Address https://gelex.eu/eli/EU/doc/http://publications.europa.eu/resource/cellar/623ffb95-dc08-423c-b71c-bd2a558e61e2.0006.01@2017-01-06/en

Contents

1. Preamble
2. ANNEX
3. ANNEX MATRIX OF COEFFICIENTS USED BY THE ECA IN THE FIELD OF THE RURAL DEVELOPMENT POLICY

The ECA’s special reports set out the results of its performance and compliance audits of specific budgetary areas or management topics. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks to performance or compliance, the level of income or spending involved, forthcoming developments and political and public interest. This report was adopted by Audit Chamber I, which specialises in the sustainable use of natural resources. The audit was led by ECA Member Phil Wynn Owen, Dean of Chamber I, along with Kersti Kaljulaid, former ECA Member. The head of task was Bertrand Tanguy, with Tomasz Plebanowicz as deputy head of task. The audit team comprised Katharina Bryan, Peeter Latti, Alain Vansilliette, Angharad Weatherall, Armando Do Jogo, Michał Machowski, Vivi Niemenmaa, Olivier Prigent, Carlos Sanchez Rivero, Frédéric Soblet, Klaus Stern, Dana Moraru and Maria Ploumaki. Hannah Critoph assisted with drafting the report. From left to right: P. Wynn Owen, H. Critoph, F. Soblet, K. Bryan, A. Do Jogo, B. Tanguy, O. Prigent, T. Plebanowicz, C. Sanchez Rivero, A. Weatherall, M. Machowski, V. Niemenmaa, K. Kaljulaid. Agricultural direct payments Direct payments are granted to farmers in order to support their incomes and also to remunerate them for their production of public goods through greening, and in combination with cross-compliance. Climate action Actions tackling climate change (referred to as ‘climate action’ in this report). Climate mainstreaming Rather than creating a specific dedicated funding instrument, mainstreaming integrates climate action into EU policies, instruments, programmes or funds. Climate tracking Monitoring the progress towards reaching the 20 % target by measuring the financial contribution of funds to this target. Cohesion Fund (CF) The Cohesion Fund aims to strengthen the economic, social and territorial cohesion of the Union in the interest of promoting sustainable development. The CF focuses on investments in environment and transport, including areas related to sustainable development and energy which present environmental benefits. Cross-compliance System which links most common agricultural policy payments to farmers’ compliance with basic rules for the environment, food safety, animal health, and welfare, and good agricultural and environmental conditions of land. EU climate coefficients Weightings given to EU funds going to projects, measures or actions. Coefficients are based on the OECD Rio markers methodology. EU climate coefficients bear the weightings of 0 %, 40 % and 100 % depending on the action’s contribution to climate change mitigation or adaptation. European Agricultural Fund for Rural Development (EAFRD) The European Agricultural Fund for Rural Development is aimed to help the rural areas of the EU to meet a wide range of economic, environmental and social challenges. European Agricultural Guarantee Fund (EAGF) The European Agricultural Guarantee Fund provides funding for direct payment to farmers, for the management of the agricultural markets and for a number of other purposes such as veterinary and plant health measures, food programmes and information activities. European Maritime and Fisheries Fund (EMFF) The European Maritime and Fisheries Fund is the fund for the EU’s maritime and fisheries policies for 2014-2020. It aims to help fishermen in the transition to sustainable fishing and coastal communities in diversifying their economies. It also finances projects that create new jobs and improve quality of life along European coasts. European Regional Development Fund (ERDF) The European Regional Development Fund is aimed at reinforcing economic and social cohesion within the European Union by redressing the main regional imbalances. This is achieved through financial support for the creation of infrastructure and productive job-creating investment, mainly for businesses. European Social Fund (ESF) The aim of the European Social Fund is to strengthen economic and social cohesion within the European Union by improving employment and job opportunities, mainly through training measures, encouraging a higher level of employment and the creation of more and better jobs. European Structural and Investment Funds (ESIF) The European Structural and Investment Funds is a group of five separate funds that aim to reduce regional imbalances across the EU, with policy frameworks set for the 7-year multiannual financial framework budgetary period. The five funds are: the European Regional Development Fund (ERDF); the European Social Fund (ESF); the Cohesion Fund (CF); the European Agricultural Fund for Rural Development (EAFRD); and the European Maritime and Fisheries Fund (EMFF). Focus areas The European Union has identified six priorities for Rural Development. These are broken down into 18 ‘focus areas’ in order to better detail the aims of each priority and to facilitate programming. Greening Component of agricultural direct payments which supports agricultural practices beneficial for the climate and the environment. Those practices include crop diversification, the maintenance of permanent grassland and the establishment of ecological infrastructure. Horizon 2020 EU’s research and innovation programme for 2014-2020. LIFE Programme EU’s programme supporting environmental, nature conservation and climate action projects throughout the EU, currently for 2014-2020. Measure In the rural development programmes, it means a set of operations or projects contributing to one or more of the Union priorities for rural development. Programming documents Programmes breaking down the overarching strategic objectives set in the partnership agreements between the European Commission and individual Member States into investment priorities, specific objectives and, further down, into concrete action. In rural development policy, they are called rural development programmes. For the other European Structural and Investment Funds, they are called operational programmes. Rio markers Codes employed by the OECD to track funds targeted at climate change mitigation and adaptation. Union priorities Objectives set for rural development, which contribute to the Europe 2020 strategy for smart, sustainable and inclusive growth. There are six union priorities in the fields of agriculture, forestry and rural areas which mainly concern fostering innovation and competitiveness, restoring and enhancing ecosystems, supporting the shift towards a low carbon and climate resilient economy, and promoting social inclusion and poverty reduction. Climate change is one of the greatest challenges facing the European Union (EU) and governments across the globe. In order to respond to climate change and the associated substantial investment needs, the EU has agreed that at least 20 % of its budget for 2014-2020 — one euro in every five — should be spent on climate-related action. This objective forms part of the EU’s leadership in climate action. The target to spend one euro in every five on climate-related action is to be achieved by incorporating or ‘mainstreaming’ climate action within different EU funding instruments. This means that, instead of creating one dedicated funding instrument, the objective is to be met through incorporating climate concerns into policy areas and the corresponding funds of the EU budget. We sought to determine whether the target to spend at least 20 % of the EU budget on climate-related action was likely to be met and whether the approach employed was likely to add value, by leading to more and better-focused funding on climate action. We found that ambitious work was underway and that, overall, progress had been made towards reaching the target. However, there is a serious risk that the 20 % target will not be met without more effort to tackle climate change. The implementation of the target has led to more, and better-focused, climate action funding in the European Regional Development Fund and the Cohesion Fund. In the European Social Fund, and in the areas of agriculture, rural development and fisheries, however, there has been no significant shift towards climate action and not all potential opportunities for financing climate-related action have been fully explored. According to Commission figures, the share of funding dedicated to climate action has averaged 17.6 % between 2014 and 2016. Overall, the Commission estimates that 18.9 % would be spent on climate action, thereby falling short of the 20 % objective. We estimated that the rate of climate funding would need to be increased to an average of 22 % across the remaining years of the current programming period, i.e. for 2017 to 2020, to reach the overall target of 20 % by the end of 2020. There are serious risks to achieving this in the main contributing areas of agriculture, rural development and research. If calculated in accordance with internationally established methodologies for assessing levels of climate finance, the assessed contribution from agriculture and rural development would be reduced by up to approximately 33 billion euros. As regards research, the Horizon 2020 programme has fallen behind its target to allocate 35 % to climate action, with its contribution currently standing at 24 %. The Commission has no detailed action plan setting out how it intends to catch up. The Commission’s approach to assessing levels of climate action funding focuses on identifying planned expenditure. However, plans will not necessarily translate into actual spending, and this approach will not provide any comprehensive information on the results achieved. In addition, the tracking method does not reflect the full financial effects of EU spending on climate action through financial instruments, nor does it distinguish between funding for mitigation and adaptation measures. Our main recommendations are for a robust multi-annual consolidation exercise and a comprehensive reporting framework to be set up, and for there to be an assessment of climate change needs. We also recommend that overestimates be corrected, that action plans be drawn up for areas that have fallen behind, and that actual spending and results be monitored. Finally, we recommend the exploration of all potential opportunities to ensure a further, real shift towards climate action. Climate change is one of the greatest challenges facing the European Union (EU) and governments across the globe. The Earth’s climate is changing due to a higher concentration of certain gases, known as greenhouse gases, in the atmosphere. These gases act as a blanket, trapping heat and so warming the Earth’s surface in what is known as the ‘greenhouse effect’. Around 9 % of the greenhouse gases emitted worldwide in 2012 came from the EU. There are two complementary policy responses to climate change: mitigation and adaptation. The first approach, mitigation, seeks to address the causes of climate change by reducing or limiting the emission of greenhouse gases, primarily through reducing energy consumption, improving energy efficiency, increasing the share of renewable energy. This approach also includes efforts to protect and enhance means of greenhouse gas sequestration, as well as to improve forestry and agricultural practices for preserving and sequestering carbon in soils and forests. The importance of mitigation action is shown in Figure 1 below. It shows projected surface temperature changes for the 21st century relative to the average temperatures during the late 20th century for the scenario of business as usual carbon emissions. The second approach for addressing climate change, adaptation, aims at anticipating the adverse and, where existing, positive effects of the climate change that will happen and taking appropriate action to prevent or minimise the potential damage. Despite the implementation of mitigation action, the Earth’s temperature will continue to increase until at least 2040, irrespective of the greenhouse gas emission scenario considered. This means that adaptation measures will be necessary even in the best-case scenario. The figure shows projected changes in the annual mean temperature for 2071-2100, compared with 1971-2000 (business as usual carbon emissions). Projected changes are based on the average of a multi-model ensemble using a high emissions scenario established by the Intergovernmental Panel on Climate Change. Source: European Environmental Agency. (http://www.eea.europa.eu/data-and-maps/figures/projected-change-in-annual-mean) Adaptation measures are dependent on the impacts of climate change. Such impacts vary significantly according to geography. They include, for example, floods, rising sea levels, drought and desertification, and a loss of biodiversity (see Figure 2). Source: European Environmental Agency, 2012. The International Climate Change Agreement, adopted in Paris at the end of 2015, is the first binding universal agreement to fight against climate change. It establishes a transparency framework for tracking the progress of countries towards achieving their individual greenhouse gas reduction targets. Even before the Paris Agreement was adopted, the EU had already committed itself to cutting its emissions by at least 20 % compared with 1990 levels by 2020 and by 40 % by 2030. It has also set a long-term goal for 2050 (see Box 1). According to the latest estimates, the total EU greenhouse gas emissions in 2014 were around 24 % below 1990 levels, although this was partly owing to the impact of the economic crisis. In order to respond to the substantial investment needs associated with climate change, the EU has agreed that at least 20 % of its budget for 2014-2020 — one euro in every five — should be spent on climate-related action. This objective forms part of the EU’s leadership in climate action, which the Commission regards as indispensable for the 2015 International Climate Change Agreement to succeed. According to our estimates, the target corresponds to a pledge of approximately 212 billion euros. According to the Commission, this commitment would triple the estimated indicative share of 6 % to 7 % of climate-related expenditure in the EU 2007-2013 budget. The Commission decided to incorporate or ‘mainstream’ climate action within all policy fields including different EU funding instruments. This included setting a target to spend one euro in every five on climate-related action for the EU’s 2014-2020 multiannual financial framework. This means that instead of creating one dedicated funding instrument, the objectives linked to climate change mitigation and adaptation are to be achieved through incorporating related concerns into policy areas and the corresponding funds of the EU budget. This might be achieved by spending more on existing climate-related programmes, adapting existing programmes, or creating new programmes and features such as selection criteria which better target climate change-related topics.

By 2020:

20 % reduction in greenhouse gases emissions (from 1990 levels);

20 % share of renewable energy in energy consumption;

20 % gains in energy efficiency.

By 2030:

at least 40 % reduction in greenhouse gases emissions (from 1990 levels);

at least 27 % share of renewable energy in energy consumption;

indicative target to improve energy efficiency by at least 27 % compared to projections of future energy consumption.

By 2050, the EU intends to reduce its greenhouse gas emissions by between 80 % and 95 % compared to 1990 comprising all main sectors.

Each Commission directorate-general is responsible for incorporating climate action into its individual spending programmes, and for its implementation, in cooperation with the Member States where appropriate. Directorate-General Climate Action provides knowledge and guidance on climate action to other Commission directorate-generals. Directorate-General Budget coordinates the preparatory work for the allocation of resources to climate in the budgets, and collects and presents the related information. The Secretariat-General of the Commission plays a coordinating role, ensuring the overall consistency of the EU actions, which includes the mainstreaming policies. The exact responsibilities of the Commission and Member States vary depending on whether a policy area is under shared management or is directly managed by the Commission. In the latter management mode, the Commission itself manages programmes, including most of Horizon 2020 and the LIFE Programme. Under shared management, the Commission appraises, discusses objectives, actions and choice of indicators and approves the programming documents prepared and submitted by the Member States. The Member States are responsible for designing, implementing and monitoring the measures included in the programmes. The European Structural and Investment Funds’ (ESIF) programmes include an indicative amount of support envisaged for fulfilling the climate change objective, whereas with agricultural direct payments, the Commission calculates this amount centrally.

Climate action refers to measures both to reduce greenhouse gas emissions (mitigation) and to adapt to the effects of global warming (adaptation). Both types of measure are necessary and complementary.

The EU is a key player in global climate action, and its actions contributed to achieving the ambitious international agreement concluded in Paris.

Mainstreaming climate action into existing policies and tracking the climate-relevant spending is a process involving cooperation between the Commission and the Member States.

Setting an objective to spend one euro in every five of the 2014-2020 EU budget on climate action is one way in which the EU is seeking to increase the climate relevance of EU spending.

The approach aims to take account of different EU policies and programmes, and of geographical specificities.

We sought to determine whether the target to spend at least 20 % of the EU budget on climate-related action is likely to be met and whether the approach employed is likely to add value. More specifically, we sought to answer the following questions:

Is the action underway on track to meet the overall target?

Is the target likely to add value by leading to more and better-focused funding on climate action?

We established audit criteria concerning the design, implementation, monitoring and evaluation of EU expenditure for climate change mitigation and adaptation. The criteria were developed from EU policy papers, legislation, Commission guidelines, Council decisions, studies and other publications. We also consulted experts from the Organisation for Economic Cooperation and Development and the European Investment Bank (EIB) on mainstreaming and tracking methods, and carried out a review of existing literature. Figure 3 provides an overview of the audited budget areas and auditees. The audited areas of Horizon 2020, cohesion policy, the common agricultural policy, fisheries policy and the LIFE Programme represent around 78 % of the commitments planned in the 2014-2020 multiannual financial framework and around 85 % of the climate funding planned for the period. Source: European Court of Auditors. Our audit work focused on the overall system established at Commission level and in two areas of shared management: cohesion policy and the common agricultural policy. Together these areas account for two thirds of the EU budget and three quarters of the overall target for climate funding under the 2014-2020 multiannual financial framework. Between October 2015 and February 2016 we conducted audits visits in Poland on cohesion and common agricultural policies, in Germany and Romania on cohesion policy, and in France and Spain on the common agricultural policy. Our sample took account of the materiality of expenditure, the volume of greenhouse gases emissions, and adaptation challenges. In each Member State, we reviewed the overall programming framework, including programmes set at national and regional level. We also carried out similar audit work for Horizon 2020, fisheries policy and the LIFE Programme at Commission level. We collected and examined audit evidence against the audit criteria by means of written questionnaires, interviews with Member State and Commission officials, and documentary and data analyses. This report also addresses the suggestion that the European Parliament made in 2015 and 2016 that we audit how the agreed target of 20 % climate mainstreaming was being achieved. With spending in the 2014-2020 period still at an early stage, this report focuses on planned expenditure, and not on actual expenditure at project level. We did not analyse non-climate-related spending, nor did we examine the potential adverse environmental effects generated by EU support. Similarly, other climate-related spending outside the EU budget was also beyond the audit scope. Therefore, this report does not include an assessment of the general effects of EU policies on climate, the performance of the EU against its 2020 and 2030 climate and energy targets, or the optimum level of EU climate funding. We also identified, where possible, examples illustrating good practices or practical case studies. This section assesses the general approach adopted by the Commission to incorporate the climate action target into the EU budget, and the progress made to date. We analysed whether:

there was a plan on how the overall target will be achieved;

an appropriate tracking method built on internationally established methodologies has been set up (see for example paragraphs 34 to 36);

progress had been reported based on reliable and relevant information.

We examined whether the Commission had set up a plan outlining which areas of the budget should contribute and to what extent. Such individual targets ought to have been laid down for specific budget areas based on a sound assessment of potential and investment needs in the area to ensure that investment is supported where most needed. At the same time, the actual potential of policies to deliver a contribution by implementing climate-related measures would need to be taken into account, for example, their principal aims and set up. The calculation used to measure climate action expenditure should be based on a transparent system. The target of ‘at least 20 %’ of EU expenditure was a political choice (see paragraph 8). The Commission justified climate mainstreaming, including the level of the target, by citing its aim of responding to the challenge posed by climate change and the substantial investment needs for climate action, in particular those associated with implementing the 2020 climate and energy targets. However, we could not find clear evidence quantifying these investment needs. The Commission has estimated that 6 to 7 % of the EU budget for 2007-2013 was spent on climate action (see paragraph 8). Since no procedure for monitoring climate action spending had been in place in the 2007-2013 period, we were unable to determine whether and to what extent the 20 % would call for an additional effort for 2014-2020. The 20 % target applies to the whole of the EU budget over the whole of the 2014-2020 period; it is therefore not an annual target. Table 1 shows the main budget areas which are contributing to achieving the 20 % target. Audited budget area Planned expenditure 2014-2020 (billion euro) Planned target of climate funding 2014-2020 (%) Planned climate funding 2014-2020 (billion euro) Heading 1 a - Research (Horizon 2020) 74.9 ≥ 35.0 16.6 Heading 1 b - Cohesion Fund 63.3 28.4 18.0 Heading 1 b - European Social Fund 91.4 1.2 1.1 Heading 1 b - European Regional Development Fund 200.3 18.5 37.0 Heading 2 - European Agricultural Guarantee Fund (agricultural direct payments) 288.0 16.3 47.0 Heading 2 - European Agricultural Fund for Rural Development 99.5 57.5 57.2 Heading 2 - European Maritime and Fisheries Fund 6.4 15.6 1.0 Heading 2 - LIFE 3.5 49.3 1.6 EU BUDGET 1 062.6 ≥ 20.0 212.5 Share of budget areas audited in EU budget 77.9 % 84.5 % Source: European Court of Auditors’ estimates based on Commission programme statements, programming documents, Commission data, regulations and 2014-2020 multiannual financial framework. We found that the co-legislators, i.e. the European Parliament and the Council, had set targets in several main budget areas by introducing them in the legislation governing the respective funding instruments (see Figure 4). These are either presented in the preamble of the legal texts, or as legally binding targets underpin the planned targets shown in Table 1, in the latter case they represent a mandatory minimum threshold. 1 Regulation (EU) No 1291/2013 of the European Parliament and of the Council of 11 December 2013 establishing Horizon 2020 — the Framework Programme for Research and Innovation (2014-2020) and repealing Decision No 1982/2006/EC (OJ L 347, 20.12.2013, p. 104). 2 Regulation (EU) No 1305/2013 of the European Parliament and of the Council of 17 December 2013 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) and repealing Council Regulation (EC) No 1698/2005 (OJ L 347, 20.12.2013, p. 487). 3 Regulation (EU) No 1293/2013 of the European Parliament and of the Council of 11 December 2013 on the establishment of a Programme for the Environment and Climate Action (LIFE) and repealing Regulation (EC) No 614/2007 (OJ L 347, 20.12.2013, p. 185). 4 Regulation (EU) No 1301/2013 of the European Parliament and of the Council of 17 December 2013 on the European Regional Development Fund and on specific provisions concerning the Investment for growth and jobs goal and repealing Regulation (EC) No 1080/2006 (OJ L 347, 20.12.2013, p. 289). Source: European Court of Auditors, based on the respective regulations. We found that the resources generated in enforcing the targets introduced in the legislation were intended to make a significant contribution to the achievement of the climate action goal. We estimated this expected contribution to be 38 % of the amount needed to meet the overall target of spending at least 20 % of the EU budget on climate action in the 2014-2020 period. The absence of specific targets in other substantial parts of the EU budget makes it more difficult for the Commission to meet the 20 % target. For example, in the budget area of Competitiveness for Growth and Jobs, there are three financially significant programmes which, unlike the Horizon 2020 programme in this budget area, have no set targets for climate funding. However, no overall plan outlining which funding instruments could contribute and to what extent was ever devised (see paragraph 26 and Table 1). This is likely to prove to be a sub-optimal way to determine the climate action contribution to be made by spending programmes which differ in nature. Since 2014, the biggest contributors on climate action have been the common agricultural policy and cohesion policy (see Figure 5). Agricultural and rural development funds, namely the EAGF and EAFRD, are playing a key role in the efforts to achieve the target. The Commission has forecast that they will contribute 47 billion euros and 57.2 billion euros in climate funding respectively. The Commission estimated that 51.9 % of the climate funding planned under the 2014-2020 multiannual financial framework would come from agricultural funds, which is more than their 37.7 % share of the EU budget. Source: Commission’s programmes statements of draft budgets of 2014, 2015 and 2016. Some measures contribute to climate change mitigation and adaptation more than others. A system therefore had to be devised to identify what action could be counted towards the 20 % target. The Commission built on an internationally established methodology, namely the OECD’s ‘Rio markers’, which assign categories to expenditure according to the rules mentioned in Table 2. The EU’s tracking methodology is a system for gauging the contribution from different funding instruments and policy areas to climate action by establishing three categories of expenditure. In order to transform these ‘Rio markers’ into financial data, the EU climate coefficients of 0 %, 40 %, and 100 % were applied to the EU expenditure, following rules specific to the various spending areas. OECD EU Applicable category Categories of activity EU climate coefficients Example: Criteria used in European Structural and Investment Funds 2 Expenditure for activities for which climate is the principal (primary) objective. 100 % The support makes a significant contribution towards climate change objectives. 1 Expenditure for activities for which climate is a significant, but not the principal, objective. 40 % The support makes a moderate contribution to climate change. 0 Expenditure not targeted at climate objectives. 0 % The support does not contribute towards those objectives or the contribution is insignificant. Source: Handbook on the OECD-DAC Climate Markers, http://www.oecd.org/dac/stats/48785310.pdf; Article 8 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Structural and Investment Funds (OJ L 347, 20.12.2013, p. 320). The audited Commission directorate-generals and Member States found the use of these three climate coefficients to be a pragmatic approach for tracking climate expenditure. However, we found two main weaknesses in the tracking system:

The EU climate coefficients applied in certain areas failed to respect systematically the conservativeness principle (see paragraphs 51 to 59), developed by the World Bank in order to avoid overestimates in climate funding (see Box 2). This failure resulted in over-estimates of the amounts allocated on climate action.

The European Structural and Investment Funds Regulation adopts an approach which deviates from the OECD categories; the 100 % coefficient is applied to support making a significant contribution to climate change, while the 40 % coefficient is a marker of a moderate contribution. Assigning the top weighting to contributions which are merely ‘significant’, rather than only to those where climate change is the primary objective, increases the number of cases in which the maximum coefficient can be used. This leads to a risk of climate-related amounts being overestimated.

We found weaknesses in the reporting arrangements. Unlike other international systems (see Box 2), the EU’s tracking system provides no information on how much is spent on climate change mitigation and adaptation. The ‘Common Principles for Climate Mitigation Finance Tracking’, developed by the joint climate finance group of Multilateral Development Banks and the International Development Finance Club, include the principle of conservativeness, which dictates that ‘where data is unavailable, any uncertainty is to be overcome following the principle of conservativeness where under-reported rather than over-reported climate finance is preferable’. The EIB has incorporated this principle within its general principles for recording its climate action lending: ‘Credibility: the recording system must maintain the credibility of the Bank’s reporting on climate action, and thus, in the case of doubt or uncertainty around climate impacts, the presumption will be to exclude.’ The EIB’s other general principles include that, as far as possible only the climate relevant parts of projects and programmes should be recorded, and that mitigation and adaptation are to be recorded separately. Source: Common Principles for Climate Mitigation Finance Tracking, 31 March 2015. European Investment Bank, EIB Climate Strategy, Mobilising finance for the transition to a low-carbon and climate-resilient economy, 22 September 2015. In 2014 the Commission proposed at least doubling expenditure via financial instruments under the European Structural and Investment Funds for the programming period from 2014 to 2020. Approximatively 21 billion euros will be allocated to financial instruments from these funds. Such financial instruments aim to revolve and to have a multiplier effect generating additional investments. For example, the EU contribution of 10 million euros in 2016 to the Natural Capital Finance Facility is included in the climate tracking exercise. This facility’s actual contribution could be 10 times as high. Tracking progress towards the 20 % in the EU core budget does not reflect the full financial effects of EU spending on climate action. At the same time, we found a potential overestimate of the Natural Capital Finance Facility’s contribution to climate action. This is because it can also invest in fields which do not have climate expenditure as either a principal or significant objective. The system used to monitor progress towards the 20 % target is incorporated in the Commission’s annual budgetary procedure. Each directorate-general determines the level of tracking detail required and reports the aggregates to Directorate-General Budget. Both Directorate-General Budget and Directorate-General Climate Action monitor progress on an annual basis. On average, the climate contribution rate has stood at 17.6 % between 2014 and 2016. The Commission working document accompanying the mid-term review of the multiannual financial framework suggests that progress has been made between these years (see Figure 6), since the total EU budget contribution to climate funding was estimated by the Commission to be 13.6 % in 2014, 17.3 % in 2015 and 20.9 % in 2016. For 2017, the Commission estimates — based on its draft budget proposal — the climate funding to be 19.3 %. Source: Commission data, mid-term review of the multiannual financial framework 2014-2020, SWD(2016) 299 final. The Commission acknowledged in a 2015 annual activity report that it was not in a position to assess with confidence whether it was on track to reach the 20 % objective for the 2014-2020 multiannual financial framework period overall. The Commission assessed progress towards the 20 % target in the multiannual financial framework mid-term review, published on 14 September 2016. It estimated that 18.9 % of the EU budget would be spent on climate action. We found that the figures for 2014 and 2015 were largely based on estimates. This was particularly the case with the European Structural and Investment Funds. While this was unavoidable, since the spending instruments for the new programming period had only just been set up, and so some information was not yet available, these limitations hampered the comparability from one year to the other of the data provided for the period 2014-2016 (see Figure 6). In addition, the approval of the multiannual spending programmes in 2015 automatically contributed to the increase in climate action funding since as programmes were approved their climate-related plans were entered into the system. As a result, the evolution between 2014 and 2016 cannot be taken as a trend for the whole period. In the fisheries spending area, Member States do not have to report their planned climate measures to the Commission until 2016. Until they do so, Directorate-General Maritime Affairs and Fisheries cannot verify the accuracy of the indicative contribution to climate change action objectives communicated by the Member States in their operational programmes. To date, no tool has been available to provide a multiannual consolidated update on the situation across the EU budget. The Commission has recently updated climate-relevant spending data for the whole financial period in the context of the multiannual financial framework mid-term review. The established approach presents an inherent risk, since it focuses on identifying the plans for future expenditure. Planned expenditure on climate action does not, however, necessarily translate into actual spending. While this audit did not look at actual expenditure, and, in general, data on actual expenditure is not yet available, we found instances which highlighted this inherent risk. When comparing actual expenditure at project level against plans in the LIFE programme, we found that the LIFE projects chosen represented an EU climate action contribution of 34 % of the total EU funds allocated to LIFE. This fell short of the 49.3 % anticipated in the budgetary documents. This case illustrates the need for the authorities to re-evaluate any projected climate funding contributions once they are sufficiently certain of the nature of their forthcoming expenditure, while avoiding extra administrative costs. The Commission has not yet developed a procedure for doing so. In addition, the Commission’s approach to the 20 % target is solely focused on financial data. Information on what funds plan to achieve or have achieved in terms of results such as greenhouse gas reductions is only available for parts of the budget. The information is also not comparable, which hampers the consolidation of the results achieved in different areas. In the European Regional Development Fund, Member States are not obliged to use the common greenhouse gas reduction output indicator apart from in the energy investments. While Member States may opt to include other areas, we found that not all of the audited Member States did so. In addition, different methodologies and tools are used to calculate greenhouse gas emissions and reductions. Several Member State authorities are developing tools to calculate emissions for certain project types such as climate-friendly transportation in the European Regional Development Fund. As a result, there is a lack of information about the extent to which climate-related action will contribute to the CO2 emission reductions, and the available data may not be comparable across Member States. We found that where indicators existed, they focused on mitigation within the energy sector, while adaptation related indicators are rare. We estimated that the rate of climate funding must be increased to an average of 22 % across the remaining years of the current multiannual financial framework, i.e. for 2017 to 2020, to reach the overall target of 20 % by the end of 2020. This matches the estimate produced by the Directorate-General for Climate Action. Compared to 2014-2016, this means that an increased effort will be required for 2017-2020. However, the mid-term review estimates an 18.9 % spending on climate action for the period of 2014-2020. We also conducted an analysis in order to assess the Commission’s prognosis. Assuming that the areas responsible for most climate funding (see Table 1) actually provide the anticipated amounts of climate funding, we estimated that the rate of climate funding to be achieved in 2014-2020 in the areas of the EU budget not listed in Table 1 was 18.2 %. This would mean doubling current efforts in these areas. We could find no evidence showing that the Commission was increasing efforts in these areas and how such a doubling would be feasible. In addition, there are serious risks that could affect the expected contribution in the areas mentioned in Table 1, which are to provide most of the planned climate funding on 2014-2020 multiannual financial framework. The main risks are examined sector by sector in the three following sections:

Assumptions concerning the largest contribution from agricultural direct payments to the climate action target are insufficiently justified and this may lead to overestimation (paragraphs 52 to 54).

Application of EU climate coefficients has led to overestimation of the contribution to climate of rural development (paragraphs 55 to 59).

We adapted the climate contributions from agricultural direct payments and rural development measures where necessary to be in line with the principle of conservativeness (see paragraphs 54 and 58). These adjustments would reduce agricultural climate funding by up to approximately 33 billion euros, which represents around 15 % of the overall target.

Horizon 2020 has fallen behind its 35 % target and needs to catch up (paragraphs 60 to 64).

Agricultural direct payments are composed of a greening component, which represents a 30 % share, and of a non-greening component, representing the remaining 70 %. The Commission estimates that the contribution from agricultural direct payments to climate change will be around 20 % per year in 2016-2020. The climate funding is calculated by adding the greening component which contributes 14.0 % and the non-greening component which contributes 5.6 % (see Figure 7). Source: Explanation of the methodology for applying climate tracking to direct payments (European Commission). The method and the EU climate coefficients applied when calculating the climate contribution of the greening component fairly reflect the climate-relatedness of the three farming practices connected with this payment. However, we found there to be a lack of quantifiable elements justifying the 20 % applied to non-greening direct payments (see Box 3). The Commission considers the final climate contribution of 8 %, i.e. 20 % x 40 %, to be conservative. The Commission believes that some non-greening agricultural direct payments provide benefits for the climate, largely through cross-compliance standards. The Commission acknowledged that quantifying this contribution would be a very difficult and costly exercise, and decided to label 20 % of the budget for non-greening direct payments as climate-related. The Commission considered using the penalty system for cross-compliance infringements to justify this 20 % share. We found, however, that there were no clear grounds for doing so. In order to reflect the climate contribution of cross-compliance, a more conservative approach was considered by the Commission, which would have considered the part of the non-greening direct payments to be taken into account to be 10 % instead of 20 %. This would have resulted in a lower contribution from agricultural direct payments to climate action. As shown in Figure 8, the contribution would be decreased by 9 billion from 47.1 to 38 billion euros. If the conservativeness principle developed by the World Bank (see paragraph 35) is applied, the Commission should have been taken into account the lower amount of climate contribution. Source: Commission data and European Court of Auditors’ estimates based on Commission data. Regulation (EU) No 215/2014 lays down a methodology for tracking climate spending under each of the five European Structural and Investment Funds. For the European Agricultural Fund for Rural Development, this entails applying the EU climate coefficients to rural development priorities and focus areas, regardless of the measures and sub-measures used to achieve these policy objectives. The Commission deemed the OECD’s ‘Rio markers’ methodology inappropriate in the EAFRD field because the measures have multiple and systematic co-benefits of an environmental, economic or social nature. The Commission’s approach rightly awards a 100 % climate coefficient to climate-related Union priority 5 ‘Promoting resource efficiency and supporting the shift towards a low-carbon and climate-resilient economy in the agriculture, food and forestry sectors’. However, the Commission has applied the same 100 % climate coefficient to all focus areas included under environment-related Union priority 4 ‘Restoring, preserving and enhancing ecosystems related to agriculture and forestry’, despite the difference in focus between these two priorities. The Commission decided that a coefficient of 40 % was too low due to the characteristics of the rural development measures. As a result of the Commission’s approach, the 40 % climate coefficient was applied to only 10 % of the planned climate funding under the EAFRD; the remaining 90 % of the planned climate funding is weighted with the 100 % coefficient. In the EAFRD, unlike in the other European Structural and Investment Funds, we found that there was a need to use different EU climate coefficients for each measure. The approach followed for the EAFRD does not distinguish sufficiently between the climate contributions made by different activities, leading to an overestimation of contributions to climate action. For example, payments for ‘areas under natural constraints’, aiming to prevent land abandonment, were weighted at 100 %. While such activities can mitigate climate change depending on the actual land use, this is not assured, and cannot be compared with activities such as forestry, which also receive 100 % (see Box 4). Payments for ‘areas under natural constraints’ compensate farmers for disadvantages stemming from natural or other constraints. Their ultimate aim is to prevent land abandonment. We found that while such payments could help prevent climate change, this was not their primary objective and so a climate coefficient of 40 % would be more prudent. This correction alone would reduce the EAFRD’s contribution to climate funding by 16 %, or 9.2 billion euros, for the 2014-2020 period. Forestry activities like afforestation play an important role in helping to meet some of the key ecological objectives of the EU Rural Development Policy. Afforestation and the creation of woodland respond to the need to enhance ecosystems and carbon sequestration and to switch to a low-carbon economy. Afforestation also helps to prevent natural hazards and fires, and contributes to the adaptation to climate change. We found that this rationale justified a climate coefficient of 100 %. When assessing the Member States’ rural development programmes, we found that the Commission’s approach had led to more expenditure being labelled as climate action than would have been the case had each measure been reviewed separately and classified according to international standards. In the light of this finding, we revised the climate coefficients (Annex), and estimated, for the whole EU, the revised amount of climate funding from the EAFRD for 2014-2020. Our estimates suggested that the EAFRD climate amounts should be reduced by 42 %, or by 23.9 billion euros (see Figure 9). Source: European Court of Auditors’ estimates based on data extracted from SFC2014 via Infoview as at 30 May 2016 — Planned EAFRD expenditure per focus area and measure of approved rural development programmes. In the ERDF and CF, the Commission faced similar issues in the classification of expenditure, but managed to apply a more detailed approach. We also found good practice within the same budget area as rural development: the LIFE Programme’s tracking practices are more conservative than those of the EAFRD. Different tracking coefficients are used for the LIFE Programme’s Environment and Climate Action sub-programmes (similar to rural development priorities 4 and 5 respectively) (see Box 5). In the LIFE Programme, in line with the OECD methodology, expenditure items have been assigned to one of three categories: primarily climate-related (100 %); significantly climate-related (40 %); and not climate-related (0 %). Most of the amounts planned to be spent under the Environment sub-programme are tracked with a 40 % coefficient, while they are tracked with a 100 % coefficient under the Climate Action sub-programme. The LIFE Programme provides us with a clear example of a case where environmental expenditure (with a maximum of 40 %) is not fully assimilated to climate, in contrast with practice in the rural development field. As a result, climate funding between areas cannot always be compared. Horizon 2020’s climate tracking results for 2014 show that 24 % of the budget was dedicated to climate action. This is considerably below the 35 % target (see Figure 4). The regulatory requirement for the multiannual work programme to include an indication of the amount of climate-related expenditure was not adhered to in either 2014-2015 or 2016-2017. Therefore, no quantified target has been assigned to the individual work programmes identifying their contribution towards the objective to spend at least 35 % of the overall Horizon 2020 budget on climate action. Horizon 2020 distinguishes between and sets out the relative budget proportions for programmable and bottom-up actions. For programmable actions, the climate-related expenditure can be estimated by applying EU climate coefficients to the relevant expenditure categories. However, the Commission considers that the results from bottom-up areas are unpredictable by nature. In 2014, the bottom-up actions represented 35 % of the total Horizon 2020 budget, and, of these, 8.5 % were considered climate related. Using the projected climate contribution from programmable actions for the years 2014 to 2017, we calculated that between 2018 and 2020 the average share of climate-related expenditure in Horizon 2020 would have to reach 47 % to achieve the 35 % target for the whole 2014-2020 multiannual financial framework. This represents a substantial increase compared with the rate of 24 % already achieved. Figure 10 shows an example of the path that the climate allocations under Horizon 2020 will have to take if the 35 % target is to be met. Source: Commission’s data for 2014-2017 (draft budget 2017) and European Court of Auditors’ estimates of climate action for 2018-2020. In November 2015 the Commission devised an action plan in order to remedy Horizon 2020’s sub-optimal progress towards its 35 % target. We analysed whether this action plan contained adequate provisions to deliver the necessary catch-up in research. The action plan introduces some measures from the 2016-2017 work programme onwards and recognises the need to do more in the 2018-2020 work programme. For example, the Commission intends to introduce compulsory climate-related checks to be performed on the whole work programme prior to approval. In addition, climate-related considerations are to be included in the standard project proposal templates and in the award criteria. Allocating a sufficient budget to measures that make a sizeable contribution to climate change objectives would be another means, recommended in the action plan, by which to help meet the general 35 % target. While the action plan includes useful proposals, it fails to present any quantifiable targets or models as to how the 35 % target might be met. For example, the action plan does not include related calculations, nor does it provide a roadmap on how the relatively low share of climate-related expenditure in the years 2014-2017 can be compensated for in 2018-2020. The target to spend 20 % of the EU budget on climate action can be factored into the various policy areas through spending more on existing climate-related programmes, creating new programmes or developing features to target spending more towards climate-related objectives. A sign of ‘better focused spending’ would be funds and programmes setting requirements which are more geared towards climate-related objectives than they were in the 2007-2013 period. Overall, we were unable to determine whether and to what extent the 20 % target represents an increase in climate action spending compared to 2007-2013 (see paragraph 27). We examined the European Structural and Investment Funds and the agricultural direct payments, since these areas under shared management account for around three quarters of the planned climate funding (see paragraph 19). For these funds, we looked at whether, compared with 2007-2013, the 20 % target had added value to the fight against climate change through:

a larger allocation of EU funds to climate action — a quantitative improvement — and/or

better focused EU funding for climate action — a qualitative improvement.

Since spending has just started for the 2014-2020 period, we analysed the quantitative and qualitative improvements by auditing the design of measures in the spending programmes as well as planned expenditure, and not actual expenditure at project level. The examples mentioned in the section therefore primarily act as case studies to illustrate the strengths, weaknesses and good practices we noted. We assessed whether the inclusion of climate action under the 2014-2020 ERDF and CF operational programmes had resulted in more funds being allocated to climate investments compared with 2007-2013. Since climate action spending was not specifically monitored in the 2007-2013 programmes, to perform our assessment we first identified which investment categories, known as intervention fields, were comparable to the 2014-2020 climate-related categories. In a second step, we applied the 2014-2020 EU climate coefficients to the EU expenditure made in the relevant 2007-2013 investment categories. Compared with 2007-2013, climate-related expenditure in 2014-2020 across all ERDF and CF programmes, including the European Territorial Cooperation framework, is planned to increase by around 69 %, from 32.4 billion euros to 54.7 billion euros. When viewed in terms of its proportion of total ERDF and CF financing, climate-related expenditure is set to increase from 12 % in 2007-2013 to 21 % in 2014-2020. As shown in Figure 11, the nature of climate-related expenditure changed between the two funding periods. Whereas in 2007-2013 railways and multimodal transport made the largest climate contribution, with this category accounting for 32 % of the total, in 2014-2020 energy efficiency investments come out on top, representing 34 % of the total estimate for climate action (see Box 6 for an example). Source: European Court of Auditors’ estimates based on Commission data. Energy efficiency projects for private and public buildings are planned to account for around 6 % of total EU co-financing in Romania in 2014-2020, compared with about 1 % in 2007-2013. The expenditure for such projects is weighted with a 100 % climate action coefficient. One example of such projects aimed at increasing the energy efficiency of residential building was funded in District 3 of Bucharest. The ERDF co-financing from the 2007-2013 Regional Operational Programme amounted to around 162500 euros. The project was completed in 2015. Thermal insulation of the block of flats and renovation of the heating system resulted in a reduction of annual energy consumption from 331 kWh/m2 to 143 kWh/m2, i.e. by 57 %. The CO2 emission savings are estimated to be 238 tonnes/year. Block of flats before the investment (next to the project site) Ongoing works (next to the project site) Block of flats after the investment (project site) Source: European Court of Auditors. The general trend at EU level is also mirrored in all three Member States visited for the audit in the area of cohesion policy. Here too the climate expenditure under all ERDF and CF operational programmes is planned to increase in 2014-2020. However, we also saw significant variations between Member States in terms of their financial commitments for climate action under the EU budget (see Table 3). Member States Estimated share of climate funding in 2007-2013 Estimated amount of climate funding in 2007-2013 (billion euro) Share of climate funding in 2014-2020 Amount of climate funding in 2014-2020 (billion euro) Germany 7.0 % 1.20 27.0 % 2.90 Poland 8.0 % 5.60 15.0 % 11.60 Romania 9.0 % 2.20 19.0 % 4.30 Source: European Court of Auditors’ estimates based on programming documents and national reporting. In addition to conducting a financial assessment, we also examined whether incorporating climate action into the 2014-2020 ERDF and CF operational programmes had resulted in investment activities which are better focused on climate action. We identified qualitative improvements in certain areas. Firstly we found that management processes were taking more account of the climate issue. Across Germany, Poland and Romania we noted qualitative improvements in how grant applications were taking climate into account, including requirements to describe the climate change impacts and risks or the project’s climate change contribution. Secondly, we found instances where changes were being made to focus on climate action (see Box 7). In Germany, the Federal Ministry for Environment, Nature Conservation, Building and Nuclear Safety set up a solely nationally funded project to encourage the active participation of environmental partners in the ERDF programming process and to support the incorporation of environmental and climate issues. Among other things, the project resulted in the production of two programming manuals. These included, for instance, examples of good practice for incorporating climate action into projects in different areas. The EU climate coefficients were labelled as a first step in the right direction, while stressing that ecological sustainability had to be integrated in all measures. Under the German Saxony operational programme, the selection criteria stipulate that company buildings must be renovated to energy efficiency standards which exceed legal requirements by 10 %. Furthermore, in energy-efficiency renovations, funding is targeted at only those parts of a project which bring added climate value, whereas previously whole projects were supported. Romania awards higher scores to projects in the Large Infrastructure Operational Programme providing higher savings in energy consumption. We also noted that the Polish and Romanian national authorities had set eligibility conditions designed to obtain greater synergies with the relevant broader strategies like the Sustainable Energy Action Plans or Sustainable Urban Mobility Plans. In 2014-2020 up to 64 % of climate-related expenditure under the ERDF and CF operational programmes is expected from the investment categories for which the 100 % EU climate coefficient is applied. This means that they make a significant contribution towards climate change objectives (see Table 2). This is an increase compared with 2007-2013, when most of the climate-related expenditure came from activities with only a moderate contribution to climate change (see Figure 12). Source: European Court of Auditors’ estimates based on Commission data. Although in 2014-2020, the funding of measures deemed primarily directed at climate action is set to increase in each of the three Member States visited, the extent of this increase differs significantly. In Poland and Romania, mainly due to the continued support of railways and urban transport, around half of the climate-related funding across all operational programmes is assigned a 100 % coefficient, while in German operational programmes nearly all of the climate-related expenditure is weighted at 100 % due to its significant contribution to climate action. However, the role of climate action in research and innovation and in the field of small- and medium-sized enterprises was found to be relatively small. In the audited programmes in Germany and Romania, we found that the Commission had not pushed strongly during programming negotiations significantly to increase the amount of climate action taken in the research and development nor business development fields in programmes where this amount was either low or non-existent. Member States were able to hit the 20 % target without having to adapt funding in these areas. This means that not all the potential opportunities for financing climate-related action were fully utilised. The Commission has acknowledged an increasing demand for green jobs, with the energy efficiency sector expected to employ 2 million by 2020, and the renewable energy sector 3 million. Matching the supply of ‘green workers’ to the increased demand will prove crucial to the establishment of a green economy. A lack of qualified specialists and workers in the green jobs sector would trigger costs and delays in the implementation of climate-related actions. At the same time, the transition to a low-carbon economy will also lead to job cuts in the fossil fuel-based sectors, leaving workers from these sectors with a need to acquire new skills. Compared to the other cohesion policy funds, the ESF operational programmes explicitly allocated a very low share to climate action, specifically 1.4 % of 83 billion euros. The Commission considered that the share of the ESF allocated to climate-related expenditure established on the basis of the information reported by the Member States in the ESF operational programmes may underestimate the expected contribution of the ESF to climate action in the 2014-2020 period, the final extent of which will only be known after the programmes’ implementation. Not having set appropriate requirements for the ESF to take climate action into account represents a missed opportunity for this area to contribute more to the shift to a low-carbon economy and to climate action in general. When the 2014-2020 operational programmes were under approval, there was no requirement for Member States to provide the Commission with any justification of the ESF allocation to climate action objectives. Therefore, the programmes were not systematically checked to see whether they would target the demand for green jobs or support the transition to a low-carbon economy. This section assesses whether the incorporation of climate action into the agricultural direct payments and the rural development programmes under review has resulted in positive changes in the quantity of climate spending — measured by an increased volume of funds for climate-related spending — and in its quality — measured by its better focus on climate-related operations. We reviewed available evidence upon the cross-compliance system and agricultural direct payments and also the 2014-2020 rural development programmes for Andalusia, Poland and the Rhône-Alpes and compared them to the 2007-2013 programmes. In a recent report, we concluded that the changes to the common agricultural policy for the period 2014-2020 reduced the number of the cross-compliance rules, by removing requirements which were not sufficiently relevant to the farming activity. The greening component was introduced as a new feature of the common agricultural policy for the period 2014-2020. Although it includes requirements relevant to climate (see paragraph 53), it is largely based on the previous good agricultural and environmental conditions, which covered similar agricultural practices, such as protection of permanent pastures or retention of landscape features. Available information shows that 64 % of beneficiaries of direct payments are exempted from greening requirements. As a result, there is a risk that reorientation of direct payments towards climate action will be limited. The Commission plans to evaluate the environmental achievements of the green payment in 2017 and at the end of 2018. The multiannual financial framework 2014-2020 contribution to agricultural direct payments is expected to amount to 288 billion euros. This amount is comparable to the amount of 276 billion euros of direct aid paid to producers in the financial years 2007 to 2013. Due to the specificities of rural development, a comparison across all rural development programmes was not possible because programme measures are implemented through different types of operation from one programme to the next. Based on three rural development programmes, we estimated the share of climate funding in 2007-2013 and compared it against the plans for 2014-2020. Across these programmes, we saw no real upward or downward shift in investments (see Table 4). Rural development programmes reviewed Estimated share of climate funding in 2007-2013 Estimated amount of climate funding in 2007-2013 (billion euro) Share of climate funding in 2014-2020 Amount of climate funding in 2014-2020 (billion euro) Andalusia, Spain 66.2 % 1.38 55.0 % 1.05 Poland (one rural development programme for the whole of the Member State) 37.0 % 0.50 39.4 % 0.34 Rhône-Alpes, France 78.0 % 0.51 75.0 % 0.80 Source: European Court of Auditors’ estimates based on programming documents. When assessing the programmes for any qualitative improvements, we found so far no significant change in the key features of the management process, such as the requirements or eligibility and selection criteria. This was particularly true of financially significant measures, such as measures dealing with areas under natural constraints or organic farming. The design of some less material measures had, however, been modified to make them more climate-related. We estimated that around 10 % of the EAFRD climate funding in the Rhône-Alpes, 22 % in Poland and 36 % in Andalusia are related to measures which better target climate action compared to 2007-2013. We found several examples of emerging good practice contributing directly to tackling climate change (see Box 8). The design of certain forestry measures we came across in Poland, the Rhône-Alpes and Andalusia had been improved to support carbon storage, or to boost the resistance of forests to climate change. The Rhône-Alpes programmes also included one measure helping to develop locally generated renewable energy by supporting investments from small forest-based companies in wood fuel. We also found improvements in the three programmes’ design of climate-friendly agri-environment-climate measures. Poland has started chemically analysing the organic carbon content of soil, and intercropping in order to achieve a positive balance of organic matter on an agricultural plot. In Andalusia, new requirements have been introduced to tackle the issue of soil erosion which blights olive production. We also found examples of good practice in measures created in 2007-2013 which are still being implemented in 2014-2020 (see Box 9). The 2014-2020 programme continues to support investment projects which contribute directly to mitigating climate change, for example through developing methane-production methods for agriculture. The objective is to facilitate the supply and use of renewable energy sources. Justifiably, the projects are tracked with a 100 % climate coefficient. The project pictured below, funded in 2012 and completed in 2015, is an example of such a project, producing energy from waste. Half of the waste input into the facility is of agricultural origin, while the other half is locally sourced green waste provided by a local company. The outputs improve the food self-sufficiency of the farm, and also meet the heating needs of a local school and other local premises. The total EAFRD eligible cost for the methane-production facility was 881000 euros. The project was 37.36 % funded through public support, with 105000 euros provided in EAFRD grants and 224415 euros of national co-financing. Example of an agricultural climate-related project Source: Conseil Régional Auvergne Rhône-Alpes. Climate change was not mainstreamed into the 2007-2013 European Fisheries Fund and the Directorate-General Maritime Affairs and Fisheries therefore has not calculated its contribution to climate action in that period. We estimated EFF’s contribution to climate action to have been around 1 billion euros in 2007-2013, representing 26 % of the Fund. For 2014-2020, the aggregated estimates of climate action contributions (see paragraph 43) provided in all EMFF operational programmes by the Member States also stand at around 1 billion euros, representing around 18 % of the EMFF. One of the main reasons for this stability in absolute terms is the reduced support which the EMFF has assigned to fleet management measures. There was a decrease in the related support for the replacement or modernisation of engines and for the permanent or temporary cessation of fishing activities, which measures are tracked with 100 %, 100 % and 40 % coefficients respectively. We have compared the current legal framework with the 2007-2013 period to ascertain whether the current maritime and fisheries fund has moved towards a better integration of climate change objectives in the content of its measures. This was done for the measures which can be traced back to the 2007-2013 period. Direct and clear references to climate change objectives, both mitigation and adaptation, are still rare and, as a result, the fisheries fund had not widened the scope of its contribution to climate action (see Box 10). Compared to the previous period, we have identified a limited number of improvements in the EMFF. Out of the 50 measures supported by the EMFF, three previously existing measures were improved to incorporate climate action and two new measures with climate change objectives were created. In addition, the EMFF now contains a stand-alone measure for energy efficiency and climate change mitigation, although similar operations were eligible for financing previously. This clearly climate-targeted measure, tracked with a 100 % coefficient, should benefit 3738 projects across the EU, the vast majority of which would concern engine replacement and modernisation. The EU institutions made a political commitment for the 2014-2020 multiannual financial framework to mainstream climate action across EU budget spending, and to ensure that at least one euro in every five from the EU budget is spent on climate-related activities. The main aim of this pledge is to respond to the challenge posed by climate change and the substantial investment needs for climate action. We sought to determine whether the target to spend at least 20 % of the EU budget on climate-related action was likely to be met and whether the approach employed was likely to add value, by leading to more and better-focused funding on climate action. We found that ambitious work was underway and that, overall, progress had been made towards reaching the target. However, there is a serious risk of falling short of meeting the 20 % target without more effort to tackle climate change. The implementation of the target has led to more, and better-focused, climate action funding in some of the European Structural and Investment Funds namely the European Regional Development Fund and the Cohesion Fund. In other areas, however, such as in the European Social Fund, agriculture, and rural development and fisheries, it is largely business as usual, i.e. there has been no significant shift of these funds towards climate action. The objective to spend ‘at least 20 %’ of the EU Budget on climate action is part of the EU’s leadership in climate action and represents a clear commitment to tackling climate change. According to Commission figures, the share of funding dedicated to climate action has averaged 17.6 % between 2014 and 2016 (see paragraphs 26 and 40 to 41). To date, no tool has been available to provide a multiannual, consolidated update on the progress across the EU budget in achieving this aim. The Commission has recently updated climate-relevant spending data for the whole 2014-2020 period in the context of the multiannual financial framework mid-term review. Overall, the Commission estimates that 18.9 % would be spent on climate action, thereby falling short of the 20 % objective (see paragraph 44). Weaknesses of the tracking method used by the Commission and Member States concern reporting and comprehensiveness. The tracking method does not reflect the full financial effects of EU spending on climate action through financial instruments and off-balance sheet items, despite their increasing use (paragraphs 37 and 38). It also does not differentiate between mitigation and adaptation measures, thereby making it difficult to assess the level of financing for these different approaches to addressing climate change (paragraph 36). The Commission should carry out annually, a robust, multi-annual consolidation exercise to identify whether climate expenditure is on track to achieve the 20 % target. Target implementation date: December 2017.

(a) The Commission should report, annually, consolidated information on the progress towards the overall 20 % target in its annual management and performance report and also report, with comprehensive information thereon, in each relevant annual activity report. This should include reporting on progress on action plans where they exist. In addition information on the climate contribution of financial instruments should be reported.

(b) Member States should report, in their annual implementation reports to the Commission, on the areas under shared management where there are potential opportunities for climate action, outlining how they plan to increase climate action in these areas.

Target implementation date: Annually, starting from the 2016 annual reports.

(c) The Commission and the Member States should ensure that data collection differentiates between mitigation and adaptation.

Target implementation date: Development of such a system for the next multiannual financial framework. We estimated that the rate of climate funding must be increased to an average of 22 % across the remaining years of the current multiannual financial framework, i.e. for 2017 to 2020 (paragraph 46), to reach the overall target of 20 % by the end of 2020. The main contributors to the target are agriculture and rural development and the cohesion policy, followed by the Horizon 2020 research programme (paragraph 33). No overall plan outlining which funding instruments could contribute and to what extent was ever devised (paragraph 26). This is likely to prove to be a sub-optimal way of determining the climate action contribution to be made by spending programmes which differ in nature. When planning the potential contribution to climate action from individual budget lines or funding instruments, the Commission should ensure that such plans are based on a realistic and robust assessment of the climate change needs and on each area’s potential to contribute to the overall target. Target implementation date: Development of such as system for the next multiannual financial framework. The main areas examined in this audit are expected to account for 84.5 % of expected contributions to the climate action target. Some of these areas have climate-related targets, the Horizon 2020 programme, the European Agricultural Fund for Rural Development, the LIFE programme and the European Regional Development Fund, supporting the delivery of their contribution (paragraphs 28 and 29). However, there are serious risks that could affect the expected contribution in agriculture, rural development and research (paragraphs 49 to 51). The Commission’s approach to planning and measuring progress towards the 20 % target across the EU budget was based on an internationally established methodology. The Commission and audited Member States found it to be a pragmatic approach to tracking climate expenditure. However, the EU climate coefficients applied in certain areas failed to respect systematically the conservativeness principle in order to avoid overestimating climate funding (paragraph 35). The assumptions concerning the contribution from agricultural direct payments to the climate action target are insufficiently justified. An application of the principle of conservativeness would result in a decrease of 9 billion euros in climate contributions (paragraphs 53 and 54). Application of EU-climate coefficients led to an overestimation of the contribution to climate of rural development. The approach followed for the EAFRD does not distinguish sufficiently between the climate contributions made by different activities, leading to an overestimation of contributions to climate action. Our estimates suggested that the EAFRD climate amounts should be reduced by 23.9 billion euros (paragraph 58). We estimated that these adjustments together would reduce the agricultural and rural development climate funding contribution by up to approximately 33 billion euros, which represents around 15 % of the overall target (paragraphs 51, 54 and 58). The Commission and the Member States should apply the principle of conservativeness and correct the overestimations in the EAFRD by reviewing the EU climate coefficients set. Target implementation date: By December 2017. The Horizon 2020 research programme has fallen behind its 35 % target and needs to catch up. While it is encouraging that the Commission has put in place an action plan, the plan does not set out in sufficient detail how the required catch-up is expected to be ensured (paragraphs 60 to 64). Apart from these risks affecting the delivery of the climate contribution in the main areas, other, less significant, contributing areas would need to double their current efforts to achieve the 20 % target. We could find no evidence, such as an action plan, showing that the Commission is increasing efforts in these areas and how such a doubling would be feasible (paragraph 47). Whenever the annual consolidation exercise reveals a risk that the expected contributions from a particular area may not be achieved, the Commission should draw up an action plan for that area, setting out in detail how it expects to ensure the catch-up needed. Target implementation date: By March 2017 for the drawing up of action plans. The Commission’s approach to assessing levels of climate action funding focuses on identifying planned expenditure. Yet this approach carries an inherent risk, since planned expenditure will not necessarily translate into actual spending. Therefore, it is the actual implementation of planned climate funding contributions which should be assessed, while avoiding disproportionate administrative costs. The Commission has not yet developed a procedure for doing so (paragraph 46). Monitoring the actual financial implementation of the 20 % target would, however, not provide any information on results achieved by the climate action spending. We found that information on what funds plan to achieve, or have achieved in terms of results such as greenhouse gas reductions, is only available for parts of the budget and lacks comparability (paragraph 47). The Commission should:

(a) in cooperation with the Member States, in the area of shared management, develop a harmonised and proportionate system for monitoring the actual implementation of climate action;

(b) in line with its ‘budget for results’ initiative, establish climate-related results indicators in all areas that contribute towards the achievement of the target, in particular to assess greenhouse gas emissions and reductions brought about through EU-funded measures;

(c) facilitate the exchange of good practice on climate-related result indicators between Member States.

Target implementation date: By December 2018. Compared with 2007-2013, climate-related expenditure in 2014-2020 across all ERDF and CF programmes, including the European Territorial Cooperation framework, is planned to increase from 32.4 billion euros to 54.7 billion euros. In addition to the financial increase, we identified a better focus on climate action and good practices in certain areas, such as in the programmes’ management process or in the type of funded investments (paragraphs 69 and 70). However, in the audited programmes in Germany and Romania, we found that the Commission had not pushed strongly during programming negotiations significantly to increase the amount of climate action taken in the research and development or business development fields. This means that not all the potential opportunities for financing climate-related action were fully explored (paragraph 75). Similarly, the European Social Fund’s potential contribution to climate action could be increased in light of the increasing demand for green jobs in the economy. We found that the ESF operational programmes allocated a very low share of 1.4 % of 83 billion euros to climate action. The Commission did not systematically check whether the programmes would target the demand for green jobs or support the transition to a low-carbon economy (paragraphs 76 to 79). Despite some good practices emerging, there has been no significant shift towards climate action in agricultural, rural development or fisheries policies. The introduction of a Green Payment does not guarantee a significant change of the contribution of direct payments to climate. This new scheme, while having a certain climate action impact, rests in practise largely on already existing agricultural practices (paragraphs 81 and 83). Across the three rural development programmes audited, we saw no real upward or downward shift in investments. Regarding the better-targeting of climate action, we found no significant change in the key features of the management process, such as the requirements or eligibility and selection criteria. The design of some less material measures had, however, been modified to make them more climate-related. We also found several examples of emerging good practice contributing directly to tackling climate change (paragraphs 84 to 87). There has been only a very limited increased focus on climate action in the maritime and fisheries fund. Direct and clear references to climate change objectives, both mitigation and adaption, are still rare. As a result, the maritime and fisheries fund has not widened the scope of its contribution to climate action (paragraphs 88 to 90). The Commission should:

(a) identify those areas with underutilised potential for climate action, such as the European Social Fund, and develop action plans for increasing the climate action contribution of these areas;

(b) The Commission and Member States should increase the mainstreaming of climate action in agriculture, rural development and fisheries, for example, by developing new, or retargeting existing, measures tackling climate change.

Target implementation date: By December 2017. This report was adopted by Chamber I, headed by Mr Phil WYNN OWEN, Member of the Court of Auditors, in Luxembourg at its meeting of 26 October 2016. For the Court of Auditors Klaus-Heiner Lehne President

ANNEX

ANNEX MATRIX OF COEFFICIENTS USED BY THE ECA IN THE FIELD OF THE RURAL DEVELOPMENT POLICY

The proposed matrix based on the audit visits in the Member States, and also adapted from the preparatory study commissioned by the Commission, remedies the lack of differentiation of EU climate coefficient by measure. On the basis of the case studies examined in the Member States, a literature review, an analysis of Commission internal notes and the application of international standards, we established, as a first step, an updated matrix of climate coefficients which takes into account the measures and their policy objectives represented by the focus areas (see below). In a second step, we determined the EAFRD amounts by measure and focus area. The data are available from the Commission to do so. The only case where an assumption had to be made was with union priority 4. Finally, we applied the climate coefficients in the matrix below to the corresponding EAFRD amounts.

PROPOSED MATRIX

Priorities and FAs Priority 2 Priority 3 Priority 4 Priority 5 Priority 6 Enhancing farm viability and competitiveness of all types of agriculture in all regions and promoting innovative farm technologies Promoting food chain organisation, animal welfare and risk management in agriculture Restoring, preserving and enhancing ecosystems related to agriculture and forestry Promoting resource efficiency and supporting the shift towards a low carbon and climate resilient economy in agriculture, food and forestry sectors Promoting social inclusion poverty reduction and economic development in rural areas Measure Code Measure Name For all focus areas Improving competitiveness of primary producers by better integrating them into the food chain Supporting farm risk prevention and management Restoring, preserving and enhancing biodiversity Improving water management, including fertiliser and pesticide management Preventing soil erosion and improving soil management For all focus areas For all focus areas 1 Knowledge transfer and information actions 0 % 0 % 40 % 40 % 40 % 100 % 100 % 0 % 2 Advisory services, farm management and farm relief services 0 % 0 % 40 % 40 % 40 % 100 % 100 % 0 % 3 Quality schemes for agricultural products and foodstuffs 0 % 0 % 0 % 40 % 40 % 40 % 100 % 0 % 4 Investments in physical assets 0 % 0 % 40 % 40 % 40 % 100 % 100 % 0 % 5 Restoring agricultural production potential damaged by natural disasters and introduction of appropriate prevention actions 0 % 0 % 100 % 40 % 40 % 100 % 100 % 0 % 6 Farm and business development 0 % 0 % 0 % 0 % 0 % 0 % 100 % 0 % 7 Basic services and village renewal in rural areas 0 % 0 % 0 % 40 % 40 % 100 % 100 % 0 % 8 Investments in forest area development and improvement of the viability of forests 0 % 0 % 40 % 100 % 100 % 100 % 100 % 0 % 9 Setting up of producer groups 0 % 0 % 0 % 0 % 0 % 0 % 100 % 0 % 10 Agri-environment-climate 0 % 0 % 0 % 40 % 40 % 100 % 100 % 0 % 11 Organic farming 0 % 0 % 0 % 40 % 40 % 100 % 100 % 0 % 12 Natura 2000 and Water Framework Directive payments 0 % 0 % 0 % 40 % 40 % 100 % 100 % 0 % 13 Payments to areas facing natural or other specific constraints 0 % 0 % 0 % 40 % 40 % 40 % 100 % 0 % 14 Animal welfare 0 % 0 % 0 % 0 % 0 % 0 % 100 % 0 % 15 Forest-environmental and climate services and forest conservation 0 % 0 % 40 % 40 % 40 % 100 % 100 % 0 % 16 Co-operation 0 % 0 % 0 % 40 % 40 % 100 % 100 % 0 % 17 Risk management 0 % 0 % 40 % 0 % 0 % 0 % 100 % 0 % 18 Financing of complementary national direct payments for Croatia 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 % 19 LEADER: Support for bottom-up capacity building that could lead to innovative approaches to meet climate change challenges 0 % 0 % 0 % 40 % 40 % 100 % 100 % 0 % 20 Technical assistance 0 % 0 % 0 % 0 % 0 % 0 % 0 % 0 %

Versions

1. 2017-01-06