Why strategic timing for the EU transition to a low carbon economy is crucial.
According to a report published by the Advisory Scientific Community of the European Systemic Risk Board (ESRB) on Thursday 11 February 2016, the right timing of the transition to a low carbon economy in the European Union is crucial. The report entitled ‘Too late, too sudden: Transition to a low-carbon economy and systemic risk” describes how while starting the transition too soon would still allow for economic costs to be effectively managed, greenhouse gas (GHG) emissions would increase in the medium term unless additional emissions reduction policies are implemented. Leave the transition too late, and the transition to a low carbon economy would be need to abrupt and both the economic and environmental costs would be significantly higher than a slow transition. The ideal scenario would be to commence as soon as possible and implement additional emissions reduction policies so economic costs can be managed while emissions reductions can be achieved.
Leaving the transition too late will expose the economies of European Union member states to three risks as follows:
- A sudden transition away from fossil fuel energy could significantly harm Gross Domestic Product (GDP), as the demand for alternative energy sources could dramatically exceed supply. In this scenario the cost of those alternative sources could increase dramatically
- The market and investors could value carbon intensive assets differently. In this scenario the most carbon intensive assets are at high risk of becoming stranded
- The frequency of natural disasters could increase as a result of climate change. In this scenario the liabilities carried by general insurers and reinsurers would increase.
The Paris Climate Change conference held in November 2015 demonstrated that there is a need for decisive policy action on climate change if the global average temperature increase is to be kept at a maximum of 2°C. Beyond 2°C, the consequences could be irreversible and catastrophic. While pledges to reduce emissions over the coming decades were made in Paris with conviction, there was far less conviction regarding the timing and speed of these emissions reductions.
According to the ESRB report, a late transition to a low carbon economy is likely based on an extrapolation of the emission reduction pledges made by countries attending the Paris Climate Change conference.
If European Union member Governments implement their pledges early, a ‘soft landing’ is possible. In a soft landing scenario, the transition to a low carbon economy would be planned, managed and gradual, allowing sufficient time for the replacement of fossil fuel infrastructure without driving energy costs unsustainably high. Carbon pricing and the higher marginal cost of renewable energy may result in a short-term energy price increase however the transition to a low carbon economy would not be adversely impacted. Policy innovations such as a carbon tax for fossil fuels would incentivise a shift to renewable energy.
In the medium to long-term under a soft landing, energy prices are likely to decrease as the production of renewable energy becomes more efficient. A transition to a low carbon economy could have a positive effect on European Union member economies. This positive effect is on the basis of new technologies arising from innovation, new jobs being created and lower production costs.
Starting too late would require the sudden implementation of constraints on the use of carbon intensive energy and could result in a ‘hard landing’. In this scenario, energy prices may spike sharply. There may not be sufficient energy available for European Union citizens given that technologies such as renewables may not be market ready. Fossil fuel energy infrastructure and companies with carbon intensive resources or technologies may also be stranded.
Policy interventions at such a late stage could require extremely dramatic emissions reductions across the European Union. In addition, coordinating emission reductions on a global scale is difficult at the best of times, so attempting to coordinate with other countries in a short time period would be extremely difficult.
Published relatively soon after the 2015 Paris Climate Change conference, this ERSB report addresses the main concern I had with the conference’s outcome. I don’t want to take anything away from the groundbreaking achievement of gaining agreement from more than 190 countries – however, I thought that waiting 5 years for countries to compare notes on progress on the emissions reductions they have achieved since the Paris Climate Change conference is too long. The ‘Too late, too sudden: Transition to a low- carbon economy and systemic risk’ report should be read and acted upon as soon as possible by Governments within the European Union and beyond so the economic costs of the transition can be managed and emissions reduction policies can be implemented to reduce emissions. I appreciate the honesty of the ESRB’s assessment of the emissions reduction pledges made in Paris, and that the report spells out end points of early and late transition scenarios. These scenarios need to be seen for what they are – evidence as to why the timing of a transition to a low carbon economy in the EU is critical.