Decarbonisation set for a boost in the EU

The
EU is stepping up efforts to tackle global warming. A new tougher target to cut
air pollution should enhance the economic incentive for companies to switch to
more environmentally friendly ways of doing business.

That is the conclusion chief
sustainability strategist Mark Lewis
draws from the European Commission’s plans to target a 55% cut in green house
gas (GHG) emissions by 2030 as part of a broader European
Green Deal programme aimed at reaching climate neutrality by 2050.

Lower emissions – Necessary and urgentargues the target is not only realistic, but also necessary and urgent in the face of an unabating stream of cli

He argues the target is not only realistic, but also necessary and urgent in the face of an unabating stream of climate-related natural disasters that can be seen as wake-up calls, including wildfires in Australia and California, hurricanes and even unusual heat and tundra fires in Siberia.

The goal is definitely achievable, not
least because good progress is already being made in decarbonising the power
sector in Europe, cutting emissions in the process.

In addition, the drop in social and economic
activity resulting from COVID-19 measures has caused emissions to tail off as
well. While the lifting of restrictions has led to higher emissions again, the
pandemic looks set to have changed behaviour structurally with more and more
people opting to continue to work at home and a potential lasting drop in
business and long-haul tourist travel.

Cost of renewable ebergyu is falling

On the cost side of decarbonisation,
renewable energy technologies have continued to become cheaper and cheaper.
Batteries, which hold the key to storing solar and wind energy, are improving,
resulting in more efficient storage and cost advantages.

Among the alternative energy sources,
green hydrogen should take a more prominent role since decarbonisation cannot
be achieved by renewable energy sources alone. As part of its Green Deal, the
EU has marked green hydrogen as a priority. It estimates that cumulative
investments in renewable hydrogen in Europe could reach EUR 180 billion to 470
billion by 2050. Moreover, the model used to scale up renewable energy sources
in recent decades can be used to scale up green hydrogen as well.

Carbon pricing – The growing incentive to switch

The EU’s more ambitious emissions cutting
target involves changes to the carbon market, also known as the Emissions
Trading System (ETS). The ‘cap-and-trade’ market works with tradeable ‘permits’
held by emitters in certain sectors and industries which they must surrender
when they emit a tonne of CO2 in a certain year.

The number of permits – or allowances –
is capped and the maximum amount declines every year to encourage emitters to
shift to greener technologies. The price is set based on supply and demand.

The net target can be expected to result
in a significant tightening of the cap. This should drive up the already near
record high price of carbon, in turn increasing the cost of polluting and
adding to the pressure on sectors to switch to lower carbon energy sources.

Further upward pressure on the carbon
price looks likely to come from companies reluctant to sell allowances that
might not be needed this year, but they require in the future as the maximum
falls. Hence, dearer carbon will act as an incentive to decarbonise.

With the price of carbon already near the
‘fuel switching’ level, i.e. the point at which utility owners are incentivised
to run cleaner gas-powered plants ahead of coal-powered plants, this could be
seen as a signal that the mechanism of pricing carbon can be applied more
broadly.

Broadening the scope in the EU and beyond

While demand for allowances took a hit from
a plunge in activity in the second quarter due to the lockdowns, it can be
expected to get a lift when the scope of the ETS is extended to sectors such as
road and marine transport and buildings are included.

Such a holistic approach would enable the
EU to cut emissions dramatically and beef up the role of the ETS as the main
driver of emissions reductions.

Equally, the ETS could be introduced
outside of Europe. Indeed, we believe the world as a whole needs to think much
more seriously about ways to cut emissions. Having a well-running carbon
pricing market can create more efficiency savings and give emitters an economic
incentive to conduct business produce in a more environmentally friendly way
for our common future.

More

• articles
  by Mark Lewis
• articles
  on sustainability

Any
views expressed here are those of the author as of the date of publication, are
based on available information, and are subject to change without notice.
Individual portfolio management teams may hold different views and may take
different investment decisions for different clients. This document does not
constitute investment advice.

The
value of investments and the income they generate may go down as well as up and
it is possible that investors will not recover their initial outlay. Past
performance is no guarantee for future returns.

Investing
in emerging markets, or specialised or restricted sectors is likely to be
subject to a higher-than-average volatility due to a high degree of
concentration, greater uncertainty because less information is available, there
is less liquidity or due to greater sensitivity to changes in market conditions
(social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Investors’ Corner Team. The post Decarbonisation set for a boost in the EU appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management.