As Europe grapples with a global health crisis of unprecedented scale, the economic fallout continues to deepen.
To recover, a return to business as usual is not an option.
Now, more than ever, Europe's ambitious climate goals must be upheld. The COVID-19 crisis highlights the importance of resilience to future shocks and disruptions, and the European Commission's European Green Deal offers both a vehicle and roadmap for recovery.
Europe's future economic prosperity relies on its climate neutrality target being met
The difference between 1.5°C and 2°C of global warming is critical for human and planetary health. In financial terms, the difference is an estimated $15 trillion damage globally, almost equivalent to Europe's GDP. To stand a chance of limiting warming to 1.5°C, we must halve global emissions by 2030, and achieve net-zero by 2050.
Rapid decarbonization of Europe's economy was never going to be easy, but the consequences of not doing so are catastrophic.
In the face of the COVID-19 pandemic, policymakers will have to make difficult and drastic decisions, fast. But it is imperative that these do not lock the European Union (EU) into old technologies and economic models that will undo, and prevent, progress towards solving current and future crises.
Public money and policymaking should serve the long-term public good, drive innovation and competitiveness, build resilience in Europe's economy, and unlock private finance to leverage the green transition.
Ambitious recovery and economic stimulus packages should, and can, drive low-carbon investment at scale.
Companies play a central role in building a new green, resilient economy – but they need the right policy support
CDP's report, Doubling Down (written with Oliver Wyman), offers the most up-to-date data and analysis on low-carbon investment in the European private sector. The report is based on investment and emissions data disclosed by 882 European companies through CDP, who represent over 76% of Europe's market capitalization and are responsible for 2.3 gigatons of estimated CO2– over half of the EU's annual emissions.
The findings are clear: businesses have been stepping up and driving low-carbon investment at scale.
Companies reported a total of €124 billion of new low-carbon investments in 2019, the majority in transforming the power system in the energy sector, and the electrification of road transport. Of the €124 billion, capital investments made up €59 billion, and research and development €65 billion.
These achievements were among those celebrated at the annual CDP Europe Awards, held under the High Patronage of Mr. Emmanuel Macron, and hosted by the French Ministry of Europe and Foreign Affairs. Over 300 business, investor, city, and policy decision-makers came together to discuss and debate the action needed to achieve the EU's climate and environmental targets, and to celebrate the trailblazing businesses leading the corporate climate response*.
Despite these efforts, low-carbon investment does not go far enough.
Our report (based on the pre-COVID-19 landscape) found that low-carbon capital investments were half of what they needed to be to meet the Europe's essential climate goals. Achieving net-zero emissions means low-carbon capital investment must double from roughly €59 billion to €122 billion. That's a significant increase in finance, but a relatively modest increase from 12% to 25% of overall capital expenditure among this group of European companies.
There is a clear business case for stepping up low-carbon investment. Companies expect to avoid over 2.4 GtCO2e of cumulative emissions reductions while contributing over €40 billion to their bottom line, from their investments in emissions reductions activities. That's because reduction initiatives offer an average profit of €17/tonne of CO2e.
The companies also identified €1.22 trillion in new revenue opportunities from low-carbon goods and services, an estimated six-fold return on investment.
The case for closing the investment gap is clear, but companies can't do this alone.
Policymakers hold the key to closing the gap and enabling low-carbon investment at the scale urgently needed.
Trillions in public funds are now set to determine the direction of our future economy, giving policymakers an historic opportunity to rebuild Europe's economy and put it on a clear path to a low carbon economy and climate neutrality.
This means that funds must flow into green assets, technologies and industries, and give companies the confidence and opportunities to up their low-carbon investment activity.
Barriers to green investment must be addressed
Our report identified three key areas:
1. Unfavorable Economics
Policymakers need to further tip the scales in favor of low-carbon investment. Many investment opportunities are technologically proven and yet currently uneconomical, as companies lack the economies of scale to drive down production costs. Fiscal policy must incentivize low carbon innovation through a mix of capital subsidies, lower finance costs, state guarantees and green conditions on public money. Policymakers must also urgently address EU fossil fuel subsidies. Our report estimated these to be worth between €55 and €112 billion, which is roughly the same as corporate low-carbon capital expenditure, and a further roadblock to innovation. These funds can be leveraged to ensure a green recovery.
2. Business Model Disruption
Regulatory pressure is a crucial driver of innovation. In 2019, the materials sector accounted for only 5% of low-carbon investment despite being responsible for 35% of reported scope 1 and 2 emissions in Europe. One company in this sector cited the absence of statutory obligations to produce low-carbon materials as an impediment to investment. Breakthrough technologies such as Carbon Capture, Utilization, and Storage (CCUS) and hydrogen fuel, along with new materials and 'circular' processes, have the potential to drive deep decarbonization. Europe's recovery should support them.
However, some transformational technologies can threaten existing revenue streams, and companies also have understandable concerns about business model disruption. For example, HDV trucks account for around a quarter of EU road emissions. Cutting these will be essential for meeting Europe's climate targets, but electric drivetrains threaten the business model of existing manufacturers, by shifting the competitive advantage to battery manufacturers.
Policymakers can alleviate such concerns by introducing regulatory standards that get tighter over time and ease the transition for established industries. In the economic recovery from COVID-19, this should go hand-in-hand with 'string-attached' stimulus funds that oblige companies to invest in green technologies.
Companies and investors need policymakers to reduce uncertainty around pricing and demand. Since the beginning of the COVID-19 crisis, EU leaders have been making the right noises, saying that every euro should be invested into a new economy. This certainty must be backed up by concrete policy. Businesses and markets need clarity and confidence in, for example, the stability and evolution of the carbon price. Likewise, a well-planned set of low-carbon standards, phase-out dates, and public procurement policies can signal to investors that there will be long-term demand for transformational low-carbon technologies. Since many of these technologies rely on new infrastructure, such as charging points for electric vehicles, policymakers must think holistically to encourage parallel investments. In return, policymakers will be right to request certainty from companies and investors in return – certainty that they have clear plans to operate in line with the EU's climate and environmental objectives.
The European Green Deal offers a framework for green recovery – and we cannot afford to go off track
In these difficult times of uncertainty, devastation and disruption, Europe's green trajectory is still on the horizon. Companies are stepping up to make the necessary transitions, and it is crucial that policymakers follow through and ensure that long-term recovery money enables green investment.
European policymakers have the chance to deliver a historic green recovery, to close the investment gap, and secure a resilient, green, economy, that works for people and planet.
*CDP expresses its thanks to the sponsors of the CDP Europe Awards, which help enable CDP to better engage its stakeholders and drive more ambitious environmental action: