EU’s Climate Goals: Few Countries on Course to Be “Fit for 55”; Further Reforms Needed
Failure to align individual Member States’ climate action with EU objectives and set the foundations for sustainable growth constitutes an important long-term risk to sovereign credit ratings.
The consequences of inaction are severe, with the potential economic, financial and social costs of a disorderly transition estimated by the ECB at around 25% of GDP by 2100. Scope Ratings captures these environmental risks in its Sovereign Rating Methodology.
The EU’s July 2021 ‘Fit for 55’ package increased the greenhouse gas (GHG) emissions reduction target to at least 55% by 2030 versus 1990 levels, from the previous 40% target. The EU is revising its climate legislation including the Emissions Trading System (ETS) and Effort Sharing Regulation (ESR). Still, national policies are lagging. Even if current climate plans are implemented, the EU will miss its target by 753MtCO2e, equivalent to 15% of 1990 emissions (Figure 1).
Figure 1. The EU 27’s net emissions targets and trajectories
Wide Divergence Across Countries’ Emissions Trajectories
There is wide divergence between countries’ emissions trajectories. Only two EU Member States (Greece and Portugal) are on track to meet the Fit for 55 targets (Figure 2) under existing measures, while 18 countries’ plans are insufficiently ambitious to meet the new EU targets.
Figure 2. Target practice – which EU member states are on track to meet ESR targets?
(% of 2020 EU ESR emissions)
The EU Still Needs to Address Structural Imperfections in its Climate Policy Frameworks
In addition, the EU still needs to address structural imperfections in its climate policy frameworks, among them ESR flexibilities, incomplete carbon taxation, lax enforcement mechanisms and the oversupply of (free) ETS allowances to meet its targets.
Governments will need to rapidly accelerate national climate action. This presents a considerable hurdle in a context of deteriorating macroeconomic conditions, rising interest rates and more challenging national political landscapes.
As such, EU-level instruments should be mobilised to spur national climate action, mitigate pressure on public finance, and demonstrate global climate leadership, supporting sovereign creditworthiness longer term.
Addressing the challenge of climate change will help bolster the resilience of EU economies, secure important competitive advantages and place growth on a sustainable path. Conversely, inaction could result in a disorderly transition, with substantial economic, financial and social consequences. Which path EU economies go down will have lasting implications for their credit-rating trajectories.
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Thibault Vasse is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.