In mid-July, the European Commission (EC) unveiled a raft of policy proposals under the “Fit for 55” package, aimed at EU climate change, reducing the EU’s carbon emissions by 55% from 1990 levels by 2030. The proposals include a carbon border tax, an end to sales of petrol and diesel cars by 2035, and a tax on aviation and shipping fuel, among others. Meanwhile, the European Central Bank (ECB) has announced it will incorporate climate change into the way it conducts monetary policy, including risk assessments, decisions on collateral, and corporate sector purchases.
Our View
The Commission’s proposals are ambitious; since 2019, emission levels were just 24% below 1990 levels, and the new target would entail a further emissions reduction of 31% in just nine years. Although these cuts are considered necessary for holding global warming below two degrees Celsius, they entail substantial price increases and lifestyle changes for European businesses and consumers. For that reason, the proposals around EU climate change will face fierce opposition from certain member states and industry groups, and they are likely to be stripped down during further negotiations in the European Parliament—a process that may take two years. Although the ECB’s plans won’t face legislative hurdles, implementation will still likely occur at a gradual pace and will gather speed only in 2023. Many of the proposed changes aim to provide higher liquidity and credit ratings for companies that have implemented comprehensive strategies to reduce their carbon footprint.
Business Implications
These EU climate change policy plans and changes to monetary policy are unlikely to have an immediate impact on the business environment, but executives should plan for the medium- to long-term implications of the reforms. MNCs and their partners pursuing a more proactive environmental strategy will likely see higher liquidity and potentially lower lending rates beyond 2024. ECB assets currently favor high-emissions sectors, meaning that any unwinding of ECB holdings in these industries could raise cost of capital.
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