After reviewing the European Commission's plan for financing the Green Deal, rating agency S&P has released a report that the Green Deal will enhance the Union's long-term growth prospects, reducing the likelihood of GDP-related climate shocks and also improving their resilience.
The main objective of this new strategy, and probably also the most ambitious one, is to restore the EU's climate targets to achieve climate neutrality by 2050, even more ambitiously reducing greenhouse gas emissions by at least 50% by 2030.
“Lower GDP can lead to lower emissions, but not the other way around: lower emissions do not lead to lower growth. The 23% reduction in EU emissions since 1990 has not weakened economic performance and it's not due to a broader services sector,” said S&P Global Ratings senior economist Marion Amiot.
“However, achieving climate neutrality in reducing CO2 emissions by 2050 will require the EU to do much more,” added S&P Global Ratings credit analyst Anna Luibachvna. "Only Sweden, Portugal and Greece appear capable of meeting the 2030 targets for sectors that are not part of the emissions trading system," concluded the analyst.
“The EU's fiscal resources are too small, therefore a change would only come with a revision of the tax rules to exclude green investments from the 3% of GDP budget deficit limit”, argues Amiot.
Alternatively, carbon pricing could be used. It would be the most efficient way to tackle climate change, but it is difficult to implement due to its social impact. Instead, the European Union would appear to be in favor of a green budget of 1.000 billion euros and a taxonomy – a hierarchical selection – for green investments. In 2017, EU research and development, in environmental terms, recorded an average of less than 0,005% of GDP, too little to fill the huge gap with respect to needs.
On the other hand, monetary policy would seem more inclined to lend a hand, but the problem is that this can only encourage the market to reassess the cost of carbon. Furthermore, its counter-cyclical nature does not make it as effective as fiscal policy.
Last but not least is that if the Union reaches carbon neutrality by 2050, it will still remain a CO2 consumer. The European Union currently accounts for 9% of global emissions, but also consumes another 2% through imports. With this carbon leakage in mind, the EU could consider a tax to ensure that consumers and businesses internalize the cost of importing carbon.
However, considering that the two major trading partners of the EU, United States and China, are also the two largest producers of CO2, this could increase trade tensions and reduce investment, certainly detrimental to short-term growth.
In the context of global trade tensions, a sectoral approach is more likely to be adopted: tax the most polluting sectors, such as steel and cement. another route would be to make its environmental commitments part of trade deals.
Looking ahead, is the conclusion reached by the S&P report, the EU will have to introduce more "respectful" policies towards the environment, otherwise it will never reach its goals for 2050. A higher carbon price would be more challenging for polluting sectors, but at the same time, it may be necessary to push for a reclassification of the cost of carbon on the market.
It is unlikely that the sustainable investment taxonomy or monetary policy will be sufficient to achieve carbon neutrality. moreover, to close the huge investment gap, EU countries will have to invest more, which suggests that without tax easing for green investment, this could prove difficult.
