Is the Green Deal Quietly Rewriting Europe’s Fiscal Status Quo?

The European Green Deal, introduced in 2019, is often described as an ambitious roadmap pointing the continent toward climate neutrality by 2050. Encompassing a wide range of policies and legislative initiatives spanning from energy, agriculture, industry to transport, it aims to reduce greenhouse gas emissions, promote clean technologies, and support a just transition for all Member States and citizens. Yet its deeper significance lies in how it is reshaping the European Union’s fiscal foundations, moving environmental aims from the margins to the center of public finance and governance. Rather than simply layering green objectives onto existing structures, the Green Deal is prompting a re-examination of what fiscal responsibility, solidarity, and coordination mean for a union of diverse economies. Questions have shifted from how to keep budgets balanced to whether fiscal and environmental sustainability can be achieved together, and what new forms of cooperation and accountability are required in the process.

What makes this transformation especially significant is that fiscal integration—once regarded as a technical or background issue—has become central to Europe’s efforts to redefine itself in the face of urgent climate and social challenges. The analysis that follows traces how the Green Deal is driving not just new rules and revenue sources, but also reimagined mechanisms of solidarity, debates about legal authority, and new forms of tension between technocratic management, democratic legitimacy, and persistent disparities between Member States. Seen together, these changes point to an ongoing, contested, and deeply consequential shift in the meaning of fiscal governance and integration in the European Union.

Key Developments

For decades after the Maastricht Treaty, the European Union’s approach to public spending was all about caution and control. The Stability and Growth Pact became a kind of fiscal rulebook, where governments were measured by their ability to rein in deficits and keep debt on a short leash. Back then, good governance meant keeping a tight grip on the purse strings. Lately, though, something more interesting has happened. The Green Deal has nudged the conversation away from a narrow focus on numbers and toward a bigger question: Are we putting our money where it will matter most for the future? In the 1990s, European governments ran deficits of approximately 5% of GDP, but hardly any of that spending went toward protecting the environment (cf. European Parliament, 2005; European Communities, 2002). Fast-forward to today, about 30% of NextGenerationEU (NGEU) funds are earmarked for climate measures (European Commission, 2022). The EU’s decision to offer up to €250 billion in green bonds through NGEU didn’t just stabilize economies; it made Europe one of the top players in the global green bond market (cf. European Commission, 2021).

Alongside these novel fiscal measures, the 2020 Own Resources Decision introduced a plastic packaging levy, charging Member States based on the volume of non-recycled waste produced (Council of the European Union, 2020). While the environmental objective of this measure is explicit, its fiscal role is equally significant, as it introduces a new revenue stream for the EU budget. This levy operates as a quasi-fee, directly correlating Member States’ financial contributions with their environmental performance.

The Carbon Border Adjustment Mechanism (CBAM), established by Regulation (EU) 2023/956 (European Parliament & Council, 2023), also exhibits this dual function. CBAM imposes a carbon price on imported goods to prevent carbon leakage, operating similarly to a tariff. It aims to equalize costs for foreign manufacturers with those faced by producers within the European Union. Beginning in 2026, CBAM will also direct its revenues to the EU budget.

The recent reform of the Emissions Trading System (ETS) expands carbon pricing to additional sectors, including buildings and road transport (European Commission, 2023). A portion of the resulting revenue will support the Social Climate Fund, established by Regulation (EU) 2023/955, which is intended to assist low-income households during the green transition (European Parliament & Council, 2023). Collectively, these initiatives illustrate a trend toward the focalization of environmental instruments and the integration of environmental objectives into fiscal policy. This development creates a continuum in which own resources range from contributions linked to environmental performance to tariffs that protect internal markets. Consequently, the European Union is quietly increasing its capacity to generate and allocate funds through environmental policy, diminishing the traditional distinction between EU fiscal coordination and national sovereignty in taxation.

Beyond revenue generation, the Green Deal is influencing the coordination of European spending and investment. The Recovery and Resilience Facility, for instance, requires Member States to achieve specific environmental and social milestones to qualify for funding, thereby making fiscal transfers contingent on sustainable performance (European Parliament & Council, 2021). Similarly, the Common Provisions Regulation (EU) 2021/1060, which governs cohesion policy, introduces conditionality by allowing payment suspensions under Article 97 if Member States diverge from agreed reform trajectories. This approach, described by scholars as ‘governance by conditionality,’ links access to European resources to both fiscal responsibility and adherence to climate commitments (European Commission, 2025; Becker, 2025; Bachtler & Mendez, 2020). Within this framework, the effectiveness of spending is evaluated not only by its volume but also by its alignment with environmental and social objectives. Fiscal discipline, traditionally assessed through deficits and debt, is now supplemented by measures of environmental and social performance. Mechanisms for contesting sustainability-related payment suspensions, such as judicial review and parliamentary oversight, are in place to protect Member States’ rights and address legitimacy concerns. As a result, the EU’s economic constitution is shifting from a focus on quantitative limits to an emphasis on ethical objectives.

Legal and Economic Implications

On the legal front, this development rests on a creative reading of the Treaties. Article 113 TFEU reserves direct taxation to the Member States. Yet Articles 191 and 175 TFEU—relating to environmental protection and economic, social, and territorial cohesion—have given sufficient legal ground for coordinated fiscal instruments. The Court of Justice has gradually accepted that environmental objectives can justify differentiated fiscal treatment, as seen in PreussenElektra (C-379/98) and ANGED (C-233/16). Over time, this jurisprudence has fostered broader acceptance of sustainability as a legitimate fiscal purpose. However, this functional expansion also introduces democratic tension. Decision-making is now more concentrated within the Commission and the Council. These bodies rely on delegated acts, performance assessments, and administrative discretion, rather than parliamentary deliberation. As Nicolas de Sadeleer has cautioned – referencing various European case law – environmental reasoning needs to be anchored in transparency and legal certainty for the administration to enjoy greater legitimacy (cf. De Sadeleer, 2014, p. 184, fn. 56).

Interestingly, the economic rationale for these developments finds strong support in established theories of fiscal federalism and the principle of subsidiarity. As both Musgrave (1959) and Oates (1972) argue, public goods or policies whose costs and benefits cross national borders—such as environmental protection—are most effectively managed at the level of government that matches their geographic scope. In this light, the supranational coordination provided by the European Union appears economically justified.

Therefore, the development of a ‘green economic constitution’ brings to the forefront the ongoing tension between two visions: on one hand, a technocratic, economically justified bureaucracy that seeks to manage and control the process with efficiency and expertise, and on the other, a legalistic democratic system that values deliberation, contestation, and public input. While the emphasis on administrative legitimacy remains vital, it is important to recognize that accountability does not rest solely on procedural safeguards. A balance must be struck to prevent the concentration of decision-making power exclusively within technocratic institutions, ensuring that democratic engagement and transparency are not sidelined in the pursuit of sustainability and efficiency. Yet, as this search for balance continues, one must ask: do we really have the luxury of time to await the perfect equilibrium between technocratic effectiveness and democratic deliberation, when the urgency of environmental challenges demands action now?

Even as the debate intensifies over how to strike the right balance between technocratic effectiveness and democratic legitimacy—and as urgency compels action—another formidable challenge persists: the deep and enduring disparities between Member States. Even if consensus is reached on how decisions should be made and who should be held accountable, the uneven capacity of countries to finance and implement climate policies poses a significant barrier to collective progress. Wealthier countries are often able to invest in green infrastructure and achieve climate targets with relative ease, while less affluent states may struggle due to limited resources and administrative capacity. Conditioning funding on climate performance, therefore, risks entrenching existing divides, as those already ahead continue to benefit and those lagging face additional hurdles. This not only threatens the fairness and cohesion of the Green Deal but also raises the risk that definitions of ‘green’ initiatives become politicized, as countries seek to align policies with their own developmental circumstances. Ultimately, addressing these disparities is essential if the Union is to move beyond procedural debates and deliver effective, inclusive climate action.

Ultimately, the European Green Deal’s quiet transformation of fiscal governance is both a reflection of mounting urgency and a test of the Union’s capacity for solidarity and innovation. Whether Europe can navigate the twin demands of swift climate action and inclusive, legitimate decision-making remains uncertain. What is clear, however, is that the meaning of fiscal responsibility, integration, and sovereignty in the EU is now being rewritten—not through grand declarations, but through the complex, sometimes uneasy, interplay of necessity, equity, and democratic values. In this evolving landscape, the real challenge will be ensuring that no Member State is left behind.

References

Bachtler, J., & Mendez, C. (2020). ‘Cohesion and the EU budget: Is conditionality undermining solidarity?’ in Coman, R., Crespy, A., & Schmidt, V. A. (eds.), Governance and Politics in the Post-Crisis European Union (2020, Cambridge University Press).pp. 121-139.

Becker, P. (2024). The EU’s Green Deal and fiscal integration: Is Brussels building a fiscal union through the backdoor? Journal of Common Market Studies, 62(3), 624–641.

Council of the European Union. (2020). Council Decision (EU, Euratom) 2020/2053 on the system of own resources of the European Union.

Court of Justice of the European Union. (1998). PreussenElektra AG v. Schleswag AG (Case C-379/98).

Court of Justice of the European Union. (2018). Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Diputación Foral de Gipuzkoa and Others (Case C-233/16).

De Sadeleer, N. (2014). EU environmental law and the internal market. Oxford University Press.

European Commission. (2025). Finance and the Green Deal.

European Commission. (2025). Four years into the Next Generation EU programme: An updated preliminary evaluation of its economic impact.

European Commission. (2023). Support to the revised EU emissions trading system.

European Commission. (2022). First NextGenerationEU green bonds allocation report confirms funds have enabled sustainable investments. 

European Commission. (2021). European Commission issues €2.5 billion in NextGenerationEU green bonds via its first green bond auction.

European Commission. (2019). The European Green Deal (COM(2019) 640 final).

European Communities (2002). Environmental Protection Expenditure in Accession Countries – Data 1996-2000.

European Parliament. (2005). The reform of the Stability and Growth Pact: An assessment.

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

European Parliament & Council. (2023). Regulation (EU) 2023/955 establishing a Social Climate Fund.

European Parliament & Council. (2023). Regulation (EU) 2023/956 of 10 May 2023 establishing a carbon border adjustment mechanism (CBAM).

Musgrave, R. A. (1959). The theory of public finance. McGraw-Hill.

Oates, W. E. (1972). Fiscal federalism. Edward Elgar Publishing.

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