Funds from the European Union's COVID-19 economic recovery fund could end up being spent on certain fossil fuels despite rules to ensure they are not invested in climate-damaging activities, officials and sustainable finance experts say. The EU's recovery package is the largest single climate spending pledge ever drawn up, devoting hundreds of billions of euros to projects that will rebuild economic growth while cutting greenhouse gas emissions. The European Parliament on Tuesday approved the package's 672.5 billion euro ($816.1 billion) pot of grants and loans, plus rules governing how countries spend them. Each country must allocate 37% of its share to climate projects, and all its spending must "do no significant harm" to EU climate goals. This principle comes from upcoming EU green finance rules, which use complex criteria to assess whether economic activities comply. For example, a power plant would be judged to do no significant harm to climate goals if it meets an emissions threshold that most natural gas plants cannot currently comply with. But the EU recovery spending rules do not tie cash to those specific criteria, which are on hold after some member states objected to a draft version. A European Commission spokeswoman said the EU executive would assess on a "case by case" basis plans to spend recovery funds on gas projects and may approve those that meet "strict conditions", such as in countries seeking to quickly reduce their dependence on coal-fuelled power. "What we're left with is a vague principle," said Luca Bonaccorsi, Sustainable Finance Director for NGO Transport & Environment. Bonaccorsi, who sits on a panel of experts advising the EU on green finance rules, said this means it will be up to the Commission to decide if countries' spending plans are deemed climate-damaging or not. "The credibility of this generation of policymakers will be seriously put to the test in the next six months," he said. The Commission will produce guidance this month for countries to assess if their spending plans "do no significant harm" to EU climate goals. This guidance "must unambiguously ban the use of funds for CO2-emitting fossil energy projects," said Brian O'Callaghan, head of Oxford University's Global Recovery Observatory, which tracks countries' COVID-19 recovery spending. Gas is emerging as a flashpoint in the EU's plan to become climate neutral by 2050. Germany, whose Nord Stream 2 pipeline would increase gas imports from Russia, is among member states planning to use gas to replace heavier-polluting coal. Meanwhile, companies and lenders including the European Investment Bank plan to phase out gas, arguing it is not compatible with a "net zero" emissions future. ($1 = 0.8241 euros) (Editing by John Chalmers; Editing by Hugh L
