Following marathon negotiations over the past several days, European Union leaders have reached an agreement on a €750 billion COVID-19 recovery fund, including significant allocations to funding climate-related projects over the coming years.

As we reported earlier this week, today’s agreement may lead to a significant resurgence in green bond issuance, with nearly a third of the package’s proceeds being earmarked for climate projects, and the initial proposal for sources of funding for the package including the use of bond markets to raise €500 billion for grants for member states, and another €250 billion from loans.

Following intense negotiations, which threatened to significantly cut the size of the package, the structure changed slightly, while many aspects remained intact. The leaders agreed to maintain the overall size of the package at €750 billion, although now only €390 billion will be in the form of grants, with the remainder from loans. Importantly, 30% of the proceeds are still slated to be allocated to climate action.

According to the European Council briefing:

“An overall climate target of 30% will apply to the total amount of expenditure from the MFF (multiannual financial framework) and NGEU (Next Generation EU) and be reflected in appropriate targets in sectoral legislation. They shall comply with the objective of EU climate neutrality by 2050 and contribute to achieving the Union’s new 2030 climate targets, which will be updated by the end of the year. As a general principle, all EU expenditure should be consistent with Paris Agreement objectives.”

As part of the compromise necessary to reach an agreement, however, the Just Transition Fund was significantly reduced in size. The fund, which is aimed at supporting EU regions most affected by the transition to a low carbon economy, was at one point proposed to be as large as €40 billion. Following today’s agreement, however, this has been reduced to €17.5 billion, consisting of €10 billion from the NGEU package, and €7.5 billion from the MFF.