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Europe’s Green Transition Risks Becoming a Victim of the Global Pandemic

Europe’s Green Transition Risks Becoming a Victim of the Global Pandemic

(Bloomberg) -- Before the pandemic halted daily life and shattered economies, the European Union had set a course for a difficult re-invention. By 2050, the bloc had decreed, under the banner of its Green Deal, there would be no net greenhouse gas emissions from the entire continent. The announcement Wednesday that the COP26 climate summit, which had been scheduled for November in Glasgow, would be cancelled due to the novel coronavirus only underscores what had already become readily apparent. Europe’s commitment to meeting its energy goals—and to the prioritization of climate-friendly policies at all costs—is being tested.

It’s already clear that the threat posed by the virus isn’t so different from the looming impacts of climate change. Both are what economists call exogenous shocks, factors that re-shape a system from without. Finding ways to suppress such shocks—say, through stimulus programs with green incentives—will be key to avoiding future downward spirals. Bailouts in one crisis can help remake entire industries and economies in preparation for the next.

“If you think back to the Great Depression and the upswing in activity that happened afterwards, then there are certainly opportunities in a recovery period to ensure that funds are going to important, longer-term issues,” says Sonja Gibbs, managing director and head of sustainable finance at the Institute of International Finance, which represents more than 450 financial institutions. “But there’s no doubt this is going to change the complexion of the climate finance debate.”

Even before the EU agreed to net zero, it had a target for 40% CO₂ reduction by 2030. That alone will cost 1.5% of 2018 GDP a year, according to the European Commission, or €260 billion ($285 billion) of new investment annually. The Commission, led by Germany’s Ursula von der Leyen, had been planning to tighten its 2030 carbon target, and that’s now in doubt. While EU leaders meeting last week on a virtual call struggled to agree on what a coronavirus bailout should look like, all accepted the need for a green transition and a better crisis management system—a victory in its own right, but not enough to ensure the Green Deal makes it through this crisis intact. 

Comparing tough climate measures to a moonshot mission has become the norm. But the Green Deal is much bigger than the Apollo program. The scale of investment needed to achieve the EU’s net zero pollution goal is dizzying. Hundreds of billions of dollars must be poured into technologies that will be crucial to the plan’s success but are now still in the early stages of development. Those include carbon capture and storage, which sucks pollution out of the air, and green hydrogen which can replace coal in the process for making steel, essential for all manner of essential products from cars to washing machines to buildings.

When it comes to ways of curbing emissions, much of the low-hanging fruit has already been plucked. EU laws already cap carbon dioxide emissions for transport, which has driven down fuel usage and spurred sales of battery powered cars. Many countries have slashed plastic bag usage thanks to a 2015 EU law, while over 77,000 consumer products now bear the bloc’s Ecolabel, improving the environmental impact of everything from vacuum cleaners to paint and detergents. The EU is on track to meet its 20% renewable energy target set in 2009, according to BloombergNEF. Zeroing out emissions by 2050 will require a steep uptick in wind and solar power installation rates, as well as the rapid adoption of electrified transport and heating. A bloc-wide ban on fossil-fuelled cars is also on the agenda, as cities seek to rid themselves of polluting cars.

Europe’s Green Transition Risks Becoming a Victim of the Global Pandemic

Technology is the easier part when it comes to tackling climate change—and Von der Leyen knows it. Deeper cuts will be harder to reach, and bigger challenges lie in the realms of politics, finance, and human psychology. Prices on Europe’s carbon market have plunged as nations shut factories and workers stayed at home to fight the pandemic. While lower prices help reduce the burden on businesses during a slowdown, they also mean less incentive to switch away from dirty fuels like coal toward cleaner ones such as natural gas—and less revenue to funnel into clean projects. 

Making matters more complicated still, the coronavirus crisis has exacerbated a long-running battle within the Eurozone over how to narrow the gaps between rich and poor members. Wealthier countries, led by Germany, are resisting a joint debt issuance called for by France, Italy, and Spain to cover costs associated with the disease. 

That same conflict runs through the heart of the Green Deal. The plan features what’s known as a just transition mechanism, a €143 billion fund to help heavily impacted regions shift to a cleaner economy over the next ten years. It’s not clear yet whether Poland, which still gets 80% of its power from coal, will consider it enough to commit to zeroing out its own emissions by the 2050 deadline. So far, it’s backed the EU-wide goal but declined to accept the timeline at a national level. The Commission had been considering radically changing the way interim climate targets are set, making it more difficult for country-level governments and the European Parliament to object. But even setting interim targets won’t be possible until officials can begin to understand what the shape of the current recession will look like.

For all these reasons and more, continuing with the Green Deal may look like an impossible task. But European Environment Commissioner Virginijus Sinkevicuis says the economic crisis creates an opportunity to renew efforts on climate change. “We’re always going to face different crises, but the climate emergency isn’t going anywhere,” he says. “This is not something negotiable. We must focus on what’s happening in the world and react to it, but we cannot stop mainstreaming climate policies that we have already started.”

The underlying trends of increasingly responsible consumers and businesses embracing tough environmental targets offer some hope to the Green Deal’s proponents. Companies like London- and Rotterdam-based Unilever, which makes Dove soap and Ben & Jerry’s ice cream, are taking the lead in slashing carbon emissions throughout the supply chain. The EU is competing with China to dominate alternative energy technologies and new environmental markets. And European oil majors such as BP PLC and Royal Dutch Shell PLC are betting they’ll be rewarded for embracing green technologies as their competitors in the U.S. fall behind. As a result, Europe has become the biggest region for sustainable investors, with about $14 trillion devoted to these strategies, according to the Global Sustainable Investment Alliance.

Emissions reductions are just part of the Green Deal goal: The program’s success also depends on countries outside the EU following suit and strengthening their own emissions regulations. The EU plans to push its new green-friendly trade rules through future trade agreements, but the coronavirus crisis will also likely focus investors on the resilience of their supply chains to external shocks. Poland has already called for emergency measures from the EU to secure investment in green projects dependent on goods imported from China, following the shutdown there. 

Europe’s Green Transition Risks Becoming a Victim of the Global Pandemic

Europe’s own Circular Economy Action Plan, published in March, proposes steps such as banning planned obsolescence in consumer electronics and mandating recycled content for batteries and a universal charger for mobile phones. These measures could also ripple through exporting countries like China, the U.S., and Turkey, which may have to comply in order for their goods to be allowed into the country. Around $1.3 trillion of imported manufactured goods could be exposed to Ecodesign standards and recycled content mandates, according to BloombergNEF.

Lidia Wojtal, a Berlin-based climate policy expert who’s been involved in international climate talks since 2007, remains cautious in her optimism. “The EU is a bloc that has all the tools at its disposal to lead the green revolution; they only need to be repurposed,” she says. “What we still lack, however, is the political confidence to stand for climate when the global economic interests come into play.”

The virus has also helped to expose weaknesses in the global economy and may itself push investors around the world toward new ways of doing business. BlackRock Chairman Larry Fink—whose firm has been tapped by the U.S. Federal Reserve to lead a government-backed bond-purchasing program—wrote in a recent note to shareholders that the pandemic underscores the value of sustainable portfolios. “When we emerge from this crisis, and investors rebalance portfolios,” Fink said, “we have an opportunity to accelerate into a more sustainable world.”

If financial leaders keep that priority in mind, the EU's attempt to remake itself as a climate bloc might find new allies to help it overcome the monumental economic setback of the coronavirus. — With assistance by Laura Millan Lombrana

©2020 Bloomberg L.P.