After a week of cataclysmic floods over large parts of Europe, the climate debate has attracted a great deal of attention. It happens to have been the same week during which the European Commission announced the “Fit for 55” program that aims to cut greenhouse gas (GHG) emissions by 55% by 2030, using 1990 as the base year. By 2019 though, the EU had already cut emissions by 24% from 1990 levels. Thus, the plan would entail a further 31% decrease over the next 9 years. The plan proposes 12 policies, targeting energy, industry, transport (cars, planes and ships making up a quarter of the EU total GHG output) and the heating of buildings. Buildings account for another third of GHG emissions. Industries and households are encouraged to switch towards a greener energy mix. A world-first carbon border tariff system, taxing imports of high-emission goods produced outside of the EU, such as steel and cement, rolled out of the EC idea box. Expect that negotiations will take at least 2 years. The ambition takes a backseat here, notwithstanding inspirational proposals as a sales ban on new combustion engine cars by 2035. Based on nationally-determined contributions (NDCs), by the end of 2020, the UN sounds alarm bells. The promising US, Chinese and EU actions fall far short of achieving the Paris Agreement target of 1.5°C limit. The Intergovernmental Panel on Climate Change (IPCC) calls for a global emissions decline of 45% in 2030 from 2010 levels in order to achieve net-zero by 2050, limiting global warming by around 1.5°C. As you can read, countries and regions are juggling with base years, aspirations differ based on reduction objectives taken from 1990, 2010 or 2016 base years. GHG reduction ambitions should be labelled in absolute numbers as well as in per capita footprint series. At this moment, global GHG emissions are still rising. Everything depends on the strict implementation of NDCs across regions, whilst adopting the UN ‘fair share’ concept, raising the bar for developed market (DM) countries vis-à-vis emerging market (EM) countries. On a per-capita basis, a high responsibility is carried by China and the US, accounting for about 40% of global GHG emissions. We should expect further updates on NDCs ahead of the COP26 summit in Glasgow end of this year. The sobering facts are, however, that currently, anno 2021, NDCs reveal that we are on a path of about 1% of GHG reductions by 2030, in stark contrast to the 45% number above required by the IPCC by 2030. That number goes to 25% if we are to remain below a 2°C rise in global warming. The 55% number is still a compromise, as the EU27 should cut by about 10% more (i.e. 65% versus 1990 levels or about 60% by 2010 levels) to adhere to the Paris Agreement objectives. The main message is the following: climate change control in the hands of the political elite is fragile and prone to slippages. Setting up fiscal policies that support risk mitigation and behavioural change on environmental issues is a necessary condition but is not a sufficient one! Enter monetary policy to increase the probability of success. The ECB, the BoE and, since last week, the BoJ have all co-opted climate risk in the policy mix. Central banks can steer funding channels across governments and corporates on a global scale. The moment cost of funding becomes attractive for enablers and leaders fostering environmental progress, lagging businesses and governments will (and should) start to pay attention. In many cases, the environment might surge to an N°1 strategic objective. Monetary policy could also facilitate funding towards existing or future ventures that propel innovation at large or technological breakthroughs in specific. Fiscal and monetary climate policies should reinforce one another. Again, assessing the gigantic challenge mentioned above, this will require modest levels of funding cost. As the stage is global, I arrive once more in my secular belief that long-term rates are on a convergence path over a 2030 horizon. A convergence path that holds government rates, as well as corporate funding rates, anchored around current levels.
