Although decried for lacking ambition and as an abdication of responsibility in some quarters, the climate law proposed by the European Commission may be more ambitious than it first appears.
Publication of the EU’s climate law last week prompted the usual confusing mixture of responses. While some commentators described the setting of a legal target for climate neutrality by 2050 as a critical milestone, others decried a failure to increase ambition and set tighter targets for 2030.
The reality, as ever, is complicated.
Commission president Ursula von der Leyen has put climate action at the heart of her new administration, much as the common energy policy was central for previous incumbent Jean-Claude Juncker. It could be argued postponing an agreement on raising emissions targets for 2030 was a failure of responsibility. The longer the delay in setting targets, the more significant – and expensive – later action is likely to be, potentially involving technologies which are costly, unproven and do not address the need for systemic change. Part of the EU plan, however, is to invest in such technologies at sufficient scale to drive down costs, a proven strategy highlighted by the experience of the PV industry.
A proposal to increase 2030 climate targets has been put forward but there is little time to get it voted through the European Parliament, especially considering the other challenges facing EU member states. Whether it’s the climate plans being readied for Glasgow’s COP26 summit in November, dealing with the physical and economic fallout of the COVID-19 outbreak or the day-to-day challenges of government, plates are already full.
And there are other challenges. The EU climate law is not actually a law. It may make the 2050 target legally binding – overall, as member states may have different timetables – but it is a set of regulations to be transposed into law on a state-by-state basis and there are questions as to whether it will be binding.
However, the climate law proposes a review of the economy from a systemic perspective and perhaps offers more than might appear at first glance.
One of the more interesting proposals is the review mechanism, which offers an opportunity to ratchet up commitments every five years and, for the first time, to use delegated acts which would not require member state unanimity to approve increases to climate targets. The goal of separating resource use from economic growth is vital and figures from last year suggest this is possible. Success in such a goal would provide significant leadership globally.
Another positive factor is the commitment to mobilize €1 trillion in investment over the next 10 years. Committing 30% of the EU budget to climate-friendly investment is worthwhile, although it’s important to note the trading bloc expects that headline figure to include stimulating the wider investment market. While some money will come from the proposed Just Transition funds, InvestEU backing and carbon trading, the private sector and green finance are going to have to play a massive role too.
That is what makes the Green Deal so exciting. Green, sustainable finance is a growing market but currently remains a niche part of the overall financial system. Investment to benefit the environment and, more widely, sustainable development, is gaining traction as returns from environmental, social and governance (ESG) funds outperform traditional strategies. The transformation of the financial market, though, will require robust data, comparable methodologies and, most of all, a framework which encourages investors to invest. That means more than simply being encouraged to look at positive investment, they must be presented with a framework demanding positive action.
Such a development would mean a significant volume of investment for renewable energy, storage and other infrastructural shifts, such as mobility and electric vehicles. Green hydrogen has become a subject of interest to the market again, and the opportunity to engage the hydrogen market with the development of long term seasonal storage addresses climate and transition needs. The need for smart infrastructure, from smart grids to sectoral integration is also likely to see significant shifts in the market.
The potential for change in a short time frame is immense. Even five years ago, voter understanding of climate change was far below where it is now. The fact it has taken floods and fires to drive the change in awareness does not negate the impact. To many people, climate change is abstract and cannot trump economic concern. A flooded house is personal, however, and such events provide a window of opportunity to turn fear into a commitment to action. In five years’ time, who knows where we’ll be.
The reality is, no single action is going to change the climate trajectory. Climate activism, political agreements, individual choices, investment models – they all have a role to play. While the new EU climate law may not be what many activists wanted – and may not be enough to move the needle on effectively addressing climate change – what it does have the opportunity to do, is change the playing field.
Today, green finance is insufficient to drive the changes required by climate science. However as the demands on risk reporting increase and green and sustainable-investment returns continue to rise, the EU’s commitment to its Green New Deal and its climate law could prove a key lever in the transformation of the markets.