As governments and companies around the world mobilise their finances to deal with the economic fallout of COVID-19, the EU has reinforced its commitment towards long-term climate goals, making sure recovery plans help speed-up the transition to a greener economy.
In December 2019, leaders of EU member states agreed to target net-zero emissions, bloc-wide, by 2050 (EA 17-Dec-19). To meet this goal, the European Commission (EC) unveiled a "Green Deal" – pledging €1 trillion in sustainable investments over the next ten years, which is slated for projects such as removing fossil fuels from the EU's energy mix, and increasing the use of renewables, clean transport and infrastructure.
The outbreak of the COVID-19 pandemic has brought into question whether the EU's drive towards net-zero will continue undeterred. Entities of all kinds need to mobilise their liquidity to fight the impact of the pandemic and limit the ensuing damage. As a result, they may have less scope for investing in green projects meaning stronger long-term climate goals could risk being shelved.
Europe's climate policy on ice?
In the wake of the pandemic, some EU members, such as Poland and the Czech Republic, were lobbying for the EU’s carbon neutrality deadline to be extended. By the end of March, 37 of the 700 members of the European Parliament (MEPs) had requested that a number of Green Deal legislation items be postponed, and Poland – the EU country most reliant on coal for energy, continued to disagree with imposing climate-related conditions to the EU Recovery Fund this July.
Key sectors, such as automotive and aviation – among the most severely impacted by lockdowns – demanded a delay in implementation of climate projects that would potentially pose additional cost and delay to their recovery.
For instance, the European Automobile Manufacturers' Association (ACEA), European Association of Automotive Suppliers (CLEPA), European Tyre & Rubber Manufacturers Association (ETRMA), and European Council for Motor Trades and Repairs (CERCA) have all signed an open letter to the president of the EC asking for a delay to climate change mitigation and protection of the environment laws, due to COVID-19.
Given passenger cars and vans account for around 14.5% of total EU emissions of CO2, potential delays in the implementation of these laws could put countries' environmental targets at risk.
Policymaking proceeds
Despite resistance from sectors severely battered by the pandemic, the EU Commission is determined to push climate policymaking forward. This was made clear with the EU budget and recovery fund agreement in July. Part of the agreement was to lift the commitment to climate-targeting expenditures to 30% of the total budget from 25% previously announced. Meanwhile, the EU still plans to publish an impact assessment plan this September on increasing the EU's emissions-reduction target for 2030 to at least 50%, from 40% at present.
The EU remains on track with its Green Deal legislative roadmap, and its EU green taxonomy was approved by the European Parliament in June. The taxonomy should help drive capital towards long-term, environmentally sustainable activities, and give market participants the confidence they are investing in green projects that align with the Paris Agreement.
Although the COVID-19 crisis may reduce the focus on the green energy transitions in the short-term, the EU and many of its members continue to update their carbon targets significantly. Many Europe-based oil companies, too – such as Repsol and Equinor – continue to shift their focus to renewable energy to diversify portfolios, and meet shareholder expectations. Large players in the industry, such as BP, have also highlighted the importance of the continued transition to clean energy, in spite of the crisis.
With such initiatives in mind, investments in renewables have not slowed down hugely, but rather have been delayed by a few months.
A green safehaven
Given 30% of the EU recovery fund is earmarked for climate-targeting expenditures, or €225 billion of the agreed €750 billion for the EU Next Generation Fund, the EU might choose to finance it through green bond issuance. This would make the bloc the main liquidity provider of a green safe asset. To put this into perspective, the European Investment Bank has issued US$33.7bn green bonds since 2007.
A larger pool of green assets would help policymakers and central banks achieve their aim of greening the financial system. Currently, the green bond market represents only 3.7% of total global bond issuance, making it difficult to ask market participants to build green portfolios.
EU green bond issuance on such a large scale could also help reinforce the international role of the euro as a green currency, respond to the fast-growing environmental, social, and governance (ESG) investor base, and increase the size of the global green bond market by around 89%, compared with total issuance in 2019 – a timely development given the costs involved with meeting the EU’s ambitious climate goals.
Greener behaviours
Although the financial losses caused by the pandemic could be negatively affecting climate goals in the short-term, some long-term environmentally positive changes may arise from the crisis.
Globalisation, for instance, may slow as a result of the crisis and heightened trade tensions between China and the US, as companies seek to set up more of their supply chains in the same location.
Structural changes to travel, including commuting, flying, and waterborne travel habits, may also reduce oil demand, and therefore emissions. And, since companies across the world have successfully experienced remote working, they may choose to cut back on business travel and increase opportunities to work from home. Having said this, greenhouse gases (GHGs) have started rebounding following the easing of lockdowns – to what level they will bounce back remains uncertain.
Finally, citizens may also be more aware, and less tolerant, of polluted environments after experiencing a few months of clean air – which is something we are already seeing, as some cities begin to favour pedestrians and cyclists over cars. Indeed, consumers’ preferences are key to ensuring companies adopt more environment-friendly strategies, which in turn, gives widespread support to agreements like the Green Deal.
Outlook for the Green Deal
Even though governments are focused on dealing with the immediate effects of the crisis today, the EU is leveraging the opportunity of needed fiscal stimulus to re-energize its pledge for carbon neutrality by 2050.
In a landscape of negative interest rates following the crisis, public investment is arguably the most powerful way to boost growth. In the longer run, this may also increase the EU's ability to grow while producing smaller amounts of GHGs, if well designed. Indeed, a look back at public and infrastructure investment over the past decade suggests that EU member states have been underinvesting.
The EU's clear mandate to tackle climate change has been reinforced with the COVID-19 crisis and the transition to greener production systems is now one of the three conditions attached to the EU recovery response, besides digitisation and pro-growth goals. And as such, the goal of achieving carbon neutrality by 2050 across the EU remains intact, despite COVID-19.
