Assessment and monitoring in the Recovery and Resilience Facility by Climate & Company

Assessment and monitoring in the Recovery and Resilience Facility – how does it work and how can it deliver the Green Deal? A policy brief by Climate & Company, May 2021

his policy brief explains how monitoring, assessment and reporting is done in the largest European recovery instrument, the Recovery and Resilience Facility. It highlights which elements of the Facility are important for it to keep its promise to kick-start a sustainable, fair and carbon-free transformation of the European economy. The brief also provides an outlook for the future greening of the European Semester. Read also our complimentary brief “The European Semester and why it matters for the EU Green Deal”. A swift, resilient and sustainable economic recovery and tackling the looming climate catastrophe cannot be separated. And this dual “green recovery objective” cannot be reached without a serious reform of the EU’s economic and fiscal policy framework and its governance regime. The success of the timely transition toward fair and carbon neutral prosperity hinges on three pillars: significant and efficiently allocated fiscal resources; a regulatory framework conducive to boosting viable green investment; and a significantly strengthened absorption capacity for such green investments, based on better skills in both the public and private sector. But how to make sure that the EU’s new €750 billion recovery instrument, NextGenerationEU, assumes its central role in achieving this? The biggest element of the NextGenerationEU Fund is the Recovery and Resilience Facility (RRF), which has a high national ownership as Member States are in charge of designing spending plans. The plans are then checked against criteria designed to secure funding for Europe’s green transition (e.g. a climate spending target and application of the ‘do no significant harm’ principle (DNSH)). The RRF rests on six pillars, namely:1 ▷

Green transition;

▷

Digital transformation;

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Smart, sustainable and inclusive growth, includ-

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ing economic cohesion, jobs, productivity, competitiveness, research, development and innovation, and a well-functioning single market with strong small and medium-sized enterprises (SMEs); ▷

Social and territorial cohesion;

▷

Health, and economic, social and institutional resilience, including with a view of increasing crisis reaction and crisis preparedness; and

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Policies for the next generation, children and youth, including education and skills.

Close scrutiny, monitoring and the governance of the RRF’s implementation will be of utmost importance to steer this unprecedented EU fiscal stimulus toward a green recovery and ultimately, a green transformation. The basic architecture for this to build on is the European Semester process. The European Semester (hereinafter Semester) is a well-established framework for the coordination and monitoring of economic policies between and across EU Member States (MS). In 2021, the mechanisms under the Semester were adjusted to function as the assessment framework for the RRF. This also means that for the first time, progress on the country-specific recommendations (CSRs) as well as the Green Deal is a prerequisite for receiving EU funding, further increasing the relevance of the European Semester and creating certain implications for its future setup. The Recovery and Resilience Facility has changed the European Semester, making a “technocratic” exercise much more political. The RRPs will be at the centre of the multilateral and bilateral surveillance of the Member States’ economic and social policies for the coming years. The link between the RRF and the Semester means a fundamental change form a (mostly) non-binding structure for policy coordination to a vehicle for the transfer and investment of a major economic instrument through

Climate & Company | Assessment and monitoring in the RRF funds collected at EU level.2 In the following, we give rise to some crucial questions around the European Semester that will be central in the coming months and years in order to harness this powerful instrument for the EU Green Deal. Our team will continue to work on these and other important questions around how the European Semester can be meaningfully contribute to the EU Green Deal. Stay up to date by following us via this link and check out our knowledge hub for any questions regarding the EU Semester and the Green Deal. We welcome ideas, feedback and comments via EUSemester@climcom.de.

How to read this brief Section 1: What to pay attention to in the assessment and review procedures in the RRF. Section 2: How are Recovery and Resilience Plans (RRPs) and their potential amendments assessed? Section 3: How is progress of the individual RRPs assessed over time? Section 4: How is the progress of the RRF as a whole assessed? Annex I: Table with relevant terms and their definition (highlighted in green throughout the text)

Overview: Assessment, monitoring and reporting in the RRF

Abbreviations: COM - European Commission; EU - European Union; MS - Member States; RRF - Recovery and Resilience Facility; RRP - Recovery and Resilience Plan

Section 1: What to pay attention to when it comes to monitoring and assessment in the RRF? Why is monitoring, assessment and reporting particularly important for the RRF? In the last decades, the EU and its Member States have not made enough progress on green and lowcarbon investments and reforms;3 putting national and EU’s progress on reaching 2030 and 2050 climate targets at risk.4 While the RRF features several relevant elements regarding Europe’s green transition (e.g. a climate target of 37% and application of the DNSH criteria), the integration of climate

and other Green Deal targets is by far not ambitious enough. Shortcomings include a lack of a strict climate tracking methodology or stringent exclusion of fossil fuels. The tracking methodology for the climate target used for the EU budget and the RRF is mainly based on the OECD Rio Marker System (0% - not relevant to climate action, 40% - significant contribution to climate action but objective not fundamental driver, 100% - principal contribution explicitly designed for climate action), a method that has been repeatedly criticised (not least by the European Court of Auditors) for being misleading as well as not objective and rigorous enough, among other points.5 However, the tracking method for the RRF climate target has recently been improved by

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Climate & Company | Assessment and monitoring in the RRF lowering coefficients for selected intervention fields from 100% to 40% or by adding more technical details to the 100% coefficients.6 At the same time, with a shrinking fiscal space due to the impact of the COVID-19 pandemic at the national level, EU funds such as the RRF are immensely important to achieve climate goals.7 National RRPs set the reform and investment agenda in the coming years. In the past, the Commission’s guidance on key climate-related national planning processes such as the National Energy and Climate Plans (NECP) and, to an extent also the CSRs, have been weak.8 The RRF puts both the NECP as well as the CSRs more in the focus, offering possibilities for a meaningful integration of the different governance regimes to achieve optimal progress on Europe’s climate neutrality goals. For that, it is crucial that the assessment of the RRPs and the review of the RRF more generally are as stringent and science based as possible to protect the promise of a green European recovery. It will be furthermore essential that the element of structural reforms in the RRPs receives sufficient attention. For a meaningful transition towards a climate neutral Europe, publicly (co)-financed low-carbon investment programs are not enough. Structural reforms, such as carbon pricing, green tax reforms, and other regulatory frameworks, are necessary to ensure economic and fiscal policy as a whole is aligned with the European Green Deal and public investments provide enough leverage for private finance to flow.9 With its longstanding experience with tracking and recommending structural reforms, the Semester is well suited to assess the structural reform elements of the RRPs. Currently, the Green Deal is not integrated well enough into the Semester in order to offer the much-needed additional green scrutiny when it comes to structural reforms. However, green structural reforms proposed in the RRPs, by being assessed through the adjusted Semester, may be way to tackle this issue. The timeline for drafting and submission of the RRPs has been very short (both for the MS and the Commission), leading to problems when coming up with plans that fulfil all necessary criteria and deliver meaningful investments and reforms. By far not all Member States have been able to submit a wellrounded RRP by the end of April 2021,10 meaning that it is likely that many details may be worked out in the assessment period (at least two months, possibly more as an extension is possible) after the submission, or via amendments to original plans. This active role of the Commission in the assessment process makes it even more important that the

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Commission applies the necessary level of guidance and scrutiny, especially when it comes to green criteria, pricing, setting milestones and targets as well as the proper incorporation of CSRs. Implications for the greening of the Semester The main criticism for the Semester in the past has been the lack of “teeth” when it comes to the implementation of the country-specific recommendations11 and progress on National Reform Programs. The RRF is changing that by making the CSRs and National Reform Programs part of the assessment criteria for distributing funding. In the RRF, national ownership for the reforms and investments is high, as they design milestones and targets themselves. The RRF is only a temporary instrument but it warrants a discussion on what this changed structure means for the underlying legislation of the Semester in the long-term.12 With the RRF in place for the next couple of years, it is currently unclear how and when the Semester will return to its “usual” cycle, and which elements implemented through the RRF framework are there to stay. Quality of milestones and targets No matter how “green” a component of a RRP may sound, it is crucial that the milestones and targets are well designed, so that the Commission can meaningfully assess whether there is actual progress. Milestones and targets need to be clear and realistic,13 and should not be conditional on external factors such as the macroeconomic outlook or the evolution of the labour market.14 The Commission states that indicators should be R.A.C.E.R (relevant, acceptable, credible, easy and robust).15 A popular framework for the creation of indicators indicates that they should be designed to be S.M.A.R.T. (specific, measurable, achievable, relevant and timebound). So, they should be clearly defined with the intention of being reliably measured,16 as they form a critical part of the monitoring and assessment of the RRP implementation.17 Components of the RRPs need to refer to concrete and specific output indicators (e.g. km of bike path built) or at least to relevant input indicators (provided resources, e.g. financial support or human resources allocated to building bike paths). One example of how such investment indicators could work is given by the Commission regarding the RRF “power-up” component.18 This component contributes to addressing the recommendations to MS to focus investment and related policies on the clean and efficient production and use of energy. One example of investment for that component is to

Climate & Company | Assessment and monitoring in the RRF support the development of district heating networks based on renewable energy and waste heat.19 Two targets are related to this investment: ▷

Roll out of the municipal technical assistance and capacity building support program in X municipalities, incl. the publication of the municipalities’ heating potential and planning map

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Increase investments in installations to produce and store heat for district heating networks by X% by 20XX (X% financed by RRF)

With their corresponding indicators: ▷

Number of municipalities having concluded the municipal technical assistance and capacity building support program

▷

Percentage of increase in investments

Poorly designed milestones and targets would create a great risk of dispersing funding without real progress.20 This is why it is important that close attention is paid not only to what the funds will be spent on, but on how progress is assessed, so that the Commission has the opportunity to withhold funding in case of a failure to perform. Furthermore, it is crucial that the design of milestones and targets are clear and transparent, in order to offer opportunities for civil society to engage.21 Sufficient scrutiny when it comes to the green dimensions of the RRPs Whereas the Commission published clear technical guidance on the application of the DNSH principle and set a higher climate target of the RRF (with 37%, the RRF climate target is higher than the overall climate spending target of 30% in Europe’s multiannual financial framework [MFF]), other “green” elements in the RRF are much less clearly defined. Formulations such as RRPs “should be consistent with (…) National Energy and Climate Plans” require additional precision if they are supposed to provide clear and meaningful guidance to the implementation of RRPs.22 This lack of clarity is exacerbated as NECPs are not yet in line with the raised EU climate ambition, provide extremely sketchy and often poor guidance on investment needs and are hence in no way fit to provide for a useful benchmark.23 In the upcoming assessment period of the RRPs, close attention should be paid on how the Commission will deal with these kind of elements. A meaningful Scoreboard for the RRF At the time of writing, the exact outline of the Recovery and Resilience Scoreboard (RRS) (see Sec-

tion 4) is still unclear as the legislation offers only few details (the implementing act will be developed during the course of 2021 and the RRS is scheduled to be operational by December 2021). As the RRS will be the main tool for reporting on the progress of the RRF as a whole, both to the European Parliament (the RRS is, for example, the basis for bimonthly dialogue between Parliament and Commission) and to the general public (information will be updated twice a year by the European Commission and publicly available on the web24), it is very important that the indicators for the RRS are chosen to be S.M.A.R.T (specific, measurable, achievable, relevant and time-bound). The RRS needs to be designed in a way that offers real accountability towards the objectives of the RRF (e.g. twin transition) and can easily be understood by experts and ordinary citizens alike. In the drafting process of the RRPs, public participation and transparency has been largely side-lined, with formal processes missing in most MS.25 Transparency and accountability in the RRF needs to greatly improve in the future; a meaningful scoreboard would be a valuable step. If designed properly, the Recovery and Resilience Scoreboard could also serve as an important tool to identify “best-practice examples” of green investments and reforms across Europe. The Semester is already using a scoreboard to monitor macroeconomic imbalances and competitiveness at MS level as the basis of its alert mechanism report.26 To date, the indicators used by the macroeconomic imbalance procedure scoreboard exclude any environmental performance and risk metrics related to sustainability. With the Green Deal as the new economic paradigm for the EU, the Semester as the core mechanism to coordinate and align economic policies across MS needs to be adjusted in order to capture the objectives of the Green Deal27 and the concept of “competitive sustainability”. This long overdue adjustment would provide, similarly to the existing Macroeconomic Scoreboard, a highlevel benchmarking and transparency mechanism, helping to identify the need for policy action and structural reforms in MS not on track to meeting their green deal targets (e.g. in terms of low-carbon investments).28 Once established, the RRS will be in place until 2026, the duration of the RRF and crucial years to prevent catastrophic climate change. The RRS to be established for the RRF has the potential to start a serious discussion of this process and inspire the tracking of progress toward implementing the Green Deal through the Semester in the long term, adding importance to the quality of the RRS.

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Climate & Company | Assessment and monitoring in the RRF Section 2: How are the RRPs and potential amendments assessed? What is the monitoring framework for the implementation of the RRF? In the EU, the framework for economic policy coordination which identifies and monitors implementation of national reforms in an annual cycle is called the European Semester. Its main purpose is to monitor and coordinate MS’ fiscal and economic policies. To support the implementation and monitoring of the RRF its the Semester has been adjusted.29 It provides the framework to guide MS in identifying national reform and investment priorities30 and National Reform Programs and RRPs will be submitted in one single integrated document. What kind of monitoring and reporting elements need to be featured in RRPs? Every MS requesting funding through the RRF needs to submit a RRP to the Commission. RRPs need to include a number of details regarding the operational elements (e.g. which national authorities are in charge per component, internal audit structures, etc.) as well as detailed information on the proposed investments and reforms (e.g. justification of costs for each component, who benefits from it, how it links to the objectives of the RRF, how it addresses the CSRs, etc.). MS are moreover required to provide details concerning the assessment and monitoring of the implementation of each individual component of the plan:31 ▷

Relevant indicators for milestones and targets for each component which meaningfully measure the achievement of a reform or investment

▷

Timeline for implementation

What is the assessment procedure of the RRPs and their potential amendments? RRPs had to be handed it by 30 April 2021 (“as a rule”),32 but MS were able to already submit a draft from 15 October 2020 onward, so that the Commission services were in the position to provide early feedback and guidance on the draft RRP.33 Accordingly, in the months prior to the submission, Commission and MS have had (and made ample use of) the opportunity for bilateral exchanges about the RRPs, including the monitoring and reporting elements. Nonetheless, only a few RRPs have been handed in by the official deadline.

adhere to the objectives and criteria set out in the RRF legislation (same assessment procedure for grants and loans), assessing effectiveness, efficiency and coherence of each RRP. If necessary, the Commission can ask MS for additional information and request revisions of the RRPs, even after the official submission deadline. Commission and MS can also extend the deadline for the assessment period by a “reasonable time period” if necessary.34 If the RRP meets all requirements, the Commission will propose the acceptance of the RRP, and the Council will approve the RRP by means of an implementing decision.35 On what basis will the individual RRPs be assessed? The RRF legislation has set out several requirements that form the basis of the RRP assessment; details regarding the criteria and ratings of the individual assessment elements can be found under Annex V to the Regulation.36 In general, the individual components of the RRPs need to be duly reasoned, address the overarching objectives37 of the RRF (for green objectives see next section), provide sufficient level of detail (granularity) and sufficiently explain the cost estimates. The Commission will assess the relevance, effectiveness, efficiency and coherence of the RRPs (see Article 19(3) for detailed criteria). The assessment of cost estimates will be done on the basis of analytical information available through the Semester context, the included justification provided in the RRP, and relevant information on e.g. the National Reform Program and the NECP.38 In terms of monitoring, the RRPs need to include information on effective monitoring and implementation of the components, including the envisaged timetable, milestones and targets, and the related indicators.39 The RRPs furthermore need to include information on the internal control system of the MS concerning risks such as irregularities, fraud and corruption and other measures and arrangement that link to making payments under the RRF (e.g. a system for providing data on final recipients of funds). This responsibility lies with the MS as disbursement of funds under the RRF is performance based. The Commission will assist this process by making available an information and monitoring system (incl. a single data mining and risk-scoring tool).40 The Commission will assess the control arrangement on a pass/fail basis.

Who will assess the RRPs and when?

What elements specifically relevant to the green transition will the Commission assess?

After submission of the RRPs, the European Commission has two months to assess whether the plans

One of the objectives of the RRF is to contribute to Europe’s green transition and the 2030 climate tar-

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Climate & Company | Assessment and monitoring in the RRF gets. To reach a positive assessment, Member States must include a number of elements regarding this objective in their RRP. Elements highlighted in the regulation include:41 ▷

Credibly demonstrate that at least 37% of the plan’s measures contribute to green transition including biodiversity or to the challenges resulting from it (based on qualitative and quantitative explanation according to the climate tracking methodology (Annex VI and VII)42

▷

Specify how all measures respect the DNSH43 of the EU Taxonomy Regulation (see technical guidance on reporting on compliance with the DNSH principle44)

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Specify the scope, timeline and expected impact of the proposed measures on the reduction of greenhouse gas emissions or climate adaptation, share of renewable energy, energy efficiency and electricity interconnection in their plan (in line with objectives of EU Climate Law and based on indicators consistent with NECP)

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Outline how the proposed measures will help to meet objectives including waste, water and pollution control; marine and water resources; and the transition to sustainable food systems and a more resource-efficient and circular economy as appropriate (to the extent possible MS should refer to environmental objectives as defined in the EU Taxonomy Regulation)

What happens in case Member States need to change the RRPs? “Within the period of implementation, [and] where objective circumstances justify such a course of action”45 Member States are able to submit a new or amended RRP, which then triggers a new assessment by the Commission and, if the assessment is positive, an amended implementing act. The Commission will have again two months (with a possible extension) to review the updates with the procedure explained earlier in this brief.46 What happens in the case of a negative assessment of the RRPs and/or their amendments? If the RRP does not meet the assessment criteria, no implementing act is adopted meaning that no financial contribution will be paid out. Member States have the chance to object to a negative assessment by the Commission within one month.47 This puts the Commission in a very powerful position, as it can reject plans if they do not fulfil the assessment criteria. It remains questionable, however, whether and to what extent the Commission would actually make use of this position (e.g. in case of a larger MS).

Section 3: How is the progress of the individual RRPs monitored and assessed over time? When and by whom is progress and performance of RRPs implementation assessed? The release of funds is performance based: relevant milestones and targets agreed upon in the assessment of the RRP must be met in order to receive a pay-out. MS are allowed to submit requests for payments not more than twice per year.48 The Commission is in charge of assessing milestones and targets, but it has to ask the Economic and Financial Committee (EFC) of the European Council to give its opinion on its assessment of the fulfilment of milestones and targets agreed upon in the RRP. If one or more MS in the EFC have serious doubts if all conditions are met, the case is discussed in the next European Council meeting.49 The European Parliament has the access to the submissions to the Council of possible disagreements regarding the compliance with milestones and targets.50 If the assessment is positive, the due amount will be paid out, presupposing that previously satisfactory fulfilled milestones and targets have not been reversed.51 The European Parliament may request an overview from the Commission of its preliminary findings concerning the satisfactory fulfilment of Member States’ milestones and targets.52 The regulation also establishes a structured “Recovery and Resilience Dialogue” in the European Parliament, and a set up of a Working Group of the European Parliament on the scrutiny of the RRF. Find more information on the role of the parliament here. What do Member States need to submit for the assessment? To ensure effective monitoring of implementation, MS have to report twice a year within the Semester process on the progress in the successful RRP implementation. The reports prepared by the MS concerned should be appropriately reflected in the National Reform Programs, which are used as a tool for reporting on RRP progress. The MS shall appoint national lead ministries or authorities (if necessary, different authorities per component) with overall responsibility for the RRPs, including reporting on milestones and targets. MS also need to collect standardised categories (defined by the Commission53) of data and information relevant to issues like fraud, corruption and conflict of interest as well as a summary of the audits carried out, including the scope of these audits in

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Climate & Company | Assessment and monitoring in the RRF terms of amount of spending and period of time covered as well as an analysis of the related weaknesses found, and the corrective actions taken.54 It is important to note that whereas MS need to submit details about the costs per component, including the underlying pricing mechanism, in the initial submission of the RRP, the actual disbursement of funds is not tied to the actual costs incurred.55 Who is responsible for monitoring and reporting on sound financial management? The main responsibility for sound financial management will lie with the MS and national control systems. The Commission will remain accountable towards the budgetary authority in the context of the annual discharge procedure and Union funds disbursed under the RRF will be subject to the external audit of the European Court of Auditors. Other bodies that may request information or investigate are the European Anti-Fraud Office and the European Public Prosecutors Office.56 Additionally, the Commission is responsible for sound economic governance and can suspend payments if MS have not taken effective action to correct excessive deficits.57 What happens in case of a negative assessment of progress on milestones and targets? If the assessment of an RRP is negative, then the payment or a part of the payment is suspended. A negative assessment means that either the implementation of the RRPs (reaching agreed milestones and targets) is not satisfactory, and/or that there are different irregularities (e.g. fraud, corruption, conflict of interest, etc.).58 A proposal by the Commission for suspending payments shall be considered adopted by the Council unless the later decides, by means of an implementing act, to reject such a proposal by qualified majority within one month after the Commission proposal.59 The concerned MS can present its observations within one month of the negative assessment. The suspension of payments will be lifted as soon as the MS has taken measures to ensure fulfilment within six months of the suspension. The European Parliament may invite the Commission to explain the reasons of its proposal for a suspension, or for the lifting of a suspension on disbursements.60

Section 4: How is the progress of the RRF assessed as a whole? When and to whom has progress on the RRF as a whole to be reported?

the RRF as a whole (first report is due by 31 July 2022). The reports need to reflect the progress made by the MS on the basis of the approved RRPs (implementation of milestones and targets), disbursements and suspensions and a quantitative assessment of the contribution of the RRF towards climate and digital targets and each of the six pillars.61 Additionally, the European Parliament has the opportunity to invite the Commission to discuss the implementation of the RRF, individual RRPs, assessment of the RRPs, etc., every two months. The Commission has to take any resolutions from the Parliament into account.62 Find more information on the exact role of the parliament here. How is the overall monitoring done? The Commission is in charge of establishing a Recovery and Resilience Scoreboard (RRS) for the purpose of reporting on the overall progress of the implementation of the RRPs of the MS in each of the six pillars and of the Facility as a whole. Where appropriate, the Commission may use the content of relevant Semester documents for the reporting. The RRS will be the main performance reporting system of the RRF and will be publicly available (website or internet portal). It is planned to be operational by December 2021 by way of a Delegated Act put forward by the Commission and updated biannually.63 How will the Facility be evaluated? The Commission shall submit an independent evaluation report on the implementation and progress of the Facility’s objectives by 2024 (intermediate evaluation) and by the end of 2028 (ex-post evaluation) to the Parliament, Council, European Economic and Social Committee and the Committee of the Regions. The evaluation report may be accompanied by proposals for amendments of the Regulation, in case of major changes in the social and economic situation of the European Union.64 Such proposal may be requested by the European Parliament and the Council if these parties feel that there is a need to reform the Regulation.65 Seeing that the RRF is supposed to be fully implemented by 2026, accompanying changes to the regulations via the evaluation report do not seem meaningful. This highlights once again that the regular assessments under the European Semester are crucial for the Recovery and Resilience Facility, as the overall evaluation appears very late in the process.

The Commission is responsible for monitoring and has to provide an annual report to the European Parliament and the Council on the implementation of

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Climate & Company | Assessment and monitoring in the RRF

Climate & Company is implementing the project “Greening the European Semester to improve monitoring and aid structural reforms to align EU economic governance with the EU’s climate goals and integrate climate objectives into its governance process” financed by the European Climate Foundation. To find out more about the project visit this link or contact us via EUSemester@climcom.de.

Contact us Stefanie Berendsen - Stefanie@climcom.de Oliver J. Herrmann - Oliver@climcom.de Ingmar Jürgens - Ingmar@climcom.de

Climate & Company Ahornallee 2, 12632 Berlin, Germany climateandcompany.com

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Acknowledgements We would like to thank Markus Trilling, Climate Action Network (CAN) Europe, Audrey Mathieu, Germanwatch, Louise Simon and Hanna Geschewski (both Climate & Company) for their extremely helpful comments and inputs.

Annex I: Quick overview of terms and concepts

Climate target

Each RRP should allocate at least 37% of the plan’s total allocation to climate action.

Climate tracking

Mechanism to track how much is spent on achieving climate targets.

Competitive sustainability

Four-dimensional guiding principle for the Annual Sustainable Growth Strategy as the EU’s new economic agenda, encompassing environmental sustainability, productivity, fairness, and macroeconomic stability.66

Component

RRPs should be composed of reforms and investments grouped into components. A component is a constituent element or a part of the RRP. Each component should reflect related reform and investment priorities in a policy area or related policy areas, sectors, activities or themes, aiming at tackling specific challenges, forming a coherent package with mutually reinforcing and complementary measures.

Country Specific Recommendations (CSRs)67

Member States present their national reform programmes, where they report on the specific policies they are implementing and intend to adopt to boost jobs and growth, prevent or correct macroeconomic imbalances. The Commission then assesses the Member States’ plans and presents a series of new country-specific recommendations to each of them in May.

Digital Target

Each RRP should allocate at least 20% of the total plan allocation to digital measures.

Do no significant harm principle (DNSH)

As part of the 2020 EU Taxonomy Regulation68 for sustainable economic activities, the DNSH principle states that an activity is considered environmentally sustainable only if it does not significantly harm any of the six environmental objectives defined in Art. 9 of the Regulation: (1) climate change mitigation, (2) climate change adaptation, (3) water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) biodiversity and ecosystems. The DNSH principle was also adopted as a precondition for investments and reforms proposed in national RRPs to be financed by the RRF. In a February 2021 technical guidance document, the COM outlined the key principles and a two-step methodology for assessing RRP activities for their compliance with the DNSH criteria.69

EU Climate Law

Aims to write into law the goal set out in the European Green Deal – for Europe’s economy and society to become climate-neutral by 2050.70

European Semester

An annual cycle of coordination and monitoring of the EU’s economic policies and national budgets.71

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Climate & Company | Assessment and monitoring in the RRF

Excessive deficit

Member State:72 ▷ either having breached or being in risk of breaching the deficit threshold of 3% of GDP ▷ or having violated the debt rule by having a government debt level above 60% of GDP, which is not diminishing at a satisfactory pace. This means that the gap between a country's debt level and the 60% reference needs to be reduced by 1/20th annually (on average over three years)

EU Taxonomy73

The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. The EU taxonomy is an important enabler to scale up sustainable investment and to implement the European Green Deal.

Investment

The RRF uses a broad concept of investment as capital formation in areas such as fixed capital, human capital, and natural capital. This would also cover for instance intangible assets such as R&D, data, intellectual property and skills.

Milestone

Reflects objectively verifiable qualitative achievements and details desirable content and characteristics.74

National Reform Program

As part of the Semester cycle, countries report on the specific policies they are implementing, prevent or correct macroeconomic imbalances, on their concrete plans to ensure compliance with EU’s fiscal rules and with any CSRs.

National Energy and Climate Plans (NECP)

EU countries needed to establish a 10-year integrated NECP for the period from 2021 to 2030 to show how they meet the 2030 energy and climate targets (within the Energy Union governance).75

NextGenerationEU

The temporary instrument designed to boost the recovery from the COVID-19 pandemic, includes the recovery and Resilience Facility.

Recovery and Resilience Facility (RRF)

€672.5 billion in loans and grants available to support reforms and investments undertaken by EU countries with the aim to mitigate the economic and social impact of the COVID-19 pandemic and declared objective to make economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the twin transition.

Recovery and Resilience Plan (RRP)

Proposal prepared by MS outlining spending and reform plans in order to access recovery funding under the RRF.

Recovery and Resilience Scoreboard (RRS)

A set of indicators designed to track implementation of the Recovery and Resilience Facility, including progress on its objectives (twin transition). Operational by December 2021.

Reform

An action or process of making changes and improvements with significant impact and long-lasting effects on the functioning of a market or policy, the functioning or structures of an institution or administration, or on progress to relevant policy objectives.

Target

Quantitative achievements on an agreed indicator76

Twin transition

Green and digital transition

Two Pack

Focuses on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the MS in the euro area.77

Six Pack

It lays down detailed rules for national budgets. These are necessary to ensure EU governments respect the requirements of economic and monetary union and do not run excessive deficits.78

Six Pillars79

1. 2. 3.

4. 5. 6. Structural Reforms80

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Green transition; Digital transformation; Smart, sustainable and inclusive growth, including economic cohesion, jobs, productivity, competitiveness, research, development and innovation, and a well-functioning single market with strong small and medium-sized enterprises (SMEs); Social and territorial cohesion; Health, and economic, social and institutional resilience, including with a view of increasing crisis reaction and crisis preparedness; and Policies for the next generation, children and youth, including education and skills.

Structural reforms are one of the three pillars of economic policy priorities advocated by the European Commission, along with investment and fiscal responsibility. They aim to allow for an efficient functioning of product, capital and labor markets and to ensure sustainable growth, both economically and environmentally. Typical structural reforms include measures in the areas of the labor market, innovation, public taxation and the welfare system.

Climate & Company | Assessment and monitoring in the RRF 1

European Union (2021). Regulation (EU) 2021/241. Recital (10), Article 3.

The question on the European Semester has also been discussed in a series of briefs for the European Parliament, see here, here and here. See also: Thematic Digest: The role for the European Semester I the recovery plan. 3

Wyman, O. (2020). Doubling Down: Europe’s low-carbon investment opportunity. Carbon Disclosure Project.

Pekanov, A., & Schratzenstaller, M. (2020). The role of fiscal rules in relation with the green economy (PE 614.524)

European Court of Auditors (2020). Tracking climate spending in the EU budget; European Court of Auditors (2016). Special report No 31/2016. Spending at least one euro in every five from the EU budget on climate action: ambitious work underway, but at serious risk of falling short; Nesbit, M., Stainforth, T., Hart, K., Underwood, E., & Becerra, G. (2020), Documenting climate mainstreaming in the EU budget - making the system more transparent, stringent and comprehensive. Report for the European Parliament, Policy Department for Budgetary Affairs; Sweatman , P., & Hessenius, M. (2020). Applying the EU Taxonomy: Lessons from the Front Line. Climate Strategy & Partners. Climate & Company. 6

One example is the budget line “025 - Energy efficiency renovation of existing housing stock […]”. Table 1 of the Common Provision Regulation assigns a 100% coefficient, which implies that €1 million spent on building renovation fully counts as a “climate spending” – regardless the amount of energy saved. This tracking method has been improved by taking 40% as the “default option” and only awarding spending with the 100% coefficient if at least a medium-depth level renovation is achieved, as defined in Commission Recommendation on Building Renovation (EU) 2019/786, which translates into primary energy savings of at least 30%. This technical criterion has been inspired by the EU sustainable finance taxonomy; Also see: Sweatman , P., & Hessenius, M. (2020). Applying the EU Taxonomy: Lessons from the Front Line. Climate Strategy & Partners. Climate & Company. See: Berendsen, S., & Juergens, I. (2020). Die Finanzierung des Green Deal während und nach „Corona“: Apologie einer zentralen Rolle staatlichen Handelns in der Erreichung gesellschaftlicher Ziele. Ifo Institut, 10/2020(73). 7

Valentová, M., Knápek, J., & Novikova, A. (2019). Climate and Energy Investment Map – Czechia. Status Report 2017: Buildings and Renewable Energy Supply and Infrastructure. Czech Technical University, Prague; Kamenders, A., Rochas, C., & Novikova, A. (2019). Investments in Energy Efficiency and Renewable Energy Projects in Latvia in 2018. Riga Technical University (RTU); LIFE PlanUp (2019). Fit to lead? An assessment of selected draft EU energy and climate plans. 9

For more examples of relevant reforms to be included in RRPs, refer to European Commission (2021). Example of component of reforms and investments. 10

Vicente Marcos, M. (2021). Taking aim at the economic and climate crises – but do member states’ recovery plans really hit the target? PlanUp EU; E3G (2021). Is the EU’s Green Recovery on Track?. E3G Press Releases. 11

Efstathiou, K., & Wolff, G. (2018). Policy Contribution: Is the European Semester effective and useful?. Bruegel.

See also: Efstathiou, K., & Wolff, G. (2018). Policy Contribution: Is the European Semester effective and useful?. Bruegel; Guttenberg., J., Hemker, J., & Tordoir, S. (2021). Everything will be different: How the pandemic is changing EU economic governance. Policy Brief for the Jaques Delors Centre; Moschella, M. (2020). What role for the European Semester in the recovery plan? In-depth analysis requested by the ECON committee. 13

European Commission (2021). Guidance to Member States. Commission Staff Working Document [SWD(2021) 12 final].

European Commission (n.d.). Better Regulation Toolbox - Tool #41: Monitoring arrangements and indicators.

Hehenberger, L., Harling, A.M., & Scholten, P. (2013). A practical guide to measuring and managing impact. European Venture Philanthropy Association. 17

Marsden, G., & Snell, C. (2009). The Role of Indicators, Targets and Monitoring in Decision-Support for Transport. EJTIR, issue 9(3), pp 219-236. 18

See also: European Commission (2020). Example of component of reforms and investment: reskill and upskill; digital connectivity; a public administration fit for the future; scale up; Renovation wave; Clean, smart and fair urban mobility. 19

European Commission (2020). Example of component of reforms and investment – power up.

Hajkowicz, S. (2009). The evolution of Australia's natural resource management programs: towards improved targeting and evaluation of investments. Land Use Policy, 26(2), 471-478. 21

CEE Bankwatch. (2020). See no evil: How a lack of transparency could dash EU hopes for a green pandemic recovery.

European Union (2021). Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility. 23

See e.g.: Climate Action Network (CAN) Europe and ZERO - Association for the Sustainability of the Earth System. (2020). Pave the way for increased climate ambition. Opportunities and Gaps in the final National Energy and Climate Plans. Climate Action Network (CAN) Europe and CEE Bankwatch Network (2020). EU funds for a green recovery: recommendations to steer EU regional and recovery funding towards climate neutrality. 24

European Union (2021). Regulation (EU) 2021/241. Article 30.

Civil Society Europe (2021). Civil Society Organisations largely sidelined in the preparation of the National Recovery Plans; CEE Bankwatch. (2020). See no evil: How a lack of transparency could dash EU hopes for a green pandemic recovery. 26

European Commission (2018). Macroeconomic imbalance procedure scoreboard.

Sabato, S., & Mandelli, M. (2021). Social policy in the European Union: state of play 2020 - Chapter 6: Integrating the Sustainable Development Goals into the European Semester: a governance conundrum for the von der Leyen Commission? In (pp. 113-132). Brussels: ETUI, The European Trade Union Institute. 28

See also: Charveriat, C., & Bodin, E. (2020). Delivering the Green Deal: the role of a reformed Semester within a new sustainable growth strategy for the EU. The Institute for European Environmental Policy (IEEP). 29

European Commission (2020). Changes to the 2021 European Semester cycle.

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Climate & Company | Assessment and monitoring in the RRF 30

European Union (2021). Regulation (EU) 2021/241. Recital (4), (5), (58).

European Union (2021). Regulation (EU) 2021/241. Recital (70), Annex V.

In the current economic situations, most Member States have an interest in quick pay out of funds and therefore have also an incentive to submit their RRPs on time or earlier. 33

European Union (2021). Regulation (EU) 2021/241. Recital (38).

European Union (2021). Regulation (EU) 2021/241. Recital (41) and (43), Article 19.

European Union (2021). Regulation (EU) 2021/241. Recital (45), Article 19.

European Union (2021). Regulation (EU) 2021/241. Article 16(3), Article 19, Annex II.

European Union (2021). Regulation (EU) 2021/241. Article 3 and 4.

European Union (2021). Regulation (EU) 2021/241. Article 15(3)(f), Article 16(3)(i), Article 19, Annex II Section 2.9; see Section 10 of Part II in the Commission Guidance. 39

European Union (2021). Regulation (EU) 2021/241. Article 15(3)(d), Article 16(3).

European Union (2021). Regulation (EU) 2021/241. Recital (54) and (56), Article 20, Article 22.

European Union (2021). Regulation (EU) 2021/241. Article 18.

European Union (2021). Regulation (EU) 2021/241. Article 15(3)(c), Annex VI, Annex VII.

European Union (2021). Regulation (EU) 2021/241. Article 5, Article 18; European Union (2020). Regulation (EU) 2020/852. Article 17 (‘Do no significant harm’ principle). 44

European Commission (2021). Technical guidance on the application of “do no significant harm” under the Recovery and Resilience Facility Regulation. Commission Note. 45

European Union (2021). Regulation (EU) 2021/241. Article 21.

European Union (2021). Regulation (EU) 2021/241. Recital (49), Article 18, Article 20, Article 21.

European Union (2021). Regulation (EU) 2021/241. Recital (45), Article 20, Article 21.

European Union (2021). Regulation (EU) 2021/241. Article 19a(3).

European Union (2021). Regulation (EU) 2021/241. Recital (52), Article 24.

European Parliament (2021). European Parliament involvement in scrutinising the Recovery and Resilience Facility.

European Union (2021). Regulation (EU) 2021/241. Article 24.

European Parliament (2021). European Parliament involvement in scrutinising the Recovery and Resilience Facility.

European Union (2021). Regulation (EU) 2021/241. Recital (54) , Article 22.

See Part III, Section 5; European Union (2021). Regulation (EU) 2021/241. Article 20, Article 24, Article 27.

European Union (2021). Regulation (EU) 2021/241. Recital (51) and (52), Article 24.

European Union (2021). Regulation (EU) 2021/241. Recital (55), Article 22; Part III, Section 5.

European Union (2021). Regulation (EU) 2021/241. Article 10; European Union (1997). Council Regulation (EC) No 1467/97, p. 6.

European Union (2021). Regulation (EU) 2021/241. Recital (53) Article 10, Article 24.

European Union (2021). Regulation (EU) 2021/241. Article 10(3).

European Parliament (2021). European Parliament involvement in scrutinising the Recovery and Resilience Facility

European Union (2021). Regulation (EU) 2021/241. Recital (31), (67), Article 16, Article 29.

European Union (2021). Regulation (EU) 2021/241. Recital (61), see Article 26.

European Union (2021). Regulation (EU) 2021/241. Recital (65), Article 23a, Article 30, Article 31.

European Union (2021). Regulation (EU) 2021/241. Article 32.

European Parliament (2021). European Parliament involvement in scrutinising the Recovery and Resilience Facility.

European Commission (2019). European Semester: The Autumn Package explained.

European Commission (2021). The European Semester explained.

European Union (2020). Regulation (EU) 2020/852. Article 17.

European Commission (2021). Technical guidance on the application of “do no significant harm” under the Recovery and Resilience Facility Regulation. Commission Note. 70

European Commission (2020). European Climate Law.

Climate & Company (2021). The European Semester and why it matters for the EU Green Deal.

European Commission (n.d.). Launching an Excessive Deficit Procedure.

European Commission (n.d.). EU Taxonomy for sustainable activities.

RRF Legislation: Article 2(4).

European Commission (2021). National Energy and Climate Plans (NECPs).

European Union (2021). Regulation (EU) 2021/241. Article 2(4).

European Union (2013). Regulation (EU) No 473/2013.

Council of the European Union (2011). Requirements for Euro area countries’ budgets.

European Union (2021). Regulation (EU) 2021/241. Recital (10), Article 3.

European Commission (n.d.). Structural reforms.

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