment mechanism (CBAM). The CBAM will put a carbon price on imports, corresponding to what would have been paid, had the goods been produced in the EU. The Commission proposes to allocate to the EU budget 75% of the revenues generated by this carbon border adjustment mechanism, what is estimated in around €1 billion per year on average over 2026-2030 (€0.5 billion on average between 2023-2030). CBAM is not expected to generate revenues in the transitional period from 2023 to 2025.

‑ Revenues coming from the Pilar 1 of the OECD/G20 agreement to the reform of the international corporate taxation framework. Pillar 1 will reallocate the right to tax a share of so-called residual profits from the world's largest multinational enterprises to participating countries worldwide. The Commission has committed to propose a Directive in 2022 implementing the Pillar 1, once the details of the OECD/G20 agreement are finalized. Pending to the final agreement, revenues for the EU budget could amount to roughly between €2.5 and €4 billion per year.

The new resources proposal needs to be approved unanimously in Council after consulting the European Parliament. The decision can enter into force once it is approved by all EU countries in line with their constitutional requirements. According to the Commission's proposal, the new own resources will be introduced gradually as of 1 January 2023.