EU Faces Uphill Struggle to Fight Climate Change

Summary

• Europe advanced the climate change fight by proposing to cut emissions 55% by 2030, but any new policy could take two years or more to be implemented.
• All 27 EU countries must ratify the proposal for it to become law. And trading partners will resist Europe’s carbon border tax proposal.
• Climate scientists understand the relationship between carbon emissions and rising temperatures. But tying these developments to weather-related events is far more difficult. Consequently, data-driven policymakers tend to be reactive rather than proactive.
• Endless talk about climate change has so far generated little bottom-up pressure from voters to hasten the changes scientists say are necessary to limit further global warming. Serious progress awaits that day.

Market Implications

• For the foreseeable future, we expect present trends to continue – more talk, more extreme weather events, incremental progress in slowing carbon emissions.
• Europe’s proposals could open more substantive discussions about how developed and developing nations share the burden of fighting climate change.

The European Union took a bold step forward in the fight against climate change last week by releasing a plan to cut carbon emissions 55% (relative to 1990 levels) by 2030.

We do not want to sound like scolds, but this will hardly move the needle on stemming global warming and climate change any time soon – for several reasons.

Europe’s Plan Faces a Long Buy-In Process

Most immediately, all 27 EU countries must agree to and sign off on this plan, which could take over two years. There are already indications less wealthy countries in Eastern and Southern Europe will demand changes or concessions.

The EU proposal to impose a carbon border tax on carbon-intensive imports such as steel and cement from countries with less stringent carbon policies has also drawn fire from trading partners. Reports say it could conflict with World Trade Organization rules. How much other countries can pressure the EU on the tax may depend partly on whether the EU can get its member countries behind the plan, and whether the US successfully imposes its own carbon tax.

The EU is doubtless serious about decarbonization. But any effort to reduce emissions and limit global warming will depend on some level of buy-in from most countries worldwide. Given Europe’s plan is global in scope, it will surely spark renewed debate among richer and poorer countries about equity and who ultimately should pay for reducing emissions. One good thing that may come out of this process is a more robust framework for richer countries helping emerging market countries decarbonize.

But all this will take time. Meanwhile, global temperatures are rising nearly 0.2°C annually. By the time the EU fully implements its plan (in whatever final form), global temperatures could already be +1.3°C to +1.4°C relative to pre-industrial levels.

Data-Driven Decision Making Is Not Up to the Task

Shortly after the EU proposal came out, Germany experienced massive and tragic flooding. Many quickly suggested climate change as a key factor driving the storms and weather patterns that caused it. Yet climate scientists quoted in a recent New York Times article were more circumspect. They indicated a weakening of the jet stream that could cause slower-moving storms but also said far more analysis was necessary to link the flooding to climate change.

In a recent book, prominent climate scientist Stephen E. Koonin noted:

The earth has warmed during the past century, partly because of natural phenomena and partly in response to growing human influences. These human influences (most importantly the accumulation of CO2 from burning fossil fuels) exert a physically small effect on the complex climate system. Unfortunately, our limited observations and understanding are insufficient to usefully quantify either how the climate will respond to human influences or how it varies naturally. However, even as human influences have increased almost fivefold since 1950 and the globe has warmed modestly, most severe weather phenomena remain within past variability. Projections of future climate and weather events rely on models demonstrably unfit for the purpose.

Not all climate scientists would agree, but these kinds of sentiments keep turning up when climate experts are asked to link weather patterns and climate change. The short of it is that while circumstantial evidence is strong, hard evidence that rising temperatures are causing climate change is less so.

In a world where government and business decision making is increasingly data driven, circumstantial evidence about climate change rarely leads to forward-looking policies. The overwhelming pattern so far has been for authorities to talk about action but respond to ongoing disasters by rebuilding in place and perhaps taking some preventive steps so the next storm, fire or flood does less damage. Meanwhile, countries like Brazil continue to burn the Amazon rainforest, and more developed countries relocate polluting and carbon-emitting industries to less developed countries. None of this addresses the underlying problem.

Seeing how Germany and Europe rebuild and address flood risks once the immediate emergency passes will be interesting. However, substantive action may await the outcome of Germany’s elections in September. Given weather forecasters reportedly predicted both the storm and flooding four days before they happened but no preparation was undertaken, the debate will likely be an extended blame game rather than about how to deal with the underlying issue of climate change.

And that leads to our final point…

Bottom-Up Pressure Will Win the Day

Governments and businesses’ sluggish and often tentative response to climate change directly relates to the lack of pressure for change from voters and customers. All the discussion, debate and warnings about climate change have yet to translate into a direct mandate to make the changes many climate scientists say are necessary to limit carbon emissions, rising temperatures and more extreme weather.

For example, states in the Pacific Northwest have more proactively encouraged the adoption of electric vehicles (EVs) than many other states, but over a decade or more. Will the record heatwave earlier this summer spur many people to switch to EVs now? Will they pressure legislatures and utilities to get on with installing EV charging infrastructure? Or will they more likely focus on upgrading their air conditioning systems?

Washington State wants to ban fossil-fuel car sales by 2030, and Europe is setting a similar target for 2035. But this can succeed only if neighbouring states and countries enact similar policies. Also, remember voters could easily scuttle these well-intentioned policies by simply electing politicians who unwind them. Likewise, if voters so demanded, these timeframes could be greatly accelerated.

Part of the problem is this. While extreme weather events may be happening more often, for most people most of the time, they are things people only read about in the papers and see on TV. And when disaster hits somewhere, saying whether it was due to climate change or just bad luck is often tricky. After all, hurricanes, cyclones and floods happen every year, and some of the worst happened decades ago.

This ambivalent stance is on full display in the US. The strong circumstantial evidence on climate change has led Democrats to propose a $3.5 trillion infrastructure bill to accelerate the development of clean energy and other steps to address emissions and climate change. But Republicans comprise nearly half of Congress, and (presumably with their voters’ support) they are fighting this initiative tooth and nail, arguing that it is not infrastructure. Needless to say, their opposition is more than semantics.

Even if Democrats can pass this legislation without bipartisan support, subsequent success in implementing it will depend critically on whether Democrats can retain control of both houses of Congress after midterm elections in November 2022.

Climate Change Is the Issue of the Decade

None of this is to imply we are climate change sceptics. Indeed, our colleague and macro strategist Jay Pelosky is right when he says climate change is the single biggest global macro event of the decade.

The question is, when does talk turn into action? Alternatively, when do we go from talking the talk to walking the walk? That is when both the benefits and costs of fighting climate change will finally start to register.

We can only hope Europe’s plan to address climate change at least moves the talk to a new and more substantive stage.