(Editor's Note: Jeff Berman of S&P Global Platts Analytics, a division of S&P Global, contributed to this report.)
- The EU's long-term goal to tackle climate change remains unchanged. But the COVID-19 pandemic will likely delay specific laws needed to reach carbon neutrality as governments and firms mobilize their finances to deal with the economic fallout.
- Some sectors, such as automotive and aviation, are pushing back on stricter environmental standards and commitments amid the COVID-19 measures. There is also a risk that the drop in global energy demand may end up delaying investment in the transition to a low-carbon economy.
- Changing consumer habits and preferences in a COVID-19 recovery could push companies and governments to do more in terms of greening the economy.
As countries grapple with the immediate consequences of the COVID-19 pandemic and EU policy focus shifts to short- and medium-term tools to alleviate the aftermath, there is a risk that long-term climate goals may be put aside for now. This may trigger a push-back on some climate-change targets for some industries. For now, however, the EU has confirmed that its green ambitions remain intact. The European Commission's temporary framework for state aid measures to support the economy in the COVID-19 outbreak, adopted on March 19, 2020, stresses that measures should keep in mind the importance of the EU objectives for green and digital transitions. Moreover, the EU is currently on track with its Green Deal legislative roadmap (see "EU Green Deal: Greener Growth Doesn’t Necessarily Mean Lower Growth," published Feb. 10, 2020, on RatingsDirect). It has also revealed an updated EU green taxonomy. We believe the overall goal of achieving carbon neutrality by 2050 across the EU remains intact despite the pandemic, although there may well be some short-term delays to specific policy actions toward achieving this.
The COVID-19 Slowdown Will Likely Provide Only Temporary Relief To EU CO2 Accumulation
Lower economic activity as a result of the COVID-19 crisis, leading the EU economy to contract by around 7% this year by our expectations, is likely to lower EU greenhouse gas (GHG) emissions by around 14% this year. This is much more than the 8% decline seen during the financial crisis (see chart 1) because high-polluting sectors such as transportation and industry are more affected (see chart 2). However, this may not be a long-term trend. After the 2008 global financial crisis, when European CO2 emissions from power generation, heavy industry, transportation as well as other sectors dropped, they had risen again to even higher levels by 2010. To achieve long-term emission reductions, Europe would need to go through a fundamental transition to greener production systems. The EU could achieve this if it implements the policies outlined in its December 2019 Green Deal.
Pandemic Measures May Delay Europe's Climate Policies
In response to COVID-19, Poland and the Czech Republic--the worst performers in the EU in terms of GDP per unit of CO2--are pushing for delays to the EU's commitment to achieving its ultimate goal of carbon neutrality by 2050. At the end of March, 37 of the 700 members of the European Parliament (MEPs), 17 of which were Polish and Czech MEPs, requested that various Green Deal legislation items be postponed, and that all focus should be placed on the EU's multi-year budget to help member states with a post-coronavirus recovery. Despite constituting a small minority, this suggests commitment to the Green Deal is not unanimous across all member states in light of the economic consequences of the pandemic.
While some are concerned that development of stronger long-term climate policy could be pushed aside in favor of short-term economic stimulus, we have not yet seen any indications that this is actually occurring on the EU level. Climate policymaking is still moving forward at this stage. Indeed, despite resistance from sectors severely battered by the virus outbreak, the EU Commission is still determined to make the stronger 2030 emission-reductions target a reality. Toward this aim, it still plans to publish an impact assessment plan this September on increasing the EU's emissions-reduction target for 2030 to at least 50%, from 40% at present. The new target is currently in the public consultation stage, which will end on June 23, 2020. In June 2021, the Commission will review and propose revisions to existing legislation relevant to the Green Deal.
On a national level, there are also no indications of delay for now. The Netherlands is still planning to go ahead with its imposition of a €30 per tonne carbon tax on industrial sectors scheduled in 2021. Meanwhile, there are not yet any indications that Germany will delay the scheduled 2021 introduction of a carbon tax for non-Emissions Trading System (ETS) sectors (i.e., emissions from homes, cars, small businesses, and agriculture), starting at €25 per tonne in that year. Nor is it postponing the implementation of its phase-out of coal-fired generation.
Germany apart, the crisis could make it more difficult to make the case for introducing a carbon tax outside sectors not covered by the ETS. From a macroeconomic standpoint, the only positive shock European economies are seeing at present is lower energy prices, which will bolster households' purchasing power. As well as being politically sensitive, a carbon tax now would deprive the eurozone economy of the only supportive development, which could lead to a slower economic recovery.
Public And Private Sector Finances Will Prioritize The Fight Against COVID-19
Aside from policy, the widespread fiscal support measures unveiled during these past weeks show that countries are mobilizing all of their fiscal space to fight the spread of COVID-19 and limit the ensuing economic damage (see "Europe Braces For A Deeper Recession In 2020," April 20, 2020). As a result, we believe EU countries will have higher government debt after the crisis and possibly less scope for investing in projects to green their economy, especially in countries in which fiscal space is already limited. We also expect EU countries to tap the balance-sheet space and social and environmental mandates of supranational institutions, such as the European Investment Bank or the Council of Europe Development Bank to help fight the pandemic while pursuing environmental objectives.
In the aftermath of the crisis, policymakers are likely to be more focused on how to help firms and consumers bounce back from the crisis rather than long-term issues such as climate change. However, despite demands from industries to delay implementing new policies that would potentially impose additional cost on industries that have yet to recover (such as the car and aviation industries) there are no indications that this is happening.
Nonetheless, companies that survive the crisis will be hurt financially as a result of disruption to their activity. This is especially true of high-polluting sectors, such as transportation. As a result, they are potentially likely to have fewer funds available to invest in environmental improvement in the absence of policy support.
Automotives Might Push Back Some Environmental Standards
The automotive sector has been severely affected by lockdowns that have reduced vehicle usage as well as people's ability to buy new cars (see "COVID-19 Will Batter Global Auto Sales And Credit Quality," March 23, 2020). Already, the European Automobile Manufacturers' Association (ACEA), European Association of Automotive Suppliers (CLEPA), European Tyre & Rubber Manufacturers Association (ETRMA), and European Council for Motor Trades and Repairs (CERCA) have signed an open letter to the president of the European Commission asking for a delay to climate-change mitigation and protection of the environment laws due to COVID-19. Given that the automotive sector is one of the most important in the EU, employing around 14 million people, these industry bodies might have some leverage. Passenger cars and vans account for around 14.5% of total EU emissions of CO2. Thus, delays in the implementation of the law would likely put countries' environmental targets at risk. The environmental objectives for the automotive sector were meant to lead to a 23% reduction of greenhouse gas (GHG) emissions from road transport in 2030 compared to 2005. This was also meant to support the EU member states in meeting their national targets under the Effort Sharing Regulation.
Aviation Has Limited Potential To Offset Emissions
The aviation sector is one of the hardest hit by the COVID-19 crisis (see: "Credit FAQ: Airlines And Airports Worldwide Confront An Unprecedented Plunge In Traffic And An Uncertain Recovery," April 6, 2020). The COVID-19 pandemic has dramatically reduced flights worldwide, down by more than 70% globally, according to flightradar24 (see chart 3). This means that airlines face major financial problems and many players risk going bust without government bailouts.
The global aviation industry produces around 2% of CO2 emissions. In order to decrease and/or offset these emissions, the International Civil Aviation Organization (ICAO) set up the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). This aims to help offset CO2 emissions from international aviation above a predefined baseline. That ICAO is targeting only emissions growth (and not reductions) highlights the limitations of technological and operational improvements and sustainable aviation fuels available to address aviation emissions. The baseline is defined as the average of CO2 emissions from international aviation for the years 2019 and 2020. Due to the pandemic, emissions for 2020 will be much lower than usual, which will consequently lower the baseline average. However, the airline trade group the International Air Transport Association (IATA), has also asked ICAO to review the CORSIA baseline using only 2019 emissions, which would bring compliance obligations closer to original expectations and prevent an undue economic burden on airline operators, which have already suffered heavy losses due to the crisis. It is also possible that countries could also pull out of the CORSIA program entirely, which would reduce its overall scope.
ICAO is expected to consider IATA's proposal during its June session. For now, ICAO signed off on the CORSIA plan on March 13, implying that the sector will stick to its climate commitments, although S&P Global Platts Analytics (which is a separate, individual division of S&P Global, as is S&P Global Ratings) does not believe that the initial compliance costs will be high enough to encourage technological improvements. Platts Analytics estimates that, as a result of a reduced baseline from COVID-19, offset demand from aviation operators could be nearly 3x prior expectations, even when various flexibility mechanisms are considered. ICAO had initially estimated CORSIA offset demand from 2021-2023 of around 100 million metric tons of CO2 (see: Platts Analytics "CORSIA offset supply now limited, but possibly ample; coronavirus leads to higher demand," March 31, 2020).
The Energy Transition Could Be Delayed If Policies Are Not Adjusted
In recent years, the energy transition has gathered momentum. The EU itself and many EU members have updated their carbon targets significantly, in some cases even committing to going carbon–neutral by the middle of the century. However, despite the ambitious targets and outlined EU climate policies, the coronavirus crisis might reduce the focus on the low-carbon energy transition path in the short term. Additional investments in clean energy resources may be less necessary to meet near-term emissions targets, as the crisis has led to a fall in power demand of up to 20% and thus reduced pressure to build additional capacity. This is partly reflected by the collapse in oil price since January (see chart 4), while Russia and Saudi Arabia have contributed to the supply glut by ramping up their production. That said, very low oil prices will push some oil producers out of business and also lead to lower investments in that sector, meaning that oil production will likely be lower in the aftermath of the crisis, perhaps accelerating the move to more sustainable sources of energy.
The fall in energy consumption has also weighed on the price of carbon in the EU Emissions Trading System (EU ETS) market, which covers carbon emissions from large stationary sources such as power plants, steel mills, and cement kilns. EU ETS carbon prices traded in a relatively narrow range of €24 per tonne-€26 per tonne for most of 2019 and early 2020, before moving as low as €15 per tonne in March (see chart 5). While prices have rebounded somewhat, S&P Global Platts Analytics believes that considerable downward price pressure remains in this market in the balance of the year as a result of COVID-19 (see "Platts Analytics EU ETS Monthly Outlook," April 13, 2020). In principle, lower carbon prices can reduce the incentive to switch to cleaner production systems, which could delay the energy transition. At the same time, a major justification as to why policymakers opted for a flexible-price carbon trading system rather than a fixed-price carbon tax is that compliance costs can move lower with changes in the economy. Additionally, there are mechanisms in place that adjust market supply to changes in demand. Platts Analytics has also flagged that reforms to long-term climate targets will directionally support carbon prices in this market.
In the medium to long term, we believe Europe's energy transition plan remains unchanged. First of all, carbon neutrality is one of the top priorities in the EU and it has already channeled much investment in this direction: many European countries are aiming to phase out coal power plants in the next decades and we believe they are likely to replace them with larger volumes of renewables. As such, investments in renewables have not slowed down massively so far, but rather have been delayed by a few months. Strengthening this argument, we expect costs of renewable technologies will continue to drop, ensuring that they remain attractive for investment purposes in spite of lower oil prices. We can see many oil companies are already shifting their focus to renewable energy to diversify their portfolios and meet the expectation of their shareholders. For example, companies such as Total, Enerco, Repsol, and Equinor are actively investing in renewable energy. Another big player in the industry, such as BP, highlighted the importance of the transition to clean energy during the current crisis.
The Crisis Could Lead To Greener Behaviors And Greener Production Systems
Although current wealth losses could end up negatively affecting green investments, some environmentally positive behavioral changes may arise from this crisis. Structural changes to travel, including commuting, flying, and waterborne travel habits, would reduce oil demand, and therefore emissions ( see S&P Global Platts Analytics report: "Quantifying Risk: How much COVID-19 could change consumer behaviors and impact long-term oil demand," March 24, 2020). As companies have successfully experienced working remotely across the world, they might choose to cut back on business travel and increase remote working. Equally, consumers might be a bit less tempted to travel in the direct aftermath of the crisis. Citizens might also be more aware and less tolerant of polluted environments after experiencing a few months of clean air, something we see already, as some cities favor pedestrians and cyclists over cars in their gradual exit of lockdowns. Finally, globalization more broadly might slow as a result of this crisis as some companies seek to set up more of their supply chains in the same location.
If consumers change their preferences, companies could adopt a more environment-friendly focus once the economy recovers. This would likely give more support to environmentally friendly policies such as the Green Deal. While governments remain focused on dealing with the immediate effects of the crisis for now, specific fiscal stimulus for the recovery remains undecided. The EU could see this as an opportunity to reenergize its pledge for carbon neutrality by 2050, for example by adding some form of environmental objective to the potential recovery fund currently under discussion. Investments in green EU infrastructure may make sense to boost growth, as would tax incentives such as "cash for clunkers" to encourage consumers to trade in older cars to purchase more environmentally friendly vehicles. In an environment of negative interest rates and following a crisis, public investment is perhaps the most powerful way to boost growth, as the fiscal multiplier is likely to be larger than 1 (i.e., fiscal spending can stimulate aggregate demand by incentivizing additional private sector investments and consumption). In the longer run, it can also lift the EU's productivity and efficiency to grow with smaller amounts of GHG if it is well designed. A look back at public and infrastructure investment over the past decade suggests that, if anything, the EU has been underinvesting in this sector (see charts 6 and 7). Given the EU's clear mandate to tackle climate change, we think it is likely that the transition to greener production systems will be an ingredient of the recovery response.
S&P Global Ratings research
- EU Green Deal: - Greener Growth Doesn’t Necessarily Mean Lower Growth, Feb. 10, 2020
- The EU Green Taxonomy: What’s In A Name, Sept. 11, 2019
- Coronavirus' Global Spread Poses More Serious Challenges For Airlines, March 12, 2020
- Credit FAQ: Airlines And Airports Worldwide Confront An Unprecedented Plunge In Traffic And An Uncertain Recovery, April 06, 2020
- COVID-19 Will Batter Global Auto Sales And Credit Quality, March 23, 2020
S&P Global Platts Analytics research
- EU ETS Monthly Outlook, April 13, 2020
- CORSIA offset supply now limited, but possibly ample; coronavirus leads to higher demand, March 31, 2020
- Quantifying Risk: How much COVID-19 could change consumer behaviors and impact long-term oil demand, March 24, 2020
- Regulation (EU) 2019/631 of the European Parliament and of the Council of 17 April 2019 setting CO2 emission performance standards for new passenger cars and for new light commercial vehicles, and repealing Regulations (EC) No 443/2009 and (EU) No 510/2011
- A European carbon border tax: much pain, little gain, Georg Zachmann and Ben McWilliams, Policy Contribution, March 2020
- Commission proposal for a regulation: European Climate Law; the European Commission
- Communication on The European Green Deal, the European Commission
This report does not constitute a rating action.
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