The EU's proposed Green Deal shows that the right policy initiatives could address the economic crisis and climate change simultaneously
Last year saw an acceleration of momentum in commitments to address climate change at a supranational, state, corporate and civil society level.
The European Union (EU) announced its intention to put a 'Green Deal' in place to transition the bloc to be a net-zero carbon economy by 2050. Growing numbers of countries and companies made equally ambitious pledges to cut emissions. Popular climate change protests gathered momentum and teenage activist Greta Thunberg was named TIME magazine's Person of the Year.
So, as we started 2020, sustainability and climate change were riding high on the political and corporate agenda. Understandably, this all came to a grinding halt with the spread of Covid-19 and the subsequent health and economic crisis that it posed.
As the importance of the climate challenge waned in the face of greater immediate challenges, it seemed the momentum of 2019 might disappear. In some practical ways, it has: COP26, the UN's flagship climate talks, have been postponed, and renewable energy supply chains have come under pressure due to logistical bottlenecks.
Bloomberg New Energy Finance calculated that governments globally have pledged more than $500 billion in ‘brown' stimulus for carbon-intensive industries such as aviation and oil and gas. Brown stimulus refers to support provided to these industries that is not conditional on them making material improvements, for example such as investing in clean fuel development.
But at the end of May we saw a clear reiteration of the centrality of addressing climate change, and the recognition that this can go hand-in-hand with the need to reboot job creation and economic growth as the lockdowns ease. The EU unveiled a major €750bn recovery plan, called 'Next Generation EU' which aims to repair the economic damage caused by the crisis and prepare the bloc for the energy transition.
Green measures proposed include unleashing a 'Renovation Wave' to at least double renovation rates across Europe. Buildings are 40 per cent of EU energy consumption and account for 36 per cent of greenhouse gas emissions, so improving the energy performance of buildings is critical for the EU to achieve its net zero target. Investment will also accelerate the scale-up of energy storage, green hydrogen and carbon capture and storage.
In addition to the EU's existing fleet emission targets for the auto industry, the plan proposes the rollout of one million electric vehicle (EV) charging points to boost EV adoption. The proposed measures also aim to boost offshore wind and better integrate the energy system.
In a related document, the EU has also proposed a ‘Renaissance of Rail investment'. The carbon intensity of rail transport is far lower than flights or internal combustion engine passenger vehicles, so it is an important part of decarbonising mobility.
We don't have the full details yet, and the proposal still needs to be approved by member states before the funds can start to flow. However, as climate change investors we are excited about the growth opportunities this could bring. Particularly across offshore wind, the electricity grid, the EV supply chain, rail, energy efficient building materials, energy efficient heating equipment, and the hydrogen value chain.
Proposed funding sources will also nudge companies to reduce their carbon intensity. The sources include the Emissions Trading Scheme (ETS), a potential Carbon Border Adjustment Mechanism, and a plastics tax. Later in the year we also expect to see the EU's current 2030 emission reduction targets boosted from 40 per cent to between 50 per cent and 55 per cent, which would require a tightening of the carbon market.
The economic crisis caused by Covid-19 does not mean the collapse of the effort to address climate change. What the EU's plan shows is that the right policy measures can tackle both challenges simultaneously.
Isabella Hervey-Bathurst is Portfolio Manager/Global Sector Specialist at Schroders.
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