ECB and OECD view slow climate policy with regret

The stretch for taking new climate measures seems to have run out a bit in Europe. In Germany, the government coalition struggled to agree a ban (from 2028) on the sale of gas boilers at the end of June, which, according to German media, has contributed to the success of the far-right party AfD in the polls. In France, President Macron wants a “pause” on new EU climate rules, to protect domestic industry. In Italy, Prime Minister Meloni is showing climate skepticism, Poland is trying to reverse EU climate legislation through the courts. The Dutch political landscape is being churned up by newcomers New Social Contract and BBB, which have so far shown little ambition in the field of climate.

In stark contrast to this mood in European politics are the increasingly urgent calls from international institutions to act more quickly for the climate. Not only the United Nations repeatedly warn: the Paris climate goals (limiting warming to well below 2 degrees, preferably 1.5 degrees) are out of reach. Economic policy institutes are also increasingly calling for speed in the climate transition. This week there were calls from the European Central Bank (ECB) and the think tank of industrialized countries, the OECD, to speed up the transition.

‘procrastination’

The ECB published her for the second time climate stress test for the eurozone economy. The conclusion, according to ECB Vice President Luis De Guindos in a blog entry: “Procrastination may be easier and cheaper today, but it means we pay a higher price tomorrow”. The ECB only foresees more damage to the economy if CO₂emissions are not “reduced as quickly and as drastically as possible,” said the Spaniard.

It is not a new message from the ECB, although its tone is gradually becoming sharper. In the first economic climate stress test, in 2021, the central bank already stated that the economic damage caused by global warming – damage to infrastructure and crops due to extreme weather, loss of productivity due to heat – is a “major source of systemic risk”. Politicians must want to be ahead of that, according to the ECB at the time.

Opposite the ‘physical’ climate risk is the so-called ‘transition risk’, or the risk of economic damage due to the energy transition. In short, companies and citizens can be affected by rising prices for fossil energy and by a difficult transition to sustainable energy. Banks that do not take this into account can incur losses on loans. In the second stress test, ECB economists focused primarily on this transition risk.

Three scenarios

According to the ECB, an ‘immediate and accelerated transition’, while relatively costly in the short term, will pay off within eight years. Heavy investments in renewable energy and higher prices for fossil energy would lead to an increased risk of bankruptcy for companies and a higher financial risk for banks. According to the ECB, these risks are manageable and, more importantly, they will decrease again from roughly 2027. Energy prices will fall again after that.

Read also: The ECB notices ‘climate inflation’. But do something for the climate yourself? That turns out to be difficult

In a second scenario, the ‘late blow scenario’, a series of even more drastic measures are taken in 2026, in a shorter time. Due to the sudden transition, the costs are much higher: energy prices can then reach the peak level of last year. And such a shock can shake companies and banks financially.

A third scenario is that of the ‘delayed action’. The energy transition is progressing slowly, while emission reduction is lagging behind. The economic risks before 2030 are small, but after that they will continue to increase and energy prices will continue to rise.

The physical climate risk comes into play in the latter scenario in particular. Because there is more CO₂ is released into the air due to the delay in the transition, climate warming is accelerating, and the physical damage caused by climate warming is increasing, for example due to natural disasters and failed harvests.

Lots of uncertainty

Such scenario analyzes are surrounded by great uncertainty. Financial-economic climate models are still relatively new. All kinds of external effects, such as geopolitical shocks, cannot be properly taken into account. It is uncertain how other major emitters, such as China and the US, will behave, and it is also uncertain how climate technology will develop.

But what the ECB argues is in line with what other authoritative economic institutes say: waiting too long with the transition causes long-term economic damage. For example, the International Monetary Fund calls the economic benefits of large-scale and rapid investments in the energy transition “many times greater” than the costs.

Global warming is rapidly emerging as an economic theme. A selection of last summer’s economic climate news – the warmest on record: Drought severely delays shipping in the Panama Canal; the price of olive oil hits records due to crop failures in southern Europe; In certain US states vulnerable to natural disasters, home insurers are retreating.

OECD wants ‘acceleration’

The OECD, the think tank of industrialized countries, warned late last year before coming into view tipping points, tipping points that accelerate global warming, such as the melting of permafrost in the Arctic. “Dramatic cuts in emissions” in “this decade” are necessary, the OECD said at the time. This week, the OECD dedicated half of an economic report on the EU to climate policy. An ‘acceleration’ of emissions reduction is needed ‘in all sectors’, it says.

ECB and OECD both provide lists of ideas. To name a few: abolition of fossil energy subsidies, higher CO₂prices for agriculture, binding climate goals for companies. But these are all measures that require democratic majorities, especially now that politicians seem to find it increasingly difficult to find them.