Europe’s Window of Climate Opportunity

Pin it!

Michala Marcussen, Group Chief Economist
06/03/2020

Climate change is increasingly in the news, and while the horrific
images of extreme weather and the tragic loss of life and livelihoods spring to mind, just how climate change is shifting consumer and investor behaviour, as well as public policy, is equally deserving of attention.

The automotive industry is a prime example with new emission standards demanding major changes to manufacturing processes,
and new consumer preferences such as car sharing requiring a
profound rethink of existing business models. As car manufacturers adjust to this new reality, the impact will be felt throughout the global supply chains, and already in 2019 there was a visible negative impact to euro area GDP from these shifts. The challenge now is for the industry to turn this headwind into a tailwind.

Automobiles are, moreover, not the only area experiencing change; a return to train travel, a new fashion for vintage clothing and flexitarian diets all come to mind. Investor preferences are also shifting, with a growing number of asset managers engaging frameworks to lower portfolio emissions, echoing the engagements of many banks. Reflecting both the shifts in consumer and investor preferences, businesses across all sectors are increasingly applying climate strategies.

Climate change is indeed no longer an issue for the long-term but is having a visible impact today. European policymakers recognise the challenges and the new Commission has set out a European Green Deal with the aim of making Europe the world’s first climate neutral continent by 2050 and is due to propose the first European “Climate Law” by March 2020 as one of the first steps in its roadmap.

Moving the Green Deal from proposal to legislation will require agreement from member states, and successful implementation will require the completion of Banking Union, Capital Markets Union, some form of Fiscal Union and support from national policies in key areas such as education policies and labour markets reform. Equally importantly, it will also require political unity on the external front: the mere mention of plans for a carbon border tax to secure a level playing field for European businesses has already sparked criticism from one of Europe’s key trading partners. Climate change and trade policy are indeed increasingly intertwined, and it was notable also that the EU-Mercosur Trade Deal was put on the line in 2019 to pressure Brazil’s government to act on taming forest fires in the Amazon.

As we enter the 2020s, the consensus of economists forecast that Europe will face one of the weakest potential growth rates among the advanced economies. Taking the lead on climate change offers a unique opportunity for Europe, holding out the prospect of new business and job opportunities, and a leadership position on climate technologies. It will require determined policy action, which requires moving well beyond the easy compromise of the lowest common political denominator. For Europe, and for the world, it’s a narrow window of opportunity.